Tuesday, February 26, 2008

NY Times: Rising Inflation Creates Unease in the Middle East

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Thanks for a reader for pointing me to this article... my research team of 1 human and 10 hamsters can't catch it all (rodents really are quite lazy), and I've been sagging on my NY Times reading. Ironically, the first paragraph has a striking similarity to a certain 1st world country that rhymes with... Cramerica. But as investors most of us are too busy clapping and cheering Fed cuts, because they always seem to make the market happy, for a few hours/days/weeks anyhow - without taking a step back and thinking of what is really being created on Main Street.

For any Realmoney.com readers Tony Crescenzi has been stating M2 (a measure of money supply) has exploded upward in the past 2-3 weeks ... apparently the Fed is realizing the first 30 steps of its 31 step credit binge recovery plan have not worked. Hmm, this has coincided most perfectly in timing with the most recent explosion upward in commodities. Related? Nah... of course not. This is the pickle for the Fed - it can create magic money out of thin air; it just cannot control where that money goes. Ironically it is either being horded on bank balance sheets, or used to speculate (run up) commodities that are already off the chart. Not exactly what they meant to do... oh well. It's only inflation... out, nothing for the working class to worry about, now the high flying elite who create financial innovations and are paid huge sums for these works of brilliance. (Mona Lisa's of capital destruction!)
  • Even as it enriches Arab rulers, the recent oil-price boom is helping to fuel an extraordinary rise in the cost of food and other basic goods that is squeezing this region’s middle class and setting off strikes, demonstrations and occasional riots from Morocco to the Persian Gulf. (replace the words 'Arab rulers' with 'upper 0.5% country club financial elite' and the blurb works perfectly for our country too)
  • Here in Jordan, the cost of maintaining fuel subsidies amid the surge in prices forced the government to remove almost all the subsidies this month, sending the price of some fuels up 76 percent overnight. In a devastating domino effect, the cost of basic foods like eggs, potatoes and cucumbers doubled or more. (this is essentially what the Chinese government has been doing as well; subsidizing costs as they spiral out of control - thankfully Americans send them their money every day so they can afford to continue this - who said we don't rub their back?)
  • In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached an official level of 6.5 percent, though unofficial estimates put it much higher. Public protests and boycotts have followed, and 19 prominent clerics posted an unusual statement on the Internet in December warning of a crisis that would cause “theft, cheating, armed robbery and resentment between rich and poor.” (sounds vaguely familiar)
  • Now we have to choose: we either eat or stay warm. We can’t do both,” said Abdul Rahman Abdul Raheem, who works at a clothing shop in a mall in Amman and once dreamed of sending his children to private school. “We’re not really middle class anymore; we’re at the poverty level.” (this is already happening in lower tranches of American society - the only difference is it is now moving upstream in the socio-economic food chain so people on local TV news actually might pay attention now)
  • Some governments have tried to soften the impact of high prices by increasing wages or subsidies on foods. Jordan, for instance, has raised the wages of public-sector employees earning less than 300 dinars ($423) a month by 50 dinars ($70). For those earning more than 300 dinars, the raise was 45 dinars, or $64. But that compensates for only a fraction of the price increases, and most people who work in the private sector get no such relief.
  • The fact that the inflation is coinciding with new oil wealth has fed perceptions of corruption and economic injustice, some analysts say. “About two-thirds of Jordanians now believe there is widespread corruption in the public and private sector,” said Mohammed al-Masri, the public opinion director at the Center for Strategic Studies at the University of Jordan. “The middle class is less and less able to afford what they used to, and more and more suspicious.”
  • In a few places the price increases have led to violence. In Yemen, prices for bread and other foods have nearly doubled in the past four months, setting off a string of demonstrations and riots in which at least a dozen people were killed. In Morocco, 34 people were sentenced to prison on Wednesday for participating in riots over food prices, the Moroccan state news service reported. Even tightly controlled Jordan has had nonviolent demonstrations and strikes.
  • In Bahrain and the United Arab Emirates, inflation is in the double digits, and foreign workers, who constitute a vast majority of the work force, have gone on strike in recent months because of the declining purchasing power of the money they send home. The workers are paid in currencies that are pegged to the dollar, and the value of their salaries — translated into Indian rupees and other currencies — has dropped significantly. (thanks Ben!)
  • In the oil-producing gulf countries, governments that are flush with oil money can soften the blow by spending more. The United Arab Emirates increased the salaries of public sector employees by 70 percent this month; Oman raised them 43 percent. Saudi Arabia also raised wages and increased subsidies on some foods. Bahrain set up a $100 million fund to be distributed this year to people most affected by rising prices. But all this government spending has the unfortunate side effect of worsening inflation, economists say. (sound familiar folks? anyone? the only difference between them and a certain first world country is that country borrows its money to create more inflation..errr... create stimulus... where these countries actually use cash)
  • Even so, the inflation of the past few months has taken a toll on all but the rich. (ahem)
  • A new class of entrepreneurs, most of them with links to the government, has built gaudy mansions and helped transform Damascus, the Syrian capital, with glamorous new restaurants and cafes. That has helped fuel a perception of corruption and unfairness, analysts say.
  • Many people believe that most of the government’s economic policies are adopted to suit the interests of the newly emerging Syrian aristocracy, while disregarding the interests of the poor and lower middle class,” said Marwan al-Kabalan, a political science professor at Damascus University.
  • The same attitudes are visible in Jordan. Even before the subsidies on fuel were removed this month, inflation had badly eroded the average family’s earning power over the past five years, said Mr. Tawil, the former economic minister. Although the official inflation rate for 2007 was 5.4 percent, government studies have shown that middle-income families are spending far more on food and consuming less

*******

Takeways?

#1 If you took away the names of the cities and countries, and just read the text and the problems, you could be talking about the US. It is amazing really - we sit so high and mighty as if we have cornered the market on a rising tide lifts all boat with "free market capitalism", but the outcome appears to be no different then in corrupt dictatorships. Humans are humans. Greed is greed. The world over. Whether it's socialist Russia, dictatorship Middle East, or democratic US of A, more and more world wealth is concentrated in fewer and fewer hands. Only those damn Norweigens, Swedes, and Danish seem to have pulled away, but what do these people (happiest on earth) know?

#2 I offer as a solution to these governments a bright idea. Create for an example, a system, where almost anyone with a heartbeat can own a home. They can get a mortgage, put nothing down, and then convince their lenders to let them draw home equity against their homes, or heck go to 120% Loan to Value. Sounds good? I know... I know.. it's flipping brilliant. It should get you guys through for 5 years or so. All you need is a world full of stupid investors willing to buy the loans. My recommendation is to package them into groups of 1000, and tell said stupid investors that when you package 1000 bad loans together, it turns into a AAA loan. What? No one would buy that line of reasoning. No really - just get a ratings agency to slap a AAA rating (how? Well you pay them off, for every rating you pay them - so they have incentive to give you AAA ratings). See how it all works? I know... it sounds almost outrageous in it's stupidity but what if I told you, it worked beautifully in the greatest country in the world? Yes... if we can do it, you can do it. And when it all breaks down, you will use your central bank to print dollars to bail out the system and you can use the excuse that "so and so bank is too big to fail." Yes we have the entire blueprint ready for you. Now get to work so your "middle class" can borrow themselves into a grave to buy the basics of life such as... food. While the ruling elite laughs at the absuridity of it all during their weekend's at Martha's Vineyward. That's how it works here... you sound like you are well on your way there to American capitalism.

Welcome to the club!

(please note the above scenario does not take into account the fact the Muslim faith, frowns on debt - clearly this would be a problem passing my proposals of financial innovation - however the snake oil salesmen of Wall Street could potentially create a new financial innovation called tbed.... you see debt is the opposite of tbed.... so they could somehow sell this with their brilliance as not being debt... but beind tbed; therefore religiously ok. These folks can sell anything, I am sure they can find a work around)

p.s. to your ruling elite - we have some beautiful $24-$32 million townhouses in Manhattan for you, once you've milked your people for all they are worth. Yes, most Americans cannot afford it, so you are welcome at it. I know... it's brilliant. You can pay me later for my solutions once you see how great they work.... but note, I only accept Euros not that trashy US dollar.


Kool Aid Bulls Twist Inflation into being a "Good Thing"

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I almost have to laugh at some of the absolute snake oil salesmanship on Wall Street - the more I see this over many years, these are essentially used car salesmen with MBAs (no offense to you hard working used car salesman who may read the blog).

After ignoring inflation for quarters on end, these salesmen ... err.. analysts and pundits... have now embraced inflation. Why? The sales job being put out there since last week's CPI is that inflation, both in the here (through data) and an increase in future expectations of inflation (through TIPS, through 10 year bond rates stubbornly going higher) is a GREAT thing. Why is it great? Because there is no way that inflation would be going up, if the economy was going to be weak in the 2nd half.

That's what is being sold and why inflation, which has been feared for a long time, is now EMBRACED.

Folks, I am in my mid 30s... most of these snake oil salesman are 10, 20, or 30 years older than me. They should know far better than I, because I was just a kid when there was another era where inflation was able to be sustained while the economy was weak. So for them to say with a straight face that higher inflation expectations must therefore mean a great economy coming in "2nd half 2008" is truly shameful.

This is why you are seeing rallies in the same tired groups that bet on 2nd half recovery. Would I buy retailers here? *Bleep* no. I'd be restarting short positions on individual names if I could. I'd submit retailers are where homebuilders were about a year ago - after a huge drop, hopes rise that "this is the bottom" and "it cannot get worse" and "we've seen the worse, time to get in" and we get these incessent hopeful rallies, that lead to another round of drops as reality washed over the dreamers in the coming months. People in NYC do not understand the corrosive nature of inflation on the consumer. They do not understand the real struggles that are happening *now*, not to mention in 6 months when their "recovery" thesis happens, as inflation continues to ramp. They conveniently put aside that 70% of GDP is based on consumer - the same consumer who is going to be eaten by inflation, that they are cheering.

My view has been made very clear on inflation - and well before any of these guys were even saying inflation was an issue... we are going into a World of Shortages. Our US centric viewpoint (narcissim at it's best) kept the blinders on all the smart folks in NYC as to the possibility of commodities ramping while the US economy falters. These same folks are today scratching their head at $100 crude when the most powerful nation on Earth is in recession (a recession they all denied until December 2007 - again the smartest folks on the planet). Too few resources chased by too many people...the definition of shortage, and the nexus of this new era of inflation .... and now with a world awash with US pesos, this imbalance will be exaggerated even further. And a stressed US consumer, whom retailers are dependent on, is going to retract further. Yet we're supposed to buy retailers here? Laughable. Macys (M) in fact today said they will stop offering quarterly guidance on sales or earnings. Sounds like a very confidant retailer. Of course they are sticking to full year guidance. ;)

If anyone wants a fun project - take the top 20 retailers in America. Plug in their full year 2008 analysts estimates today, and check back next February (2009) when we have the truth. You will, in my opinion, see a huge drop (from already heavily discounted levels) as throughout the next 10 months we hear retailer after retailer, warn and then "beat" lowered guidance - just like they've been doing the past 2 quarters. But over time, we will see 08 full year drop significantly. (but the pundits will clap about "beating estimates"). So all these great values on full year 2008 we hear about today, are going to look very different by the time we actually get there. But we can't be bothered with that now since $600 rebate checks are going to fix it.

Now one of my thesis for a 2nd half market (not economic) recovery is all this Fed liquidity will inflate all assets. One asset is stock prices. So I could certainly see that asset inflating... because more worthless dollars will be propping it up. And it will create an illusion that all is well in the real economy, because "the market foreshadows the real economy by 6 months". But no, it will be mostly billions of dollars swirling the world trying to find a home. And US equities, by default are going to get some of those dollars. While Main Street buckles under the inflation exaggerated by these moves. Truly a sad state when you really think about it, but we know whose side the Fed is on...

Anyow, just wanted to update you on the latest "consensus" of the brightest minds... "there is no way inflation expectations could be rising if the US economy won't be rip roaring later in the year...."

"What's that? 1970s and early 80s?"

"Put a sock in it, and stop raining on our parade. If you ignore that era than our thesis works perfect! Inflation is *GOOD*! Pass the Memo!"

KBR (KBR) has a Solid Quarter, but I am Selling

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Ironically, I am less impressed with KBR's (KBR) earnings than I am with Foster Wheeler's(FWLT), but the former is up and the latter is down. KBR actually missed on apples to apples continuing operations (28 cents vs 32 cents analysts)- but expectations were so low, I suppose the stock could rally. Typical. But I think the wrong company is taking the big hit today. People only seem to look at headlines these days on Wall Street, not look at the numbers so they see a big "beat"....which is not accurate.

Backlog is solid but only rose 5%. My worry with KBR is the focus in Iraq; while the company has been branching out into a lot of other areas to provide diversification its bread and butter is still Iraq. If... errr... when Obama gets elected, this could pressure the stock. But the trends are a bit troubling to me; profits are up, but full year revenue has been quite flat this year. On the positive side, due to Cheney connections I could see this company getting a lot of high level business opportunities, especially in the Middle East (i.e. Saudi Arabia)

Technically this is actually a chart that is improving as the stock broke back above its 50 day moving average in the past few days. But with the stock up from $30s to near $36 in just over a week, I am going to break one of my rules and sell a vastly improved chart. While the stock could continue to run, I don't see myself allocating much money to the name go forward so having a small stake in a name I have questions about probably doesn't make sense. So while I could see a run to $40, I just don't have enough skin in this game to make it worthwhile.

Again, if you take away the stock action all the numbers in the Foster Wheeler report were much more impressive to me (plus FWLT trades at a lower valuation)... but it's all about results vs expectations and KBR clearly had a lower bar to hurdle. So I am a bit mixed on how to treat this stock... but we'll sell for now and see how the next 3-4 quarters play out.

I am selling my 0.7% stake in KBR, 225 shares, in the low $36s. I've held KBR since August 10, 2007 as part of my large basket of infrastructure stocks - buying as low as the upper $20s and as high as low $40s; all in all I lost about $1500 on this position over the 6+ months, as the stock gave back all of its gains by mid January.

  • Former Halliburton subsidiary KBR Inc. said Tuesday fourth-quarter profit rose 65 percent, lifted by contributions from natural-gas projects, work in Iraq and a tax benefit related to a 2006 asset sale.
  • The Houston-based military contractor and engineering and construction firm said profit for the October-December period was $71 million, or 42 cents a share, up from $43 million, or 28 cents a share, in the prior-year period. The most-recent quarter included income from discontinued operations of $23 million, or 14 cents a share, due to tax benefits from the 2006 sale of its production services group. Wall Street expected KBR to earn 32 cents in the quarter, excluding one-time items.
  • Revenue for the final three months of 2007 amounted to $2.4 billion, topping the Wall Street forecast of $2.27 billion. Revenue in the year-ago quarter was $2.3 billion.
  • The company, which split from Halliburton last spring, said income from continuing operations amounted to $48 million, or 28 cents a share, versus comparable income of $45 million, or 30 cents a share, a year ago.
  • KBR said operating income in the fourth quarter of 2007 was partially offset by $22 million in charges from potentially disallowable costs incurred under U.S. government contracts in the Middle East in 2003.
  • KBR is probably best known for providing food and shelter to U.S. troops in Iraq, thought Utt has said the company is likely to continue to do less work in Iraq as troop levels decrease.
  • KBR has announced several new contracts in the past year, both in the U.S. and overseas. They include a pact to manage construction of a chemicals and plastics production complex in Ras Tanura, Saudi Arabia -- a plant that's expected to be among the world's largest petrochemical facilities.

Long Foster Wheeler in fund and personal account


Bookkeeping: Taking Some off the Table in Mechel (MTL); Moving More into Deep Sea Oil Drillers & Oil Service

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This run in Mechel (TML) has surpassed all my expectation; the chart is amazing and it would be wrong not to take some off the table at this point. Up 30% in just a few weeks. Selling about 20% of my position here at $130. I will look at add back on (hopefully) a pull back.

I mentioned yesterday that the oil service stocks seem to be on the verge of life here - both of my 2 deep sea oil drillers, Atwood Oceanics (ATW) and Diamond Offshore Drilling (DO), are looking nice today, so I am going to add a layer to both these positions on positive momentum. I find both dirt cheap and undervalued; and finally the technicals seem to be improving... also added to some National Oilwell Varco (NOV) and Core Laboratories (CLB).

As oil holds up and people realize crude is not beholden to the US economy, perhaps these stocks will finally get their due. I am still a bit worried about adding at the top of a bear market rally phase, but these stocks have really lagged the underlying commodity so hopefully that will provide some cushion.

Long all names mentioned in fund; no personal positions

Bookkeeping: Beginning Position in DryShips (DRYS)

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We've been talking about DryShips (DRYS) a lot lately
  1. Feb 15: DryShips Reports Excellent Number
  2. Feb 11: Another Constructive Day in Dry Bulk Shippers
  3. Feb 10: Dry Bulk Shippers - Time to Get Back In?

With the stock pulling back to it's 20 day moving average ($78) I am creating a new position in this name with a relatively large initial buy of 250 shares in the $79s. This is a 1.75% stake.

I already have talked about the fundamentals, but due to the volatility of this name, I have a very simply technical strategy. The 50 day moving average is $76; I want to see DryShips continue to hold that level. If the stock breaks to $75 or so, I will be out with a loss... simple as that. I keep about 10% of my portfolio for more shorter term opportunities, of which I'd place DryShips into that category because I still have some unease about the "very long term". But with the stock down from a high of $88 yesterday and coming off a fabulous earnings report, we take a stake here and see how things pan out. For my personal style this is exactly the type of chart I love. A stock in an uptrend which has pulled back to a key support level. Other people like to buy 52 week highs, but I prefer this sort of set up. I have a clearly defined support level not too far lower, so if this is broken I can exit with a contained loss....

Long DryShips in fund and personal account

Yahoo Finance Did Not Take Kool Aid Swig This Morning

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I just had to have a quick laugh this morning when I went to Yahoo Finance and saw the top 5 headlines, and then notice the market is BOOMING this morning ;) Quite a divergence in headlines versus Kool Aid equity market - just find it a hilarious dichotomy and quite honestly, a perfect example of all the magnificent things about this magnificent puzzle that is the stock market. Remeber, it is not the news, but the reaction to the news that matters. So when the financials rocket up higher on their coming writeoffs don't scratch your head just drink some Kool Aid and remember "this is the kitchen sink quarter, it will all get better from here, the Fed is fixing the system, Fed cuts solve everything, an economy which is based 70% on consumer spending will not weaken much after all from a consumer recession, we'll be booming by the 2nd half of 2008, and I need to buy more stocks"

Please note I don't follow most of these figures, surveys, and government junk reports - all I care about is what the companies themselves say, but I just found the headlines amusing when amassed in 1 spot so this is why I highlight it.

Job Worries Sink Consumer Confidence
  • Consumer confidence plunged in February as Americans worried about less-favorable business conditions and job prospects, a business-backed research group said Tuesday.
  • The Conference Board said its Consumer Confidence Index fell to 75.0 this month from a revised 87.3 in January.
  • The reading was the lowest since the index registered 64.8 in February 2003, just before the U.S. invaded Iraq, researchers said, and was far below the 83.0 expected by analysts surveyed by Thomson/IFR.
  • The expectations index, which measures consumers' outlook over the next six months, fared even worse. The expectations index dropped to 57.9 from 69.3 in January. The February figure was a 17-year low, the Conference Board said, standing just a bit above the 55.3 of January 1991.
  • "The weakening in consumers' assessment of current conditions, fueled by a combination of less-favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggest that the pace of growth in early 2008 has slowed even further," Franco said in a statement accompanying the report.

Home Prices Drop 8.9% in 3 Months

  • U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index
  • "We reached a somber year-end for the housing market in 2007," said one of the index's creators Robert Shiller. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak."
  • The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.
  • Home prices also plunged 5.4 percent from the previous three-month period, by far the largest quarter-to-quarter decline in the index's history. The previous record was the revised 1.8 percent drop in the third quarter of 2007.
  • Miami continues to lead the weakest markets, posting a 17.5 percent annual decline. Las Vegas and Phoenix followed with a 15.3 percent drop each. Los Angeles, San Diego, San Francisco, Detroit and Washington, D.C. all recorded double-digit annual declines.
  • Only three metro areas -- Charlotte, N.C., Portland, Ore., and Seattle -- showed year-over-year increases in prices, but Seattle's growth was up a slim 0.5 percent. (go Seattle! Got a lot of readers there!)

US Home Foreclosures Soar in January

  • The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.
  • Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier
  • The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions
  • January's tally represented an 8 percent hike from December. (that's a heck of a sequential increase, thankfully it will be all fixed by 2nd half 2008)
  • One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007. "It suggests that there's little or no equity in a lot of these homes, because they're not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales," Sharga said. (remember, we are going to a country full of upside down home owners, people who are UNDER WATER - they owe more than their home is worth - and it's getting worse by the DAY)
  • A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.
  • Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said. Rounding out the top 10 states with the highest foreclosure rates were California, Florida, Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan.

Wholesale Prices Jump in January

  • Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.
  • The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.
  • The January inflation surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years.
  • Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.

Again, I don't take stock in government reports, surveys, and the like - they are all inaccurate and subject to clever subtle changes to make things look better than they are. But it certainly is some amusing reading when overlaid to a market running hard and fast. People will say it is all priced in... highly doubtful. In the end, stock prices are a reflection of corporate profits. The Kool Aid of the past month or so has been, yes we're in a rough patch but by 2nd half of 2008 things will be all fixed. Sometime in the next 4 months that will change to (mark my words) yes we're in a rough patch but by 1st half 2009 things will be all fixed. So we will rally on a false belief in the Fed's power to fix everything, and a false belief in full year 2008 estimates based on a roaring economy/consumer coming back like magic to the economy once we hit July 4, 2008. So as long as this is the religion on the Street, we can get counter trend rallies of large proportion.

We went through the exact same thing in September/October 2007 when the market rallied in the face of continued bad news on "this is a 2nd half 2007 issue, everything will be better by 1st half 2008" mantra. Notice how the theme never changes, only the dates? :)

Again, we'll let the charts tell us when to change views and join the Kool Aid drinkers in full "see no evil, hear no evil" stride. If the S&P 500 can make it out to 1420+ or so, then a longer term downtrend will look to be broken. We did break S&P 1370 which has been a thorn in the side of bulls for a while now. The next resistance level is the 50 day moving average at S&P 1390. 10 points away - we'll see how the market handles that point.

While I am a bear on the economy (Main Street) I always respect Wall Street works in it's own parallel universe - when the technical condition of the market improved in September 2007, I put my "see no evil, hear no evil" googles/earlplugs on and went into Kool Aid bull phase - it is useless to fight a stampeding herd of Kool Aid toting bulls, so if we get to a similar stage I will go find my goggles/earplugs once more. But first the technicals must confirm the Kool Aid.


Oh, Google (GOOG)

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It is funny, I was looking at some of the top performing mutual funds for 2007 and reviewing their top holdings - most were chock full of Google (GOOG) and Apple (AAPL) in their top 5 holdings. And judging by their year to date performance in 2008, I assume they made no adjustments since Jan 1, 2008 since many of these funds are down nearly 20% for the year, on the backs of these 2 names along with a few others. Lack of adaptation - which in my book is deadly.

While I've held both these names, Google has never been more than a 1-1.5% stake and Apple was actually the name I liked better; however when the technical stock action breaks down I act relatively heartless (don't get attached to any stock), and began reducing exposure. I am a big believer in a very uneven playing field on Wall Street - those with connections get information first no matter what the SEC assures us... and this is reflected in the stocks with deteriorating price action. So once a stock breaks key technical levels, I try to cut back exposure - no questions asked because it means someone, somewhere has information I don't. Period. Does it work 100% of the time? No. Nothing does. But it works a vast majority of the time, and on the Street that is a huge advantage.

I've been watching these 2 names very closely, as without them I just don't see any great rallies in the stock market that are meaningful ... and on each Kool Aid rally these stocks barely do anything. Which makes me not want to add to them, even at these "value" levels.

Specific to Google (GOOG) I wrote back in August [August 30: Google (GOOG) Can't Get any Traction - is this Why?] I was worried about the potential for this stock to finally suffer in a US recession - people called it recession proof at the time, but I found it hard to believe that anything reliant on advertising is recession proof.

financial advertisers account for more than a third of all web advertising, and as the plunging share prices of investment banks clearly demonstrate, the mortgage crisis is affecting a lot more than the mortgage sector.

And online revenue doesn't have to collapse the way it did in 2000 for online companies to get hurt and Internet stocks to get crushed. It just has to experience a normal advertising recession.

Very interesting points and they have some serious merit in my book. You don't notice all the ads because at some point you just begin ignoring them as white noise but based on how many refinance offers I get in the mail each week, plus all this advertising on the web that is EVERYWHERE for getting a mortgage or refinancing.... this has to be pulled back.

Now today's news is not about financial advertisers pulling back but simply a dramatic drop in click thrus. Personally I am immune to internet advertising - I click on no ads at all; it is all white noise to me. But I guess many of you do click and that keeps the advertising world happy. But as Americans get poorer, they are going to be forced to consume less, which means less pull into clicking on those ads for those "must have" shoes, Coach (COH) bag, that new book, that new this, that new that. People have to pay for things like food and gas after all.

This is yet another of countless examples of why the stock market is so difficult. You can be intellectually correct, but if the herd on Wall Street ignores reality you can be out of money by the time your thesis proves correct. So let's say someone thought Google would slow down due to recession in August - and shorted the stock; well after the big rally in teflon tech stocks (the "4 horsemen") through Dec 31, 2007... they'd be much more poor, and unable to get much of the benefit of the crash Google has been going through since. Even though they were right intellectually. So not only do you need to be correct in THEORY, you need to time it correctly. Very difficult. This is why it is not easy being a short - you need to fight Kool Aid. Another parallel is the current issue with inflation - the Street is laughing it off and going with the Kool Aid thought that by 2nd half 2008 it will be fine and Fed cuts fix everything. When in fact it is going to be corrosive to a CONSUMER LED economy. But people don't get that now, nor will they believe it. So they trust in 2008 estimates for all these consumer based companies. And they will be proven wrong later in the year. But between now and then, just like with Google and a host of other examples, we are subject to Kool Aid love and rallies... inflation will "take care of itself" and the "consumer will be roaring by 2nd half 2008".

I still own Google (GOOG) but it is a minor position, around 0.5% of the portfolio. I was actually debating mentally whether to cut it cold turkey based on its action the past few days (no rally when the rest of the market was bouncing on bond insurerer Kool Aid), but at this point the stock is now at long term support levels $440-$450, so I'll just sit on what is left. I really don't have any urge to add more here even at this "great discount". I did mentioned a Google miss as one of my 13 Outlier Predictions for 2008, which already proved true [Jan 31: Google (GOOG) Misses], and today's news reinforces this theme - proving once again I need to listen to myself more, even though the sirens of the Kool Aid bunch constantly whisper sweet nothings about how great everything is...

Google is finally hit by an earnings miss by Q3 2008. It won't be a major miss, but enough to rock psychology. Advertising slowdown, led by US recession... err not a recession but a "slowdown" (its a political year folks), finally hits Google, despite secular growth. Google will be seen as human and a company that is not immune to the business cycle, driving the stock down.

Long Google in fund; no personal position

Adding to Foster Wheeler on Earnings Miss

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We are taking a hit today on the Foster Wheeler (FWLT) earnings miss, but I believe this is simply the Cramer-ites jumping off the bandwagon who expect the constant "beat and promise more" of classic momentum trading. Foster Wheeler and cohorts are in a business that is very lumpy - contracts are recognized in batches; it is a very different bidget than "produce widgets, sell widgets, repeat". So when something goes awry people panic and cry. In fact we saw an instant replay a few quarters ago last summer, the stock sold off huge, and created an enormous buying opportunity.

Now I did step on a mine as I took Foster Wheeler up from 1.8% to 3.5% allocation in the past week; and broke one of my own rules - don't build up a position going into earnings because the Street acts like a 3 year old brat if they don't get everything as they wish, but what's done is done. I am in fact adding another 100 shares this morning on the 8%+ selloff. I wasn't online this morning so I missed the low below $70, but I am adding in the $72s. This $72 level is also the 50 day moving average so I see it as a sign of strength that the stock already rebounded back above this level. I could certainly be wrong and this is part of a bigger trend, but I heard the same doom and gloom the last time Foster Wheeler missed, and the stock went on to more than double from those oversold levels within a few months. I continue to watch this bursting backlog, and that is key #1 to my eyes. $4.6 BILLION in NEW ORDERS Booked this quarter alone - wow. That is almost equal to the entire amount of business they did in year 2007. Staggering.

This remains a company which grew 50% last year, and trades at roughly 20x forward earnings. While 50% won't continue, 25-30% future growth (over 2-4 years) seems very plausible.
  • Foster Wheeler Ltd. said Tuesday fourth-quarter profit rose, but missed expectations due to the repeal of a tariff in Italy, contract issues with a client and fewer bonuses and incentives.
  • The engineering and construction services company's profit rose nearly 24 percent to $78.1 million, or 54 cents per share, from $63.1 million, or 44 cents per share, a year earlier. Revenue jumped to $1.47 billion from $1.19 billion.
  • Analysts expected profit of 76 cents per share on revenue of $1.42 billion, on average, according to a Thomson Financial poll.
  • Full-year profit rose 50 percent to $393.9 million, or $2.72 per share, from $262 million, or $1.72 per share. Revenue climbed 46.1 percent to $5.11 billion from $3.5 billion.
  • Milchovich noted, “We reported solid results for the fourth quarter of 2007. However, EBITDA was below the average of the first three quarters of the year because of reduced EBITDA in our Global Engineering and Construction (E&C) Group due to three factors. First, E&C experienced an $8.3 million negative impact due to the repeal of an Italian power price tariff, which had been enacted in the third quarter of 2007, as a result of a court ruling in the country. Second, we experienced fewer profit-enhancing opportunities such as bonuses and incentives during the quarter as compared to the early part of the year due to portfolio mix and contract timing. Finally, E&C took a $5 million reserve on one reimbursable contract due to issues with the client over project scope growth. We’re hopeful that this matter will be favorably resolved in future periods but felt that it was appropriate to reserve for it at this time.”
  • Milchovich added, “As we look at 2008, we continue to be very positive about the markets that both our businesses serve and about our position as we enter the year. In our E&C Group, consistent with what we’ve been saying for months, we expect meaningful organic growth and sustainable margins. We’re hopeful that this can be complemented by growth through strategic acquisitions during the year as well. In our Global Power Group, as we’ve previously stated, we remain confident that we will enjoy a material level of margin improvement and revenue growth during the year given our position and momentum entering 2008.”

Long Foster Wheeler in fund and personal account


Monday, February 25, 2008

LDK Solar (LDK) Reports Solid Numbers

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LDK Solar (LDK) with a decent report tonight and based on how pummeled the stock is, decent is good enough to offer some contentment for bulls. Revenue showed solid sequential growth, gross profit margin continued to suck wind, down to 30.1% (from 30.8% previous quarter and way down from the 43% of a year ago), but they beat estimates by 3 cents ($0.44 vs $0.41). In terms of guidance, first quarter is "better than expected" @ $0.41 - $0.45 but considering they warned on earnings just a few weeks ago due to the Chinese storms it's sort of silly to see them do that, and then push estimates right back up. (Analysts in @ $0.39)

For the full year 2008 they are sticking to the $960M to $1B target (below analysts target) with previously announced 26-31% gross margins. That continues to be an enormous range and means 2008 earnings estimates are still a huge guess; 27% gross margin average for 08 would derive a very different result than 30% would. I would of liked to see a narrower range or at least a narrower range for the 1st half of 2008 i.e. 28-31% for first 2 quarters and then 26-31% in second 2 quarters. Right now, it makes it just impossible to model an earnings estimate.

This is still an interesting long term story; if/when they get their polysilicon plant off the ground (1+ year) their gross margins should expand dramatically and each unit of revenue should produce much more profit. But there are still a lot of ifs between now and then.

Long LDK Solar in fund; no personal position

Bunch of Food Related Stories in FT.com as DBA Hits $42

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I just mentioned last week Powershares DB Agriculture Fund breaking $40 for the first time [Powershares DB Agriculture Fund (DBA) Hits $40 for First Time - Soybeans Now a Shortage]; it is already $42; this is not just a financial instrument - its increase reflects a serious crisis brewing that we've been predicting for a long time but now appears to be gaining urgency by the day.

The Financial Times is all over the coming food crisis issue today... let's hope this stock market continues to rally so the upper 20% can continue to eat ;) the lower 80%? Let them eat cake! No wait... they cannot afford to eat cake. Well.... Let them imagine they can eat cake!

I mentioned Kazakhstan earlier today in another post; don't let any Borat references make you snicker. These Eastern European/former USSR satellite countries are very similar to the US heartland. These 2 areas provide much of the world's grain exports. So when these type of countries pull back it's dangerous. By dangerous, I am not being a sensationalist - many of the world's poor, lower, and now middle class (remember what is middle class there might be considered lower poor here) are going to be in a very serious situation as prices continue to rise.

#1 Wheat Prices Hit All Time Highs
  • Prices of top-quality wheat jumped 20 per cent on Monday, the largest one-day increase ever, to a record high as Kazakhstan, one of the world’s largest exporters of the grain, said it would impose export tariffs to curb sales.
  • The move, which follows similar export restrictions in Russia and Argentina, is likely to put further pressure on already tight global wheat supplies, analysts said. Akhmetzhan Yesimov, Kazakhstan’s minister of agriculture, said the government wanted to limit exports as it battled against rising domestic inflation of nearly 20 per cent.
  • “Whatever happens, we will soon limit exports,” Mr Yesimov said. Kazakh grain, prized for its high protein and gluten content, is similar to some of the scarce top-quality North American crops that jumped in price on Monday.
  • The price of spring wheat, used to bake bread, has more than doubled since January and has risen fourfold in the last year, contributing to a rise in global food inflation.
  • Gavin Maguire, of Iowa Grain in Chicago, said consumers such as mills and bakers, who needed wheat, were “panicking”. “Historical references are useless. We are breaking all the rules,” he said.
  • Iraq and Turkey said they were planning substantial wheat purchases to replenish inventories and analysts said China could be forced to follow because of drought damage to its next crop.
#2 High Food Prices Might Force Aid Rationing
  • The United Nation’s agency responsible for relieving hunger is drawing up plans to ration food aid in response to the spiralling cost of agricultural commodities. The World Food Programme is holding crisis talks to decide what aid to halt if new donations do not arrive in the short term.
  • Josette Sheeran, WFP executive director, told the Financial Times that the agency would look at “cutting the food rations or even the number or people reached” if donors did not provide more money.
  • Our ability to reach people is going down just as the needs go up,” she said.
  • WFP officials hope the cuts can be avoided, but warned that the agency’s budget requirements were rising by several million dollars a week because of climbing food prices.
  • The WFP crisis talks come as the body sees the emergence of a “new area of hunger” in developing countries where even middle-class, urban people are being “priced out of the food market” because of rising food prices.
  • The warning suggests that the price jump in agricultural commodities – such as wheat, corn, rice and soyabeans – is having a wider impact than thought, hitting countries that have previously largely escaped hunger.
  • Hunger is now “affecting a wide range of countries”, she said, pointing to Indonesia, Yemen and Mexico. “Situations that were previously not urgent – they are now.”
  • The main focus of the WFP to date has been to provide aid in areas where food was unavailable. But the programme now faces having to help countries where the price of food, rather than shortages, is the problem.
  • Ms Sheeran said that in response to rising food costs, families in developing countries were moving in some cases from three meals a day to just one, or dropping a diverse diet to rely on one staple food.
  • In response to increasing food prices, Egypt has widened its food rationing system for the first time in two decades while Pakistan has reintroduced a ration card system that was abandoned in the mid-1980s.
  • The US Department of Agriculture warned this week that high agricultural commodities prices would continue for at least the next two to three years.
#3 Shoppers Warned Bigger Bills on the Way
  • When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.
  • His warning that a strong wave of food inflation is heading towards the world economy was met by nods from agriculture traders, food industry executives and western’s government officials at the USDA’s annual Agricultural Outlook Forum.
  • Larry Pope, chief executive of Smithfield Foods, the largest US pork processor, warned delegates of a wave of “real food inflation” just at the time central banks were under pressure to cut interest rates. “I think we need to tell the American consumer that [prices] are going up,” he said. “We’re seeing cost increases that we’ve never seen in our business.”
  • The comments highlighted one of the conference’s main concerns – that rising agricultural prices have reached a stage at which the impact will be felt not only on fresh food but will also filter through the supply chain and raise the cost of processed food.
  • Tom Knutzen, chief executive of Danisco, one of the world’s largest ingredients companies, said rising vegetable oil costs made it more expensive to produce preservatives, colourings and flavourings.
  • He said that wheat prices had previously moved from $3 to $5 a bushel without significant pain for consumers. “But now the wheat price has jumped to nearly $20 a bushel. These large increases will show up [in consumer prices].”
  • Some people hope a slowdown in the US or global economy would push down agricultural commodities prices. But Mr Glauber said that would have a limited impact on agriculture commodities prices. “I am more concerned about higher prices than lower prices.”
#4 Demand for Wheat Puts India at Risk
  • India is at risk of sustained food price inflation as domestic production of key staples such as wheat and edible oil fails to keep pace with rising demand, according to the country’s top official on commodities trading.
  • B.C. Khatua, the chairman of the Forward Markets Commission, which regulates futures trading for food commodities ranging from wheat and rice to dried beans, said India urgently needed to improve agricultural productivity to stem food price rises, which hit the nation’s poor majority the hardest. “India has a deficit of oilseed, a deficit of many pulses and now a deficit of wheat – all the major staples are now getting hit by the demand-supply gap,” said Mr Khatua.
  • Food inflation is one of the most politically sensitive areas of the Indian economy, with the World Bank estimating 29 per cent of India’s 1.1bn people live below the national poverty line.
  • Mr Khatua said India needed to address infrastructure problems such as the lack of rural roads and warehouses, cold storage and processing facilities to lift productivity and help reduce wastage, which he estimated at 15-20 per cent of agricultural output.
Whew. As happy as I am intellectually to have nailed this long ago before it was front page news; it is quite heart breaking to see it play out due to the impact of so many people. Fuel inflation hurts only so many - keep in mind much of this world is still rural and poor. Many could care very little about how much petrol goes up. But food affects everyone.

Long Powershares DB Agriculture Fund in fund and personal account

Another Spike Off Same Issue

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I am not sure how many times we can have 1-2% spikes intraday off the same bout of news but once again, the market goes straight up off bond insurer news. Much like a drug addict I believe the more times we use this drug, the less effective its high will be. How many more times can we use this parlor trick. And note with all this great news thrown at the market about ratings confirmations and bailout plans, the S&P does not go above 1370. It's getting a bit tiring; I just wish the bailout would be done and the rating agencies would confirm that no matter what happens, even if the bond insurers would go bankrupt they'd sit and smile and award them a AAA rating.. because that's what they've essentially done the past 6 months. So let's make it official so we can move on with the rest of the reality.
  • Wall Street bolted higher Monday after Standard & Poor's affirmed its ratings for Ambac Financial Group Inc. and MBIA Inc., raising hopes that troubled bond insurers will emerge from the credit market crisis on solid footing.
Myself? I'm going to be re-adding some short exposure on this "surprise" news.

More Writedowns Across Financial Spectrum says Goldman Sachs

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In news that is a surprise to no one reading this blog for more than a week, and in fact we've been predicting since the day of the last major round of "kitchen sink writedowns", more are coming down the pike per Goldman Sachs. Further, also as predicted long ago, these won't have as much to do with subprime as all the other parts of the credit chain. As I've been stating, subprime is the tip of the iceberg and simply a symptom of the disease; not the disease itself. Although it is conveniently blamed by those in power i.e. "if not for those subprime people..." Look for some of their former CEOs on Capital Hill this week...

The infection will move up the food chain to alt A mortgages, to prime mortgages, and then across to other parts of credit - student loan, auto loan, personal loan, commercial loans, and credit cards. These are the things they are going to be writing down the coming year. Why this is a surprise to anyone would be beyond me... but I am sure someone is aghast at this 'surprising news'. Probably someone who watched CNBC all day and listens to the seals clapping.

But remember, WAY back last August we were told "THIS" was the kitchen sink quarter by both the companies and the financial press. Never forget that as this plays out and the hypocrisy is shown. At the time (and I'm not financial expert, simply someone with a brain still intact within the skull), I was writing we have an entire house full of sinks, and sinks will be found in rooms we did not even know existed. That will be the story of 2008; and why all earnings estimates for these companies for 2008 are a complete waste of time, and anyone telling you financials are cheap on 08 estimates needs to be put into a straight jacket or at least needs to stop managing money. And can I just say, Citigroup (C) is simply an unmitigated disaster.

Also, as I've been stating, we're going to see another round of foreign infusion - in fact we must for some of these companies to remain going concerns. Or the Fed will literally be forced to buy the junk right from the banks themselves so they can maintain capital ratios. Either or.
  • Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.
  • Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cos. all the way up to a whopping $12 billion projected for Citigroup Inc.
  • "Although many of the write-downs in the back half of 2007 focused primarily on subprime and CDOs, we expect first-quarter 2008 write-downs to be spread across all aspects of residential mortgage-backed securities including subprime, Alt-A and prime, commercial mortgage-backed securities and leveraged loans. We forecast first quarter write-downs of approximately $1 billion to $12 billion for each of our large-cap companies across all of these categories," the Goldman analysts concluded.
  • On Citigroup - "Our new estimate assumes about $12 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities. We believe write-downs from its asset-backed CDOs will account for the largest percentage of the overall write-down. Citigroup has also been one of the least aggressive in terms of its write-down of these assets, in our view," Goldman's analysts said.
  • On JP Morgan - "Our new estimate assumes about $3.4 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities as well as our assumption for no private-equity gains in the quarter (previously we assumed about $700 million in gains) based on most recent management guidance," Goldman concluded.
  • On Bear Stearns - "Our new estimate assumes about $1.4 billion of additional write-downs across Bear's portfolio (although the primary drivers are likely to be from Alt-A and commercial mortgage-backed securities). Absent these write-downs, our forecast would have still had earnings down 10% year over year, a clear indication the firm is suffering from a global slowdown in mortgages," Goldman said.
  • On Lehman Brothers - "Our new estimate assumes about $3.5 billion of additional write-downs across leveraged loans, residential mortgage-backed securities, and commercial mortgage-backed securities. Lehman has the largest absolute commercial mortgage-backed securities exposure of the group at $40 billion, and we expect this asset class to contribute close to half of the write-downs this quarter," the Goldman analysts said.
  • On Morgan Stanley - "Although Morgan Stanley will likely have some meaningful negative valuation adjustments this quarter on leveraged loans and commercial mortgage-backed securities, we do not believe the firm will be as impacted as some peers as it appears that the firm was more aggressive on its subprime write-downs last quarter, it has less Alt-A exposure than some of its peers, and its commercial mortgage-backed securities portfolio is more of an international concentration, which has been less impacted than the U.S., in our view. "Our new estimate assumes about $3.1 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities," Goldman concluded.
  • On Merrill Lynch - "Our new estimate assumes about $4 billion of additional write-downs across leveraged loans, CDOs and commercial mortgage-backed securities. We also assume a smaller write-down on the firm's remaining Alt-A and subprime residential mortgage-backed securities portfolios. Merrill was one of the more aggressive firms in writing down its CDO exposure in the fourth quarter of 2007," Goldman said.
This will most likely be the quarter even likely Goldman Sachs might need to do a writedown or if nothing else bring expectations for 2008 down quite a bit.

And after these writedowns, the companies will insist (for the 5th time I believe already) that this is indeed the kitchen sink quarter and then analysts will come onto CNBC and cheer and clap and tell you financials are so dirt cheap and the Fed is printing money and you need to buy these stocks because we can't fight the Fed and everything will be fine in 6 months. You will continue to ignore these people. Why? They said the same thing last August. Eventually they are going to be correct, as all blind squirrels are. But entire lines of business are disappearing for these companies and once again, without home prices stopping their fall and the consumer shielded from real inflation and cost of living stress, none of these things improve in the near term.

No positions

Bookkeeping: Continuing to Add Infrastructure Exposure

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I continue to like the relative strength in this sector today... I am adding in $4-$6K lots to the following positions
  1. Jacobs Engineering Group (JEC)
  2. McDermott (MDR)
  3. KBR (KBR)
  4. Shaw Group (SGR)
  5. Fluor (FLR)
Again, many of these names report later this week... as I've stated I am in a dilemma overall as most of the groups I like are either (a) on an extended run and I don't want to chase the names upward and onward or (b) in terrible technical condition on their charts. Infrastructure is the one group, that while showing good strength of late, is still well below previous levels, and combine that with rapidly improving charts - just about every name in the group is now breaking back above their 50 day moving averages. So this is exactly the point I like to add, and about the only group that has both things going for it.

Some of the oil related names are potentially nearing that point too but still too early to tell...

Long all names in fund; long Fluor in personal account

China Medical (CMED) - What Stock Market Correction?

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If you took away the stock symbol, I'd think China Medical (CMED) were a gold stock or agriculture crop. The chart is fantastic and the relative strength impressive. It doesn't make huge week to week moves so it does not show up on my weekly "big movers" list, but I've followed this name since it began trading in the US, and after an initial huge "China medical stock" euphoria, it went and did nothing at times for quarters on end (most of 2006 and half of 2007) - but now is in the middle of a huge run.



I don't want to chase this name, and earnings are out later this week so we'll see how they do. My main concern has been valuation as the stock is now trading at nearly 30x next year's estimates, but the proof is in the pudding - people want into this name.

Zachstocks.com wrote a nice piece on China Medical (CMED) back in November. It does have nice revenue mix, a bit similar to Intuitive Surgical (on a much smaller scale) - sell the hardware with 1x bonus, but then enjoy aftermarket benefits from selling consumables needed to continue to operate said hardware. I like that.
  • As China emerges into a modern economy, demand for services that most Westerners would consider basic is on the rise. China Medical (CMED) is hard at work filling the healthcare needs from both the treatment side as well as through its diagnostic products. Last year the company received 60% of its revenues from its High Intensity Focused Ultrasound (HIFU) line whose primary function is treating tumors. The ultrasound waves are focused directly on the offending tissue and essentially breaks down the tumor.
  • While HIFU has been the primary bread winner the past few years, a new acquisition in March paves the way for the company to expand its diagnostic line of products. The system that was purchased is called the Fluorescent In Situ Hybridization or (FISH). The acquisition is part of the company’s strategy to transform itself into an advanced in-vitro diagnostic (IVD) business. The specialized technology allows physicians to spot prenatal disorders as well as cancer occurrences in adults.
  • While the main product line sold to physicians is capital intensive and sales of this magnitude can take time to complete, CMED enjoys a predictable revenue flow from the reagents or consumable inputs needed to run many of its diagnostic tests. This reagent business helps smooth out the peaks and valleys in between the less predictable sales of large equipment. As the company is successful in placing more and more diagnostic products, its base of consumable reagents will create a stronger recurring revenue source.
  • Earlier this month, CMED issued a press release stating that the Korean version of the FDA had approved the HIFU system for treatment of liver cancer, pancreatic cancer and uterine fibroids. This is a positive first step towards the broader global footprint the company is aiming for. Expanding into Korea, Japan and eventually Europe and the US will cause investors to view the stock as a better global expansion play instead of pushing it higher or lower in sync with the China market. The company has partnered with France’s EDAP to sell the HIFU system in Europe and Russia pending approvals.
No position

I Didn't Realize US Comptroller Resigned

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This is the #1 story on CBSMarketwatch.com today - I missed the fact Mr. Walker resigned. I've listened to him over the years and found him to be refreshing, realistic, blunt, and honest. Obviously, there is little room for a man like him in Washington DC, and I can only begin to imagine the frustration he must feel walking into work every day and running his head into the wall, watching politicians continue to promise the world to Americans to buy votes, and sending our grandchildren and great grandchildren into a death spiral of debt. He is like the one parent, surrounded by hundreds of 3 year old kids who act like they listen but once the parent turns his back for even 15 seconds, go on misbehaving.

Personally, I cannot wait to see what he is going to say now that he does not have to walk a fine line of appeasing the feelings of drunken spenders and will be in a self funded foundation, where he can really speak his mind (and he has already been saying things that I am sure peeved off many in that town!)
  • The resignation of America's unheeded and under-funded chief accountant and watchdog, along with the billion-dollar bullhorn he's been given, are the ultimate sell signals for America's stock investors.
  • David Walker, comptroller general of the General Accountability Office (GAO) has since 1998 been the objectively informed and outspoken critic of America's balance sheet. He has criticized supporting Iraq's dysfunctional government, pork barrel spending by Congress, unrealistic "universal health care plans" we can ill-afford or support, the escalating risks of huge deficits, fiscal vulnerability to hostile foreign governments, and a lack of will to reform our government.
  • Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.
  • That money will attack what the foundation considers "the most substantial economic, fiscal and other sustainability challenges of our current age" -- including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time. (BRAVO!)
  • "I have been around a very long time, and I have never seen so many simultaneous challenges that I would describe as undeniable, unsustainable and virtually untouchable politically," Peterson said in a prepared statement.
Here is an example of the fiscal ills we are facing, put into simple Powerpoint that even the most simplistic Congress Person should understand. Not that they want to be bothered with facts. I do urge our foreign debt buyers to also read this report - or perhaps they are. See how the dollar is acting.

Soybeans, Wheat Continue to Romp

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I keep saying crops today are where crude oil was in 2004; it is jumping madly, people are asking why, where, how? And how high could it go? We continue to see unprecedented moves, and a reader told me that on Friday even CNBC started plugging Powershares DB Agriculture Fund (DBA) - as usual 6-9 months late! But while I do expect a pullback somewhere along the way (and probably it will be quite a hectic one considering all the hedge fund money piling into the area), I think any pullback will be a buying opportunity as we are headed for some major food supply issues that the world is not prepared for. As I've written in the past expect some countries to begin restricting exports; in effect hording. Which takes even more supply off the market. Yet another one apparently began today.
  • European wheat prices jumped more than 2 percent in early trade on Monday after worries over supply propelled U.S. high-protein spring wheat to a fresh record and lifted all wheat contracts in their wake.
  • U.S. spring wheat on the Minneapolis Grain Exchange surged above $20 per bushel on Monday, extending recent gains and setting a record high for any U.S. wheat contract.
  • Chicago soybean futures and all contract months for European rapeseed also hit record peaks, with Chinese demand prompting active follow-up buying in the case of soybeans.
  • Agricultural commodity markets were continuing to benefit from speculative buying by funds wary of some asset classes.
  • On the world stage, traders were watching Kazakhstan's plan to curb grain exports by imposing a customs tariff from March and reported drought in China's wheat belt.
  • "The Minneapolis price broke through that significant level and Chicago prices are chasing the move," said Kenji Kobayashi, grains analyst at Kanetsu Asset Management. "Wheat is at an unprecedented level, but further gains are expected as long as fears over shortages in spring wheat are there. The strength in Minneapolis will keep others buoyant."
  • U.S. wheat stocks are projected to fall to their lowest levels in 60 years by the end of the 2007/08 marketing year on May 31, after shortfalls in several world wheat regions in 2007 steered export demand to the United States.
  • China's Xinhua news agency said some provinces in the north, the country's wheat basket, were suffering from drought. But analysts say it seems unlikely China will be a net wheat importer in the near future given ample stocks. Still, the areas hit by drought included China's top soy-producing province of Heilongjiang, fuelling concerns over increased soy demand from China.
  • China, the world's top soy buyer, has been buying U.S. and South American soybeans as well as vegetable oils to meet its food needs, traders said. China is experiencing its highest inflation in 11 years, largely driven by higher food costs. Despite inflation, China needs to keep importing, even at record high prices, rather than risk shortages, analysts said.
Long Powershares DB Agriculture Fund in fund and personal account

Greenspan Gives us his Weekly Update

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In his continuing stomping on Bernanke's ground (bad form to constantly point attention to yourself after leaving the job), Greenspan gives us his weekly update. Remember, Greenspan is actually an advocate of my stagflation thesis and "World of Shortage" thesis [Dec 17: Greenspan Jumping on my Stagflation Thesis] and his comments on crude oil (while one man's thoughts) are quite interesting. I have to give him credit on this call because most of the US economists including those at the Fed have believed that as the US slows, inflation will simply go away, as if the world revolves around the USA. Again, it's a very inward looking and dangerous view that is outdated. Once they realize this, and they have very little control over booming commodities (short of worldwide recession) I assume the panic begins when people realize just how little power they have over the inflation genie. But until then, we drink the Kool Aid.
  • U.S. economic growth has stalled and recovery may take longer than usual, former U.S. Federal Reserve chairman Alan Greenspan said on Monday.
  • "Growing globalisation of trade and the economy would facilitate the absorption of shocks in the U.S.," he said.
  • Greenspan also said a boom in oil prices, which hit a record of $101.32 on Wednesday, will "go on forever".
One day politicians will realize that helping to support the alternative energy industries is not pandering to "greenies", and something that will be mission critical. Maybe at crude $150.

Can crude go to $75-$80 again? Surely. $50? I doubt ever again.

Silver Wheaton (SLW) Ok Results but Some Massive Expansion Opportunities

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As I've stated in the past, I am not really concerned with quarter to quarter earnings with Silver Wheaton (SLW) - I am looking at it simply as a proxy for silver. Earnings are out this morning and are "fine", but the future expansion is quite astounding. Again, this continues my theme of finding companies with VISIBILITY in VERY uncertain times; companies with pricing power, large backlogs, great macro trends behind them, etc. Doesn't mean the stock price goes up, but while people have been chasing the bottom in home builders, retailers, and financials for half a year (and constantly losing), I just don't see the point when there are a handful of much more "easy" stories out there.
  • Silver Wheaton Corp. (NYSE:SLW - News) is pleased to announce record annual 2007 net earnings of US$92 million (US$0.41 per share) and record operating cash flows of US$119 million (US$0.54 per share). Fourth quarter net earnings and operating cash flows were US$25 million (US$0.11 per share) and US$34 million (US$0.15 per share), respectively.
  • With 2007 investments in silver purchase contracts (Penasquito and Stratoni) totalling US$558 million, annual silver sales are expected to almost double to 25 million ounces by 2010 without any further capital expenditures. This growth was financed by way of operating cash flows and a US$500 million debt facility.
  • The Company has entered into five long-term silver contracts with Goldcorp (Luismin mines in Mexico and Penasquito project in Mexico), Lundin Mining (Zinkgruvan mine in Sweden), Glencore (Yauliyacu mine in Peru) and Hellas Gold (Stratoni mine in Greece), whereby Silver Wheaton acquires silver production from the counterparties at a price of $3.90 per ounce, subject to an inflationary adjustment. [Please note current price of silver is in the $18s!]
  • The Company expects, based upon its current contracts, to have annual silver sales of approximately 15 million ounces in 2008, increasing to 19 million ounces in 2009 and 25 million ounces in 2010. Silver Wheaton is actively pursuing further growth opportunities.
Long Silver Wheaton in fund; no personal position

More Details Emerging on Visa (V) IPO

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More news out this morning on the very eagerly (at least from this corner) VISA (V) IPO; an issue we've been talking about for many months. This is going to be quite the enormous issue, so like I've said in the past, it won't provide the real magnificent upside that Mastercard (MA) did simply because there was no established bar (via publicly traded competitor) when Mastercard began trading.
  • Visa said Monday it could raise almost $19 billion from an initial public offering, which would easily become the largest IPO in U.S. history.
  • San Francisco-based Visa Inc. said in a Securities and Exchange Commission filing it will offer 406 million shares at $37 to $42 per share. There will be an option for its underwriters to buy an extra 40.6 million shares to cover any excess demand.
  • The Visa IPO, even at midpoint price, would surpass the $10.6 billion AT&T Wireless raised in 2000. It would be almost as big as the two largest past deals combined -- AT&T's offering and Kraft Foods' $8.7 billion offer in 2001.
  • Mastercard raised $2.39 billion in its IPO nearly two years ago. Shares of Mastercard have risen fivefold since going public and are now trading at more than $203 each.
Long Mastercard in fund; no personal position

Hedge Fund Computers Not as Smart as HAL

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More and more sweet justice emerges by the day. As we've written in the past, about 70% of trading nowadays is done by computers because, frankly, anything a human can do, a computer can do better, right? Well apparently not all the time (you see computers are still programmed by those lousy humans); I suppose these computers have not reached the level of HAL.

We're in an era where "quant investing" or essentially mathematicians and statisticians of PhD caliber create programs to find any tiny discrepancy even if for seconds, and try to trade these dislocations thousands of times a day. It works great. Until it doesn't. See, models are back tested on historical data to find the discrepancies aka opportunities. The problem is historical data doesn't contain things like the biggest credit bubble of all time. Bummer.

And in one of the biggest trademarks of the Street; the more popular something gets, the less it works as more people chase the exact same trend. And with what I am sure are thousands of "me too" quant funds chasing the early hedge fund winners with similar models, the "black box" investing system seems to be collapsing under the stress of a market that doesn't go in 1 direction for more than 4 hours at a time. Pardon me while I wipe away a tear. But don't you worry, as we all know, a hedge fund manager can simply wave this away as a once in a lifetime issue, raise a new round of billions and go his merry way, finding ways to make large sums in "safe" strategies that only implode in unprecedented (i.e. historic) times... which seem to happen every 6-8 years.

We've know about Goldman Sachs Global Alpha Fund having an absolutely terrible time of things since the credit issues came to light last summer, but it appears some others in the brotherhood are also faltering. Suddenly I don't feel so bad being down 5% since Jan 1 - I'm smashing the smart guy's computers by 10% ;) It's all relative baby...
  • Welcome to superstar hedge fund manager Cliff Asness' winter of discontent. Asness' AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street's most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.
  • Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion. (27.5% drop - ouch)
  • The steep losses have dealt a major blow to Asness, a University of Chicago-trained mathematician whose investing prowess catapulted him into the ranks of the super-rich, and his firm. Founded a decade ago with fellow Goldman Sachs alumni, AQR now faces the daunting prospect of employee defections, falling management fees, and credit problems.
  • AQR, based in Greenwich, Conn., has long been one of the most prominent hedge funds to use complex mathematical formulas to spot - and profit from - temporary inefficiencies in stock prices. Before launching AQR, Asness and his co-founders developed the computer models that helped Goldman Sachs' Global Alpha fund return 140 percent in 1996, its first year, and regularly book handsome double-digit returns before finally collapsing last year. (it appears most of these hyper return strategies work great, until they collapse all at once)
  • The strategy that Asness used is known as quantitative trading, or "black box trading" given its reliance on computers to execute trades. Over the years, AQR's founders built a money management franchise with $36 billion in assets, $11 billion of which was invested in hedge funds.
  • For AQR's management, the payoff from quantitative investing was exceptional. Institutional Investor magazine regularly named Asness one of the highest-paid hedge fund managers. In 2002 and 2003, he reportedly pocketed $37 million and $50 million, respectively.
  • Quantitative funds have been devastated by the market volatility that began last summer. At one point in July, the AQR Absolute Return fund booked a 13 percent loss. While it recouped about half of that loss later in the month, the fund's once-resilient mathematical models were no match in the face of a global credit crunch, the severity of which few predicted. (that's because computers don't have brains, hence they cannot predict things out more than a few seconds)
  • Worse for AQR, the firm could now see its star employees head for the exits. That's because of a peculiarity of hedge fund management called the "high-water mark," in which a fund manager must recoup the amount of prior losses before earning the lucrative 20 percent and higher performance fees. AQR's rank-and-file traders and analysts now have little incentive to stick around - unless, of course, the fund's owners guarantee them compensation from a cut of their fees.
  • A fund spokesman declined comment. To be sure, AQR's non-hedge assets, which are the bulk of the firm's assets, are ahead of their primary return targets for the year. (well, I am glad to hear that - wouldn't want to see any poor soul trade down to a starter mansion/yacht in CT)

Sunday, February 24, 2008

Bookkeeping: Weekly Changes to Fund Positions Week 29

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Week 29 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: 28.3% (vs 20.7% last week)
50 long bias: 57.8% (vs 62.4% last week)
6 short bias: 13.9% (vs 16.9% last week)

56 positions (vs 59 last week)
Additions: Fluor (FLR)
Removals: Suntech Power (STP), Blue Coat Systems (BCSI), Riverbed Technology (RVBD), Diamond Hill Investment Group (DHIL)

Top 10 positions = 28.8% of fund (vs 32.1% last week)
30 of the 56 positions are at least 1% of the fund's overall holdings (53.6%)

Major changes and weekly thoughts
As mentioned in this week's fund performance it was a tale of 2 weeks, pre Ambac bailout report/rumor/lovefest, and post. Ironically I was actually doing far better relative to the market averages this week before the news, but as I've kept repeating you cannot be comfortable as a bear or a bull in this market. All the King's Horses and all the King's Men, will try to put Humpty Dumpty together again - and each time we hear the hoofs galloping through the Forest, the market mounts a rally. So as I've been doing the past few weeks (and I believe many institutions have been doing as seen my blips up late on Fridays), I've sold off Ultrashorts (as institutions are covering shorts) because we all fear the heavy hand of the government messing with our portfolios. So my short exposure above is not very reflective of the week; in fact going into Friday I was in the lower 20%s exposure with cash around 20%. Early in the afternoon I took some off the table (as I noted I would earlier that day in the blog) due to the "intervention at any moment" scenario and once things spiked I took another large allocation off, and put it into cash. So I'd characterize it as two separate 3-3.5% transfers; the 2nd one being forced by what could be a giddy period reminiscent of previous periods in which no solution really came but a lot of happy talk created conditions for rallies. So net net I am back down to mid teens exposure on the short side.

Other than that it was truly just another week of quicksand - no real movement, we went from the high end of our recent range and were steam rolling to the low end towards end of week, until 3:30 PM Friday. It is hard to assess the future because we'll have to see how much fuel the bond insurer rally has. Continuing to seek a move back to S&P 500 level of 1400-1410 to develop any real near term bullish thesis.

We have a lot of economic reports this week, and I expect investors to react as normal - churning through the bad news to find any sliver of good news to explain to us how this economy will be rip roaring in 6 months; we are just too near sighted to see the shreds of good news within the bad. Or that the government solutions will fix the array of problems. And each time people buy into that line of thinking we get these small rallies, and each time people say "what the heck are we drinking?" (answer: Kool Aid), we get these small sell offs. And we continue onto a path to nowhere fast. But as always it's entertaining to watch the pundits clucking.

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. Tuesday, I cut back some fertilizer exposure just to lock in some very nice gains over the few weeks. At this point I've cut these names as far back as I feel comfortable with, so if the stocks continue upward I won't be cutting anymore.
  2. Wednesday, nothing of substance in terms of transactions
  3. Thursday, Research in Motion (RIMM) reported a stronger than expected subscriber growth metric, and the stock ramped up 10%, so I sold most of my position, and set a limit order to buy these shares back (if they fall) lower.
  4. After yet another quarter of beating estimates and raising guidance, and seeing the stock not react, I exited Blue Coat Systems (BCSI) and it's cousin in arms Riverbed Technology (RVBD), two long held positions. One day these stocks will reflect fundamentals, but after quite a few months of not being rewarded for performance, I've decided to move on for now.
  5. I expanded fund exposure to the infrastructure group, by adding to fund holding Foster Wheeler (FWLT), and restarted a new position in Fluor (FLR).
  6. After Suntech Power's (STP) surprisingly poor results and more importantly a much more clouded outlook for year 2008, I closed this long held position. At this point while I expect a "speculative" rally in the group, I am concerned for what could be coming to this group over the next few quarters, but we'll see soon if it's a company specific issue or industry issue.
  7. Friday, I closed a long held position in asset manager Diamond Hill Investment Group (DHIL).
  8. Early in the afternoon I lightened up my short exposure, then after the market spike in the last 30 minutes, I did another layer of lightening up in case the market has a more sustained run off the bond insurer bailout... err "market based private solution".
The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows.


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