Bookkeeping: 'Rising Tide' Performance Week 26

Week 26 performance of the mutual fund

Comments: I laid out most of my thoughts in today's post 'Is is Time to Adjust Strategy?' so I'll keep it relatively short this week. It feels like a world away from 11 days ago when emergency 75 basis point cuts pulled the world back from the cliff it was about to jump off. That was not even a fortnight ago, yet it seems like eons. This is the complexion of a bear market *IF* we are in one. Maximum frustration. Suck you in. Spit you out.

From what I have been reading on other sites of people I have been reading for years - I sense a lot of frustration. There is no rhyme or reason day to day and "market rumors" seen to change mood or thoughts by the hour. Not even by the day; by the hour. Each day seems like its own year, totally unrelated to the past. Impossible market to game in the near term right now. Further, a lot of frustration with which stocks are going up. Now if this plays out as a true bear market move, the market will continue higher - drawing in more people from the sidelines who were cautious and not willing to believe in this rebound. As they jump in, they drive up prices, drawing in more buyers. And more. And then once we're all in - we have the next major selloff... just as those doubters had thrown in the towel and joined the bull case.

Myself, I am going to try to remain patient. I hate underperforming on any single week, but it's just not reasonable to beat indexes week in and week out. But that does not make me not want to grit teeth. Rising Tide Growth Fund made money this week, but it was probably the most unhappy I've been with a gain in a long time. +1.33% in a week should never be frowned upon (that annualizes to >65% annual) but I have major performance envy this week as the indexes flew off the handle with the S&P 500 up 4.9% and the Russell 1000 was up 5.1%. Just a huge week for the indexes.

For the fund, I own nothing the market wants right now. I don't even know how I eeked out a gain as very little I own has anyone interested, and I have a hefty Ultrashort exposure facing the sectors the market is driving up massively this week.... financials, real estate, and small caps. Considering how I am exposed there, I am happy to have not lost money this week. Again, this feels very similar to mid August when the first discount cuts came out of Big Ben. People of relative intellect were pointing to the greater problems in both the real economy and the financial institutions but it was like talking to a wailing 4 year old toddler screaming at the top of their lungs with their hands over their ears - the market ramped up week after week for nearly 2 months. So we'll see how much farther we have to go here; this move off last Wednesday's intraday lows has been extreme. For the move to continue breadth needs to spread to other sectors. Quite frankly the problem with this market the past year has been narrow breadth - it is a situation of rotational leadership - I was fortunate to own the leaders of last year, so while the rest of the market stalled (or free falled) these names did very well, providing great out performance. Now the tables are turned; I'm the one on the outside looking in on the happy family gathered around the warm fireplace clinking wine glasses full of retail stocks, homebuilders, and financials. Brrr... it's cold out here.

The question is how real he move is and for how long it can continue in the face of the economic news coming out daily. Unknoweable. The whole gig is based on unshakeable faith in the Fed and the federal government - the same entities spit on 2 weeks ago for their incompetence. :) How quickly the worm turns. What we have established is any notion of free market capitalism died in the past 3 months. This at least allows me to smirk in day to day life when people tell me about how America is the bedrock of free markets [because that's what their textbook said in 9th grade social studies]. (hey I need to find a silver lining somewhere)

Technically, the S&P 500 is still in a longer term downtrend, but obviously bouncing very strongly within the downtrend. We went so far below the 200 day moving average (literally historic even considering the huge selloffs earlier this decade), that we are just making up a lot of lost ground. The S&P now sits at 1395; we could conceivably still retract all the way up to 1450 or so and still be in a series of lower highs. 1450 is 3.5% higher from here. But if we keep moving straight up (again historic, atypical but what hasn't been the past half year?) - and break through these levels, then I need to concede bearishness - and move to ignore all economic news and turn into Kool Aid toting bull who believes Fed cuts fix everything, as I was forced to in September and October 2007.

As I like to say. Bad news? Doesn't matter. Until it does. Right now it doesn't matter. And when it matters again, people will overdo it once more on the downside. Human nature. One extreme or the other. The reasonable middle ground has no place with human beings torn between fear and greed on a literal hourly basis (of late).

This week ends my 2nd quarter - I will do a more in depth write up of this quarter in a separate entry but it was one heck of a quarter - two separate months of vicious corrections of 10% (or more) in November and January. The fund ended quarter 1 @ $11.925 NAV and ended quarter 2 @ $11.01 or a 7.7% loss for the quarter. Essentially a wasted 90 days as that matched the indexes; but up to the 2nd week of January things were looking far rosier. Much good work was wasted in the past 3.5 weeks. And now the fund is back below the goal of beating the indexes by 15% each year.

Price of Rising Tide Growth: $11.009
Lifetime Performance to date (vs Aug 3, 2007): +10.09%

Comparable S&P 500: 1,395.4 (-4.76%)
Comparable Russell 1000: 761.1 (-4.40%)

Fund return vs S&P 500: +14.85%
Fund return vs Russell 1000: +14.49%

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 January 2008.

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

Some More Coal Commentary

Again, current earnings really are not the focus but we have earnings from (fund holding) Massey Energy (MEE) and (not a fund holding) Arch Coal (ACI) in last 24 hours. For those of you former dry bulk shipping addicts (or deep sea oil driller fans) we have a similar pricing situation here - most of these companies are in long term contracts so the sharp rise in coal prices won't improve performance right away. But as those contracts come off, and new ones are negotiated to replace the old, we will see the benefits of higher prices. And in a leveraged fixed cost business, higher profits drop quite well to the bottom line. We should see this play out very well over next 9-18 months.

Also a bit of analyst concern on the Peabody Energy (BTU) front below

• Shares of most coal producers rose Friday, as better-than-expected earnings from Arch Coal boosted investors' confidence following several disappointing reports from competitors.
• St. Louis-based Arch Coal Inc. said Friday its fourth-quarter profit rose just a penny to 56 cents per share. But the report surprised Wall Street, which had been expecting a profit of 47 cents per share, according to Thomson Financial.
• Forward said investors should take notice of Arch's "respectable" fourth-quarter earnings and 2008 guidance, as well as continued domestic coal price increases.
• But also Friday, Calyon Securities analyst Gordon Howald lowered his 2008 earnings estimates and 12-month target price on Peabody Energy Corp. A day earlier, Peabody warned its first-quarter 2008 earnings would be hurt by the impact of production delays in Australia, and that other charges would hamper its full-year results.
• Howald did maintain his "Buy" rating on the stock, expecting global coal demand will continue to soar this year.

I don't like this area quite as well as fertilizer (but then again I don't like anything as much) but if we want to find recession proof areas, full of pricing power I'd be hard pressed to find much better than the coal/infra/agri consortium. Not that the market cares right now because it is too busy chasing up retailers (who will be flush with shoppers by summer), homebuilders (who will be snapping up homes by this fall), and financials (who are now in the clear thanks to the Fed). Or so the herd says.

At some point reality will seep back in the market - could be next week, or a few weeks though. I have to see how much Kool Aid is left in the punch bowl.

Long Massey Energy, Peabody Energy in fund; no personal position

Readers - Thanks for the Articles You are Emailing Me

I am getting a lot of interesting stuff sent via email so just wanted to say thanks to the readers aka my "supplemental research staff". So I might not send a personal message back for each one, but I do read everything.

However, to the guy who keeps sending me "Low caost candiiana drusg, click here!" - please stop emailing me ;)

One request, you guys send me a lot of articles that support my viewpoints. That's fine, but if you find things that argue 100% the opposite feel free to send those as well. It is very easy (like certain government administrations) to be sitting among a group of people who all agree on things and have the same views, and you disassociate with reality. I'm not naming names (ahem). And then you get into a very dangerous pattern of believing this is the "only way" or everyone "agrees with us".

So for example if you find an article stating, corn prices should drop 30% next year, please send that to me as well. ;) I like to read pros and cons on every situation, macro event, stock - and then formulate my own thesis based on what I've read and know. Pro and con.

But again, thanks for all the articles. If only I could clone myself - time is very difficult to come by to absorb all this information plus what I normally read.

Mark

Intuitive Surgical (ISRG) Very Impressive

Well we have a few highly valued companies who actually are going up when they open their mouth this earnings season - Intuitive Surgical (ISRG) is one. I don't own this for the fund or in personal account but follow it with 1 eye. I once owned this stock, quite a few years ago, in the $40s :). Kind of like watching your kid grow up into an adult with this one. That said, I've had many kids go Britney Spears on me as well ;) they don't all work out this well when you buy them as small caps. I'll give Motley Fool credit for catching this one VERY early in it's life.

I've been debating it mentally as to whether to add this name, but didn't want to buy ahead of earnings due to how these stocks have been treated, but it is now up 20%. The valuation has been very rich for a long time, but it's essentially a monopoly. The fear has been hosptials (due to credit crunch) would begin pulling back on purchases of the very high end robotic machines. Again, we have to fight the "hidden shadows behind every corner" in a bear market. Thus far it does not appear to a true thesis that the bears are advancing in this name.

This is an impressive report and shows the benefit of its "razor and shaver" strategy - sell the shaver, and make long term, consistent profits off selling the razors indefinitely.

• Shares of Intuitive Surgical Inc., maker of the da Vinci robotic surgery system, surged in premarket trading Friday after the company reported a much stronger fourth quarter than analysts expected.
• The company's earnings more than doubled, rising to $1.24 per share, and revenue rose 68 percent to $189.4 million. On average, analysts surveyed by Thomson Financial expected profit of $1.04 per share and $175.9 million in sales.
• The stock gained $41, or 16.1 percent, at $295 premarket before the opening bell. Shares closed at $254 on Thursday.
• Jefferies & Co. analyst Mark Richter called the quarter "stellar." He noted that almost half of the company's revenue came from sales of accessories to facilities that already own da Vinci systems, and he said that portion is growing.
• He added that Intuitive sold 78 da Vinci systems during the quarter, 12 more than he expected, and sale prices were higher than in the third quarter.
• Oppenheimer & Co. analyst Amit Hazan said Intuitive also expects a strong 2008. He wrote that the company forecast a profit of $4.92 per share for the year, a total he called surprisingly aggressive. Intuitive expects revenue to grow 40 percent in 2008, which implies $841.1 million.
• Analysts expect profit of $4.70 per share on $811.2 million in sales.

Again, very very rich stock - but it has scarcity value. There is no other Intuitive Surgical out there.

No position

Bookkeeping: Locking Profits in Mastercard (MA)

I am selling down the remaing of my Mastercard (MA) to lock in prices here in the $213s. I will hope to buy back at lower prices if we get another market correction. Nothing has changed fundamentally; I'm still a raging bull, simply risk/reward shifts to risk the higher it goes.

Mastercard is now a 0.2% position in the fund; as noted yesterday I sold this down from a very substantial position on fears of the market unfairly attacking the stock on its earnings - which proved to be a false pretense. But as I stated, I have taken a "better safe than sorry" attitude to this market, until it proves me otherwise.

p.s. I've debated adding Google (GOOG) here... going to wait. Maybe we get $450s. I cut both these 2 positions very heavily going into their earnings for similar reasons. Caution.

Long Mastercard in fund; no personal position

Bookkeeping: Starting Position in Powershares DB Agriculture Fund (DBA) and Adding to Gold

The future is looking more clear to me. We are going to be laying the groundwork for another 50 basis point cut next meeting and as things degrade I can now see us going to 2%. All the while giving us some vague statements about being concerned about inflation. Inflation is a lost battle - here it comes.

I've written about Powershares DB Agriculture Fund (DBA) in the past [Food....Food...Food] - it is essentially a product that ties to 4 futures contracts for wheat, corn, sugar, soybeans. I think all of it is going up. Both due to world shortages and with a world awash in liquitity and the next bubble could certaintly be in this asset class. Either way, I have been awaiting a pullback that never comes. So I am going to bite the bullet and begin my position. I am going to use DBA differently than you might imagine. I am so confident in the inflation thesis and the food shortage thesis, that I am going to use this as both a hedge and my "money market". Since I get zero interest in Marketocracy.com for funds held in cash, I am going to use DBA as a larger than normal stake - I believe its yield (gains) will generate some nice return. Further, I am using it as my Altria (MO) - safe haven. Further it's an inflation hedge.

I could be very very wrong but I have spent 2 weeks thinking of a scenario where corn, soybean, or any major crop plummets in price. I have yet to devise one. If I had a way to buy futures contracts on farmland I'd be buying that too. And yes I am very serious. I think values for farmland across the world are going to rocket in the next decade.

I am also adding a bit more to my more conventional hedge, Kinross Gold (KGC)

I am as convinced today as I was in August the Fed will take every step necessary to bail out the US financial system by flooding the world with dollars. I also believe people underestimate the coming weakness in Europe, especially UK. Those countries want to hold the line on inflation (they actually care about it, unlike the American central bank who just TALKS about caring about it). But the economic weakness that will be coming in the next 2 quarters, will force W Europe to cut rates and flood the world with pounds and Euros. I think this will become clear by fall 2008. Again I could be wrong, but if you stand against the crowd you will never out perform the crowd.

I am beginning Powershares DB Agriculture Fund as a large 4% position right off the bat, with a 1200 share position bought in the $37s ($44K) Again this is going to be my "money market" and in many ways my "cash" going forward - so if the market tanks I will sell this down and use it as a source of funds. I might be increasing it anywhere up to 10% of the fund as time goes by as its both my safety hedge and a play on my #1 thesis for the coming decade. Again, my version of Altria (MO).

The Fed is now creating it's 3rd bubble in just over a decade. This is our system now. It is a sad statement on what the Fed has become in my opinion. But that's neither here or there - as an investor I have to figure out where the next bubble will be. My early guesses are commodities or foreign markets. We'll know by 2013 as this bubble bursts and creates the next worldwide crisis. But between now and then we want to take advantage and make money.

Long Powershares DB Agriculture Fund, Kinross Gold in fund; long Powershares DB Agriculture Fund in personal account

Is it Time to Adjust Strategy?

One must be constantly flexible, and staying married to any one viewpoint is, in my estimation, a way to lose money. The question is, with the flurry of changes over the past week and a half, is it time to change focus in the fund? This is something I have been thinking about a lot the last few days.

Let me give you my thoughts from a macro economic/strategic view point. I have a lot of new readers, and based on the fund performance the past month where things have stalled I'd like to go over a 40,000 point of view.

On the economic front my predictions have been just about dead on since August. Everything is playing out as I envisioned, and in fact even more accelerated than I thought. I saw a weakening US economy, distress in financial system, and a reactive Federal government on all levels. Things have moved even faster than I predicted - back when the first discount rate cuts came in August I said inflation concerns will be thrown out the window as the cockroaches came to the surface - so ignore all pundits who tell you the Fed cares about inflation - we are going to 3% by Spring 2008. It's already happened. In my 13 Outlier 2008 Predictions I revised that to 2.5% Fed funds rate (this was when we were at 4.25%). We seem to be headed there, and it might be by next meeting considering how putrid these unemployment numbers are.

Now we are at an inflexion point, much like in mid August after the Fed began their rate cutting actions. It is very easy for popular pundits to now say "don't find the Fed" - and to buy the early cycle names especially retail and financials.. These were the same guys who said it in August (and they were right for 8 weeks after the market went on a Kool Aid rally). But they were wrong when they said it in October. (November was a 10% correction). They were wrong in December on the next cut. (January 10%+ correction at its lowest). And anyone in retail, financials, homebuilders lost far more than 10%. Many names were down 40-60%. So I find it a bit ridiculous they crow now. But so be it. The more important question is what now?

In my 13 Outlier 2008 Predictions I wrote

#7 After over 2.5 years of not suffering a down 2% day dating through early 2007, volatility in the stock market takes over as the theme of the year, 2% daily increases and drops become a weekly occurrence. The market suffers its first 20% drop (from Oct 9, 2007 peak) in the first half of 2007 as consensus emerges that "a major slowdown" (which dared not be called a recession due to elections coming), is happening. The first half of 2008 is marked by major downward revisions in 08 estimates and a 'cheap market' doesn't look so cheap.

So far so good. Daily volatility has been off the charts in January (do you realize we went 2.5 years without a 2% correction in the market during 2005-2006? It was an amazing time) We had a 19% correction in the Dow and more than 20% in the small caps.

Later in that point I wrote

Markets make a dramatic rally off these lows as all the worlds banks coordinate to flood massive infusions into the system (all this money needs to go somewhere) - and in combination a massive wave of foreign investment hits US firms (non financial), driving up equities late in the year. Investors are giddy before realizing a 10% return in equities marked with 9% inflation really only means 1% return, but they clap like seals anyhow. Pundits will claim how resilient the economy is without realizing we are selling off large pieces of it... The market ends the year only down 2.78% as economic based bloggers throughout the world wonder what it takes to make the market ever go down?

I still think this is a very likely scenario - but the question is of timing. Is everything moved up now since the government actions have been even more aggressive than I envisioned? I'm still not convinced.

What will change my mind is the next round of write offs and foreign capital inflows in the coming 4-8 weeks. What's that? You thought we were done with that? No, I don't think so. It has just been pushed to the side the past 2 weeks. But back to my point above - what will change my view on financial is the next round of writeoffs and foreign capital infusions. If the financials begin to rally HARD off of announcing $8 B in losses - then I will believe the bottom is in. Because folks... we will have more losses. And more foreign infusions. The thing to note is not the "news", but the "reaction to the news". So the next 4-8 weeks will tell me whether to join the Kool Aid crowd or not. If $12 B write offs at Citigroup are rejoiced over - than its time to ignore all economic reality and buy financials hand over fist. If we sell off on this news, then it's still not a bottom.

I referenced earlier this is a very similar time to August after the first emergency cuts. Why? Because we began to drink Kool Aid in large swigs. The conventional wisdom at the time was the Fed will save us and almost no one was talking about recession - this was a financial issue and the Fed could fix the banks and things will continue as normal. Not one investment bank was talking about recession. Very few bloggers were. That all changed within 3 months. As for the markets - they raged upward on "trust" in the Fed... the same investors who now berate Ben everyday for being behind the curve. Funny how things change eh?

I had a lot less readers in August but do you know how I was positioned? Very similar to how I am now. And the fund suffered - I was losing money daily on the Ultrashorts... because banks were "saved" by the Fed. This was before even the first foreign capital infusion. I kept saying this is just the beginning and whatever disclosures the banks were making (they were calling these kitchen sink quarters) was nothing. We had a whole house of sinks to go through. And we have seen this was true. But PERCEPTION IS REALITY. And PERCEPTION at the time was, "the banks will be FINE once we get over this rough patch" and "recession? laughable". So the market ramped for 2 months into mid October.

What did I do with the portfolio? After suffering some losses for about 3 weeks and just being step for step with the market (no outperformance at all) since my gains in longs were constantly eaten up by losses in Ultrashorts (talk about a true hedge) I said (and I repeated this almost daily) - I don't know why the market is going up because the economic background is degrading and the financial situation is just beginning. But I said, even though that is true, it doesn't matter. Because all that matters in the stock market is the current belief system. And the current belief system at the time was the Fed was all powerful and any economic slowdown was a blip. So I could of continued with my viewpoints for 8 weeks and continued lose money (I would of been proven correct over the long run, but much poorer). Instead I plugged my nose, went heavy long and just prayed every day that the next shoe would not come to wipe out us all. I kept typing (for those who were around) "it does not matter. Until it does."

Then it began mattering again in November. Then it really mattered in January.

So that's the past. Where are we now? Well I find the same viewpoints now everywhere. The Fed will save us. I am looking at what is rallying and I have to ask an open question. With a flailing employment situation ... and folks, we won't see the truth of the employment situation until the summer in the "government numbers"... how do you justify a bullish move into retailers, homebuilders, and financials? Perhaps I can understand financials, but a distressed customer won't buy Macs (see Apple performance of late) but will buy shoes, clothes, housewares, home improvement products, etc? Logic? None. A distressed consumer cannot afford hambugers (see McDonald's performance of late) but will buy homes? Cars?

Very interesting logic. But nonsense. But PERCEPTION IS REALITY. Further, I think (and I don't stress this enough) people need to understand the power of computers in the market. Computer trading is 70%+ (and probably increasing by the quarter). It's based on models. When models see Feds cut so aggressively they go to "early cycle" plays.... rightly or wrongly. This is why "scientists" or "logical" people get frustrated with the market. Right brained people. I myself have been gritting my teeth. 10 years ago I'd sit here and say what the heck is going on - none of this makes sense. Today, I say - none of this makes sense - but I realize why it is happening. This is just the "playbook". And the computers are driving up these stocks.

So the open question going forward is where do we stand? I wrote in the late summer/early fall people are underestimating our issues. They think there will no real slowdown and the financial system will be fine in a few months. SO the market went up. I think the same is going on now.

We have 2 risks (a) systematic financial risk and (b) recession risk. What has made this market scary to me is having both risks at once is not something I can recall - nothing in 98 or 01-03 was similar. Perhaps 1990 was the same, but that was before my time in the market. If this were simply a recession story I could "game that" a bit easier. But both at once? Much harder to game. Now with that said, we are beginning to work through the systematic financial risk... i.e. the bond insurers won't go out of business and bring down the system. But we still have other new financial risks that people are now glossing over in their drive to run up the financials. Those have been discussed at nauseum here - mortgage risks in Alt A, prime. Car loans. Student loans. Credit card borrowing. I still believe almost none of this is discounted in the market. But all people care about now is that we don't have a global collapse due to bond insurers and that's good enough for a hell of a financial rally. But that doesn't mean we don't have many more shoes to come. Shoes I don't think are being discounted at this time.

Employment is the key here folks. I don't care what the government statistics are. Follow the market - follow the job cuts. Retailers are beginning. Mortage companies already have done some but the greater financial services cuts have yet to come. And just like on the way up, this "fake economy" based on overextended housing market created ancillary jobs throughout the system, the exact opposite happens now. For each 20 less construction workers, is 1 less barber, 2 less mortage bankers, is 2 less realtors, is 1 less dog groomer, is 1 less grocery clerk, is 1 nail technician, is 1 less bartender and so on and so forth. It's a major ripple effect and it takes time to work through the whole economy. Does it mean people don't need to cut their hair or groom their dog or go to the bar to drink? No. But they cut back. And when consumers cut back, business owners cut back. They cut jobs. (80% of jobs in America are small business - business suffering through same inflation the UPS, the Fedex, the airlines, the food producers are going through - coupled with higher health care costs, coupled with slowing consumer). Almost our whole non export (15% of GDP) economy is now based on housing - not 4.5% as "they" would lead you to believe. Through housing comes jobs; through housing comes equity; through houses comes spending. So if you are on the fence of housing is coming back this fall in a big way, you need to ignore this entire thesis, because I will be wrong. And we are at the bottom.

I will say - Main Street and Wall Street are 2 things. For long periods of time they can disassociate. What I see coming is a period of serious hardship on Main Street but a time of potential pleasure on Wall Street. And people will be shaking their heads again. A tidal wave, an absolute flood of liquidity is coming to the world through the US Federal Reserve... and next UK... and eventually EU. Those in the right places and in the right time will benefit enormously and asset classes will rise as we have limited supply of equities, commodities and the like. Those who own those properties will be enriched. (Foreign capital will also flood US markets) At the cost of massive inflation, and the common man on the street who must pay for goods day to day. All these new dollars will circulate the globe adding to inflation and hurting Main Street. But enriching Wall Street and those who hold assets. So I do believe we will be entering an era where I will be writing about a lot of bad economic things happen to the common man, while the very same day writing about some massive gains in the stock market. Pundits will say "well what's good for Wall Street is great for everyone" because 70% of America is now the investor class. All those working folks with $3800 in their 401k ... right. Meanwhile job losses will magnify, foreclosures will increase, people will find it increasingly harder to pay for households goods (Procter & Gamble raising prices 6% across the board - Procter and Gamble tells analysts it plans to raise prices six percent or more on many of its household products, including Iams dog food, Cascade dishwasher detergent and Zest soap.), energy and food.

I do believe my stagflation thesis still holds, and there will be a lot of suffering among the non investor class. But we can cheer our Ameritrade accounts going up to offset it.... John Edwards "2 Americas" will become even more magnified in the coming years...

I'm already on record as making my first 2009 Outlier Prediction - that yet another government rebate will be coming to Americans as they struggle to pay day to day bills in food, energy, and anything Procter & Gamble makes.

Lost in today's unemployment numbers is this simple fact "Average hourly earnings for jobholders rose to $17.75 in January, a 0.2 percent increase from the previous month. It was half the pace logged in December. Economists were predicting a slightly larger gain of 0.3 percent. Over the last 12 months wages went up by 3.7 percent. With high energy and food prices, though, workers may feel squeezed and feel like their paychecks aren't stretching that far."

Again, wages are not keeping up with inflation. They haven't in years. It's been masked by the home equity ATM. Inflation is ramping, not stabilizing. And pressured business are going to squeeze laborers to please their investors (the stock market) - they want to keep margins high to keep stock prices high. How? Reduce costs. Fire. Those that remain - limit their wage increases. In an inflationary environment no less.

So am I changing strategy? Nope, not until I see financials ramp hard on their next round of write offs and capital infusions.. I do think the "perception is reality" trade will push me into financials, and homebuilders as the year goes on (I've already written about this). Retailers scare me in this environment where the US consumer is falling behind inflation on a daily basis, but "perception is reality" so they can go up to. Again I need to stress - Main Street is not Wall Street. When 5700 people lose jobs, the stock goes up. But I don't think much of what I've written above (which can of course all be incorrect) is priced anywhere in this market.

8 Banks Join to Rescue Bond Insurers

And yet another bailout. This one seems legit. The irony of it is the parallel of you, I, our neighbors, and our every person insured say for example, under Blue Cross, having to pitch in and send money to Blue Cross so they can continue to insure us. That's how bad the situation has become.

• Eight large banks have joined forces to seek a rescue plan for MBIA Inc (NYSE:MBI - News), Ambac Financial Group Inc (NYSE:ABK - News) and other troubled bond insurers battered by the global credit c
• The $2.5 trillion bond insurance industry is struggling with mounting losses and capital shortfalls, jeopardizing the "triple-A" credit ratings that insurers such as MBIA and Ambac depend on to function normally.
• CNBC said the eight banks are Barclays Plc (LSE:BARC.L - News), BNP Paribas (Paris:BNPP.PA - News), Citigroup Inc (NYSE:C - News), Allianz's (XETRA:ALVG.DE - News) Dresdner Bank, Royal Bank of Scotland Group Plc (LSE:RBS.L - News), Societe Generale (Paris:SOGN.PA - News), UBS AG (VTX:UBSN.VX - News) and Wachovia Corp
  (NYSE:WB - News).
• Unless the market or the insurers stabilize, investors may unload hundreds of billions of dollars of bonds, raising borrowing costs and ultimately burdening taxpayers. It could also result in hundreds of billions of dollars of additional write-downs at banks worldwide, analysts have said. Standard & Poor's on Wednesday estimated total banking industry losses tied to mortgage problems will exceed $265 billion.

But as I stated, these bond insurers have been a Sword of Damocles hanging over the market for a long time [Bond Insurers Becoming More Troublesome]. This has been an ongoing issue, but what has changed in recent weeks is regulators and those in government finally realize the issue, and behind the scenes arm twisting is happening. And "solutions" are found. Remember, this was exactly the same solution proposes to keep hiding SIVs... the government (Treasury) in fact proporsed that... Mr Paulson wanted the other banks to come to the resuce of the Citigroup's and Merrill Lynch's and contribute their own money to set up a fake 3rd party customer to eat up the off balance sheet SIV's so that people would not have to fess up to it. [Oct 15 - the Super Bailout Fund] Keep in mind off balance sheet accounting is part of what took Enron down. Yet now we have a government who is encouraging the creation of fake 3rd parties to keep things hidden off balance sheet. This is how far we have fallen, and why no one calls this an outrage is beyond me. My belief is the systematic risks are so high of global financial failure that no one dare raise a beef.

You think I exaggerate? We've already seen this mortgage asset based contagion hit cities, states, other countries, and now it's hitting individual companies. We talked about Ciena (CIEN), and yesterday it hit Bristol Myers. Even Potash!

• Bristol-Myers Squibb Co.'s $275 million writedown on subprime investments shows the mortgage crisis is spreading from Wall Street to the drug, technology and mining industries, where companies are posting losses on assets once rated AAA.
• The widening collapse threatens U.S. earnings and stock values. Computer-related companies led by Ciena Corp. already reported writedowns similar to those at New York-based Bristol- Myers. Smaller technology companies including Lawson Software Inc., a maker of human-resources software, may be at risk based on their investments, according to Merrill Lynch & Co.
• ``Many of the securities that the corporate treasurers thought were perfectly safe in fact are not,'' said Anthony J. Carfang, a partner at Treasury Strategies, a Chicago-based financial consultant. ``No one knows where the bad paper is.''
• Bristol-Myers and Ciena said they picked AAA-rated investments considered safe by rating companies Moody's Investors Service and Standard & Poor's. In its most recent quarterly regulatory filing on Oct. 25, Bristol-Myers said it had ``floating-rate instruments with an `AAA/aaa' credit rating'' that could ``be liquidated for cash at short notice.''
• ``They are rated Triple A today, in two months they could be Double A and in six months they could be Single A,'' said Michael Shinnick, who helps manage $3 billion at 1st Source Bank in South Bend, Indiana. He owns technology companies such as Microsoft Corp. in part because of their cash. ``The situation in some of these mortgage-backed securities is likely to deteriorate.''
• Not everyone is as fortunate. Apex Silver Mines Ltd., a silver producer in Bolivia, Peru and Mexico, said in November it recorded a $21.1 million charge against the value of $71.7 million of auction-rate securities. Potash Corp. of Saskatchewan Inc., the largest maker of crop nutrients, had a $26.5 million charge for auction-rate securities in the fourth quarter. Spokeswoman Rhonda Speiss declined to comment.

So again, another blow to free market capitalism. Is it good for the system? Yes. But this just kills people who bet against these stocks for valid reasons. A healthy market allows shorting. A healthy market allows people who bet against dying companies to feel safe in those bets. The American Government has now made it unsafe to bet against the financial system through multiple steps (this is just the latest). I suppose this deserves a Bronx cheer. I a sure many billions were placed on bets against these bond insurers but the "invisible hand" has come in and says, whatever your homework was that made you predict this - it doesn't matter. You will not reap the benefits. And this is US free market capitalism. Again. Obviously we have found a new oxymoron for the lexicon. US free market capitalism.

Microsoft (MSFT) Makes Bid for Yahoo (YHOO) - I Got it Half Correct

Today's news probably explains the strange weakness in Microsoft (MSFT) shares after a stellar earnings report. I half way predicted this move in my 13 Outlier 2008 Predictions.

In a sick twist of fate Yahoo emerges as the best performer in the space as News Corp comes in with a buyout as the stock trades listlessly again in 2008.

I tried to be to cute and find someone other than Microsoft as a logical candidate, but seeing today just how huge Yahoo's market cap still is (>$40B on this offer), the # of potential suitors is very limited. Too big for News Corp but I thought perhaps a Myspace.com / Yahoo marriage would be nirvana. Years upon years of splits in the late 90s/00 have created way more shares than I assumed, and hence even at $20 Yahoo is a huge market cap company.

So I'll give myself a 50% on this one.

No positions

Serious Food Inflation (read shortages) Hitting China Due to Storm

This is quite a storm and you see nothing about it on the US TV screens except a 20 second blip on CNN. Again, we are so inward looking - this is a massive situation.

Taking away the human aspect and thinking as investors, keep in mind the Chinese have been hard balling the potash consortium trying to get a better price. I think that option is quickly leaving the table.

Also this should do quite a heck of a dampening affect on Q1 GDP in China.

It is just the sort of things such as this that make a very tenous world grain situation turn into a potential crisis. And each day/week/month that passes can create a new crisis as it's all weather dependent. One day I guess people will pay attention. Until then we can hide under the covers while the Morgan Stanley analyst cries about the blip in potash inventories - "mommy mommy, I found a way to bring the stocks down to get clients in!" [Morgan Stanley Worried About Fertilizer]

Do they realize these companies have their customers on allocation? Allocation is a fancy word for RATIONING. Sounds very reasonable to cry about a blip up in potash inventories with your customer base on rations. Quality research work again from our lovely analysts.

Anyhow, on to the latest global crisis that does not matter because Britney Spears went into the hospital this morning....(I do like how the article rips on the yuppie professional Chinese haha)

• Hundreds of thousands of desperate travelers, some hoisting terrified children or baggage over their heads, pushed their way onto trains Thursday as service resumed after the worst winter storms in decades paralyzed China.
• Railway officials said the restored service could carry 400,000 passengers a day, but hundreds of thousands of stranded people, most of them migrant workers, were still waiting to leave the city.
• A record 178.6 million people - more than the population of Russia - were expected to ride the rails. Most would be riding in "hard-seat class," in train cars with only hard wooden seats.
• A top agriculture official warned Thursday that snow battering central China has dealt an "extremely serious" blow to winter crops, raising the likelihood of future shortages driving already surging inflation.
• Regions hit by the worst winter storms in 50 years provide the bulk of China's winter fruit and vegetable production, Chen Xiwen, deputy director of the Communist Party's leading financial team, told reporters.
• Chen said the overall effect on agriculture depended on how long the storms lasted and whether they moved into northern China, which produces most of the country's wheat and oil crops. "If it heads northward, then the impact on the whole year's grain production will be noticeable," Chen said
• Along with crops, fish and poultry farms have also been hard hit, and much industrial production is at a standstill.
• Transport delays have already driven up vegetable prices nationwide, with those in the hardest hit areas more than doubling. Wholesalers in Beijing were quoted as saying only about 20 percent of the usual supplies of fresh vegetables were reaching the city.
• Chinese cuisine places an emphasis on fresh produce, much of which is now grown in plastic-sheeted greenhouses that have buckled and collapsed under the snow.
• In the central city of Zhengzhou, tomatoes had doubled in price since before the storms hit, local media reported. Lamb and other meat prices soared in the southern transport and manufacturing hub of Guangzhou, and in nearby Shenzhen, the cost of 47 types of vegetables had risen by an average of 36 percent, the reports said.
• Fuel prices have also increased, with anthracite coal for household heating rising by 75 percent to $208; per ton from before the snow.
• Authorities have ordered a priority given to coal and food shipments, with all tolls, fees and restrictions waived. On the tropical island province of Hainan, transport bottlenecks maxed out refrigeration capacity, with large amounts of fruit and vegetables at risk of simply being left to rot.
• Food shortages complicate Beijing's struggle to lower inflation by increasing supplies, a task the government has made a top economic and political priority. Double-digit increases in food prices for much of last year drove December's inflation rate to 6.5 percent.
• In other remarks, Chen said January's inflation rate would likely stay around the December mark, despite the weather-related disruptions. (sounds like our government... whatever the reality is on the ground, just say inflation is contained and its not an issue - keep lying to the peons)
• The government has already responded with a variety of measures, from freezing prices for a slew of goods, to boosting farm subsidies and curbing industrial use of corn.

Shortages.
Inflation.
Shortages.
Inflation.

I said it August 2007. I say it today. I'll say it in August 2008, 2009, 2010. These are the epidemic problems of our future.

I was holding off on buying Powershares DB Agricultural Fund (DBA) until it pulled back, but the thing never pulls back. [Food....Food....Food] Just like with coal... it time to bite the bullet and ignore the short term noise and understand this is probably the best hedge we have on earth right now. Crops. Any crop. Better than gold; at least you can eat this hedge. (I did buy some more gold today...)

And fertilizer... well, you know the story.

Long fertilizer and will be long Powershares DB Agricultural Fund tomorrow; long a lot of fertilizer in personal account

More Bailouts on the Way. I Cannot Even Keep Track of the Proposals Anymore.

We have more bailouts coming, so many ... I cannot even keep count.

NY Bond Insurer Rescue Advances

• New York Gov. Eliot Spitzer said Thursday a plan by the state's insurance regulator to bail out struggling bond insurers is making good progress amid fresh worries about the financial industry.
• Feel free to click on the link for more details - it is too sickening of an assault of "free market capitalism" for me to even waste bandwith on it.

And then we're going to bailout the people buying subprime loans, and the owners of the homes. Again... I never, ever, ever want to hear about free market capitalism in the US again. It's a complete joke. Eventually as they throw one after another against the wall, one will catch. And the worse it gets the quicker one of these stinking heaps they throw against the wall will become "reality"

New Subprime Bailout on the Table

• A proposal to bail out subprime mortgage borrowers who are at risk of foreclosure was floated at a Senate Banking Committee hearing Thursday.
• Senator Chris Dodd, the committee chair, said he is working to create a Home Ownership Preservation Corporation, which would purchase mortgage securities that are backed by at-risk, subprime loans from lenders and investors.
• Additionally the loans on these properties would be restructured so that borrowers could afford the new payments and remain in their homes. Borrowers could see their monthly costs drop dramatically.
• According to today's testimony, the fund might require $20 -$25 billion in seed money from taxpayers and, after that, it should self-fund. (sure it will)

So what do we tell the people who already lost their home? You should of held out just a bit longer.

What do we tell people who act responsibly? You're stupid.

We are going to have a bunch of overpriced homes occupied by people with 580 FICO scores who the government lowered their payment from $3800 a month to $740. Who will be laughing at their idiot neighbors who took out a 30 year fixed at 5.75% and are struggling to make good faith payments in the multi thousands. With 150 more FICO points.

Very fair. I'm truly sick about all of it.

What a country.

Google (GOOG) Misses

It wasn't that bad of a miss but good enough to spook people. Another one of my 13 2008 Outlier Predictions coming true ;)

So cutting back severely made me miss out on Mastercard (MA), but saved me in Google (GOOG) - I guess it's a wash.

Remember, there is a jobs number tomorrow... as for the # itself who knows. But clearly the labor market is weakening and keep in mind employment is a LAGGING indicator. Meaning by the time we see serious downtrends in labor it will also be recession time. Just look at all the news around you of layoffs. See Home Depot (HD) today, see Ann Taylor (ANN) yesterday. Look around closely and you can see it everywhere. It is around you - no matter what the government report says. That said, if anything positive comes out tomorrow the bubbleheads will say "see told you, no recession!"

Ignore government reports; listen to companies. Even if its bad news - its still a highly flawed report. [Monthly Jobs Report & Birth/Death Model]

p.s. it appears the market was thrilled with bond insurer MBIA's comments ... do you realize they only allowed questions that were emailed to them last night? No real live questions. And this is what we rally on? Quite pathetic.

Do you also realize that the rating agencies have been pressured behind the scenes not to lower the AAA ratings of the bond insurers? Because of the havoc that would cause. So they are told to lie, and everyone needs to wink and let the charade of AAA ratings continue, until we devise a bailout. This is our American, free market capitalist system at work.

Long Mastercard, Google in fund; no personal position

Pulte Homes (PHM) Up 11% on "Bad Earnings"

I am going to start watching the trio of Ryland (RYL), Toll Brothers (TOL), and Pulte Homes (PHM) since one of these (or a basket of all 3) will eventually make up my homebuilder stake in the fund. While I still think it is too early to get involved in these names other than for short term trades, the market seems to think what is happening with the interest rate/rebates/bailout scenario is already enough to jump start the housing market. Obviously my countless commentaries point to me not agreeing, but I am always open to the fact I can be wrong. As I say nearly every day "Perception is Reality" - if perception is the housing market will turn in the fall, than it does not matter if it's truth or not - as long as it is believed, the stocks can react very well, no matter what the reality is on the ground half a year later.

It is interesting to watch Pulte jump 11% on what I would consider to be an abysmal report. But again, the market is forward looking and the assumption is (it appears) by next fall our home market will have bottomed. I won't be on that bandwagon, but the stock action is the stock action, and one must respect it. I like Pulte for the active - adult market, and this was one of the stocks I used to trade in my personal account during the "good times" in 2003-2005. Let's see what they have said

• Pulte Homes (PHM) reported a wider fourth-quarter loss as new orders fell 29% from a year earlier to 4,562 units.
• To us, this indicates that Pulte did not respond to market trends as much as Ryland (RYL) or Centex (CTX) which reported order declines of 7% and 10% respectively," wrote Banc of America Securities analysts led by Daniel Oppenheim, in a research note.
• "We think this will lead to two issues: further declines in margins when they adjust pricing and more importantly, increased cancellations as buyers in backlog see the lower prices," the report said.
• Pulte, the nation's third-largest home builder, reported a loss of $874.7 million, or $3.46 a share. The loss included $543.3 million of charges related to inventory write-downs, other land-related charges and impairment of goodwill. It also took a $622 million charge related to deferred tax assets.
• Pulte said it ended the year with $1.1 billion in cash, exceeding its goal, and no debt outstanding under its $1.86 billion revolving credit facility. The company got some breathing room this summer when it renegotiated the covenants with its lenders.
• With its focus on the active-adult market, Pulte is "well positioned to take advantage of significant demographic tailwinds," said Morningstar Inc. analyst Eric Landry in his latest review of the company. "Unfortunately, though, it entered the current downturn with too much land and debt, a condition that may hinder its prosperity once demand picks up."
• Yet Pulte's chief executive, Richard Dugas, during a conference call Thursday was cautious in his outlook for the U.S. housing market. "For the home-building industry, the year 2007 will likely be remembered as one of the most difficult and challenging in decades," the CEO said. "Factors that signaled the beginning of this downturn such as high cancellation rates, elevated supply of for-sale homes both new and existing, and the tightening of mortgage availability simply worsened as the year progressed."
• "By the end of the year gross margins remained under pressure as the competition for home sales intensified during this market downturn," Dugas said. "Consumer confidence continues to be depressed, particularly with higher energy prices and the fear of a recession on the minds of many potential homebuyers." He added: "The challenging market conditions that plagued 2007 will likely have a significant impact on 2008 as well."
• Pulte's strategy since the third quarter of 2007 has been mothballing communities rather than selling homes at a deep discount, according to Anna Torma at Soleil Securities Group. "Additionally, the company announced it would reduce pricing and use incentives only in select communities where closings would lead to positive cash-flow generation," the analyst said.

So overall, outside of the ugly numbers... are some ugly words from the CEO about 2008 (no quick turnaround folks). That said, the market is ignoring the CEO and saying "we know better than the CEOs in the industry and it's time to take homebuilder stocks up because the Fed fixes everything". I happen to agree with the CEOs, but the stock market disagrees with me and the CEOs for now.

No positions

Mastercard (MA) Continues to be Priceless

Please note, my caution caused me to cut back on my Mastercard (MA) position severely in the past week so I am not partaking much in this 9% move today, off of earnings. [Bookkeeping: Reducing 2 Names] However, this went under the "better safe than sorry" category since this was the type of stock that got ripped the minute they open their mouth, but the other part of better safe than sorry is you miss out on some gains. Mastercard once again proved their worth and remains one of the few financials which in my book deserve to actually go up, instead of going up only because "The Fed will Fix Everything" thinking.

Again my thesis, which I seem to be in the minority of,is that a strapped US consumer will in fact turn MORE to credit cards to get through the day to day. People have argued that the US consumer will just retrench totally so Mastercard (and VISA will get hurt). I believe each and every week more and more gasoline, grocery, etc type of purchases are going on cards as people fall further and further behind cost of living. I also think things that they used to do direct withdrawel such as electric and home heating bill, will be moved from "pull from checking" to "pull from my credit card". That said, perception is reality and I was worried perception of slowing US consumer would bring down this stock. Last, people forget this is truly an international play and as I have written in the past, many parts of this world are still mostly cash based societies so we have many years of "conversion" in those countries as we "Americanize them" and turn them into credit card drunk consumers. (just like us!) So I am happy I am correct on the call in this company, but unhappy I am not participating much in this move, considering I dropped 70% of my position in the last week. All you doom and gloomers got to me... :P

• Credit card processor MasterCard Inc. said Thursday that strong spending abroad and its sale of stock in a Brazilian company boosted profit in the fourth quarter by about seven-fold. The Purchase, N.Y.-based company said profit in the October to December period rose to $304 million, or $2.26 a share from $40.9 million, or 30 cents a share, a year ago.
• The latest results include an after-tax gain of $185 million from sales of the company's stake in Redecard SA, a company that signs up merchants in Brazil. Excluding that gain, profit came to 89 cents per share.
• Revenue rose nearly 28 percent to $1.07 billion from $839.2 million a year ago.
• The results were well above estimates, even excluding the one-time gain that analysts typically exclude. Analysts polled by Thomson Financial predicted, on average, earnings of 72 cents per share on revenue of $984.8 million.
• MasterCard's full-year profit was $1.09 billion, or $8.00 a share, on revenue of $4.07 billion.
• MasterCard does not have to set aside reserves for loan losses as many of its rivals do. Unlike American Express Co. and Discover Financial Services LLP, MasterCard processes card payments but does not take on the debt. (if you are new to the blog or Mastercard story, I must stress this which I try to do each and every time I write about VISA or Mastercard)
• What could hurt MasterCard is a slowdown in U.S. spending that many economists are predicting in 2008. When cardholders spend less money, that means fewer fees from merchants. (again I think a stressed consumer will turn MORE to cards, not LESS as the current fear is)
• Fortunately for MasterCard, it has increased its business abroad and thus benefited from the weakening dollar. The conversion of stronger currencies to the dollar boosted revenue by 4.7 percent in the fourth quarter, the company said, while international travel lifted cross-border transactions -- which generate higher fees than transactions within a country's borders-- by nearly 28 percent.
• MasterCard's gross dollar volume rose 15.2 percent to $634 billion, discounting currency conversions, and the total number of transactions processed rose 17.2 percent to 5.2 billion.
• Robert W. Selander, MasterCard president and chief executive officer pointed to South Asia, the Middle East, Africa and Latin America as high-growth regions.
• While other big players in the financial sector are selling stock to raise their cash levels, MasterCard is continuing its stock buyback plan; as of Dec. 31, the company repurchased 4 million shares for $601 million, and as of Jan. 25, bought an additional 657,000 shares for $124 million.

Again, I got boxed out by the "fear of dark shadows around every corner" on this name - I admit; it stinks to see a formerly large position run without you. But you can't have everything (risk and safety) at the same time. Once the market returns to normalcy, this is a name I see back in the top tier of positions. Now I have to hope for a general market sell off to bring down Mastercard and continued drum beat of fears that have kept this name down the past month, to give me a better entry point. I am not interested in chasing it up at these levels in this type of market. I am sure we will find another opportunity down the road to buy cheaper.

Long Mastercard in fund; no personal position

Cameron International (CAM) Down 10% - Can't Win in Oil Services Right Now

I don't own Cameron International (CAM), but it was one I was considering when I decided on Smith International (SII) instead... so today they have earnings, fine earnings, but guidance is again "disappointing". As with Smith International and a host of other names in oil services, whatever you buy - you lose money on, the minute they open their mouth during earnings. [US Markets Continue to Savage Oil Service Stocks]. This is why I reduced National Oilwell Varco (NOV) - since it had not opened its mouth yet. There is no winning right now in earnings season - bad news is punished, and good news is not believed and you are punished for future fears. Bear market baby. This is simply multiple contraction across the board.

• Oil services company Cameron International Corp (CAM) reported higher fourth-quarter earnings on Thursday, boosted by strong demand from its oil and gas producer customers, but its shares fell 7 percent on a weaker-than-expected outlook.
• Net income rose to $125.9 million, or 54 cents per share, from $96.5 million, or 42 cents per share, in the year-ago quarter. Excluding items, the company posted earnings of 61 cents a share, a penny above Wall Street's expectations and well above year-ago earnings of 47 cents a share.
• Quarterly revenue rose 25 percent to $1.34 billion, spurred by strong revenue growth from its drilling and production systems business.
• However, the company's first-quarter and full year 2008 outlook fell short of analysts' expectations and shares of the company fell $3.06 in pre-market trade to $40.
• The Houston-based company forecast first-quarter earnings of about 50 cents to 53 cents a share and full year 2008 earnings of $2.45 to $2.55 a share. Analysts, on average, have forecast first-quarter earnings of 59 cents a share and full year 2008 earnings of $2.63 a share, according to Reuters Estimates.

Long Smith International, National Oilwell Varco in fund; no personal position

Bookkeeping: Adding Peabody Energy (BTU) on Earnings Drop

Coal is one of the few sectors I am looking to add exposure to on any earnings misses. With the 10% drop in Peabody Energy (BTU) this AM off of earnings, I am incrementally (i.e. slowly) adding exposure here around $50. This takes my exposure back up to 2% of the portfolio (up from 1.5%). I am in no rush to add anything in this type of market. But I sold some shares off 2-3 days ago near $59 [Trimming Many Positions], so I am simply adding these shares back at a 15% discount. The stock broke its 50 day moving average and now has fallen all the way down to its 200 day moving average ($50.50) with today's move and is in fact now trading intraday below that level.

Folks this is the type of market we have. Buy and hold is dead for now. I have outlined the longer term story for coal, so I am going to be building these names on pullbacks. But with the market prone to more weakness, I am not going to rush. I really don't care about current earnings or even next quarter's earnings for this sector - the long term in both potential for massive increase in exports and rising prices will bode well. Again, no rush to load up. As you can see from guidance below, it's a huge range because there are a lot of variables in play. But Peabody especially with their Australian operations should benefit from this major weather issue in China. [China has a Power Shortage, South Africa has a Power Shortage]

• Peabody Energy Corp (BTU), the world's largest coal producer, on Thursday posted lower fourth-quarter earnings, hurt by the company's spin-off of its Patriot Coal Corp PCX.N unit.
• Net income was $35.8 million, or 13 cents per share, compared with $175 million, or 65 cents per share, a year earlier. Earnings from continuing operations were 71 cents per share, from 68 cent per share in the year-ago period.
• Revenue rose 10 percent in the fourth quarter as the company sold more coal, offsetting lower prices at its Australia operations.
• Peabody said it expects to earn $1.00 per share to $1.85 per share in 2008, with earnings before interest, taxes, depreciation and amortization (EBITDA) between $1.0 billion and $1.3 billion.
• For the first-quarter, it expects earnings between 5 cents per share and 25 cents per share.

Long Peabody Energy in fund; no personal position

Earnings on Tap Tomorrow

Hard to make a judgement call on how the reaction will be since euphoria could be rampaging for now so everything that was bad could be good in 24 hours. So I'll just list the interesting names on the list coming tomorrow since emotion is unmeasurable. Same world economy that (judging by stock markets) was going to implode 8 days ago, now has no worries :) Amazing to watch the swings in emotion.

Cameron International (CAM) - another oil service name similar to fund holding Smith Interational (SII)

Gold Fields (GFI) - gold. inflation. South Africa.

Google (GOOG) - fund holding that I reduced today.

Intuitive Surgical (ISRG) - classic momentum stock that is the type that has been punished relentlessly in 2008.

Massey Energy (MEE) - fund holding in coal - metallurgical. Still love this group.

Mastercard (MA) - fund holding which has high valuation. It has held up very well but is exactly the type of name people have been selling off in panic the minute the earnings release hits the airwaves, no matter what the earnings release actually says. I cut back severely in the past week for "safety" reasons.

Peabody Energy (BTU) - fund holding in coal.

Procter & Gamble (PG) - classic safety bellweather stock.

Tesoro (TSO) - refiner. Group had a huge 1 day move earlier this week due to Valero (VLO) earnings.

Under Armour (UA) - already preannounced to the downside. I was considering adding under $30 a week ago. Now $38. Ugh.

So a busy day for the fund. 2 coal holdings and 2 relatively highly valued stocks that up to 1 hour ago, were the type sold heavily the minute they released the earnings release. We shall see how the reaction is tomorrow. I am hoping for some further sell off in the coal names to rebuild larger positions.

Bookkeeping: Adding Short Exposure on this Rally

I just don't buy it. People need to ask what is so bad that the Fed just cut 125 basis points in 8 days. That should scare them. That is historic.

That said, I was buying short exposure off the surprise cuts in August and it cost me for about 8 weeks... until the market came to face reality.

Now what? 8 weeks of no stimulus... and calls for more cuts within a few weeks. The market got everything it asked for (and more) - now what?

So another prediction came true, this one from last fall - Fed funds rate at 3% by spring 2008. Back than that was an outlier prediction. Now, it appears "slow to the game" but I did not expect 125 bps in 8 days. So about 3 meetings got squeezed into 8 days.

Now it looks like we go to replay of 2001 and head to 2-2.5% in the coming quarters.

S&P500 is now at 1375. Lots of resistance overhead. 1380, 1400, 1420
I'll expect a sell off to start from one of those levels after euphoria leaves the market....
I've added incrementally to a few of the Ultrashorts. And will layer in if we breach the 3 levels mentioned above.

Gold jumping

Inflation is going to be a beast... even more than it already was. In about 18 months I can see a massive uptick in rates to try to tame inflation. And people blaming Ben for causing inflation, and "bowing" to the markets. The same commentators who today will be cheering. Guy can't win.

But for now... "they" rejoice. Since all that matters is today. Main Street will suffer in the long run. NYC wins again. At least for a few hours/days/weeks whatever. Until reality returns. Cramer is screaming Alleluliah. So at least he is happy. All his buddies in Manhattan can enjoy they have manipulated Ben into a twisted mess.

Hungry Haitians Resort to Eating Dirt

As I said, this "World of Shortages" I keep repeating will have profound global implications. And since it's food this time we are going to see a lot of suffering across the globe. I began item #3 in '13 Outlier 2008 Predictions' with

#3 Food inflation ramps worldwide causing serious issues and front page news in countries across the world. The US central bank says, really who cares, after all its not part of core inflation.

One example

• It was lunchtime in one of Haiti's worst slums, and Charlene Dumas was eating mud. With food prices rising, Haiti's poorest can't afford even a daily plate of rice, and some take desperate measures to fill their bellies.
• Charlene, 16 with a 1-month-old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country's central plateau.
• The mud has long been prized by pregnant women and children here as an antacid and source of calcium....cookies made of dirt, salt and vegetable shortening have become a regular meal.
• Food prices around the world have spiked because of higher oil prices, needed for fertilizer, irrigation and transportation. The problem is particularly dire in the Caribbean, where island nations depend on imports and food prices are up 40 percent in places.
• At the market in the La Saline slum, two cups of rice now sell for 60 cents, up 10 cents from December and 50 percent from a year ago. Beans, condensed milk and fruit have gone up at a similar rate, and even the price of the edible clay has risen over the past year by almost $1.50. Dirt to make 100 cookies now costs $5, the cookie makers say.
• "I'm hoping one day I'll have enough food to eat, so I can stop eating these," she said. "I know it's not good for me."

News like this won't hit the radar until it begins affecting people who actually vote. So while we have shortages throughout the country in food banks [One Lonely Voice Agrees with Me on Food Inflation], until it starts making a move upstream to lower middle class and middle class, in a large enough way - only then will it begin to be noticed as an "issue". And sadly the worst off in the US are far better off than many on this globe.

My prediction after seeing how this is so quickly creeping up on Americans is about a year from now is we will have another government rebate check mailed out to us.... to begin helping to pay for day to day costs of life... minor things... like food.

On the bright side, we bought off some votes in the farm belt with the ethanol proposals. And for the investor class, the stock market should be raging in a year with the huge amounts of money flooding into the system. (econ 101 = fixed amount of assets (stocks), huge increase in supply of fiat money = higher prices of stocks). Always a bright side, as long as you are not in the bottom 80% in the world.

Still Too Early to Buy Homebuilders Other than for Short Term Trades

As I have been saying, we will get 25-35% type of bounces off of oversold levels in homebuilders from time to time. This has been going on for nearly 2 years now. We are in the middle of another. Eventually these will be "buys to hold". But I just don't think it's time even with the government abandoning any sense and allowing lenders to stuff Fannie and Freddie full of $700K+ mortgages (up from $417K). [I do believe this could prove catastrophic in the long run and a tax payer bailout might ensue in 3-5 years from this action but this government is all about solutions that fix things today, not in the long run]

Yesterday's Centex (CTX) report shows some of the signs why it is too early - it's not the numbers (they have been bad, remain bad, and will continue to be bad) but the commentary.

• Centex (CTX) shares tumbled 6% Wednesday after the homebuilder's loss more than quadrupled in the latest quarter, while cash flow generation came in lower than expected.
• On the conference call following the third-quarter report, the company said the level of discounts being offered for new homes are at record levels and that housing inventories and prices have not stabilized.
• "The housing market continues to correct and tighter mortgage underwriting standards are affecting home prices," Centex CEO Tim Eller said in a statement.
• For the quarter ended Dec. 31, Centex's loss swelled to $975 million, or $7.94 a share. That was substantially worse than the loss of 78 cents a share that analysts expected, according to Thomson Financial. (to analysts <--- oops)
• In a note to clients, Pali Reseach analyst Stephen East said the results were disappointing. Centex underperformed on cash flow generation, orders, land charges and operating margin before charges, he said.

Again you want to buy these stocks maybe 6-9 months before a turn in the housing market. People now believe with the flooding of liquidity, lowering of 30 year rates, and the ability to stuff Fannie/Freddie with overpriced expensive mortgages, the housing market will be back by summer or fall. I just can't get on that bandwagon. In my opinion mortgage rates can be zero and for many people if they are forced to put a down payment down (in a country full of people who do not save), they still can't afford homes. So I am not sure where this flood of new buyers comes from. Without a return to 0% down mortgages we won't see any swift recovery. It's as simple as that.

What I do expect to see is a flood of refinancing so people can reduce their home payments (which is good for them), and/or extract equity to pay for day to day expenses (which is just a repeat of the bubble we came out of in 02-06). But this (housing) was an epic bubble - and epic bubbles do not get solved in 18 months. Especially with all the foreclosures that are just now beginning. All those homes need new buyers too... along with all the homes that people will just walk away from since they are upside down on. So we are going to see a "great reversal" - many homes bought in 2005-2007 are just going to be right back on the market - they won't have to be sold to be put back on the market. Owners who abandoned them (walked away) or were forced out (foreclosure) will be the cause for them returning to the market.

But the home builders are doing their part - they are doing "record" discounts on home prices... this will drive down median home prices. As I keep saying, it's existing home owners that will be the last to fall. They will refuse to sell their homes because they will get less for it than they bought it for in 2006 or 2005. But they will succumb and face reality eventually. When that happens in droves we should be near to a bottom.

From a new buyer perspective, I simply ask - why would people be rushing in to buy an asset when they see no bottom/floor. How many people (even those with cash) are going to running in to buy an asset that could be worth 10% less a year from now? I just don't see it... this huge rush of buying this summer.

Doesn't mean one cannot make some great near term trades (as the past week in the homebuilding stocks), but we are still quite a ways off from "buy and tuck away" time.

No positions

What Investment Bank to Buy?

As I've written in the past [Jan 7 - Washed Out Sectors]

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

So I am mulling over which investment bank to enter and when. The knee jerk reaction is to go with Goldman Sachs (GS) because they seem the least unscathed. But a series of news items from Lehman Brothers (LEH) makes me wonder about them as well, and truth be told they are in the best technical condition.

Lehman Brothers Hikes Dividend to 68 Cents, and Increases Share Buyback

• Lehman Brothers Holdings Inc (LEH), the Wall Street investment bank, on Tuesday raised its common stock dividend 13 percent and said its board of directors authorized the buyback of up to 100 million shares.
• The quarterly dividend will rise to 17 cents per share from 15 cents.
• New York-based Lehman said the buyback program covers nearly 19 percent of its 530.6 million shares outstanding at year end, and supersedes a prior authorization.

These don't appear to be moves of a company going underwater - further Lehman has not had their hands out asking for foreign companies to infuse them with life saving cash. While the buyback on the surface is VERY impressive, what is "announced" as an authorization is very different from what really happens, so I'd like to see these shares actually bought back. It is very easy for any company to say "well we have authorization to buy back XX amount of shares", and then quite a few never follow through. But at least theoretically this is 1/5th of the shares of Lehman - very impressive if it happens.

As for the other 3 - Merrill Lynch (MER) has a great CEO now but appears to be an epicenter of subprime slime. A lot of risk but reward there ... still too early I think. Morgan Stanely (MS) I really don't hear much about but it's stock is moribund - no reactive bounce off Fed cuts tells me more shoes to fall and those "in the know" are telling us that by the stock not moving. Bear Stearns (BSC) is a disaster but you are playing Bear for a buyout offer. With a $12B market cap that is easy picking for China or a Middle Eastern buyout. But I don't really buy stocks for buyout potential; I'd rather have a nice business.

So at this time, going back to the previous two, I am leaning toward Lehman Brothers (LEH). As I wrote above, unlike the money center banks I think we might have 1 (or maybe 2) more quarters of write offs in the investment banks and then the decks should be cleared. So either "now" or "soon" might be the time to get in. What I will be looking for in LEH is a move above the 200 day moving average which sits at $65. Or (looking at the chart) an entry around $54 would also be potentially advantageous. So I want to buy on a "panic pullback" or "breakout". The stock traded $85 a year ago... so it has not fallen as much as the 3 not named Goldman, so the (potential) reward is not so great as buying one of those 3, but the risk appears to be far lower. Which suits me fine.

No positions but putting Goldman and Lehman on radar

More Economic News from the Companies Themselves

I wrote this (in jest) yesterday

Kellogg (K), Kraft (KFT) - more CEOs who are going to try to tell us they see (haha) inflation or something. Silly CEOs.. there is no inflation out there. It's all in your imagination. More Fed cuts by the way! NYC and the top 1% must be saved! Go cry about your inflation to the bottom 60%.

But again folks, nothing to worry about here. The Fed is cutting rates (again), the Federal Government is sending us all rebate checks and that will solve everything! Don't you notice the market telling us that? Inflation is benign and under control. So ignore (once again) everything the CEOs are telling us, and buy those home builder stocks!

Kelloggs

• Earnings for the December quarter dropped to $176 million, or 44 cents a share, from $182 million, or 45 cents a share, a year earlier. The food company backed its 2008 forecast, which falls below Wall Street's current projection.
• Kellogg's gross margin for the quarter slid 50 basis points to 42.8%, hit by double-digit increases in commodity, fuel and energy costs. (but ignore that, inflation is just in your imagination and not a factor - PPI increases are negligible)
• To partially offset the continued cost inflation, we have increased prices and pursued various productivity initiatives." (ignore that - CPI increases are negligible)

So with Kellogg's all you need to know is the CEO is not reading the government reports (again!), and does not realize that is rising commodity, fuel, and energy costs are not real. Further his price increases will not his American consumers, because government reports tell us CPI is rising 3%... what is all this double digit baloney? Obviously excuse making by the CEO.

Kraft

• Kraft Foods Inc., the nation's biggest food and beverage maker, said Wednesday its fourth-quarter profit fell 6 percent due to higher dairy prices and one-time costs. Net income fell to $585 million, or 38 cents per share, for the three months ending Dec. 31. That's down from $624 million, or 38 cents per share, during the same period last year.
• The company primarily blamed a nearly 40 percent boost in dairy prices during the quarter for the earnings decline. The high commodities costs dragged down operating earnings at the company's North American Cheese and Foodservice division by more than 53 percent. (ignore that, just imagination)
  
• Kraft's operating margin dropped to 11.4% from 14.2% the prior year amid what the company called an "unprecedented" input cost environment.

Again, another CEO who truly does not understand our government reports. 40% dairy costs? I find that nowhere in any CPI or PPI report. So again, just a figment of another CEO's imagination and please ignore it.

I wrote this about UPS yesterday

UPS (UPS) - always interested in the bellweather transport companies commentary - probably they will say "things have slowed down, it looks like it will be slow next quarter - what's that? News flash, Fed cuts rates! Never mind - BOOM TIMES by Memorial Day!"

UPS

• UPS (UPS) matched analysts' adjusted earnings estimates for the fourth quarter, but the package shipper predicted a "difficult" first three months of 2008.
• Executives said UPS was hampered by the large spike in fuel prices in a short period of time in the fourth quarter. Usually, the company is able to pass increases in fuel prices along to customers, but executives said that wasn't as easy to do in the fourth quarter because of how quickly fuel prices rose. (please ignore the large spikes in fuel prices, just imagination running wild again)
  

So the first part of my prediction came true, and when the Fed cuts this afternoon (which again, solves EVERYTHING) I am sure the CEO will come back on the wire, and say "forget everything we said this morning, unicorns and butterflies are here again!"

And as I said with the other 2 companies, please ignore the comment about large spikes in fuel prices, because I don't see any of that in government inflation reports. So again, a figment of imagination by another CEO. And also ignore how the transport companies have been passing along fuel surcharges to companies - because when one passes along higher surcharges to companies, that also does not cause inflation.

Again, I am seeing a lot of imagination by all these CEOs of late as we've discussed this week. They are all seeing some sort of imaginary inflation that our government reports do not show. So obviously one is wrong. Since I always trust the government, it is very obvious that all these CEO's are living in an imaginary world and just making excuses for their poor performance. Thankfully we have Fed cuts coming anyhow... and that solves EVERYTHING. Even imaginary inflation. World of Shortages anyone? Stagflation? Nah.

At least Kool Aid is not going up in price!

Long imaginary inflation and CEOs who read government reports to see the "truth"

News Alert: Altria (MO) to Spin off Philip Morris International March 28

Strange to see an earnings report released during the middle of the trading session, but Altria (MO) just posted theirs.

• The Board of Directors of Altria voted today to authorize the spin-off of 100% of the shares of Philip Morris International (PMI) to Altria’s shareholders. The distribution will be made on March 28, 2008, to Altria shareholders of record as of 5:00 p.m. New York City Time on March 19, 2008 (the “record date”).
• Altria will distribute one share of PMI for every share of Altria common stock outstanding as of the record date, based on the number of Altria shares outstanding at 5:00 p.m. New York City Time on that date.
• Currently, there is no public market for PMI’s common stock. It is anticipated that PMI will be listed for trading on the NYSE under the symbol “PM.”

So it looks like a 1:1 distribution March 28th. And the new symbol for the international piece will be PM.

No position

Bookkeeping: Starting New Position in Kinross Gold (KGC)

I began a new position in Kinross Gold (KGC) here around $22. I plan to treat this as a hedge that I increase and decrease relatively often, much like the Ultrashort positions. I am only beginning with 600 shares today or roughly $13.2K or a 1.2% position. I'd like to add more lower if the stock falters to $21 (or better $20). But with another round of Fed cuts and more "liquidity" coming from Europe in the coming months/quarters, I expect gold to continue its trek to $1000+. So I want to get some skin in the game here. My belief is the UK will buckle first (cuts cuts cuts), and then eventually the EU (begrudgingly). Today's 0.6% Q4 GDP in the US even shocks me... Q3 was near 5%, so that is a heck of a drop off in just 3 months. Scary bad.

I wrote my full reasoning here for choosing Kinross [Jan 28 - Stalking Kinross Gold]. The stock has dipped a bit since I wrote that piece earlier this week, about 2%. These stocks trade in a relatively narrow range so every bit helps. My other potential choice of gold miners was Barrick Gold (ABX), but as you can see below these 2 trade in near lockstep so I don't see a reason to go with a basket approach of buying both. (again the risk with buying just 1 miner is a mine closure, flood, emergency etc - along with political risk in the countries the company mines in).



Long Kinross Gold in fund; no personal position

Bookkeeping: Cutting Google (GOOG) in Half Ahead of Earnings

What an environment for tech stocks. You open your mouth, you lose 20%. I have held Google (GOOG) in the fund since day 1 as a small position (1%ish)... I sold out briefly in late October [Closing Smallish Position in Google (GOOG)] as the stock approached $700, but did re-enter later in the year. But still it remained a small position, mostly due to valuation and having such a high market cap. The higher the market cap, the less potential long term appreciation.

However, since August I've had a bit of a concern about an advertising slowdown, more tied in with the mortgage company blowups (who do a huge amount of internet advertising) [Aug 30 - Google (GOOG) Can't Get Any Traction - Is This Why?] Google proved me wrong with an excellent earnings report last quarter, but now my worry extends more in a general economic sense. In a slowdown/recession the first thing to go is advertising as it is easy to cut. With that said, internet advertising is still in a secular growth trajectory. So the question is, when advertising will be cut, what will be the first to go? Traditional or online advertising? The second question is - does it really matter? Remember, 'Perception is Reality' - even if online advertising stays strong will people begin to move to the side of the aisle that says "so what, eventually advertising online will also be cut". If that is the perception than the stock will suffer, unfairly or not.

Either way, no reason to take the risk, and I am cutting my already small position in half. I have been debating this the past week, only to watch the stock continue to fall. This reduces Google from 1.1% of fund to 0.55%. If the stock implodes from that level, so be it - it won't have a large effect and I still like Google in the long run as a dominant franchise. I do expect its wayward competitor Yahoo (YHOO) to be bought out as I wrote in my 13 2008 Outlier predictions. I am selling 11 shares in the $550s. Technically the stock has closed below its 200 day moving average the past 2 sessions, which is another negative factor. Looking at a long term chart, there is some support around $500 and then $450. So those might be areas I buy back some stock if it falls; I still like the franchise - and one day the market will again embrace these names. But $450 is 22% lower from here.

Overall I have very small loss in Google, around $500 since inception. The stock has done a complete round trip since I began buying in August, and I have done very little trading in this stock, trying to just buy and hold. But as I keep saying, this is not a market for buy and hold investors and I gave up all my gains in this name. With earnings tomorrow, I don't want to bother with earnings risk, and this is exactly the type of name that has been punished brutally for saying "anything" - you say good things, you fall, you say bad things, you fall. So short of promising the world, I don't see how Google does not fall tomorrow. Not due to their business but due to fears and risk perceptions and multiple contractions. The stock now trades at 26x 2008 estimates, which is quite good for a company of its size growing so quickly - but I said the same thing for Apple (AAPL), and again in this environment, "value" means nothing. Earnings multiples mean nothing. All that matters is people don't want these stocks. Period.

Long Google, Apple in fund; no personal position

Byron Wien 5 Sure Things for a Turbulent Market

Thanks again to reader for sending me this article from Seeking Alpha (my favorite website of course) ;). The more readers we get, the more "analysts" I get working the streets out there. Soon, I may have to fire my team of hamsters which until now were my team of analysts.

While I don't agree 100% with every comment Byron Wien says in this piece, I agree 97%. And some of it is almost verbatim to things I have written. And when I write some of the harsh things I have written (especially as with yesterday talking about how the US is really falling behind in so many ways) I sit back and think "Am I overdoing it?", "Am I sounding like a sky is falling type?", "Will readers think I am anti-American or something?" (answer: no, I am simply saddened to see much of what is happening - the cost to many, for the pleasure and profit of a few - and seemingly no end to it)... but then I read a story like this from a very respected (and much older) gentleman who seems to see things through the same lense I do, and I feel better in that I am not just a bitter dude blogging evil words. ;) I've heard his name bandied about many times, but have not read a piece by him.

Granted, we could both be wrong but he states many of the reasons I have been espousing re: this won't be your 2001 type of 2 quarters and done recession/slowdown/whatever. Again, these are mostly economic thoughts and the market can rally in the face of recession or bogged down sideways economy... but for those interested in someone else's thoughts on similar topics to which I blog about daily read on:

• I'm as cautious right now as I've been in some time. Certainly since 1999. I think where I disagree with the two previous speakers is that I think what's going on here is more serious than people recognize.
• What's going on in the housing industry is going to have long-term implications. You have probably two million unsold homes out there and I think that industry is going to be in the doldrums for at least two years. That means that all the people working in industries ancillary to the housing market, like the homebuilders, the mortgage brokers and so forth, are going to have tough times. Many of them are going to be laid off.
• I think the credit situation is extremely serious. Not only are the money center banks suffering huge writeoffs and significant executive turnover as a result of it, but they are also going to have to shore up their balance sheets and they're probably going to require foreign capital in order to do that.
• In addition to that, when they get financially solidified I think they're going to be very careful in making loans. So I think it's going to be hard to borrow money when people or institutions or corporations get the enthusiasm to do that.
• I also think that America is not quite the place it once was. This is a global environment and America is losing ground. I think people underestimate the unusual position America was in after the end of World War II where we had enormous scientific talent, we had enormous manufacturing capability and the rest of the world was in economic shambles.
• Today the rest of the world is in terrific shape. Some countries, particularly China, have infrastructures superior to ours and a scientific capability that rivals ours. We still have the greatest universities in the world, but many of the students coming to train here are going back to their home countries after graduation.
• My view is that people underestimate the seriousness of the energy situation. We are only finding oil at a rate equivalent to replacing the oil production that erodes every year as a result of the existing wells getting tired.
• In addition to that, China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumers 13 to 15 barrels, Japan, Korea the same amount. As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there's no way the world can meet that demand. So I think the price of oil is going a lot higher.
• I also think that we have to recognize that we've been running a trade deficit now for a decade -- a serious trade deficit for a decade -- and that foreign holders of dollars have become increasingly impatient. I traveled around the world twice last year. I was in the Middle East twice and in China and India and I can tell you that while they are not going to sell any U.S. bonds, they may slow down their buying of them. Our demand for the kindness of strangers to finance our deficits is going to continue inexorably. So I think that's leading to a serious situation.
• Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
• Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.
• The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies.
• Cotton is going to be the commodity of choice because the world's standard of living is increasing and the places where it's increasing fastest are warm and they don't wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that's all you have to know.
• Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the seven percent that they did last year.
• Our portfolio is very heavily overseas, but we're in the agricultural area with Potash Corp (POT) and a lot of energy stocks.

Again, I agree with just about everything. I do think there is a potential for the dollar to be bottoming. Not because we won't continue to cut and turn into the American peso. But because I think things will worsen overseas, and the European countries will be forced to cut rates (both UK and EU) - that could help the US dollar "relatively speaking" as we bash it in the knee caps with repeated cuts. But otherwise... I agree with all he just said and have written all these things in the 6 months of the blog.

Long Potash in fund and personal account (and long any crop in the world in theory)

FBI Investigating 14 Companies Over Loans

As I've been saying, we need to find a "fall guy" - this generations Jeffrey Skilling (Enron), or Dennis Kozlowski (Tyco), or Bernie Ebbers (Worldcom) - hell, Martha Stewart will do in a pinch!

Just step 1 of a long process. The next laughable step (again, humans follow the same path over and over and over) will be the politicians red faced and fist shaking "How could this happen!?!" as they have their hearings...a joke, all of it. When the money was rolling in, nothing was questioned. As long as the 'right people' were getting rich, no regulation needs to matter. Now, suddenly will come the wave of (fake) outrage.

• The Federal Bureau of Investigation on Tuesday said it is investigating 14 companies for possible fraud or insider trading violations in connection with loans made to risky borrowers, and investments spun off of those loans.
• Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the industry, from mortgage lenders to financial firms that bundle home loans into securities sold to investors.
• The development comes as authorities in New York and Connecticut investigate whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors. (you bet they did, but I am sure their lobbying staff can make most of this trouble "go away" and if we repeat 2001-2003, they will pay massive fines.... fines around $5 million! Or about 0.001% of all the billions made in this fiasco. And admit no wrong doing. Because people who pay fines, of course do so out of charity.)

Those Who Cannot Learn from History are Doomed to Repeat It. And repeat it we will. By some bubble being birthed today with "easy credit 2.0", that will come to fruition (and then implode) circa 2012-2014. Count on it.

Earnings Preview Wednesday

It appears we have entered the era of late August, September - where each bad data point is cheered by the market because it meant (Kool Aid!) more Fed cuts. We'll see how long it lasts. We have 2 long, cold months until the next Fed meeting after this month. Will we even make it to Valentine's Day before more clamoring for cuts begins? The folks in NYC are drug addicts... they need their cuts. As you can see I am near to my "utmost caution" allocation that I was hoping to get to by this time leading to the Fed meeting. 15% cash and >20% short exposure.

Altria (MO) - big MO! Let's see if they have anothing more to add about the Philips Morris International spin off - which I'd like to get my grubby hands on. After struggling the past week during "opposite time" (worst of breed rocks, best of breed stinks), the stock made a decent surge today.

Amazon.com (AMZN) - obviously best at what they do, but I could never get behind that valuation. And in this type of market where anything of remotely high valuation gets sand blasted, I wouldn't want to risk it. Anything remotely related to tech has been a disaster of late. Until I see Microsoft (MSFT) rewarded for it's great news and (in theory) "safe haven" status, it is hard for me to get back on the tech bandwagon.

Boeing (BA) - don't look now, but Mark is suddenly interested in this beaten down giant who is part of a worldwide growth secular growth market. In a better market, I'd be interested and I can see adding this later in the year.

Covance (CVD) - the last of the 3 major players in US drug research outsourcing. As I said, I looked at this group 8 weeks ago, deemed them to expensive. I looked again this weekend - still found them expensive, although I think it's a great sector.

Evergreen Solar (ESLR) - just has been a long term dog of the sector, constantly on the cusp of raging success and profitability. One day.... maybe. I suppose it will affect the solar names, but I see no reason to pile into a name like this on hope, when leadership companies are producing day in and day out. But we have to watch it since investors treat solar stocks like a monolith - they are either all good or all bad. One day that will stop. I hope.

Kellogg (K), Kraft (KFT) - more CEOs who are going to try to tell us they see (haha) inflation or something. Silly CEOs.. there is no inflation out there. It's all in your imagination. More Fed cuts by the way! NYC and the top 1% must be saved! Go cry about your inflation to the bottom 60%.

Legg Mason (LM) - asset manager who wishes they were Blackrock (BLK)

Merck (MRK) - one of the biggest producers of Washington DC lobbyists. I also believe they run a side business somehow relating to drugs.

Pulte Homes (PHM) - a company I actually like along with Ryland (RYL). And maybe Toll Brothers (TOL) especially if stuffing Freddie and Fannie permanently with $700K+ mortgages is the wave of the future. When I turn to homebuilders permanently, expect these to be the names.

Starbucks (SBUX) - yawn. New CEO who was old CEO will promise the comeback of the century. Rebate checks will allow Americans to buy 30 lattes each. Go look at a chart of Dell (DELL) and remember the last time a new CEO who was the old CEO came around. Yawn.

UPS (UPS) - always interested in the bellweather transport companies commentary - probably they will say "things have slowed down, it looks like it will be slow next quarter - what's that? News flash, Fed cuts rates! Never mind - BOOM TIMES by Memorial Day!"

Long none of the above

Pilgrim's Pride CEO Lacking Good Government CPI/PPI Data

Following up on yesterday's Tyson Foods (TSN) commentary [Some Economics Signals from Companies Themselves], today we have earnings from the largest US chicken producer, Pilgrims Pride (PPC). But again, please ignore everything below because there is no inflation out there - it's only in our imagination per CPI/PPI data. But for those who like to imagine (or actually shop for groceries), I submit:

• Pilgrim's Pride Corp (PPC) on Tuesday reported a quarterly loss instead of the profit Wall Street had expected, sending its shares down 8 percent, as the largest U.S. chicken producer faced much higher feed prices.
• For the first quarter ended on Dec. 29, the Pittsburg, Texas-based company said its loss had widened to $32.3 million, or 49 cents per share, from $8.7 million, or 13 cents per share, a year earlier. Excluding a one-time income tax charge of $13 million, the loss was 29 cents per share. On that basis, Wall Street analysts on average had expected a profit of 34 cents, according to Reuters Estimates. (to analysts --> "Oops")
• "Our feed-ingredient costs for the quarter, on a pro forma basis, rose 24 percent, or $157 million, when compared to the same period a year ago," Chairman Ken Pilgrim said in a statement. (hmm, I don't see anything like that in goverment reports - surely there must be an error on your side Mr. Pilgrim)
• "Those cost increases -- when coupled with labor shortages, higher production, freight and fuel costs during the quarter -- offset most of the improvements in market pricing and product mix," he said. (Mr. Pilgrim, Fed cuts solve everything - remember how the August Fed cuts helped? And the Halloween Fed cut helped? Now stop your whining and enjoy the Kool Aid with the rest of us... go buy a home builder stock or something! Always takes the edge off of 24% cost increases)

So yet another CEO who clearly has no clue. If only he would read the government reports he would see inflation is contained, and benign. Hence, we can cut interest rates to zero if we choose to. Because inflation would somehow still be contained and benign. Ah, those government reports - so awesome.

No position

Credit Default Swaps Paint Ugly Picture for Homebuilders. Stock Prices of Late? Unicorns and Butterflies!

You can't tell from the large spike in stock prices, but odds are increasing that we are going to get a bankruptcy in the housing sector. Or multiple ones. [Jan 11th - Standard Pacific (SPF) - the First Major Homebuilder to Go?] But maybe not in this era of government intervention and moral hazard. Perhaps a shotgun wedding will be arranged or a private equity or foreign buyer will be "gently persuaded" on the merits of buying a homebuilder. After all the US real estate market will come back. Heck, by spring 08 at this rate right? We can get those Fed cuts down to low to mid 2%s. We can increase mortgages covered by Fannie and Freddie to some ungoldy number like say $700K+ (oh wait, that's already taken care of) etc.

Well the bond market seems to say differently. I keep pointing this out because all fall while the equity market was drinking "Fed cuts solve everything" Kool Aid, the bond markets were signaling a different story. I remember repeated blog entries wondering how the market was not falling when the bond market was signaling bad things. Then in a span of 3 weeks in 2008 it appears the bottom fell out. Well humans are very pattern oriented, so we are in another phase of Kool Aid now. This time we are told to not fight the Fed. Just like we were told in August... October... etc etc.

Again it's a matter of perspective. If one believes this recession talk is nonsense, a media creation, and the US consumer will be fine once he is loaded with free money from China... I mean bonds sold to China because the US is broke... and refinancing boom 2.0 will save us, it's all upside from here in homebuilders, financials, and retailers. If not, you just sit and wait patiently for the impatient toddler that is the equity market to look to the bond market as its scolding parent and frown once again. We shall see how it plays out.

• The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.
• Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments. According to Byron Douglass, an analyst at Credit Derivatives Research, the most exposed are Standard Pacific, Hovnanian (NYSE:HOV) , Beazer, and Meritage. All are among the top 15 publicly-listed US homebuilders.
• Mr Douglass said bankruptcies were "highly likely" among top homebuilders. Homebuilding is viewed as being the sector most threatened by the slowdown as housing has been the worst hit part of the economy.

One of 13 2008 Outlier Predictions made in December was not 1, not 2, but 3 major homebuilders go under in 2008. However, my prediction was made assuming free market capitalist society was allowed to reign. Obviously, that is a very bad assumption in 'socialist' USA, where no one is truly allowed to pay the price :)

No positions

Some Trina Solar (TSL) Updates

Some updates for this portfolio killer on both production / sales....

• Trina Solar Ltd., which makes solar wafers and related products, said Tuesday it has already sold most of its planned 2008 output.
• The company said it expects to produce 200 to 210 megawatts worth of solar modules this year. As of Tuesday, it said it had sold 100 percent of the modules it plans to build in the first half of the year, and 75 percent of its expected output for the second half.
• In the fourth quarter, Trina said it started two new solar cell production lines, processed 75 percent of solar cells in-house and began producing 220-watt multicrystalline-based solar modules.

....and polysilicon (althought without pricing information i.e. what price they paid it tells us very little)

• Solar energy company Trina Solar Ltd (TSL) said on Tuesday it has secured more than 80 percent of its silicon requirements for 2008 and 60 percent of its needs for 2009.
• Silicon is the key raw material that goes into solar cells and panels. Solar cell and module producers have been grappling with tight supplies of the material, leading to soaring prices. Silicon supplies are expected to become more ample next year as new production capacity comes online.
• Trina said it sources up to 80 percent of its silicon requirements from reclaimed silicon sources, saving it between 30 percent and 50 percent when compared with spot market prices.

It all sounds good and dandy... "up to" 80% of silicon from reclaimed sources saving 30-50% compared to spot prices (currently $400) yet gross margins struggle near 20%. (some peers doing 4-5% higher)

The good news is the in house cell production - this is the long awaited step that should be helping gross margins. We'll see if there is proof in the pudding at the next earnings report in February. This stock seems to be a soul brother of Solarfun Power (SOLF) - a company which could not get out of this way for quarters on end during 2007, until finally a brief rocket shot in the last part of the year (only to give most of that back in 2008 of course). With the low stock price in relation to earnings estimates, it is clear management with its 2 faltering quarters has lost the trust on the Street and the earnings estimates (which show a huge variance of $1.65 to $3.40) are not believed. Further, you can see how many moving parts are in this industry. Low estimate of $1.65 with high estimate over 100% higher? Ugh. Some clarity would really help this stock.

Long Trina Solar in fund and in personal account

Fascinating Move by Walmart (WMT) - Continuing "Pooring of America" Scenario

I thought Fed cuts fixed all these ills? Hmm....

Walmart Chops Prices in Bid to Lure Shoppers

• Wal-Mart announced Tuesday that it will chop prices between 10 to 30% this week on groceries, electronics and other home-related products in an effort to keep its cash-strapped consumers excited about shopping.
• While its rivals, including Target (TGT, Fortune 500), have seen sales decelerate dramatically in recent weeks from a consumer spending slowdown, Wal-Mart (WMT, Fortune 500) has been benefiting from more shoppers trading down to its discount stores.
• The world's largest retailer recently reported that its December same-store sales rose 2.4%, which was at the high-end of its expectations for the month.
• However, one retail analyst said the timing of the price cut, coming just ahead of the Super Bowl weekend, is a clever marketing move by Wal-Mart.
• Wal-Mart spokeswoman Melissa O'Brien told CNNMoney.com that this month's week-long additional price cuts are "the first of more to come." "We will have more of these during the busier shopping periods of the year like Valentine's Day and Easter," O'Brien said.
• In addition to the extra discounts on "thousands of products," the retailer said it will offer no interest for 18 months on purchases of $250 or more with a Wal-Mart Credit Card.

Very interesting. Very. I continue to eye Walmart (WMT) as a potential inclusion to the fund. While its not a typical holding, if the recession is farther and deeper than currently is consensus (and keep in mind, consensus 2 months ago was there will be no real slowdown), than this is an obvious beneficiary. Unfortunately moves like this, while driving traffic in, do hurt profits. But it is simply fascinating in a macro economic lense...

No position

Consol Energy (CNX) Profit Falls - But Who Cares?

Consol Energy (CNX) reported a very ho hum quarter; in fact not so great (idled mine being a main factor). Similar to what it did 3 months ago [Oct 25- Consol Energy Reports as Expected]. But it doesn't really matter. I went bullish on coal in mid September when no one liked them [Coal Stocks Quietely in a Bull Market], and as each month passes and more data points come out about the shortages in energy [China has Energy Shortage, South Africa has Energy Shortage] I think coal is becoming more and more of a secular growth story - joining the agriculture names, and global infrastructure names as one of my favorite themes. Deserving a larger weight in the fund holdings. While I did sell off some names today, this is more a condition of a bear market, not specific to these stocks. On the next pull back (if/when it occurs) I plan to make these larger holdings than the basket of stocks I own has been the past 4 months (generally a 5-7% stake).

As energy shortages become more of a crisis the world over, I can see more countries hoarding their own reserves... and coal is turning more into a global marketplace - so those with excess will benefit. As other countries take their supply out of the world marketplace, the US producers, who do have excess, will benefit. And if there is one thing the US has excess of aside from "financial innovation" and hot air out of politicians, it's coal. And countries in crisis will pay up for this, especially with our trashed dollar making it so cheap for them to import. This was my original thesis back in the fall, and it is playing out like clockwork. So I plan to expand the fund position in this sector, as the secular growth story is building. So earnings here or there... whatever... the next few years are going to showcase coal in my belief. Of course in the near term, much like a gold miner, there is always risk associated with mine issues - so you will have opportunities along the way. But you can look at the chart of Consol Energy (CNX) above... and see a stock at a 52 week high... in *THIS* type of market. That tells you all you need to know. In fact it reminds me of the fertilizer stocks about a year ago when people were saying "what's the big fuss? why are these stocks ramping? Overvalued!!"

Consol Energy Profits Falls on Idled Mine

• Coal producer Consol Energy Inc (CNX) said on Tuesday that despite soaring coal prices, fourth-quarter profit fell sharply, much of it because of idled production at one of its main mines.
• Net earnings were $6.8 million, or 4 cents per share, compared with $115.3 million, or 62 cents per share, in the same quarter of 2006, the Pittsburgh-based company said. Revenue fell 3.7 percent to $918.6 million.
• Consol said the Buchanan Mine roof fall that occurred last July, forced the mine to idle production and hurt net income by approximately $31 million.
• There were additional expenses incurred in managing and monitoring the underground mine atmosphere since the mine was idled, as well as reduced income from lost sales.
• Consol had expected to resume full production in January at Buchanan near Mavisdale, Virginia. But last week it said it hoped to enter the mine for evaluation and repairs on Jan 27.
• In October, Consol lowered fourth-quarter and full-year production estimates, citing adverse geological conditions at two other mines as well as the idling of Buchanan.
• "The idling of the Buchanan Mine for the entire quarter significantly capped fourth quarter earnings," said President and Chief Executive Officer Brett Harvey. "However, now that we have reentered the mine, I expect this event to move quickly to conclusion with the result that financial performance should improve substantially."
• "Despite the loss of Buchanan for the entire quarter," Harvey added, "coal operations still managed to report a period-to-period increase in average realized prices of 5.1 percent, a modest increase in total costs per ton of 1.6 percent, an increase in operating margins of 20.5 percent and an increase in financial margins of 33.8 percent."
• He said coal fundamentals remain good. "Global demand for coal is strong and sets a positive tone in both our export markets and the steam market here in the United States." He said steam coal supplies were in close balance with demand, while high quality metallurgical coal was in tight supply.

Wow a lot of bad news - imagine if Apple (AAPL) reported such a quarter? Instead of dropping 20% it would be down 90%. How bad did this hit Consol Energy? Off a massive 1.6%. That tells you all you need to know. Now I do hope the general market takes these coal stocks down so I can remount sold off positions at lower prices. But unlike retailers or financials, this is truly a growth market with fundamentals behind it... so you have to discern between one rally and another, as to "why".

One more thing... 10 Year US Coal Export Deals Possible

• With overseas demand for U.S. coal so strong, CONSOL Energy (CNX) could this year sign the longest TERM contracts seen in recent years -- seven to 10 years in duration, CEO Bret Harvey said Tuesday.
• With the strength of global coal demand expected to continue unabated this year, we could sign additional international contracts for steam coal this year with durations of seven to 10 years," Harvey said in a news release describing the company's fourth-quarter performance.

Bingo. Secular growth market.

Long Consol Energy in fund; no personal position (yet)

US Markets Continue to Savage Oil Service Stocks

Even in the oil services world, the US (Gulf) markets are laggards. We seem to be screwing up every company, even in the best sectors. Smith International (SII) is selling off today on "record earnings" (but missing estimates) and weakness in the US markets contributed to not so great margins while also hurting near term guidance. 2009 should be a good year for this name, but with the market of an attention span of a 4 year old, 2009 might as well be 2019.

This is not a major position at 1.3% of the fund, and I was considering dropping it even further going into earnings, but since I was sitting on a quick loss in this position (bought in low $70s) I didn't want to sell. But once again, a lesson that the market reteaches you over and over. Better to take a loss many times, than wait and hope. Now I have a more meaningful loss as the stock is down 9% today. I'll probably exit this position wholesale if we get a decent bounce back to $60 because the specter of "weak US offshore" is going to hang over many names in this sector. I've tried to focus on more internationally focused names both in drilling and oil services, but the US weakness taints almost everything. So there is no escaping it.

I am going to use this opportunity to cut back on National Oilwell Varco (NOV) which is also a 1.3% position - before its earnings. I'm sure they will have an issue with the US as well. (who doesn't?) It's chart looks like Smith International's did 24 hours ago. So I want to take the sale when I can, better here at $65 than when it was $55 last week.... there really is no safe harbor out there. I have 225 shares, I am going to cut it back to 100 shares (selling 125) and then just keep it tucked away in some dark corner of the portfolio. If it sells off post earnings, well it is not a major part of the portfolio at that point. I still like this sector (oil services) but finding something totally not affiliated with the US is hard to do. Again, it is trecherous to be holding anything into earnings right now, and anything associated with the USA land, air, or sea - is causing pain. Unless your a homebuilder or financial of course since the Fed cuts fix everything. Or so the Kool Aid says.

These things are getting very cheap, Smith International now is trading at less than 15x 2008 estimates, but again - the market doesn't care about value and continues to selloff anything with any strength due to "disappointment". Why not buy "cheap" stocks? Well "cheap" stocks can remain so for many quarters... or years. This is what value investors do - they buy, and sit for however long until the market favors their stocks again. Eventually they are right but it could be 2 months, 2 quarters, 2 years or 5 years. And in between now and whenever "then" is, a lot of opportunity cost is lost. It is not a "right" or "wrong" strategy - good investors of all types of strategy can make money over the long run. But just not my cup of tea (mostly). Trina Solar (TSL) is a great example of a value stock - based on all perceptions of value it's cheap. Within the solar sector it looks even cheaper. Yet it does nothing month after month, but lose money for investors. One day it will probably make a 40% move in 1 week. But from what level? Those who bought in the $50s and $60s would not even break even if it made a 40% move from today's levels. That's the problem with value investing - you need to time your entries well even in that style of investing or you are doomed to lose money. Having a portfolio of 50 Trina Solars just seems like an exercise in frustration. Even having 3-4 of them hurts performance.

We want the money working for us now, in things that will be working in the coming few months - trying to find relative strength. I see a lot of good values in many sectors now - many considered growth sectors in fact. But that does not mean those stocks won't trade in a listless 10-15% narrow band for months or quarters to come. When their technical conditions improve, this will mean buyers (the big time buyers in the market) are once again interested in these names, and that's when I will return in larger scale to these names/sectors. I don't want a portfolio full of listless names, that can drift sideways or downs for quarters on end, waiting for the eventual day that the stocks bounce 30% in a week (that's what people who bought financials, homebuilders, and retailers have been doing the past 6 months) Eventually you will be "right" but off of what level? Usually a far far far lower level than you entered the stock. So you are just paring losses and wasting a lot of time, nothing else. I said the exact same thing for CNH Global (CNH) [Closing Last of CNH Global]- it was cheap before earnings... it got a whole lot cheaper after earnings... and it still is cheap. Who knows how much longer it will remain "cheap"? Maybe 1 more week? 1 month? 1 year? Until the market deems it's going to recognize "value", I don't see a need to sit there waiting for the market to come to it's senses. By the time it does, the stock could be far "cheaper" than it is today, which means by holding it, we lost even more money. Refiners, another group that was "cheap" for months on end... only to become more cheap by the week (losing investors money).

What appears to be happening is the same correction that took 60-80% off many retail, financial, and homebuilder stocks will now happen to most other sectors... because.... "well that's how it is". Sense has no room in the market in the near term and multiples are contracting across the board. At some point this will reverse and people will wake up and say "wow these things are darn cheap".... but until then these are just buoys in a rough sea, directionless and without any group of buyers willing to come to the rescue.

Smith International earnings

• Smith International Inc (SII) on Tuesday reported a 17 percent increase in its fourth-quarter profit, but the results fell short of Wall Street expectations sending the oilfield services company's shares down 11 percent.
• Flooding in Mexico and a drop in the number of rigs working in shallow waters in the U.S. Gulf of Mexico are among the factors that weighed on the Houston company's profit margins.
• The company said its fourth-quarter net income rose to $167.0 million, or 83 cents per share, from $143.0 million, or 71 cents per share in the year-ago quarter. Revenue rose to $2.3 billion from $2.0 billion.
• Analysts surveyed on average had expected a profit of 88 cents per share, according to Reuters Estimates.
• Chief Executive Officer Doug Rock said in a statement that $3.70 to $3.80 per share would be a "reasonable" expectation for earnings in 2008. For 2008, Wall Street had expected a 2008 profit of $4.00 a share, according to Reuters estimates.

Long Smith International, Trina Solar, and National Oilwell Varco in fund; no personal position

Bookkeeping: Trimming Many Positions

These are not wholesale selloffs - but simply trimming 10-25% off of some long positions. Technically, many have bounced back so they are now below their 50 day moving average. If the market makes a sweeping move upward, then these sells will be poor decisions as the stocks will continue to ramp up, but as I look across the market I see a lot of stocks in very similar situations - having bounced from panic oversold lows (on very damaged charts), they have now trended back up to the 50 day moving average. This is a key technical level, and for moves to continue these stocks need to close above this level. I'll use Foster Wheeler (FWLT) as an example, but literally I could replace Foster Wheeler with about 150 stocks out of 200 on my watch list. They all are in the same condition. If this is indeed the bottom, and the next bull market begins, well you simply have to pay up at a higher price for the same stock once the technical condition improves. I am not betting that way myself, so I am raising cash to buy back these same names at (hopefully) lower prices on the next round of correction.

A few other stocks I trimmed are simply not performing or acting well at all, especially in the technology group - Apple (AAPL) is a great example. Another stock on my watch list, Intuitive Surgical (ISRG) is another. You'd expect people to come back to these names if the market were truly healthy. I could be wrong, and with a few more days of kool aid, maybe investors will flee back to these names and good times will be here again. But their lack of bounce makes me worried. So I'd rather take some smaller loss here in some of these names, rather than be selling into the next downturn (again, I am assuming there will be a next downturn). This does not change my affinity for any of these names fundamentally, but the vast majority of stocks in my portfolio or watch list (for future potential addition) are in poor technical condition. Outside of fertilizer and coal I don't see a whole bevy of stocks above their 50 day moving averages...

I've trimmed

1. Mastercard (MA)
2. Apple (AAPL)
3. Research in Motion (RIMM)
4. Foster Wheeler (FWLT)
5. Shaw Group (SGR)
6. Huron Consulting (HURN)
7. First Solar (FSLR)
8. Peabody Energy (BTU) <-- this is actually a healthy chart relatively speaking
9. Massey Energy (MEE) <--- same as BTU
10. Mechel (MTL)
11. Diamond Offshore (DO)
12. Suntech Power (STP)
13. Mosaic (MOS)

Again, aside from the 2 coal stocks, Mechel (which is a coal/steel/iron play), and Mosaic every chart above is not a good chart. While I pick stocks on fundamentals and long term trends, I don't want to ignore facts on the technical side staring me in the face - and the blunt truth is most stocks have a lot of technical damage in them - the type of things that do not get fixed in a week. I much prefer to buy stocks pulling back in strong uptrends, and that type of stock just is extremely rare. So I am taking the opposite tack of a bull market - instead of buying on pullbacks, I am selling on strength. I could be a day or two early, but we are now (just that quickly) at an inflection point. These stocks need to start breaking through overhead resistance (50 day moving average) to make the next leg up. Judging from what is "working" in this environment (worst of breed) it doesn't appear this will happen, but as always, I can (and will at times) be wrong. For now, caution and raising cash.

Long all names mentioned aside from Intuitive Surgical in fund; long Mosaic, Foster Wheeler, Suntech Power in personal account

Refiners Finally Moving

This is a very tough environment... the main things moving are the most beaten down sectors, so to partake you either (a) have to make wholesale leadership changes and believe financials, homebuilders, retailers are going to lead us to the next bull market or (b) be a very short term trader - buy these for what they are, trades, and then exit shortly.

In a mutual fund environment there is not much to do, other than to sit and watch as these parts of the market race and most areas with hopes outside of short covering bounces lag and do very little. This has been the case for most of the past week and a half in fact. Another of those long lost beaten down groups, the refiners, are finally making a huge move today based off the Valero Energy (VLO) move. As I wrote Sunday:

Valero (VLO) - the largest independent refiner; a group that has been demolished... still this group is usually worth a trade or two every year as its very cyclical - but the past 4-5 months have just been a big money loser trying to play these from the long side

Owning these names in this sector has just been a money losing expedition for much of the past 6 months. [Nov 7 - More Refining News] I know, because I've tried before cutting losses (at much higher levels). [Dec 17 - Closing Tesoro] [Dec 28 - Closing Frontier Oil] However, unlike the retail, financial, home builder complex I actually like this group for more than a week and a half trade; I just have ben waiting for "the trade" that comes 2-3x a year to come back. Each time I've tried of late it has not worked out. Is this finally the move? I don't know. What is interesting is in these beaten down groups all it takes is "we are not going out of business" and the stocks are putting on huge rallies. Meanwhile a stock like Microsoft (MSFT) posts incredible earnings/guidance and the market sells it off. Once again, a very difficult market. Only very short term trades buying "worst of" is working right now. This is even happening withing sectors - clear leadership stock Nokia (NOK) is struggling, whereas dog of all dogs Sprint (S) is making a huge move. These moves show to me just how over confidant and over exposed the shorts (bears) were. They are now being forced to cover. But the lack of movement up in previous leadership stocks show me this is not real buying (at this point). We have a combination of massive short covering driving up the "dogs" combined with some very short term traders partaking in the "trade" (the type of people who could care less about fundamentals - they only latch onto whatever is working for the moment). So it remains a market hard to really get behind.

Again, if you are in the camp of "this is the bottom", "the Fed and the government can make all the problems go away", then you want to be buying financials, retailers, home builders hand over fist as the leadership mantle returns to them. I still remain skeptical and it will take a multi month move in these sectors to sway me. You can see it in today's Countrywide (CFC) numbers - they promised this quarter they would return to profitability (kool aid alert!) - instead they post a large loss. Thankfully they have an arranged shotgun marriage with Bank of America (BAC) or the path to $0 would be paved for CFC.

More on Valero - Earnings tumble, but beat Wall St.

• U.S. refiner Valero Energy Corp (VLO.N: Quote, Profile, Research) on Tuesday said fourth-quarter earnings fell sharply on lower profits from gasoline production. Net income in the quarter dropped to $567 million, or $1.02 a share, from $1.11 billion, or $1.80 a share, last year.
• Profit margins from refining were relatively weak in the quarter as gasoline prices failed to keep pace with oil prices, which soared to record levels.
• Margins for many of its secondary products like asphalt, fuel oils and petrochemical feedstocks were also weak.
• Valero said it believes supply constraints coupled with seasonal demand growth will result in stronger gasoline margins this spring and summer.

That last point would indicate this group might finally be coming into favor. I keep an eye on crack spreads, as always.

No positions

Nikkei, Nasdaq, Homebuilders.... China Next?

Excellent graph from Minyanville.com (click to enlarge) showing a stark pattern of 4 bubbles... almost frightful in identical magnitude of each move both in the peaks (for all 4) and eventual falls (for the first 3, one to go)

First bubble, Japan (Nikkei) - orange
Second bubble, Nasdaq - yellow
Third bubble, home builder index - white
Fourth, Shanghai index - green

For those looking at silver lining, it looks like we could be somewhat close to bottoming out on the home builders... but again that does not mean a spike, turnaround and move up by 100% - as the pattern indicates, things can go "sideways" for ... years.

If Shanghai follows suit we will be talking about a drop from 6000 to 2000. The first 1000 is already in the bag, only 3000 more painful points to go. If you believe in such things ;) One other wrinkle is Shanghai is not truly an open market, with foreign investors allowed nor shorting. But we'll see if human fright during a downfall, and natural herd tendency, is more powerful than socialist controls...

Long Ultrashort Xinghau China 25 in fund and personal account

India Facing a Shortage of.... ?? .... Workers

I remember reading about this about 6 months ago in some publication; maybe BusinessWeek itself but here is another article so I might as well bring it to the blog. How can a country with 1 billion souls be short of workers? Well it's a certain type of worker of course - and those type are in short supply. When I read the article (whenever it was) last year about how IBM and Accenture were expanding in very big ways and outbidding the Wipro's (WIT) and Infosys' (IFY) for talent, I knew this was not an area to be invested in (these were major darlings of the market in 04-06), even though there is a serious dearth of Indian ADRs to invest in, in the USA. Bidding wars for talent eat at the profit margins.

Now why do we care? Multiple reasons... one this is yet another brick in the mountain of "eventual" inflation. China (and to lesser degree India) has provided deflationary forces to the US economy (this is why products are so cheap in Walmart even compared to 10 years ago, adjusted for wages). But that tide is now turning in the "white collar" in India... and yes it will eventually turn in China too. Don't think so? Remember that "big sucking sound" Ross Perot talked about in the early 90s? Well that wasn't China ... that was Mexico. Mexico with its $1.05/hr labor. In the automotive industry for example, there was a huge migration of factories and supplier factories down to Mexico. But constant competition and the need to find cheaper and cheaper supply made Mexico too expensive for many products, and not within 7-8 years. Then Mexico heard a big sucking sound... from the East (Far). And many an old "booming factory" town now is quite desolate. This is the amazing flow of capital across this globe that I reference all the time. It has no feelings, and it has no compassion - it goes where the cheap labor is. Now automotive is a bit insulated because shipping costs (due to heavy product) are so onerous, but most other industry went East young man! And guess what? I am awaiting the Vietnam ETF because that's the next spot where this capital will go once China at $0.40/hour becomes too expensive of a labor pool. And so it will go to Vietnam. That should take us to 2016 or so. After that? Well I don't know yet... but I am sure there is some labor pool who will see an upgrade in living standard even getting to $.20/hour.

But that's the long run - in the near term... as Western countries deal with "the reason things are so cheap" (i.e. lack of safety, quality control issues, financial control issues - i.e. dogs dying, kids sucking on lead infested toys, et al), eventually the customer demands better. And when the customer demands better, costs must go up as you must hire more head count for the safety/financial/quality issues. And on the other end of things, when food inflation (which is the #1 cost for most) starts ramping to a point people will starve at going rates, well then the wage must rise. (even if a little). So costs go up. We discussed the first hints of this a few weeks ago in 'Another Myth Falls - Exports Will Save the Economy'

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

But we'll worry about China down the road... for now let's see what's happening in India. Keep in mind this fits in very well with my "global wage arbitration" theme - which simply states for those in the bottom 60-80%, our wages will be falling to a mean, as those who can provide similar/same services throughout the globe rise... until eventually they (near) match. Sounds impossible eh? What if I told you I could get you a loan for 110% of the value of your home, with nothing down and I wouldn't check your income. You'd laugh... if this were 2001.

And then ask, if you in the role of "working for the man" got a 14-16% raise this year? (outside of promotion). And think how quickly a major gap can close among countries when one sees 15% annual raises, and another 2-3%. There is no blame or finger to point here - this is the reality of the truly flat, global economy we are now in stage 1 of. Eventually it will reach the point jobs are outsourced back to the US ..... No wait, that is already happening 'Indian Call Center Lands in Ohio - CNNMoney.com' but luckily we still get a premium in salary (for now).

• In a country with over 1 billion people, a worker shortage shouldn't be high on the list of concerns for corporate executives. But India, with the world's second-largest population, has a labor shortage in many industries.
• According to a recent report from London human resources firm ECA International, average wages at multinationals in India are likely to jump 14% this year, putting India at the top of a ranking of 47 countries worldwide for the second year in a row. "Salaries in India are catching up to developed nations at a faster rate [than in many other Asian countries]"
• According to another recent survey, by human capital firm Watson Wyatt Worldwide (WW), sectors such as manufacturing and pharmaceuticals will boost salaries this year. Manufacturing salaries are likely to grow 16%, with pharma rising 15.7%, Watson Wyatt reports. In 2007 these two sectors saw increases of 12.5% and 12% respectively. Overall, the firm projects average salaries across sectors this year to increase 14.8%.
• The pay hikes are also pronounced in other fast-growing sectors such as retail, infrastructure and engineering, aviation, health care, technology, and real estate, where the demand-supply gap is huge. (that pretty much covers every white collar industry out there)
• The paucity of people isn't the only factor affecting salaries. "It's also to do with the expanding ambitions of existing companies, and new entrants to the sectors. For instance, there are just four listed health-care companies in India today, but over 50 more are keen to enter the sector. And some of those already in the health-care business have major expansion plans that call for hiring of many more workers. Fortis Healthcare, the operator of a dozen Indian hospitals and a subsidiary of India's leading pharmaceutical company, Ranbaxy Laboratories, began with one hospital three years ago. Now it hopes to operate 100 more in three to five years.
• Such ambitions are evident across sectors. Almost every big Indian conglomerate is entering retail, infrastructure, and real estate. At India's leading engineering and construction company Larsen & Toubro, the wage bill is up 50%, from $202 million in 2006 to $304 million in fiscal 2008. With an order book of $12.6 billion, L&T needs engineers and project managers. India needs over 150,000 engineers in infrastructure alone, and L&T hires 2,500 engineers and diploma-holders every year. It wants to double that. (hmm, funny I keep hearing how the infrastructure bull market is just about done....)
• Now employing 500 project managers with annual salaries ranging from $64,000 to $177,000, L&T needs over 500 managers in the next two years. (those salaries would be appreciates even here in good ole USA, no?)
• How will the company manage? M.S. Krishnamurthy, senior vice-president for human resources, says the plan is to lure people with employee stock options and pay a 20% salary premium to poach workers from rivals. "With senior management, the volume of value goes up," he says.
• The airline industry also has to pay out more to attract workers. India is one of the world's fastest growing aviation markets. The country's airlines have only 400 planes in operation, but they are likely to double that number by the end of the decade. With almost every Indian airline in serious expansion mode, India must increase the number of people employed as cabin-crew members by more than 300%—from 6,000 to 20,000—in the next two years. Even though a lot of cabin-crew training schools are sprouting in India, people still need to be trained, claims Ajay Singh, a director at low-cost airline SpiceJet. With salaries up around 20%, "recruitment is still an area of concern."
• To fly all those new planes, Gurgaon-based SpiceJet must go on a hiring spree and add 1,000 more pilots. However, there's a dearth of airline pilots in India already. So local airlines have been hiring retired foreign pilots—and that just pushes the wage bill higher. At SpiceJet, pilots now account for 50% of total wages, according to Singh.
• Even the most powerful name in corporate India is feeling the pinch. Reliance Retail, the Mumbai retail arm of mighty Reliance Industries, with 500 stores sprawled over 2 million square feet of retail space in India, has ambitious plans to increase its 17,000 head count to 70,000 in the near future. Such rapid expansion "does put pressure on resources," says Raghu Pillai, president and chief executive officer for operations and strategy at Reliance Retail. With attrition rates in the sector at nearly 40%, Pillai says salaries at Reliance Retail are up 20% to 50%.

Remember, there is a whole wide world out there, racing ahead. While we deal with our "financial innovations" and destroy our currency to bail out the engineers of the madness. This is why I keep repeating don't get fixated on the mess we've created here. Yes, India and China cannot continue at this breakneck pace and there will be periods of 1-2 years with some major swoons as excesses happen (as they do in every country, but especially ours). But the long term trend is very firm. And in the modernizing Middle East. And Brazil. Turkey. Etc.

Credit Suisse Bullish on Infrastructure in this Week's Barron's

Ironic that 2 weeks after Barron's itself seemed to come out bearish on the infrastructure group (by picking on Foster Wheeler in particular - although their comments could apply one and the same to everyone in the group) [Barron's Out With Negative Piece on Foster Wheeler (FWLT)], they have a piece this weekend from Credit Suisse that is very bullish. It basically emphasizes my points laid out numerous times... that this is not a end market that is going to go away if the US or W. Europe or Japan all go into recessions - these countries have their own needs and the cash to handle the situation no matter what happens to us.

I grabbed this from a message board so I don't have source link...

• WE RECENTLY HAD THE OPPORTUNITY to meet with the management teams of several industry leading engineering and construction companies including McDermott International, KBR, Chicago Bridge & Iron and Shaw Group.
• In summary, the takeaways from our meetings do not support the recent selloff in the stocks (off average of 22% year-to-date). Bidding activity remains extremely robust and capacity remains a real concern reflecting record levels of demand. Bottom line: Based on recent customer conversations, none of the companies are projecting a slowdown or potential slowdown in spending in the near future.
• We recommend buying a basket of engineering and construction names with exposure to the overall energy infrastructure spend including both oil and gas and power. (thanks, I already did that half a year ago) :)
• Forward-earnings multiples have compressed nearly nine points from early October (from approximately 26 times) to near historic-low levels. We use the 2002-2005 time frame as our base, as this depicts a more normalized cycle. In other words, this was prior to the emergence of the oil and gas and power cycle, and when growth prospects were much lower.
• To put this in perspective, the E&C group is currently trading at 17.5 times our 2008 estimates versus the historic range of 15 times to 20 times. Jacobs Engineering Group and Fluor remain at the high end of the range, but this is consistent as they are considered the bellwethers of the group.
• Projects continue to be economical as customers are reaping the benefits of record-high oil and gas prices despite recent commodity volatility. Front-end engineering and design (FEED) work continues to accelerate on the upstream side, a precursor for large engineering, procurement and construction (EPC) projects to come.
• We would also note that there are several differences with this cycle versus the prior. First, the current cycle is demand driven fueled by developing countries like China and India. It is also notable that most of the spending is slated to occur overseas, in particular, Asia Pacific and the Middle East. We believe this is a key point as current valuations indicate that investors appear to be incorrectly assuming that North America will be the primary driver of earnings growth in the coming years. Finally, national oil companies are becoming more important in the mix. (this I have been explaining month after month, without the access or ability to speak to management as an analyst would have - the writing is on the wall, and very clear - however I am glad those who speak to these people on a regular basis come to the similar conclusion I reached independently)

I think, we... as (mostly) Americans need to stop focusing so much inwardly and realize there is a whole brave world out there [A Tour Through the Middle East]. Many very hungry people on the cusp of 2nd and 1st world success over the coming decade. Spending time and interacting with people daily we are a very inward looking nation i.e. if it doesn't happen here it doesn't matter. This is reflected in news, entertainment, most all media (and why I try to read UK papers to see what is "really going on out there"). This is a very dangerous mind set, and partly to blame for many of the ills (in my opinion) hitting us. We did many great things in the past 60-80 years and appear to be resting on laurels of those people before us who did the hard work. We are in global competition and are still of the mindset of 50/60s/70s/80s/90s when we were the end all, be all. (except for USSR for a time). That's changing. The rest of the world is not decoupled, we (USA) are still a large gravitational pull - but each year that passes more and more companies, and people's will be able to be successful with or without us. I only point this out because when I see the negative cases against the agriculture, infrastructure, indeed coal stocks - it is all so focused on "Well if the US goes to recession, no sector or company can win - in fact the rest of the world will essentially grind to a halt ... until the US emerges as a butterfly from a cocoon ... and then the rest of the world will again prosper thanks to us."

Dangerous. Very dangerous. In 25 years it might be the exact opposite in fact, the way things are going. Which is a sad statement on the sorry state of leadership (political), public education, priorities etc. We can do a lot better. In fact we need to. People work hard but there is a difference between working hard and working smart. Hopefully we see that before others start lapping us. I sometimes wonder if a stock market essentially standing in place from where it was a decade ago is a type of precursor. (yes it had its up and downs but we are doing a lot of thrashing about to get nowhere fast). We're up 35% on the S&P 500 in 10 years... that's not even matching the inflation rate. Thankfully we still have pockets of rabid innovation that are creating products that the whole world wants, but clearly not enough to support the entire economy. If we spent half as much time on education as we did on creating paper currency bulls... just imagine how great things would be...

Meanwhile, we can hand wring once more about how infrastructure stocks are doomed to end the cycle because of subprime and US recession. Again - even though almost none of their customers could care one iota.

And once again, proof positive the one US customer with limitless pockets (as long as you take from the great great grandchildren your pockets never empty) is happy to pony up dollars for the services of these companies - McDermott (MDR) with $500M contract for nuclear components (part of an earlier announced $1.7B contract but now going into backlog officially)

Long all names mentioned except Fluor in fund; long Shaw Group, Foster Wheeler in personal account

Some Economic Signals from Companies Themselves

I always prefer to hear what companies themselves are saying as opposed to listening to misguided, inaccurate, and backward looking government reports. I mentioned today [Earnings Preview Monday-Tuesday] would be an interesting day. The early results are not very encouraging. Let's take a look

First, I defended McDonald's (MCD) when it was downgraded a few weeks ago, on the US consumer slowdown theory [No Safety, Even in McDonald's] - and while it is too early to make a trend, it appears December showed flat same store sales in the US. Again it's one month, and a month that could of been impacted by weather and people scrimping for Christmas, but this is something to keep an eye on. If Jan-Feb see similar trends, then (a) I was wrong to say if nothing else, people will be fleeing to McDonald's as they get "poorer" and (b) the economy is even worse off than I imagined if people cannot even afford McDonald's. Again, you can't make anything out of a 1 month trend, but we definitely don't want to see similar results in the coming few months.

McDonald's Corp (NYSE:MCD - News), the world's largest restaurant chain operator, on Monday posted flat U.S. same-store sales in December, sending its shares down 8 percent and weighing on the entire restaurant sector

McDonald's cited softer consumer spending and severe winter weather for the flat U.S. December sales at restaurants open at least 13 months.

That result, the weakest monthly U.S. sales number since the company posted a decline in March 2003, spooked investors -- who worried that consumers had begun cutting back on spending at inexpensive and traditionally recession-resistant fast food chains.

Next, YRC Worldwide (YRCW) is one of the major trucking companies in the US - and a leading indicator on the economy (it's been in free fall for 3 quarters) looks like it posted (net of all the charges) a barely profitable quarter despite analysts looking for $0.54. Oops.

"The economic environment was challenging throughout 2007 and it was increasingly so in the fourth quarter," said President and Chief Executive Bill Zollars in a statement. "Looking forward, we expect the first quarter to also be difficult given it is seasonally the softest and we don't anticipate the economy improving in the near term."

Last, on the inflation front Tyson Foods (TSN) a stock I flagged way back at the beginning of the blog as a potential China pork play [Is Pork the Next Chinese Boom Play?] is announcing price hikes to compensate for the large costs they are absorbing feeding their livestock. Costs are up for 2008 $200M over where they expected it way back in.... November 2007. That's a factor of a miss of estimate by magnitude >60% in just 3 months. Just shows you how bad inflation is getting (errr if you don't listen to government reports that is). World of Shortages. They also withdrew 2008 guidance - never a good thing.

The company expects to face more than $500 million in additional grain costs for fiscal 2008, which CEO and President Dick Bond said is well above the $300 million increase it had expected in November.

"Because of these unanticipated and extraordinarily high corn and soybean meal costs, we have no choice but to raise prices substantially," Bond said.

"For the foreseeable future, consumers will pay more and more for food, especially protein, because grain represents a proportionally higher percentage of input costs compared to other foods," he said.

"It just seems it's not a prudent use of corn as it has affected food and food inflation," Bond said, calling for the government to lift its mandates on ethanol production.

Keep in mind, Tyson already substantially raised prices this year [Nov 12 - Tyson Foods Continues to Point to Food Inflation], so this is the next iteration and it's going to be "substantial". Note his last comment, which is something anyone with half a brain can see. Unfortunately, voter pandering won't allow this to happen... so the other 95% of us will continue to suffer so the farmers votes can be "secured".

On the plus side, that next round of exports to China (pork) might (eventually) come to fruition (but with costs so high this just seems like an un-investable sector)

"We are as well talking to COFCO and to the opportunities to export to China. It is a tremendous opportunity," said CEO Richard Bond. "I do believe that there was a significant loss to their number of hogs that were available in China."

So folks, these are not good signs. That said, if we use August 2007-December 2007 thinking this is GREAT news because it means the Fed can cut rates! Yahoo!

No positions except general apathy & disgust to those who keep passing more awful iterations of the ethanol boondoggle bills - costings millions upon millions to the other 95% of Americans not benefiting from said boondoggle

New Home Sales Plummet

In the department of "Oh Really? Shocker" ....

New Home Sales Fall by Record Amount

• Sales of new homes plunged by a record amount in 2007 while prices posted the weakest showing in 16 years, demonstrating the troubles builders are facing with a huge backlog of unsold homes.
• The Commerce Department reported Monday that sales of new homes dropped by 26.4 percent last year to 774,000. That marked the worst sales year on record, surpassing the old mark of a 23.1 percent plunge in 1980.
• The government reported that the median price of a new home barely budged last year, edging up a slight 0.2 percent to $246,900, the poorest showing since prices fell by 2.4 percent during the 1991 housing downturn.
• The new report reinforced the view that housing is currently undergoing its worst downturn in more than two decades, with the slump threatening to surpass in some ways the severe housing recession of the early 1980s.
• While the median home price for the entire year was up slightly, the median price of homes sold in December was $219,200. That was down 10.4 percent from a year ago, the biggest 12-month price drop in 37 years.
• It would take 9.6 months to eliminate the backlog of unsold new homes at the December sales pace, the longest stretch of time since the month's supply stood at 10.3 months in October 1981.
• The big fall in new home sales followed earlier reports that sales of existing homes fell by 13 percent in 2007, the biggest drop since 1982, while construction of new homes dropped by 24.8 percent last year, the biggest fall since a record decline in 1980.

So it's not all bad news. This is part of the whole denial, anger, acceptance process. Median home prices (while finally falling in December) are stubbornly high, and still need to fall. On the good side, new construction is now falling off a cliff which means we can actually begin working off inventories... by 2010.

Median home prices will be solved by 2 things (1) people forced out of their homes by unaffordability - although the government is doing everything in its power in making people continue paying for an overvalued product - they call this "help" and (2) stubborn home sellers in an illiquid market finally dropping prices. If the latter point does not happen then the other choice is we hold prices at this level and wait 7-9 years for real wages to increase 3-4% a year to catch up to where homes are actually affordable... for a person who has to actually have a FICO score north of 600, a documented income, and 5% down. (things that were not necessary in 2004-2006)

I'm still boggled by those calling for a housing bottom this summer, but I will be the first to say I am wrong if some miracle does happen. At this point I think the people who are going to be able to refinance with this "free money 2.0" policy of the Fed are just going to be happy not to have this huge weight over their head of an ARM jump. They are not going to be out in the market looking for a new home. So we wait, and wait. At some point the combination of falling prices and nearly free money (dare we go to 5.25%? 5.10% 30 year rates?) will bring business back. But I don't think one or the other - both will need to be there - especially with banks now actually forced to (gasp) assess credit worthiness of the borrowers. Oh yeh, one more thing they are trying to slide into this "rebate program" is a major overhaul in the limits of loans for Freddie and Fannie - instead of $417K as they have been for many years, now they want to shuffle mortgage limits up to $720K or so. Which means I'd be very afraid if you were a Freddie or Fannie investor... or a tax payer. A lot of Californians and New York (and other high cost of living states) are going to be salivating to shuffle off their risk to the quasi government institutions.... these companies are already on the edge and now we want to shuffle off even more high risk loans their way. Sounds prudent and a very solid idea from the politicians. Anything to get this housing market going and keep prices inflated over where they should be...

I Need Some Gold - Stalking Kinross Gold (KGC)

The more I hash out my earlier economic thoughts over the last half year and how things are playing out, the more I am making a bullish case for gold. I am obviously late to this game, and instead have a smallish position in Silver Wheaton (SLW) which I added in mid November [Market Seems to be Holding - Adding 2 Weak Dollar Plays]. Not a bad return at 10% net (outside of my trading around the position), but as you can see below over a 3 month period it is trailing the 4 largest gold miners, along with trailing the simple Gold ETF (GLD).



I am still going to hold onto the Silver Wheaton, but I want to get some gold exposure as well. I am relatively ambivalent on which gold miner but based on what is happening in South Africa, I want something facing away from that area of the world, with as little political risk as possible, and as unhedged as possible. From my superficial reading (I am not gold expert) it appears many of these companies (even the majors) are in "turnaround mode", so I don't really want that excess risk/reward - simply a play on all the things gold is. Newmont Mining (NEM) still has some relatively serious hedges (that they are unwinding) in place, and aside from Russia I don't see any place of major political risk that Kinross Gold mines. (or electrical risk in this case).

Further, on Jan 18th Kinross Gold provided us with some outlooks for 2008 and 2009 as summarized below

• "This will be an important year of transition at Kinross. In 2008, we expect to bring all three of our new, lower-cost development projects into production on schedule, increasing our gold equivalent production by 20 per cent this year and setting the stage for expected production of 2.5 to 2.6 million ounces in 2009, a 60-per-cent increase over 2007 production," said President and CEO Tye Burt.
• Based on a preliminary review of fourth quarter 2007 results, including the impact of higher royalty costs as a result of a higher gold price, and higher energy costs, Kinross currently expects its full-year average cost of sales for 2007 to be at the high end of, or slightly above, its previously stated cost of sales guidance range of $355 to $365 per gold equivalent ounce.
• In 2008, Kinross expects to produce approximately 1.9 - 2.0 million gold equivalent ounces, an increase of approximately 20 per cent from 2007 production levels, and 2.5 - 2.6 million gold equivalent ounces in 2009. These forecasts reflect the positive impact of new production from the Company's three development projects at Paracatu (Brazil), Kupol (Russian Federation), and Buckhorn (USA), all of which are expected to be commissioned during 2008
• Cost of sales per gold equivalent ounce is expected to average between $365 and $375 for the full year 2008. By the fourth quarter of 2008, the average cost of sales is expected to decrease to between $325 and $335 per gold equivalent ounce. As illustrated in the table below, costs are expected to decrease progressively over the course of the year as the Paracatu, Kupol, and Buckhorn projects are commissioned and total production increases. Based on the assumptions noted below, Kinross expects the average fourth quarter 2008 cost of sales per ounce to be indicative of the Company's average 2009 costs.

So if these numbers are to be believed, after a slight increase for most of 2008 over 2007 cost levels, the company expects by Q4 2008 and into 2009 to make meaningful reductions in costs (down to $325-335 per ounce), so that margin will all flow to the bottom line at that time. This is a very leveraged business, much like fertilizer in fact. While we do have some political risk in Russia, finding one of these miners without any risk is finding a needle in a haystack. I don't want to go down to the smaller fare and prefer to stick to the bigger names - again I am not trying to find the hidden gem per se, simply a company that can provide inflation hedge.

Now we saw at the worst of the selling last week that gold does not provide downside in a frantic, panic driven market - that's not the point. I do think as the US continues to print fiat money, and (eventually) the rest of the world "might" follow as their economies weaken, gold is still a good place to be. I called for $1000 gold in 2008 and that still looks very doable. [13 Outlier 2008 Predictions]. Some are calling for much higher prices and some much lower. Either way, we are trashing our dollar so it's another way (along with silver and even wheat, soybean futures, etc) to hedge away to something with consistent value - which our peso errr... dollar, no longer has. I am not going to be buying today in the mid $22s range, but instead have it on my radar and am hoping if we continue a selloff to see the stock price in the $20-$21 range. At that point I'd be beginning a position. If anyone who is reading happens to be a gold expert and has some skeleton in the closet I should know about Kinross please append a message to this post; again I would like a miner instead of the Gold ETF simply because I think there can be some nice leverage opportunities if gold continues upward (as margins expand). But of course there is also more risk as opposed to playing the simple route and just buying the metal ETF itself.

Long Silver Wheaton in fund; no personal position

China Has a Power Shortage; South Africa Has a Power Shortage

I talk about our coming World of Shortages (tm) :) each and every week. More and more evidence comes to the forefront, no matter what commodity we discuss. You can click here for all my posts about inflation which is essentially the other side of worldwide shortages.... we just have more and more evidence from a story here, and a story there. Once you begin adding up all these mole hills, eventually you have the mountain. Maybe this was why the coal stocks were so buoyant last week.

China Feels New Year Chill as Coal Shortage Bites

• China is experiencing an acute power shortage with a nationwide electricity shortfall at 70 gigawatts, the equivalent of almost Britain’s entire generating capacity
• State media has described the crisis as China’s worst-ever power shortage. With coal prices soaring and supplies disrupted by some of the most severe winter weather in years, it is certainly the most acute since 2004 when demand outstripped supply by 40 gigawatts.
• A rush for individual generators and to buy diesel to fuel them sent state firms into the international markets, provoking a spurt in crude oil prices.
• So worried is the government that on Friday it put in place a two-month ban on coal exports. (leaving more for our producers to fill the gap... bingo)
• The coal shortages have forced the five biggest electricity producers to close 90 power stations - with a combined capacity of more than 20,000 megawatts - in northern and central China. Coal stockpiles at the plants have dropped below the "caution mark" of three days' requirements.
• The shortage could not have come at a worse time for the ruling Communist Party. The leadership is anxious to ensure plentiful supplies of power for the most important holiday of the year, the Lunar New Year holiday,which begins on February 7, just as rising prices – particularly for food – are fuelling popular discontent.
• Chronic winter shortfalls of coal, which fuels 78 per cent of China’s electricity supply, have been aggravated by transport disruptions due to unusually heavy snow across central, eastern and northern China. The unusually icy temperatures have prompted a surge in demand for power as people try to keep warm.
• The core problem is that China’s economy is still caught between Marxist central planning and market forces. Domestic prices of coal have been liberalised and rose 14.2 per cent year on year in December while electricity prices rose only 2.1 per cent since these are capped to by the state to curb inflation. Utilities have chafed at caps on electricity rates that prevent them from passing the higher costs for coal on to customers.

That last point, is what I see as a major problem for China. They continue to supress free market pricing in the energy market... which in turn drives demand even higher than it should be, so its a very vicious cycle. Keep prices lower than they should be, and keep driving up demand over "market levels". At some point something breaks. And it breaks badly.

Now on to South Africa...

South African Mines Remain Shut Down Amid Power Shortages

• AngloGold Ashanti Ltd. and Gold Fields Ltd., Africa's biggest gold producers, kept their South African mines closed for a second day as an electricity shortage threatened growth in the continent's biggest economy.
• Mining companies stopped thousands of workers going down shafts, some of which are more than two miles (3.2 kilometers) deep, after state utility Eskom Holdings Ltd. said it couldn't guarantee a stable electric supply.
• Gold and platinum rose to records in London trading yesterday on concern that shortages may result from the mine closures. Eskom, which supplies 95 percent of South Africa's power, mostly by burning coal, can't meet demand after the government delayed an expansion decision by four years.
• Eskom asked 138 industrial customers on Jan. 24 to cut use after heavy rain damaged coal stocks, cutting generation that threatened to destabilize the entire grid, said Andrew Etzinger, a spokesman from Johannesburg-based Eskom.
• Talks also have started with coal suppliers about diverting some high-quality coal destined for exports to Eskom plants for blending with the coal normally used. Export-quality coal is more expensive than the coal Eskom typically uses.
• The power cuts may shave South African growth by half a percentage point this year, Goolam Ballim, chief economist of Standard Bank Group Ltd., Africa's biggest lender, said yesterday.

Since early in the fall, I've mentioned coal as the forgotten commodity - despite all the fuss about how dirty it is, it is driving much of the world's growth. Now we see 2 countries potentially diverting exports to take care of in house emergencies. And in this World of Shortages, I think what we are seeing here is just a preview of what will be coming. Remember, 2006 marked the first year this globe has ever seen with >50% people living in urban centers as opposed to rural. And each year the global population grows. And each year more move to cities. And we're struggling even at these levels with our global natural resources.

This is why I am saying the most dangerous words ever written: "It is different this time". Inflation is of a global scale and will be derived from a population too large for our world's natural resources. These are long term, structural changes. Eventually (10+ years) technological innovation will come in and alleviate some of the issues, but in the 1-8 year period - I think it's going to be a very hairy situation. I can't forecast past that because I don't know what innovations will come to the forefront... but if they are not meaningful we will have major global crisis. We're just seeing small blips now...

Potash (POT) King Shows No Mercy

Thanks for 2 readers for letting me know of this article... this article states (as I've said before) why Potash (POT) has a premium valuation over Mosaic (MOS), simply the ability to expand production anytime soon. But I still think the valuation gap is too wide [P/E Ratio by Stock], as increases in production will take a long time...[Potash Expands Mine for $2 Billion].

As I keep saying, pricing power, pricing power, pricing power. While the stocks fluctuate 30% some weeks as people throw everything out - this is the most immune bull market I can find - which in theory should be the "safest" (outside of the panic movements). I'm a broken record on this group...

Also, sounds like Mr Doyle is open to a buyout offer. While that would be a nice 1x gain, I hope it doesn't happen for a few years - I'd rather have year after year of 30-40% gains in these names, rather than a one time 50% premium.

Potash King Shows No Mercy

• Bill Doyle is the most powerful chief executive in Canada, maybe the world. Don't laugh. The CEO of Potash Corp. sells something everyone needs -- fertilizer -- and he and his peers can charge what they want.
• Even the mighty Chinese government has little choice but to accept the price of the two global potash-selling cartels: Beijing stared them down once, and blinked (asking for a US$20-a-tonne price cut, but accepting a US$25 hike in 2006-07). This time, the price will likely go up by more than US$100.
• The Chinese are playing tough in negotiations, but the potash makers have them over a barrel. And Mr. Doyle -- his company is the world's largest fertilizer maker -- has the temerity to brag about it. If the Chinese don't like his price, he'll sell to someone else.
• "We'll do better without them," he said yesterday, leaving Beijing with the "real political risk" of facing food shortages.
• Tens of millions of people are leaving poverty behind in China, India, Brazil and Eastern Europe each year, buying cars, homes and better food. Specifically, they are eating more meat, which requires more grains to feed the animals, which is why prices for corn and other basics have soared. And don't forget ethanol.
• To get more out of their fields, farmers buy fertilizer -- demand is growing by 4% per year. Inventories are at their lowest in 17 years, and only Potash has the ability to raise production between now and 2012, by restarting idle mines, further cutting its industry-low costs.
• Demand and production are rising, costs are falling and prices are soaring. One ton of potash in North America cost US$232 way back on Oct. 30. By March 1, it will be US$414. Prices in Brazil and Southeast Asia are even higher.
• Potash will be the next Canadian jewel to be snapped up by a foreign buyer. Like Alcan, and Canada's nickel and steel giants, it trades at a decent price, but nothing like the premium foreign buyers would pay. High commodity prices and profits made those deals seem like bargains in retrospect. Potash investors should take note. "We know BHP Billiton has taken a look at us, we know Rio has looked at us" and sovereign wealth funds "are also a possibility," Mr. Doyle told me. It makes sense. If metals are strategically important to developing nations, agriculture will be, too.
• "I don't think [the stock price] is nearly representative of our value," Mr. Doyle said, a standard line for CEOs but probably true in his case. "It won't be cheap if someone does take a run at us."

Long Potash and Mosaic in fund and in personal account

Monthly Jobs Report & Birth/Death Model

Since a lot of new readers have joined of late, let me spend a minute or two explaining why this monthly job report, while hyperventilated over, is quite useless. (but we must pay attention to it, because it moves the market) - it is important enough to devote an entire entry to.

Barry Ritholtz does a good job explaining on his blog here, so I won't re-create the wheel - but in summary the whole report is based on assumptions, and biggest being the Birth/Death Model (of businesses, not people) which can be off by 100K or 200K in any month (who really knows?) And considering most months the loss to gains range is -150K to +150K, the entire job gain (or loss) is within margin of this assumption which is a "black box" - we are never told how it is even created. So in fact a gain of 150K jobs could really be 250K or 0K. We don't know. But the whole market heaves one way or the other in reaction to it. Useless. Barry's take below: (I've copied the chart from the entry which shows, that the Birth Death model is now approaching almost the entire monthly job gain - meaning, the "black box" assumption is what is leading to almost all job "growth)...

Since 2003, the B/D adjustment has been part and parcel to BLS' Current Employment Statistics (CES) program, the official measure of US employment.

In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

But in fixing one problem, they created another: At the other end of the cycle -- where we are today -- the B/D adjustment potentially will hypothesize lots of phantom job creation.

To give you a better idea of how badly the B/D is currently skewing the data, consider these charts below (via Econbrowser). Looking at the changes of the past 3 years, its apparent that the B/D model went from being a modest portion of the CES data to being the increasingly dominant source of reported new jobs over the past 12 months:



Again, it's an economic report, even more useless than most. But the whole market will spend days analyzing it, calling the Fed either behind the curve or over reaching, blah blah and blah. Not to mention this report gets revised by a magnitude of 50-100%+ many times... yet we use it as gospel. So you have to be aware of it, but when the market goes in a hissy fit the first Friday of each month, just be aware of the background of the model.

As I say with inflation, as I say with "government retail sales", as I say with employment - just keep your ears and eyes open and listen to the companies themselves - they have to report reality. The government can (and does) report fiction.

Earnings Preview Monday-Tuesday

Aside from the State of the Union Monday, we have the Fed Meeting Tue-Wed. I believe at least 25 basis points is already baked in; no cut could cause the whining babies in the stock market to sell off (again), and then Friday's job report (yawn).

Earnings of note **Monday** - no fund holdings reporting but an excellent day to see a snapshot of American economic health.

American Express (AXP) - they already prewarned; the consumer crunch is moving even to the 'rich folks' (but remember "subprime is contained" <-- Bernanke Spring 2007)

Halliburton (HAL) - big daddy of oil/energy services

McDonalds (MCD) - I expect continued good things, especially abroad even if analysts think the story is over ... in fact I believe more Americans are going to be stuck eating there whether they like it or not. (beggars can't be choosers)

Tyson Foods (TSN) - I've been looking at these names the past 6 months simply to see the early signs of food inflation

VMWare (VMW) - a very brief fund holding suffering under the "perception is reality" mantra - Microsoft (MFST) wants in on virtualization hence people have fears of VMW. All things considered the stock has actually held up relatively well the past month but the valuation is rich.

YRC Worldwide (YRCW) - I don't follow it closely but I believe the largest trucker in the USA. As a leading indicator of the economy the stock has tanked the past half year - but since the Fed cuts, has bounced hard along with other beaten down sectors. Will be interesting to see what the forward guidance is as much like a railroad, these guys have their hands in all parts of the economy. If I am overstating the weakness of the economy, these type of stocks will be the first to blast off and provide us a clue of a coming bounce in the greater economy of the USA.

**Tuesday**

3M (MMM) - another bellweather

Burlington Northern (BNI), CH Robinson (CHRW) - two transport names - one railroad, one logistics - see comments re: YRCW

Consol Energy (CNX) - fund holding and best performing coal stock I've held. Should see continued strength in coal prices as our ravaged dollar makes coal exports cheap from the US.

EMC Corp (EMC) - bellweather in tech

Pilgrims Pride (PPC) - see Tyson Foods - more poultry specific

Robert Half International (RHI) - could be an interesting tell on employment

Smith International (SII) - fund holding in the oil services patch

Dow Chemical (DOW) - bellweather industrial name

Valero (VLO) - the largest independent refiner; a group that has been demolished... still this group is usually worth a trade or two every year as its very cyclical - but the past 4-5 months have just been a big money loser trying to play these from the long side

Yahoo (YHOO) - just marking time until someone buys them

128 Stock Returning >10% Last Week

Finally a Winners list with more than gold on it... it's been a while.

As mentioned throughout the week, if you were very nimble this was the week to buy retail, homebuilders, and some financials. The most troubled, bounced the most this week (short covering definitely - real buying? who knows). In terms of fund holdings - it was coal and fertilizer week (along with Mercadolibre); again I lightened up on all these positions as they bounced so strongly. In this volatile of a market, it's the only prudent thing to do.

Criteria (as always)

1. >$2 Billion Market Cap
2. >$10 Stock Price
3. >100K daily trading Volume

Green we own, Blue we have owned or discussed

Symbol	Company Name	% Price1 Wk
PHM	Pulte Homes Inc	35.10
DHI	D.R. Horton Inc	31.80
ANR	Alpha Natural Resources Inc	31.60
KBH	KB Home	31.00
WM	Washington Mut Ord Shs	29.40
FNF	Fidelity National Financial Inc	27.80
BPOP	Popular Ord Shs	27.30
FDG	FORDING INC	26.00
CTX	Centex Corp	25.70
TOL	Toll Brothers Inc	25.30
KMX	Carmax Inc	25.30
DRI	Darden Restaurants Inc	24.50
ADS	Alliance Data Systems Corp	24.20
DFS	Discover Financial Services	24.00
CNX	CONSOL Energy Inc	23.70
CISG	CNinsure Inc	22.90
LEN	Lennar Ord Shs Class A	22.10
COH	Coach Inc	22.10
TRMB	Trimble Navigation Ltd	21.70
CNB	Colonial BancGroup Inc	20.70
WLT	Walter Industry Ord Shs	20.60
JWN	Nordstrom Inc	20.50
MEE	Massey Energy Co	20.00
AKS	AK Steel Holding Corp	20.00
NMX	NYMEX Holdings Inc	19.20
MELI	Mercadolibre Inc	19.10
FHN	First Horizon National Corp	18.80
GOLD	Randgold Resources ADR	18.70
BBT	BB&T Corp	18.50
TCB	TCF Financial Corp	18.20
ACI	Arch Coal Ord Shs	18.10
FAST	Fastenal Co	17.90
SAY	Satyam Computer Services ADR	17.90
WFC	Wells Fargo & Company Ord Shs	17.30
JOE	St. Joe Co	17.20
AEM	Agnico-Eagle Mines Ltd	17.20
KEY	KeyCorp	17.10
PCLN	Priceline.Com Ord Shs	17.00
BSC	Bear Stearns Ord Shs	16.90
AIV	Apartment Investment & Management	16.60
RF	Regions Financial Corp	16.50
GFIG	GFI Group Inc	16.40
MTB	M&T Bank Corp	16.40
FULT	Fulton Financial Corp	16.10
MPEL	Melco PBL Entertainment (Macau) Ltd	16.10
FIG	Fortress Investment Group LLC	15.80
AN	Autonation Inc	15.60
CME	CME Group Inc	15.50
CF	CF Industries Holdings Inc	15.40
DDR	Developers Diversified Realty Ord Shs	15.20
WL	Wilmington Trust Corp	15.10
MI	Marshal & Ilsley Ord Shs	15.10
CREE	Cree Inc	14.50
KSU	Kansas City Sthn Ord Shs	14.50
DRYS	DryShips Inc	14.40
NYB	New York Community Bancorp Inc	14.20
WFR	MEMC Electronic Materials Inc	14.20
MAS	Masco Corp Ord Shs	14.10
AVT	Avnet Inc	14.00
RL	Polo Ralph Lauren Corp	13.90
TNH	Terra Nitrogen Co LP	13.80
NDAQ	Nasdaq Stock Market Inc	13.80
EQR	Equity Residential Ord Shs	13.80
CIT	CIT Group Ord Shs	13.70
CMI	Cummins Inc	13.70
TRN	Trinity Industries Inc	13.60
SNDA	Shanda Interactive Entertainment Ltd	13.40
LOW	Lowe's Companies Inc	13.40
COF	Capital One Financial Ord Shs	13.30
BRE	BRE Properties Ord Shs	13.20
DKS	Dick's Sporting Goods Inc	13.20
NSC	Norfolk Southern Corp	13.00
PBR	Petroleo Brasileiro ADR Reptg 2 Ord Shs	13.00
SEE	Sealed Air Corp	12.90
GM	GM Ord Shs	12.90
WSM	Williams-Sonoma Inc	12.80
ALD	Allied Capital Corp	12.80
ZION	Zions Bancorp Ord Shs	12.80
BTU	Peabody Energy Ord Shs	12.80
MOS	Mosaic Co	12.80
WB	Wachovia Corp Ord Shs	12.80
LRY	Liberty Property Trust	12.70
KIM	Kimco Realty Ord Shs	12.70
CFR	Cullen/Frost Bankers Inc	12.60
ODP	Office Depot Inc	12.40
AEO	American Eagle Outfitters Inc	12.40
CLF	Cleveland Cliffs Ord Shs	12.30
CLI	Mack-Cali Realty Corp	12.20
ABX	BARRICK GOLD CORPORATION	12.20
AF	Astoria Finance Ord Shs	12.10
RCL	Royal Caribbean Cruises Ltd	12.10
PLCM	Polycom Inc	12.00
GES	Guess? Inc	12.00
CBG	CB Richard Ellis Group Inc	12.00
DTV	DIRECTV Group Inc	12.00
PVH	Phillips-Van Heusen Corp	11.90
TKS	Tomkins Depository Receipt	11.80
NMR	Nomura Holdings ADR Reptg One Ord Shs	11.80
DLTR	Dollar Tree Stores Inc	11.70
IHG	InterContinental Hotels Group ADR	11.60
XLNX	Xilinx Ord Shs	11.60
BPO	Brookfield Properties Ord Shs	11.60
GG	GOLDCORP INC	11.60
ORLY	O'Reilly Automotive Inc	11.50
LDK	LDK Solar Co Ltd	11.40
WHR	Whirlpool Corp	11.40
MVL	Marvel Entertainment Inc	11.30
TEX	Terex Corp	11.30
HOT	Starwood Hotels & Resorts Worldwide Inc	11.30
SHLD	Sears Holdings Corp	11.30
BEN	Franklin Resources Inc	11.30
CNW	Con-Way Inc	11.20
SID	Sid Nacional ADR Repstg One Ord Shs	11.20
CNI	CANADIAN NATIONAL RAILWAY	11.10
MER	Merrill Lynch Ord Shs	11.10
WRI	Weingarten Rlty Ord Shs	11.00
JBHT	JB Hunt Transport Services Inc	11.00
ICE	IntercontinentalExchange Inc	11.00
AME	Ametek Inc	10.90
VFC	VF Corp	10.90
HXM	Desarrolladora Homex DR	10.80
JNS	Janus Capital Group Inc	10.80
AKAM	Akamai Technologies Inc	10.80
WDC	Western Digital Corp	10.40
POT	Potash	10.40
M	Macy's Inc	10.30
CPT	Camden Property Trust	10.20
MHK	Mohawk Industries Inc	10.10

Bookkeeping: Weekly Changes to Fund Positions Week 25

Week 25 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: 5.9% (vs 0.0% last week)
49 long bias: 73.7% (vs 94.7% last week)
6 short bias: 20.4% (vs 5.3% last week)

55 positions (vs 57 last week)
Additions: Ultrashort Technology (REW)
Removals: CNH Global (CNH), Agco (AG), MedcoHealth Solutions (MHS)

Top 10 positions = 37.3% of fund (vs 39.3% last week)
45 of the 56 positions are at least 1% of the fund's overall holdings (80.4%)

Major changes and weekly thoughts
The market finally offered some gifts to the bulls this week, but only for those with the conviction to sit through an ugly day and a half Tuesday and through 2/3 of the day Wednesday. Once again, our rally has been very short lived (if swift), essentially 1/3 of the day Wednesday and Thursday. So the pickings remain slim on the long side. The market action Friday was a bit disconcerting; if this was simply due to a lack of confidence or people wanting to lock in "any" profits they had this week afters weeks of shellacking is an open question. Either way, we had hoped for more of a rally than 1.33 days. Looking at a chart of the S&P 500 we are still well below any meaningful resistance so the hope was of a larger rally off the lows, going into the Fed meeting at least. We shall see if we are given any of that early next week. Until proven otherwise, all rallies must be sold and used as an opportunity to remount short exposure. Again, this will hold true until we begin to make new highs, over and above previous high points. For the S&P 500 this is an easy number to remember: 1500. Breaking above that high, marked towards the latter part of December 07, would hint we can become more constructive and aggressive on the long side. Until then it remains a time to be highly cautious.

For the fund, I used this rally (however short it was) to lighten up on positions across the board, and rebuild short exposure. I had entered the month of January 2008 very cautious and believing that earnings estimates for 2008 needed to be ratcheted down as they were far too high. I thought this would be the catalyst for the meaningful move down to come; but it came even earlier than that and in far greater force than expected. So after being positioned well the first week and a half of the year, the next week and a half resulted in a lot of pain, and giving back a lot of earlier gains. Since my yearly goal is to beat the indexes I track against by 15%, and I already achieved that (and in fact was well ahead of this goal 3 weeks ago), there is no reason to bet the house here and take more chances than necessary. Easier money will be made to the long side at a later date, so I am going to try to remain more patient in the coming weeks and wait for those moments. I have 1 more week until my 2nd quarter ends, and time and time again I can see when the market has any sort of breathing room the majority of positions I hold rebound very well - so I am confidant I have the correct type of positions once the market finds its footing. So I don't need 90%+ type of long exposure to benefit when the market turns. So I'll be sticking with a larger than normal short exposure (and hopefully cash if we get another bounce) for the foreseeable future to reflect this viewpoint. I will let the technical condition of the market guide the near term views; as of now it is quite awful.



We can see from the chart above we are below both key trend lines (50 and 200 day moving averages) and we now have an intermediate bottom at S&P 1270-1275 or so. It would be doubtful that we do not at some point make a retest of these lows; which are parallel to a Dow 11,500 level. What happens at that level will be very important. If we bounce sharply off these lows a "double bottom" could be achieved... bullish. If it fails, and we break through this barrier, we than will go on to make further lows. The next key support, if S&P 1270-1275 is broken would be S&P 1220, which are summer 2006 lows. I do expect some sort of stand made there as that was a previous "double bottom", which created an enormous run.

One might ask why I am adding short exposure to the parts of the market that bounced the best this week - retail, financials, real estate, etc. It is a simple theory - if one believes this slowdown (recession or not) will be shallow (2 quarters or so), then one should be very constructive on stocks as they usually do very well in the 2nd half of a recession/slowdown (say we started one in November or December 2007). The reason being the major stimulus that is thrown at the market - we saw a lot of pieces of evidence this week. This seems to be the playbook of some (such as Cramer) right now. If your belief is the recession will be longer, than it is far too early to get too constructive from the long side on the market. I am still in the latter camp. While the lowering of interest rates and coincident drop in long term mortgage rates will help to buffer the fall, this in my opinion, will help a subset of the people at the epicenter of the problem (homeowners), specifically 2004/2005 (and earlier) mortgages - and only those with equity in their homes. Those people will be able to recapitalize their debt at lower rates, and keep the house ATM game going on (again the solution to the original problem of the house ATM, is simply to recreate the same problem). [30 Year Mortgage Rates Approaching Decade Lows] For the renters who don't have large cash banks available to them (i.e. savings), for the home owners who put 0-5% down, and bought in latter 2005-2007 and are now upside down on their homes, well there is really no saving them. I expect many to save themselves by simply walking away from their house (why pay for a depreciating asset that you have put either nothing or nearly nothing in from your own savings). So I expect that leg of the downturn to just be starting. Even if the government can push mortgage rates to 0%.

Again, my overhanging long held thesis is the bigger issue hidden behind the mortgage mess is the real and pervasive inflation that the government reports are ignoring. Too much of our consumption culture has been based on the 1990s era of 3-4% wage gains with 2-3% inflation (exaggerated by free and easy credit). That's no longer the world and it started ending half a decade ago (except the easy credit which ended about a year ago). This reality was masked in the aggregate by the house ATM. I don't think it will be masked anymore, and this is why you hear voter after voter in the real world (aka outside the top 10%, and outside of Washington DC and NYC) say "I feel like I'm working harder but not making any progress". Hence, why I am more bearish than most on the economy. I think a lot of people are going to finally be having that moment where they realize they cannot spend (or live) like they used to. They are in fact, moving downward in a slow and steady erosion of living standard. With inflation the real culprit. The consumer is going to be in big trouble... his/her 3-4% wage growth and "live paycheck to paycheck" mentality does NOT work well in an inflationary environment. Again, some will be saved by their home equity but not until home prices reverse and start making meaningful strides upward can we begin to hide the truth about how people are falling behind incrementally, year by year (wages vs expenses)

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. On Monday, I prayed the markets would never open. ;) [Worldwide House of Horrors]
   
2. On Tuesday, after the "it's a surprise, really it is" Fed cut, I did not do much but did cut some of my 5%ish short exposure, especially in the foreign Ultrashorts as they were up 12-15%. Also noting some strength in retail, financial, and small caps (relatively), I began lightening up on my Ultrashort Russell 2000 (TWM)
3. Wednesday, with the market in a major downswing most of the day in positions I held, I simply sat by and did not want to sell any positions into the depths of despair. I did close a tiny position in CNH Global (CNH) first thing in the morning after an earnings report, the Street deemed disappointing. While I like agriculture, I am most likely going to be focusing on fertilizer as opposed to equipment.
4. Potash (POT) reported fantastic earnings, as expected... I did take the opportunity to lighten up some on this position only because of the frantic market; I yearn for the day I can simply sit and hold these fertilizer names which are like buoys in a very violent ocean and being batted around in huge daily swings. But for now, it appears "buy and hold" investing is simply being sneered at by this market, even in the best of names, so some trading is required to make even the smallest amount of money.
5. Solarfun Power (SOLF) announced a convertible debt offering Thursday, which pained me. I don't want to be in stocks with convertibles, so I said I'd sell; instead of selling off the reactionary drop to $14 Thursday, I sold half at $17 not 24 hours later, and have a limit order to get rid of the rest somewhere in the $18s. If it does not hold true, and SOLF just continues to drop, at least I dropped my exposure from 2% to 1%.
6. I sold 33% of my position in Mercadolibre (MELI) and 60% of my position in Mastercard (MA) Thursday. The former due to the stock making a huge move off its "panic lows" and locking in those "gains", and the latter due to its position as a relatively highly valued stock in a market that does not take earnings or guidance very well, even good earnings and guidance - see Microsoft (MSFT) Friday. This reduced my exposure to Mastercard to 1% of the fund which I can sit with even if the market decides to drop the stock 25% due to whatever it wishes to, next earnings report. I will be a willing buyer if we get that gift (priceless?)
7. I did add some Suntech Power (STP) Thursday near $50 as the price is seemingly very low for what I consider to be one of the leadership stocks in the sector.
   
8. Friday, I closed agricultural equipment name Agco (AG), a peer to CNH Global (CNH) - simply based on yet another stock heading into earnings, and based on the treatment of CNH Global (CNH) I don't want to take a hit. I find a lot of value in these names, and their exposure to a true secular bull market but that doesn't stop the market from letting fear get in the way of a good story...
9. I closed a very small remaining position in MedcoHealth Solutions (MHS) - this was a "safety stock" that worked out pretty well for me in the January selloff since I sold near the top, but after I cut it back, it began tanking - apparently news that Walmart is making some noise in the space could be a weight on the sector. If it is truly effective or not does not matter - what matters is perception and perception right now appears to be that Walmart will hurt the incumbents. So I will need to find some other safety stocks/sectors, and once again this shows how hard it it to hold even the "safety" stocks in this type of market.
   
10. Friday morning I trimmed a host of names as listed here. I also listed in smaller scale many other names through the day to raise cash and buy more short exposure. Essentially I went through my entire long list and reduced a lot of positions 10-15% to raise some cash.
11. Along with the 5 Ultrashorts I've held since August (domestic) and October (foreign), I added a new name Ultrashort Technology (REW) to help offset some of my long technology exposure.

The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows.

Investing Philosophy

I'm working on a more comprehensive entry here but for now

How I run a "fund" is a bit different than a personal account - I can be more nimble and be totally in and out of a position in a personal account. In the spirit of how I'd manage $300, $400 million of money I try to show a style that would actually be scalable to that dollar amount. So I tend to move in layers, in and out of positions here rather than wholesale 100% in and 100% out.

I like to call the fundamental strategy, core & edge. Keep core positions and trade around the edge.

1. At heart I like solid fundamental stories showing excessive growth (bottom up analysis); which generally leads me to mid caps or larger small caps.
2. Use macro economic views (top down) to focus on what groups to favor or disfavor
3. I use simple (basic) technical analysis to hopefully provide entry / exit points
4. I have both long and short positions; the weightings are based on viewpoints of the market at the time
5. Cash is not evil; it is an effective tool in bear markets
6. Time frame is dependent on the type of market - I tend to be a trend trader and like to focus on relative strength. However in the markets of 2nd half 2008 and early 2009 this strategy (or in fact almost any strategy with holding periods longer than 5 days) has not worked - so we're making adjustments until the market returns to a more normalized behavior.

I'll add more to this as time allows.