Recession to be Longer Than Usual - University of Michigan

If someone says anything from the University of Michigan, then you know it must be true. And don't make me break out the fight song to prove it to you!

Ok aside from the great source, I also wanted to post it due to the comment about income inequality because I truly believe this is why the fellas in NYC have really no idea what is happening in middle America.

Recession to Be Longer than Usual

• The U.S. economy has entered a recession that will be more painful and drawn out than the usual downturn, the director of the Reuters/University of Michigan consumer sentiment survey said on Friday.
• Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.
• "This is no ordinary recession," he said. "The aftereffects will last much longer than the typical downturn."
• He said the Conference Board's expectations index is a strong predictor of economic contractions, and that it is currently flashing red. With Americans getting hit with everything from a housing downturn to excess borrowing, things will get worse before they get better.
• "Consumers must take more drastic steps to stabilize their finances in the midst of high fuel and food prices, stagnant incomes, and record debt," Curtin said.
• The new report adds that a rising wealth gap will, even more than usual, lead to disproportionate pain for middle- and lower-income Americans. "Growing income inequality has insulated higher income groups to a greater extent than ever before," the report said.
• Yet the rich will not go unscathed, with the stock market's recent slide likely taking a bite out of many an investment portfolio. (oooh, poor babies)
• Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.
• "The negative impact will grow as home prices continue to fall in the year ahead," he said.

Long U of M

Eric Bolling on Wallstrip.com

Always worth a listen. Fast Money misses him. I've seen snippets of him on Fox Business but never enough and he gets shouted down by rude people who know about 1/10th what he knows. Go Bolling!

Bookkeeping: 'Rising Tide' Performance Week 27

Week 27 performance of the mutual fund

Comments: We started a new quarter for the fund - Year 1, Quarter 3 and it looked a lot like Quarter 2. More randomness and bipolar action. Do you feel whipsawed? You should. Let me show you what the S&P 500 has done the past 4 weeks.

3 weeks ago: -5.4% (the worst week in 5 years)
2 weeks ago: +0.4% (eye of the storm)
1 week ago: +4.9% (the best week in 5 years)
this week: -4.6% (I don't know where it ranks but it essentially wiped out last week completely)

These are enormous moves in indexes and this is part of the reason we are all feeling so uneasy and no trend lasts for more than 3-5 days (or 3-5 hours in some cases). It is madness out there. We are actually at exactly the same point we were 2 weeks ago in the indexes, before the +4.9% gain (last week) and -4.6% loss (this week). So we went through all that trouble ... to get nowhere in particular. This is why I opined earlier today, it makes one want to just go to cash and sit idly by waiting for a better time.

My take for this rampant volatility (and it is a guess) is we are moving from (a) no recession school of thought that pervaded the Street in December to (b) some recession thinking school of thought... and now the next phase is (c) what kind of recession? Layer on top of that the continued unease of the bond insurer situation and the fact that the duration and depth of the recession don't depend as much on traditional things (job creation, inflation) but in large part on an unknowable component - housing. Housing permeates everything - our job creation, our financial system, our banks, our confidence, everything. For every 100 mortgages, we now need to have some idea of how many will still be paying in a year? how many in default? how many in foreclosure? (will the owners have a job?) and then where are all those exposures throughout our financial system. Who owns those mortgages? What balance sheet are the bad ones sitting on? After they blow up how much more write offs will be necessary? What foreign sovereign fund will come to the rescue next time? Will any?

One point I like to drive home to people new to the market is that the Street prefers BAD news to uncertainty. Period. Bad news can be absorbed, measured, and reacted to. Uncertainty cannot. This is why the black boxes that are our banks, and in fact the entire financial system is such an issue. The best bank experts and even those within the companies seemingly cannot make heads or tails of exposure. We all guess. But we have no real idea. And even if we did, it is a moving target. Today 2 houses on Maple Street in downtown Tampa Bay are in foreclosure, 4 other are in default and 3 months late... what will the picture be in 6 months? in 12 months? Who knows. But unfortunately all those moving parts affect the balance sheets of a plethora of global financial institutions. So I am not sure how this ever gets 'measured' - the only "fix" is for home prices to rebound and people to stop (or slow down) defaulting. When that happens than at least we have a baseline and can assume things only get better from there. Right now, the market is simply guessing when it happens and the most popular guess nowadays (using old and useless playbooks) is the commonly cited "6 months from now". As if in 6 months a magical elixir will be swallowed by the country and "it will all go away". Well I'll tell you what the elixir has been the past 20 years - Fed rate cuts. But these are a whole different set of problems than we've had in the past. Essentially a Ponzi scheme built on home price appreciation. So I expect a lot more uncertainty to continue for the foreseeable future. It would be nice if the markets did stop making half the magnitude of a correction (10%) move every week though.

Last week I felt quite frustrated. While the fund made 1.3% I badly trailed the indexes (which I measure myself against) as they went ballistic, chock full of financial, retail, and homebuilder stocks that people wanted so badly. This week, aside from Thursday when "bad news in retail stocks means great news", all those sectors sold off. So it was a more normal week to some degree than the past 2 when "worst of breed" reigned supreme. It was a bad week for the indexes so there weren't many areas of outperformance but areas of (relative) strength for the fund were coal, fertilizer and the good sized short exposure. Areas of weakness were solar, tech, infrastructure, and anything oil related.

The S&P 500 lost 4.6% this week with the Russell 1000 down 4.5%. Rising Tide Growth Fund lost 0.65% this week, so essentially while down, we made up all of last week's underperformance vs the indexes (and then some). For some odd reason I feel better about this week when the fund lost money (but beat the indexes by nearly 4%), than I did last week when the fund made money (but trailed the indexes by 3.5% or so). Maybe because things seemed more normal this week as sectors infected with subprime and a slowing consumer weren't the best performers.

Price of Rising Tide Growth: $10.937
Lifetime Performance to date (vs Aug 3, 2007): +9.37%

Comparable S&P 500: 1,331.29 (-9.14%)
Comparable Russell 1000: 726.87 (-8.71%)

Fund return vs S&P 500: +18.51%
Fund return vs Russell 1000: +18.08%

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

Bookkeeping: Initiating Position in MFA Mortgage Investments (MFA)

I mentioned yesterday the technical strength in the Mortgage REIT market [Thank You Readers - Found a Bull Market - 4 Mortgage REITs]. I did a lot of digging last night (and still plan to do more) but I decided to make the plunge with one of the names today. I chose MFA Mortgage Investments (MFA), and began a start position of 1.0% of fund @ $10.89.

I also have considered:

1. Annaly Capital Management (ANY)
2. Capstead Mortgage (CMO)
3. Anworth Mortgage (ANH)

Readers mentioned Chimera Investment (CIM) as another way to invest in this trend, but I have not looked closely at it yet.

I also discovered, lo and behold, an ETF from iShares which is a quick and easy way to get all the major players in one ETF: iShares FTSE Mortgage REITs (REM). So I considered that as well.

Playing any of these companies is essentially a bet on the competence of management so it not quite so easy to model that like you would a normal business. So my first inclination was the ETF. But when I looked at the composition I saw:

1. Annaly Capital 24.7%
2. Thornburg Mortgage 9.5%
3. MFA Mortgage 8.0%
4. Redwood Trust 6.5%
5. Capstead Mortgage 4.8%

So this ETF is heavily weighted in the top handful of names, especially the top position, with a quarter of weighting toward Annaly. Since Annaly is a Cramer pick it probably has some of its upside already within the stock performance... and I already own the 2nd name in this ETF, which I started this week (how ironic?) [Beginning Stake in Thornburg Mortgage (TMA)] So buying this ETF would be a 35% stake in 2 positions, one of which I already own.

So of the remaining 3 choices, MFA Mortgage is the largest (almost double in market cap vs CMO or ANH), and the other 2 were up quite a bit today anyhow - Capstead Mortgage up nearly 10% - so maybe if I had been ready to buy yesterday I'd do a basket of MFA Mortgage and Capstead Mortgage. Again, I have nothing scientific to offer you - the prowess of management will determine ultimate success. I want to have exposure to the trend overall and judging by the 3 month performance of the 3 names I was considering (as seen below) - they are all generally in the same ballpark. Since I am buying the largest of the 3 I considered, I'll pass up a little return, for hopefully some stability.



Looking at MFA Mortgage Investments specifically, we have stellar relative strength and a stock in a clear uptrend. Although I initiating a position today near $11, I am hoping for a pullback to $10 (or even less) if possible, to add more. Much like with Thornburg Mortgage.



Due to the nature of the business I am not putting a lot of stock in the earnings estimate but 11 analysts follow MFA and have a $1.11 estimate with range of $0.82 to $1.55 range. So even at the bottom end of that range it seems to be a reasonable valuation.

Again, these 2 purchases this week (MFA & TMA) are my way to participate in the financial "boom" in mortgages caused by Fed cuts and LIBOR rates falling, without exposing myself to bigger (non pure play) banks with a lot of potential writeoffs still coming down the pike, or home builders who still have major issues ahead. While the latter 2 sectors are good for short term trades (which I might attempt) from time to time, I am hoping the areas I began positions in this week can be more of long term type of positions, which I can retain a core position for quite a while. Last, these type of positions should have little correlation with the type of stocks that make up most of my portfolio (or so I hope) so when they zig the rest of my portfolio might zag and I have more stability overall.

The risk for positions like this is they have come a long way off of very oversold levels, but the reward is these sectors, relative to where they were even 7-8 months ago, are still extremely sold off. But technically, these are some of the strongest stocks in the market and I love relative strength.

Long Thornburg Mortgage, MFA Mortgage Investments in fund; no personal position

Bookkeeping: Closing First Solar (FSLR) Position

Wrong type of stock in this environment so I am going to close out my smallish position with a small gain. (whopping $300). I obviously had a larger gain (stock had ramped to $280+) but gave some of it back during the January swoon. I did sell some along the way, which is the only way I made even the small profit I did. Again, buy and hold investing is useless in this environment.

I started First Solar (FSLR) in mid November [Starting Small Stake in 2 Emerging Solar Leaders], after some incredible earnings in early November [First Solar (FSLR) Impressive Results]. I've had a hard time wrapping my mind around a large position in this name due to its extreme valuation, but I do like it's ability to grow without limitations of polysilicon.

That said, earnings season is upcoming for solar stocks and these are very volatile names in earnings season (even more so than usual). And I believe (maybe my memory is failing me) that First Solar stated that 1st half 2008 expectations would be in line with back half 2007. So that could potentially provide disappointment for such a highly valued stock. Actually opening your mouth in this environment provides the potential for disappointment, so I am going to exit and see if I can re-enter at a lower price maybe post earnings. The stock has support at its 200 day moving average in upper $130s, which also coincides with its October 2007 lows. So if something goes amiss with guidance we could see a move there. Or not. But another move I am filing under "better safer than sorry".

As for valuation, it is very difficult as this is the only major solar player not stuck in the polysilicon shortage issue. So it has scarcity value. And it's earnings last quarter surprised everyone so I think everyone is guessing on First Solar's earnings potential. Analysts have a consensus of $4.51 next year with a range of $3.25 to $6.24. So it's a huge variance, but very typical for every solar stock. Everyone is guessing. If $5 is reasonable this is still a very pricey 35x forward earnings multiple. But for all we know earnings could be $4 or $7 by the time we hit to the end of fiscal 2009. However, this is just the type of high multiple stock that the market has punished without mercy so no need to take out sized risk in this environment.

Hence, I am closing the 0.6% stake in First Solar around $174, and will re-assess down the road. I do plan on adding this name back, based on the information I have, at some point in the future since I do think "in the end"[The Long Term in Solar] the solar space will be dominated by a handful of dominant players but this will probably take 4-5 years to play out. And First Solar already has the size/scale to be considered a front runner to be one of those dominant players. But for now, I'm worried about the next 4-5 weeks, and I'll let someone else take the risk (and potential reward).

No position

Mechel (MTL) Considers German IPO for It's Mining Division

Mechel (MTL) has been showing some nice relative strength of late - it has nice exposure to multiple areas of interest for me - steel, iron ore, coal. Today's 7% move seems to be driven by news of a potential IPO for its mining division. We did discuss this in mid December [Mechel Reports Earnings, Considers Mining IPO] but now we appear to have more details.

• Russian steel maker Mechel (MTL) is considering listing its mining division in Frankfurt in an initial public offering that could raise around $4 billion, Russian business daily Kommersant reported on Friday.
• Mechel MTLR.RTS aimed to sell a 20 percent stake in a newly created mining division which it values at $20 billion -- considerably more than the entire company's current value.
• New York-listed Mechel, Russia's sixth-largest steel maker, has a current market capitalisation of $8.3 billion, but has acquired extensive coal assets in the country's far east. It has since spent 58.2 billion roubles ($2.36 billion) to win access to large coal deposits in the far eastern Russian region of Yakutia. These include the Elga deposit, potentially Russia's largest coal field.
• Mechel Mining would include the company's stakes in coal firms Yuzhny Kuzbass, Yakutugol and Elgaugol and may also include the Korshunov iron ore mining and concentrating plant, Kommersant said.

Mechel is still viewed as a steel maker, which is fine - since China and Russia have a relatively cozy relationship and I've viewed Mechel as a nice back door play on the needs of China infrastructure growth. It also has a lot of iron ore exposure - another hot spot in a continued "World of Shortages" scenario. But of course all these acquisitions in the coal market, make me the most happy. I continue to really like this undiscovered gem.

Technically, this is one of those select few stocks trading over its 50 day moving average, and in fact is only about 5% below its all time high. It has been beaten to a pulp during the January sell off (down to low $70s), but I surmise when the day comes the market regains its footing, this is the type of stock to shoot off like a cannon.

Long Mechel in fund; no personal position

Milk is the New Wheat is the New Corn

Well you learn a new thing every day in a crisis situation.... just discovered New Zealand has the world's largest dairy exporter. Who knew?

Unfortunately record drought conditions are causing some small issues. Not that it shows up in inflation figures or will in the future... but if inflation were real (in theory) we'd have to worry about things like this

• Fonterra Cooperative Group Ltd., the world's biggest exporter of dairy products, said drought cut New Zealand's milk production and may restrict new export orders.
• Record dry weather in much of the country means season-to date output is falling below last year, Chairman Henry van der Heyden said in a statement e-mailed to Bloomberg News. The Auckland-based company had budgeted on a 3 percent rise in production to about 14.8 billion liters.
• World dairy prices reached a record in November after doubling in two years as drought cut production in Australia and rising land and feed prices increased costs in Europe and the U.S. Fonterra is New Zealand's biggest export earner, with dairy accounting for about a fifth of the nation's overseas sales.
• ``Lower production at a time of strong international demand and elevated soft commodity prices risks raising the price of agricultural commodities further,'' TD Securities strategists Stephen Koukoulas and Joshua Williamson said in a Feb. 5 report.
• Fonterra accounts for about 40 percent of the international trade in butter, cheese and milk powders
• ``The weather is key,'' Fonterra's van der Heyden said. ``Everyday without rain is hurting farmers.'' On a daily basis, output in Waikato is down 27 percent, van der Heyden said. Bay of Plenty production is down 21 percent and in Taranaki by 9 percent, he said.
• Customers are being advised that new export orders may not be accepted, he said.

Unfortunately more fertilizer orders cannot help this situation. :) If it were a situation. Because it's not... since it's on the other side of the world. And there is no inflation. But if it were a situation, it would be problematic. But anyhow, don't worry about it, CPI is running 2-3% and a slowing US economy will cause rain to fall from the skies over New Zealand and take care of our inflation problems.

What's that? Yes that's the new working theory - since the whole world revolves around the US (don't worry about those 2.5 Billion in China and India), when the 300M Americans and their economy slows down all the world's inflation problems will go away. Yes it's true. Just like in the 1970s ... what's that? That didn't work out so well in the 1970s stagflation? Nevermind that - it will work out this time, we promise. I heard it on CNBC so it must be true. So once the US economy slows down, inflation goes away! POOF! So we can cut rates to zero in that environment!

What's that? The bond market disagrees with that theory? And that's why 10/30 year bond rates are stubbornly staying up? Never mind those bond guys - what do they know. Listen to CNBC and the equity guys. They say inflation disappears once the US economy slows, so therefore it must be true.

What's that? The US economy will be booming in 6 months due to Fed cuts and housing "re-boom"? That's why housing, financials, and retailers are flying up.

So how could inflation go down in 6 months (due to slowing economy), yet at the exact same time the US economy will be booming (in 6 months)? Therefore making for a total nonsense, circular arguement?

Well just stop asking those tough questions and just keep buying financials, retailers, and homebuilders! It makes the analysis that much more easier. After all that's what the PLAYBOOK says to do. So just do it! (and buy some powdered milk while you're at it)

So again, let's review. 300M on this earth (USA) will offset the other 5 Billion people. So when those 300M people slow down... inflation will stop. So the US can cut Fed rates to zero and it won't harm a thing. But with that said, don't worry about the US slowdown either. Because it will be over in 6 months. But that coming boom in 6 months in the US economy, also won't cause inflation. Because inflation was defeated by the slowdown we are going through now.

Got it? Good. Now go buy stocks.

And after reading this hair brained CNBC pundit idea I just convinced myself to buy back some of that Ultrashort Russell 2000 (TWM) exposure I sold off this morning. If *THIS* is the type of thinking causing the boom in these stocks - well it's all a big hoax.

Wheat is the New Corn

We discussed Wheat Earlier this week [Wheat Goes Above $10 a Barrel]. $10? Now its nearly $11, and if not for the daily limits (it is only allowed to go up so much each day) it would be over....

Wheat Rises Exchange Limit to Records as Inventories Decline

• Wheat rose to a record for a third day on the Chicago Board of Trade, gaining the maximum permitted by the exchange, as the U.S. forecast its lowest inventories in 60 years and global demand outpaced production.
• The U.S. will hold 272 million bushels at the end of May, the lowest since 1948 and 6.8 percent less than expected a month ago, the Department of Agriculture said in a report today. Inventories in the U.S., the world's biggest wheat exporter, will drop 40 percent from a year earlier. Wheat futures have more than doubled in the past year as supplies dwindled.
• Wheat futures for March delivery rose 30 cents, or 2.8 percent, to a record $10.93 a bushel at 9:54 a.m. on the Chicago Board of Trade. The contract has risen the 30-cent exchange limit for five straight days. The 16 percent gain this week would be the biggest in history.
• U.S. yields were curbed by a freeze, followed by excessive rainfall, and then drought hurt production in Canada and Australia. Global buyers increased purchases of supplies on speculation farmers wouldn't harvest enough to meet needs and to curb rising food costs.
• Wheat was the fourth-biggest U.S. crop in 2006, valued at $7.7 billion, behind corn, soybeans and hay, government data show.

This is part of the very awful cycle I've been talking about since last summer. Take out all the issues about weather, droughts, climate change, whatever. The simple fact is new farmland is not being brought online at a very quick pace. Crop yields are increasing but not nearly enough to support demand. So as our US government (by incentivizing corn ethanol) pushes more of our crop lands into this stupid foray, every other crop will suffer. So production falls, inventories fall, and prices rise. This is why I think ANY crop out there... ANY is a buy. Cotton, sugar, coffee, anything.

But again folks, we won the hearts and minds of the farmer vote so there is always a silver lining. Also thankfully inflation is "contained and benign".... so nothing to worry about.

Last, all this Fed liquidity has to go somewhere. Money never goes to the last bubble so it won't be real estate. My guesses have been commodities and/or foreign markets for Fed inspired Bubble 3.0. So aside from all the basic ECONOMIC reasons, the Fed induced bubble reasons are yet another reason. All these hedge fund computers lapping up subprime infected financials and home builder stocks are surely chasing these commodities up. If not for the lock limits each day, I truly wonder how high these crop prices would be.

AGAIN, DON'T WORRY! Inflation is contained. I'm just saying if it were not... it is something to think about.

I added a bit more to my Powershares DB Agriculture Fund (DBA), which again I am using as my safety valve and "money market" in this environment. I am awaiting any and all ETFs the market brings which allow me to buy any specific crops. Thank you Washington DC for making quite possibly the most easy investing thesis in my lifetime.

The way things are going, within a decade farmland is going to have more value than ocean front property.

Long Powershares DB Agriculture Fund in fund and personal account

S&P 500 Still Looks Putrid

This chart continues to be in really bad shape. What is interesting is if you draw a line between the 4 highs of late 2007

1. Early October
2. Late October
3. Early December
4. Late December

And continued that line into February 2008 you would of expected more of a pop on this rebound... i.e. a pop to S&P 1450 or so, before being turned back. We didn't even get to S&P 1400. So we're stuck in no man's land of a primary bear market in my book. We could bounce 100 S&P points (to S&P 1435) and still be in a bear market.

It still appears to be we are going to be retesting those January lows of S&P 1275 or so. What happens there will determine our mid term fate. A bounce, and we might create some nice conditions for a rebound. A break of that level and we continue down...1230 area which was summer 2006 lows looks like the next level.

So while we get caught up here in the day to day, trying to figure out why absolute junk sectors are rebounding etc... it's really all white noise day to day. I say that because I see the exact same thing in many charts. They go up 4%, they go down 3%, they go up 2%, they go down 5%... up, down, down, down, up, up, down, down. And making no real progress. We have a few exceptions but 90% of the charts I am looking at are "white noise" charts - useless, directionless, cannot hold onto a move for more than 3 days a time, and then immediately reverses. As Doug Kass on Realmoney.com says "this is a market with no memory of the previous day". So for people like me who like to trend trade - that is hold onto positions and ride trends/relative strength for months/quarters it is quite a terrible market. For "buy and hold" types, its quite a terrible market - those folks have lost quarters worth (year+?) of gains lately. It only is working for daytraders at this point. So I think many people are frustrated out there.

The absolute lack of conviction is leading to these hourly changes in direction which are making many people sea sick. However, it is not even (that) easy for shorts because the things that were the easy shorts of 2007 are now the stocks holding up the best. Irony at it's best. The market likes to confound the most people it can. Certainly this type of situation can make the case that it is easier to just go to 100% cash and wait it out until things become more certain. ;)

Bookkeeping: Cutting Back Ultrashort Russell 2000 (TWM)

I am also cutting back Ultrashort Russell 2000 (TWM). Strangely, the small caps which are most tied to the US economy, are acting better than large caps of late. I think this simply goes to the strength in financials (many smaller regional banks in Russell 2000), homebuilders, and retailers, etc. The "playbook" of what to buy when Fed cuts rate so starkly. While I disagree with the assessment of a fall rebound in the US economy, I am not going to fight 10,000 hedge fund computers who insist the economy will rebound in 6 months and hence are buying these names hand over fist.

I am cutting back 375 of my 675 shares in Ultrashort Russell 2000 (TWM). This brings my exposure down to 2.3% of the fund.

To be blunt I have to rethink what to short and what not to short. Perception is reality on Wall Street. If perception is the economy will be booming by this fall, then small caps, financials, retailers, real estate will all go up. Even if next October we see this theory was blatantly wrong. We saw this the 2 weeks previous to this week, when those washed out sectors rallied hard. What is funny is all the facts that are coming out are pointing to a quickly degrading economy. But that doesn't matter because perception is all that matters. So quite frankly I am not sure what to place my short hedges at this point because facts say to short one area, and perception says to short another area. I don't know which area will win out in the coming months - facts or perception. So it is something to mull over. I still contend the areas rallying the most of late (retail, homebuilder, financial) have a lot of issues and it won't be resolved by this fall. What I am laughing at yesterday are investors rushing into retailers who say 2008 estimates are "so and so". The same retailers who cannot forecast accurately 4-8 weeks ahead of time. But when they say "2008 will be not so bad after all", people believe them. And people rush to buy the stocks because "things are going to be ok". Huh? No one call tell you what the environment will be in 6 months, yet when the retailer CEOs bring out their crystal balls and insist things will be ok in September 2008, we are supposed to believe them? That is how desperate bulls are right now - any silver lining they cling to. And people short those sectors get whacked as hope triumps reality.

I do plan to still keep relatively high short exposure overseas for now - or at least until perception changes to "well the huge US rebound this fall means overseas markets will also be booming this fall". I also am sticking to my commercial real estate short because while residential real estate might be washed out, commercial real estate is a direct tie to the slowing US economy. Further, we don't have bailout plan after bailout plan to try to save commercial real estate like we do for financials. So I'm going to stick with that position until it starts to hit the street that yes, we have too many stores, each talk of store layoffs and store closing means more pressure on commerical REITs, etc etc. I don't think thats priced in yet.

Again, this is an impossible market to game as reality on the ground differs 100% from the "playbook", and if all the institutions use the "playbook", it doesn't matter what the reality is. We saw that all September and October 2007 when the market went up week after week, in the face of an avalanche of bad news. Even harder now is "opinions" are changing daily. On days economic reports come out people seem to accept the facts that things are bad... other days, they seem to cling to hope. There is again, no rhyme nor reason.

So until bad news matters again, it won't matter. And right now people have decided the Fed will save us again and small caps are reacting very well to that perception. If that perception changes (again) which could be in the next 10 minutes - I'll re-up my exposure to this position.

Bookkeeping: Cutting Back Ultrashort Technology (REW) By 75%

I am looking at these poor technology stocks and their charts look like the financials did about a month ago. Maybe they have further to go down but some of the valuations are getting to a point of ridiculousness, and they are due for at least some bounce sooner or later.

I still think we are in a greater bear market, but just like the financials, homebuilders, and retailers can rebound off very oversold levels these stocks just look pathetic, so I think the "easy money" has been made for this round.

I have 400 shares of Ultrashort Technology (REW), and am going to sell 300 today in the mid $74s range, and cut my exposure back by 75%. This reduces my stake down to 0.7% of the fund, from nearly 3%. I bought this position just a few weeks ago [Starting New Position Ultrashort Technology (REW)] to offset my long technology stake, and it's done a good job, making a few thousand for the fund in a few weeks. At these levels stocks like Microsoft (MSFT), Google (GOOG), Apple (AAPL) are turning into "value" stocks. Since the charts are so putrid I am not going to buy these just for a quick lift but I don't want to press the hand too far, so I am going to lift the Ultrashort for now, let them rebound and then on a bounce go to a larger exposure. Again, the fact these stocks get squeezed so badly while the stocks at the heart of the mess go up (financials, housing, retail) is a little silly but I do understand the "playbook", and when 10,000 hedge fund computers say "this is how it happens" you have to respect it. But when I look at the charts many of these stocks fell right off a cliff, and this is eerily reminiscent of how financials, retailers, restaurant stocks looked like a month ago before they rebounded. So I am going to reduce my bets against and revisit at a later date.

If this was more of a hedge fund environment, in fact I'd probably buy a bunch of technology stocks to try to flip out after they bounce 5-10%, but since that is not the mandate for a mutual fund I am simply going to move to the sideline and into cash.

Long Google, Apple, Ultrashort Technology in fund; no personal positions

Truly a Bear Market

Even stocks that beat estimates by 70 cents, cannot generate any lift :)

Unless they have subprime exposure I suppose.... than they are a raging buy.

Adding some more CF Industries (CF) here near $107 - I guess it's going to trade to a PE of 8 for 100% growth

Long CF Industries in fund and personal account

CF Industries (CF) Monster Quarter - AGAIN

On October 29th, CF Industries (CF) was my #1 position - which I held into earnings. The title of my post that day was '#1 Position CF Industries (CF) Monster Quarter'

This is what they did in October

Estimates $537M revenue, and $0.97 EPS
Actual $583M revenue, and $1.52 EPS

Well, I hate to plagiarise myself, but ANOTHER even MORE MONSTER quarter. This is what they just did

Estimates $796M revenue, and $1.67 EPS
Actual $852M revenue, and $2.38 EPS

Wow. Just wow. And to think this company has a 10 PE multiple on it. Pathetic.

This is not my #1 position but I added today as I wrote earlier [Bookkeeping: Adding Fertilizer] and took it up to a 4% stake. Now we can listen to the bears talk about natural gas costs and the coming end of the agriculture boom. And just say wow.

One day the analysts will catch up to these fertilizer names and get the earnings estimates correct. But as I said with Mosaic (MOS), as I said with Potash (POT) - that day is still not here. So we walked into the day with $9.25 in 2008 EPS and at $106, a forward PE of 11.5. Obviously 2008 EPS analyst estimates are total trash (again) - they are up from total trash $6.35 90 days ago by the way - and away we go. We just got cheaper instantly. Not to mention gross margin explosion which is the whole secret to the fertilizer industry. This is a company growing in excess of 100% year over year, for a 10 multiple. Of course growth will slow in the future but please? Can't we bear a 16 PE? 20? If not, someone is going to come in and buy this type of company.

• Sales and net income highest for any quarter since company’s August 2005 IPO
• Net sales rose to $852.5 million, up 62 percent from fourth quarter 2006, driven by substantially higher prices and increased nitrogen volumes
• Operating earnings totaled $214.2 million, compared to $10.9 million in fourth quarter 2006
• Net income totaled $135.4 million, or $2.38 per diluted share, compared to $8.0 million, or $0.14 per share, in fourth quarter 2006
• Fourth quarter results included $12.9 million in non-cash, pre-tax unrealized gains, or $0.15 per diluted share on an after-tax basis, from mark-to-market adjustments on natural gas derivatives. The gains compare to $9.4 million in non-cash, pre-tax unrealized losses, or $0.10 per diluted share on an after-tax basis, for mark-to-market adjustments included in fourth quarter 2006 results
• Gross margin increased more than five-fold from the fourth quarter 2006 level to $236.0 million.
• Board approves increase in regular quarterly dividend to $0.10, up from $0.02 per share

How's the future looking? Not too shabby

• Record grain prices and robust worldwide demand for fertilizer point to strong spring season
• Company’s forward bookings substantially higher than levels a year ago
• “Looking to the spring planting season, the fundamentals that drove our strong 2007 performance look even better for the farm economy and the company in 2008,” CF Industries’ Wilson noted.
• “Prices for most major crops remain at record or near-record levels, providing an incentive for farmers to maximize planted acreage and to optimize fertilizer application this spring. And despite today’s high fertilizer prices, these crop prices clearly should support excellent farm economics in 2008, coming on the heels of 2007’s record farm income,” he commented.
• Predictions from some agricultural economists point toward lower corn acreage in 2008, with expectations generally for 88 million to 89 million acres, down from the near-record 93.6 million acres planted in 2007. Putting that into perspective, the planned acreage would still be well above the 79.1 million acre average planted during the 1997-2006 period.
• Wilson also noted that the United States Department of Agriculture is predicting increased acreage for other nitrogen-consuming crops such as wheat and sorghum in 2008. Both crops are enjoying strong prices, and increased acreage for them could reduce any negative effect on nitrogen demand caused by the expected reduction in corn acreage. Strong crop prices are also expected to push up nitrogen application rates for corn and other crops as farmers attempt to maximize yields.
• Wilson added that corn demand for ethanol production is expected to increase by 30 percent from 2007 levels this year, with much of the increase required to meet federal mandates under the Renewable Fuels Standard. Margins on ethanol production are currently below the record levels achieved last year, but they remain positive.

“I’m extremely pleased by the results we delivered for both the fourth quarter and the year. Strong domestic and international grain markets have produced exceptionally high global demand for fertilizer. Tightness in this demand-driven market pushed fertilizer prices sharply higher for all of our products. In this environment, effective execution of our operating and sales plans delivered our best-ever public company sales and earnings performance,” commented Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc.

“The weather cooperated perfectly during the fall season, and the combination of good levels of fall fertilizer application and normal customer inventory stocking for the spring season helped us ship nearly 2.5 million tons of nitrogen and phosphate fertilizer during the fourth quarter, almost 170,000 tons more than in the year-earlier quarter,” Wilson added.

And now the bear case - all in 1 paragraph (but again, these costs will be passed through to end customers through higher prices)

• CF Industries, along with other phosphate producers, is facing significantly increased input costs, especially for sulfur. Increased sulfur demand from the phosphate and metals industries, coupled with outages at several major Gulf Coast refineries that produce sulfur, have tightened the market. The company believes the supply/demand balance for sulfur could become more favorable to users later in 2008 when refineries are expected to be producing sulfur at higher rates.

Overall?

• “Looking ahead to the first half of 2008, questions remain regarding corn acreage, sulfur cost, and the strength of the general economy. However, taken against the backdrop of low grain stocks worldwide, high grain prices, record farm economics, and robust global markets for nitrogen and phosphate fertilizers, we’re looking at the first half of 2008 with excitement and optimism. We’re well positioned to serve our customers in this strong agricultural market,” Wilson added.

Well I'll go enjoy this 70 cent beat while bears start whining about increases sulphur and natural gas costs.... if you are new to the fertilizer area all of these companies earning reports have a bevy of data in it, well worth the read. I only took the main highlights into this blog entry.

Long CF Industries, Potash, Mosaic in fund and in personal account

Earnings Update on Our 2 Drillers: Atwood Oceanics (ATW) and Diamond Offshore (DO)

I lightened up on both these deep sea oil drilling names yesterday heading into today's earnings because... quite simply, if you open your mouth you get sold in this market.

Atwood Oceanics (ATW) reported after the bell and this could be the shortest earnings press release I've seen in all my years... I assume the rest was not transmitted across the press wire, but from what little we have they have a nice little beat - $1.20 vs analyst $1.16

• The Company earned net income of $38,549,000 or $1.20 per diluted share, on revenues of $111,048,000 for the quarter ended December 31, 2007, compared to net income of $21,085,000 or $0.67 per diluted share, on revenues of $88,800,000 for the quarter ended December 31, 2006.

And that's about the extent of the release.... no really. :) So we have nice solid 50% top line growth year over year, and 80-90% type of earnings growth, and the stock trades at 12x 2008 estimates. This is what is frustrating about the oil drillers. They are seen as cyclical (even the deep sea type) and hence get the terrible multiples. And when oil falls, they fall - even if they have long term contracts in place that don't care if crude is $65, $85 or $105. Same old story.

Diamond Offshore (DO) reported this AM and was hurt a bit by its jack up rigs (those that are in shallower water) so it sold off a bit today, but not too bad - 3%. A tax issue (1x) made the numbers a bit difficult to get to, but overall it was not bad. Jack up rigs are less than 15% of revenue but still it was enough to offset the 85% of "good" in the deep sea oil business. (Which is the part I like). They did declare a nice one time dividend it appears.

• Diamond Offshore Drilling Inc. posted a sharp drop in fourth-quarter profit as a one-time tax charge and other expenses offset revenue gains.
• The company's intermediate submersibles division reported the biggest gains in operating income, while its jack-up rig business saw its operating income sliced nearly in half. Many had been expecting weak jack-up rig results across the industry as overcapacity led to lower demand and pricing.
• However, Diamond's full-year results improved, with profit rising nearly 20 percent to $846.5 million, or $6.12 per share, from $706.8 million, or $5.12 per share. Its revenue rose by a quarter to $2.57 billion from $2.05 billion.

DO is a larger animal than Atwood so it's growth is not quite as swell, but still ... it now traded at under 10x 2008 estimates (now in the case of these drillers with the issues in the jackup market, 2008 estimates might need to come down across the board). So the stocks are probably a tad more expensive than they look but again even if 10-12x estimates really is 12-14x, these companies still are growing 25-35% and have no exposure to the US consumer, subprime, etc. But when oil sells off, these sell off - thats the depth of the analysis.

Anyhow these names are on the backburner as we had another day of people chasing retail, homebuilders, and subprime slime infected financials on the "Fed cuts solve everything and if not, well the playbook says to buy these stocks anyhow so our computers are programmed to do it". So I managed to own 5 out of 6 Ultrashorts that all lost money today - so much for hedging risk. (they did come handy the first 3 days of the weak when some logic ruled).

This market is so bipolar right now. Last week these same "Fed saves everything" groups were flying, the past 3 days they tanked, and today was another great day for them. Attitudes chang daily if not hourly. While groups with zero subprime exposure or financial issues are getting sold off. It looks like we are going to have this internal struggle on and off for quite a while judging by the past few days and weeks. No rhyme. No reason.

Long Diamond Offshore Drilling, Atwood Oceanics in fund; no personal position

Baidu.com (BIDU) Breaks 200 Day Moving Average

Ouch! I am going to declare victory on Baidu.com (BIDU) here. One of my 13 Outlier 2008 Predictions was a 40% loss in the name, which at the time was $400. That time was not long ago - Dec 31, 2007! 6 weeks ago...sheesh. I was actually pretty good all around on this prediction involving Google, Yahoo, and Baidu.com

#8 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. Baidu.com will suffer a 40% loss as investors, not realizing Baidu is in China and Google is in the US, think US advertisers will cut their spending with Baidu.com as well. Or maybe it's just too expensive. 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.

So 40% off of $400 is $240. Today's stock price? $239.

I'm actually beginning to get interested in Baidu.com here as it is still the dominant ad/search name in the fastest growing market on Earth, but with the technical pattern in such disarray it is simply better to wait for the chart to improve and miss trying to catch the bottom. This causes a lot of bloody fingers as we try to catch a knife. So instead of trying to guess what floor the elevator stops on the way down; I'll wait for a time when the elevator is moving back up... I'll miss catching the bottom (floor 1), but once people go back to these type of stocks the moves will be tremendous so catching it at floor 3 will be fine. I still retain a minor position for the fund, in which I still have a profit since I sold along the way ... way up there in the $350s-$420s. Talk about a round trip - I began buying in August in the $160s-$180s and we look like we are heading right back.

This is why I don't mind a high turnover rate for the fund - people who like low turnover to avoid taxes are right now giving back all their gains over the past few years... day by day. Paying taxes is a sign of success in my book (although double taxation is an awful thing Mr Government) so I'd rather have taxes TO pay.... than to watch my taxable gains all disappear. Maybe we can adjust that thinking in bull markets when the market generally only trends up - but that is not our era the past 6 months.

So Baidu.com joins Google, and Apple as former teflon stocks now below 200 day moving average. Only Research in Motion remains above that key level, and she tested that price point this morning. But as a group, tech is simply moribound and no reason to focus on it until that changes. That said, this group is extremely oversold and if retail, homebuilder, and financial stocks can rebound so strongly off a washed out bottom I can see the same thing developing here once people move back to technology and don't consider it evil. That could be in 2 hours, 2 days, 2 weeks or 2 months. But it will turn back in these guys favor eventually. The world is not ending for these quality names.

Long Google, Apple, Research in Motion, and Baidu.com in fund; no personal positions

Bookkeeping: Adding Fertilizer

It's a trader's market.

I want more CF Industries (CF) ahead of earnings tonight (I rarely add ahead of earnings so this is a very risky move) - I'm adding CF Industries and Mosaic (MOS) exposure. CF is now up to 4% of fund and MOS back to 6%.

Preview on what they will punish CF Industries for (same reasons they punish TRA today)... higher natural gas prices. (which is an input for them). Now here is the logic. Natural gas is hard to transport, unlike crude - hence it is more of a local commodity as opposed to global. Hence natural gas ebbs and flows (in theory) with the US economy. So if you think the US economy weakens...then so should natural gas down the road. Since slowing economy means we need less. But, bears will say natural gas going through the roof, hence margins will be hurt in CF Industries business. Not realizing pricing power of these companies and how, much like a transport company they will maintain margins by passing along costs to their end customers. But logic like that cannot be used when we need to build a bear case against an industry. So fear the natural gas ...

Terra Industries (TRA) is a quite similar company to CF Industries so we can get a preview from their earnings out earlier today

• Fertilizer producer Terra Industries Inc (TRA.N: Quote, Profile, Research) said fourth-quarter profit rose six-fold, topping Wall Street expectations, helped by higher nitrogen selling prices.
• The company earned $69.7 million, or 66 cents a share for the quarter, up from $11.6 million, or 11 cents a share, a year ago. Revenue for the quarter rose 27 percent to $570 million.
• Analysts expected a profit of 64 cents a share, before items, on revenue of $539 million, according to Reuters Estimates.
• Nitrogen products revenue for the quarter rose to $554.1 million from $438.2 million last year. Nitrogen solutions selling prices improved 69 percent over last year, while ammonia prices rose 16 percent on stronger demand.
• "Nitrogen products selling prices remained strong as high commodity grain prices continued to support very healthy nitrogen demand," Chief Executive Michael Bennett said in a statement.
• The company forecast nitrogen prices will remain strong through 2008, but said natural gas prices will significantly affect product costs.

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

I want more coal. Darn names won't pull back aside from Peabody Energy (BTU) which has some company specific issues. Waiting for some sort of panic to drive the others down... please?

Strangely, I want Walmart (WMT) too... and anything mortgage related.

Long CF Industries, Mosaic, Peabody Energy in fund; long CF Indusries, Mosaic in personal account

Thank You Readers - Found a Bull Market - 4 Mortgage REITs

Thanks for the feedback to my request from yesterday. I found a fearsome foursome that benefits from the same thought process as my new long position in Thornburg Mortgage (TMA) - mortgage REITs. We have four names here, led by one Cramer has been touting for a long time Annaly Capital Management (NLY). 3 others that share the space are: MFA Mortgage Investments (MFA), Capstead Mortgage (CMO), and Anworth Mortgage (ANH).

I am not that familiar with this space - have sniffed around Annaly in the past but I need to do more homework before jumping in. So instead, for now, I added a bit more to the Thornburg Mortgage position today (talk about strength in a shoddy market). But the charts of these 4 mortgage REITs are flying; I just posted 1 to the blog - the other 3 look identical. What I don't know and need to assess is if we missed the meat of the move (they've all had huge moves) or if (as I theorize) Fed Funds are going to 2% (or lower), we can continue to find profits for a much longer period - trends tend to stay in place for far longer than we anticipate so this could be the beginning of a much larger move (or not).

What is amazing is almost all these companies are raising capital (selling new shares) yet the stocks continue to march up. And they continued UP through the hell that was January. Now that's a bull market (and relative strength).

More to come....

Bookeeping: Beginning to Rebuild Mastercard (MA)

It's a traders market - not a buy and hold market. I mentioned on Feb 1st I was essentially taking my Mastercard (MA) position to near nil to lock in profits [Locking in Profits on Mastercard (MA)]. The stock hit $220 that day. Now it is over 10% lower in the $197 range. So I am SLOWLY rebuilding this position, taking it from 0.1% of the fund to 0.65%. So this is my first "layer of buying". My hope is, if we get another round of serious selloff, they take this stock to $160s-$170 range. Then I'll get more aggressive in buying, and add more layers of purchases. Mastercard just showed us in their last earnings report their incredible transaction based earnings power. But this market refuses to let any stock off the hook, and any strength is sold. So now that they are punishing Mastercard for ... well for being a stock trading in the US market. That is the main sin. The stock has just fallen to its 50 day moving average, $195. Hence why I bought a layer. The 200 day moving average is down at $164. If we get that price I will be loading the boat with more layers.

As I keep repeating, right now "buy and hold" is dead. So I'm trying to trade around positions I really like, fertilizer, coal, and a select few others. Another example of buy and hold pain - I sold down 2 tech stocks Monday (!) to reduce exposure and raise cash [Reducing Research in Motion by 40% and a bit off Apple]: Research in Motion around $94 and Apple north of $130... Apple now is below $120 and Research in Motion near $82 (200 day moving average). Just trecherous to hold much long in this market. However, I am not going to buy back those stocks in this type of market - I am going to focus on strength, not weakness. Tech right now is weakness. The market is creating incredible value however; I am salivating at some of the valuations out there. But value means nothing in a bear market, so have to remain patient.

Long all names in fund; long none in personal account

We Don't Want your Crummy Dollars

I still believe 2008 will be the year that crude oil will moved to a shared currency standard - off the dollar, and into some mix of international currencies. I'm torn on whether the US dollar is near a bottom or not.

On the pro side of a bottom is my belief that Europe and UK will begin cutting in earnest this summer (UK cut another 25 basis points today) to stave off recession - thus beginning to weaken their own currencies in relation to the US dollar.

On the con side is the continuing bad decisions by US govt to build bigger and bigger deficits, and give out rebate checks and bailouts when we cannot afford it; along with a potentially "bigger" government if Dems wins, means even worse structural issues are coming down the pike. Plus we're not done cutting rates here either - 2% Fed funds looks more than likely and maybe below...

So I'm torn on just how atrocious the dollar will get - will be putrid or ....deathly putrid? Either way, funny anecodotal stories popping up as I mentioned in another post today... by funny I mean pathetic and sad. But at least Disney (DIS) theme parks, Las Vegas casinos, the real estate market in Manhatten, and stores in NYC are benefitting from the putrid US currency as foreigners invade the country, laughing it up at how they can buy American things so darn cheap! :)

• In the latest example that the U.S. dollar just ain't what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.
• "We had decided that money is money and we'll take it and just do the exchange whenever we can with our bank," Robert Chu, owner of East Village Wines, told Reuters television.
• The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.
• "We didn't realize we would take so much in and there were that many people traveling or having euros to bring in. But some days, you'd be surprised at how many euros you get," Chu said.
• "Now we have to get familiar with other currencies and the (British) pound and the Canadian dollars we take," he said.
• While shops in many U.S. towns on the Canadian border have long accepted Canadian currency and some stores on the Texas-Mexico border take pesos, the acceptance of foreign money in Manhattan was unheard of until recently.
• Not far from Chu's downtown wine emporium, Billy Leroy of Billy's Antiques & Props said the vast numbers of Europeans shopping in the neighborhood got him thinking, "My God, I should take euros in at the store."

Speaking from Michigan, in past years people didn't want Canadian currency because it was essentially 70 cents on the dollar, maybe 80 cents. Now its par or greater. So it is now cool to have a Loonie. Sad. And yes it helps the small sliver of our economy that is export based, but it hurts us in so many other ways and I can't recall any great empire thriving with a weak currency.

Agco (AG) Reports - Guidance Disappoints; Bunge (BG) too

Well today's comments by Agco (AG) are why I have exited the equipment business in agriculture. [Closing Last of CNH Global] & [Closing Agco]. Agco demolished earnings estimates by 19 cents and revenue estimates by $300M (!), but any cautionary future guidance is killing stocks these days. Underpromise and Overdeliver is how you do it, but the underpromise part right now is smashing every company that tries it. This is why I am selling so much and just moving to the sidelines ahead of earnings as much as I can.

I find the values in ag equipment to be compelling but expectations are probably too high for what is reasonable. I still think these are great long term plays, but need to settle over the near term. Again, investors seem to think of every sector as a monolith. It is very easy to say 'agriculture' is overvalued or 'too hot' or 'too speculative'. Crops are different from fertilizers are different from genetic seeds are different from oilseed processing. But Wall Street doesn't care about minor things like that many times.

Agco earnings and guidance

• Agricultural equipment maker Agco Corp (AG) on Thursday posted a profit in the latest quarter versus a year-earlier loss, as higher commodity prices prompted farmers worldwide to buy more of its tractors and combines.
• But the company forecast 2008 earnings that would fall short of Wall Street's hopes, sending its shares down more than 7 percent in early trading.
• Agco said it made a net profit of $81.1 million, or 82 cents a share, during the fourth quarter, compared with a net loss of $128.5 million, or $1.41 a share, a year before.
• Net sales rose 32.9 percent to $2.2 billion.
• Analysts had expected the Duluth, Georgia-based company to earn 63 cents a share on sales of $1.9 billion, according to Reuters Estimates.
• But looking forward, Agco said it expects to report a full-year 2008 profit of $2.75 a share -- though it said it had a "goal" of hitting $3 a share.
• That was below the $3.23 a share analysts were hoping for, on average, according to Reuters Estimates.

Again, I fully expect these lowered estimates to be beaten a year from now, but that doesn't mean it helps today. And why I stepped aside from this group.

Bunge (BG) also reported - this has never been a favorite of mine nor something I've ever owned but a certain guy on TV just loves this name.... and again people will lump everything together into an "agriculture stinks" thesis. Again, tremendous growth but future guidance not good enough. Counter this with the pure play fertilizer plays which I still think have a lot of pricing power to go (and hence increased future estimates). We've see it with Mosaic (MOS) and Potash (POT) already in the past few weeks, and tonight we'll see how CF Industries (CF) does.

• Bunge Ltd (BG), the world's largest oilseeds processor, forecast on Thursday 2008 earnings well below analysts estimates and its shares fell sharply.
• The company said higher input costs could pressure margins in fertilizer and edible oils during the year while the strong real will increase costs in its Brazilian business.
• For 2008, Bunge forecast earnings per share of $6.01 to $6.30 a share. Analysts on average forecast $6.60 a share, according to Reuters Estimates.
• "Although the company expects strong market conditions in 2008, as in 2007, it continued to caution about higher input costs for fertilizers (sulphur) and about the potential effect on farmers from the strong Brazilian real," Pablo Zuanic, analyst at J.P. Morgan Securities said in a research note.
• The forecast came even as Bunge posted a higher-than-expected quarterly profit, helped by higher international fertilizer prices and increased margins in its oilseeds processing business.

Remember, higher sulphur costs were what initially hit Mosaic (MOS) the day after it's earnings [Mosaic - Another Excellent Quarter], before it rebounded strongly (and analysts started upgrading up the wazoo in the weeks since). We can make a bear case for everything - I say the price increases in fertilizer are so strong it will more than make up for the higher input prices. But when we fight shadows behind every corner you have be wary. I've cut back some fertilizer exposure expecting the market to pull back so I am hoping to see lower prices in these pure play fertilizer names to load up (again). But this is certainly one of the most frustrating things about the stock market - the simplistic, monolithic view on any sector. We see the same in oil - lower prices means everything drops - an exploration company, a deep sea oil driller, an oil service company - all of it. Very simplistic but that's how it goes. I'm sure we'll see the same issues in agriculture from time to time even though a potash producer is very different from a combine manufacturer or seed maker. But these short term inefficiencies in pricing stocks create great long term opportunities to profit.

Long Mosaic, Potash, CF Industries in fund and in personal account

Buffet Reads my Blog!!

Ok maybe not, but he used the word Kool Aid today! Love it :) I love this whole story in fact - Buffet is the man. A voice of reason in this world of ridiculous people shouting at the top of their lungs. The only thing that stinks is we all pay for it through inflation and the dollar's death to bail out these suckers who ruined the financial system. It's getting to the point that only those in the top 5% are going to be able to travel abroad. Sheesh.

• The woes in the U.S. financial sector are "poetic justice" for bankers who designed and sold complex investments that have since gone sour, billionaire investor Warren Buffett said on Wednesday.
• The head of the Berkshire Hathaway Inc (BRKa) (BRKb) group of companies also played down worries about a credit crunch by saying that recent interest rate cuts mean low-cost funds are readily available.
• But he warned that the U.S. dollar will continue to slide unless the country can rein in its yawning trade deficit -- the "biggest factor" behind the decline. Still, he said, the U.S. economy will "do very well over time."
• Buffett, one of the world's wealthiest people, appeared to see irony in the fact that many of the banks who marketed complex investments which have now crashed are bearing much of the fallout.
• "It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end," he said.
• Buffett said on Wednesday in Toronto that the turmoil that has rocked the U.S. economy in recent months has imbued the markets with a healthy degree of caution, while the rate-cutting response from central bankers has ensured that cheap money remains available for borrowing.
• I wouldn't quite call it a credit crunch. Funds are available," Buffett said during a question and answer session at a business event. "Money is available, and it's really quite cheap because of the lowering of rates that has taken place."
• He added: "What has happened is a repricing of risk and an unavailability of what I might call 'dumb money,' of which there was plenty around a year ago."

:)

p.s. I saw a story today that some shops in NYC are now not only allowing people to pay for things in Euros but prefer it. Pathetic statement on what is going on in this country. The latest Bush budget? Great news folks - it will balance the budget! ...err...um... in 2012.

Long Kool Aid

Coal Bandwagon Gaining Steam

Again, I am usually 5-6 months too early on every trend [click here for all posts related to coal], but it appears now people are waking up in the mainstream media...

• Coal, whose price surge has already outrun those of crude oil and natural gas, is generating an even louder buzz as a rash of bad weather has reduced its production globally.
• Citigroup earlier this week raised its forecast for thermal coal, saying it now expects prices for the benchmark product to double this year as blizzards in China, power outages in South Africa, and floods in Queensland cut into global output. Meanwhile, demand for coal keeps rising as the world's electricity use expands. Coal is poised to continue its rally as "tight markets are being further squeezed by new developments," Alan Heap, an analyst at Citigroup, wrote in a research note.
• Prices already have had a remarkable run. Thermal coal prices at Newcastle, Australia -- an Asian benchmark for coal used in power generation -- jumped 73% last year, beating crude oil as the best performing energy commodity.
• This year, coal futures trading on the New York Mercantile Exchange have gained 42% to nearly $80 a ton, a sharp contrast with oil futures' nearly 10% decline and a small rise for natural gas.
• Citigroup's Heap now sees coal futures reaching $100 per ton at the end of 2008, nearly double 2007's year-end price of about $56 a ton.
• The recent run-up in fuel prices means higher costs for consumers and industries heavily dependent on electricity. In China, which gets most of its electricity from coal, smaller metals manufacturers could go out of business due to higher electricity prices, analysts said. At the same time, higher traditional energy prices are likely to push China and other countries to pursue alternative energies to heavily-polluting coal.
• Over the past month, deadly snowstorms raging across China grounded the country's transportation system, cutting off coal supplies. Stalled freight trains brought the country's coal reserves to a short-term low. The current stock of coal for power generation is less than half of the normal amount, which is usually enough for 15 days of consumption, according to Minggao Shen, an analyst at Citigroup. More than 80% of China's power generation comes from burning coal, government data show.
• David Riedel, president of overseas-equity specialist Riedel Research Group, anticipates China will sharply increase coal imports in the coming months to build its reserves. Coal demand from China, the world's largest coal consumer, "will be very strong in February and March," said Riedel.
• China, a net coal importer, recently banned coal exports until March, a factor that could further push coal prices higher.
• Long-term demand for coal is also high. Demand growth from China is estimated 1.5 times above its GDP growth, which stood at 11.4% last year, Heap said.
• Those factors have pushed up the front-month coal futures contract to nearly $80 per ton Tuesday, up from $56 per ton at the end of last year. U.S.-traded coal futures are rising because the U.S. is shipping more coal to Europe, which has seen its coal imports from Africa and Australia disrupted, said Charlotte Wright, a coal analyst at Platts, a commodities information provider.
• "The recent power crisis has been triggered by short term influences, but a much deeper supply demand problem is underlying which is unlikely to be resolved until 2012 or so," said Citi's Heap.
• As a result of coal shortages and surging prices, the Chinese government last month ordered power restrictions in more than half of its provinces. China could see more power outages if the snowstorms linger and coal reserves remain low, analysts said.
• Recent disarray in coal supplies could also translate into long-term problems. On top of them, a lack of port and rail infrastructures is restricting supplies and the entry of new players worldwide.
• "These bottlenecks are most evident in Australia, but are also present in South Africa, Canada, Russia and China," Heap said. As a result, the long term growth trend on thermal coal demand is considerably higher than many other commodities.
• Besides power-generating coal, Citi also lifted its price prediction of coal used in steelmaking to $200 a ton in 2008, up from last year's $95.

I wrote about most of these coal trends in September 2007. Nice to see it all play out. As I've said lately, the coal market reminds me of fertilizer about a year ago. No one believed the rally, everyone said the stocks had run too much, it's a short term issue, and the stocks were destined to implode. They were wrong on fertilizer then, and I believe they are wrong on coal now. I find very few areas with great macro themes behind them, pricing power, and tremendous supply issues - coal and fertilizer are the main two.

Now the coal stocks, like the fertilizers, might go down 30% in a week, but it has nothing to do with fundamentals. Each time they dip, people will say this is the end of the run. I'll be buying. You can read above, we have issues into 2012. Just like we do in fertilizer. Capacity expansion takes a long time. We have bottlenecks everywhere throughout the supply chain. And countries are keeping coal inhouse as a World of Shortages continues to play out - expect more hording of natural resources over the coming decade.

The US exports very little nowadays. But one thing we have a bevy of is coal. We are the Saudi Arabia of coal. So we have our crops and our coal - 2 bright spots in an otherwise blighted service economy. Again an easy way for those new to the area is Market Vectors Coal ETF (KOL) [New Coal ETF (KOL) Introduced from Van Eck Global]. I have a bevy of coal names in my basket and am now even thinking of adding Arch Coal (ACI) - that should give me all 4 major public coal producers in the US, along with an ancillary play in Russia (Mechel (MTL)).

In an unrelated note, I do believe these shortages are the type of thing to really hurt some economies, esp. China. Along with the snow storms, this inability to get energy to the right places could dampen GDP. But it showcases the need for another of my big themes (of which the stocks have been punished of late).... infrastructure buildout. It all ties together folks - one big mosaic.

Long Peabody Energy, Consol Energy, Massey Energy, Mechel in fund; long Massey Energy, Consol Energy in personal account

Some Comments on Retail Numbers

I'd like to make some comments on the general retail numbers today to cut through the spin, and follow up on points I've been making for months

1. American parents will do whatever their kids want. They spoil them, especially at the middle and upper middle class. Hence you will continue to see relative strength for $140 jeans selling at Abercrombie (ANF), while the parents cut back for themselves. I've been saying the same for video games, and Apple products. It's just a sad reality. This is the culture; it will take something truly earth shattering for that to stop.
2. Keep in mind, any "beats" you see today are off sharply lowered estimates, lowered in the past month in many cases. So all these companies that are beating (in most cases) is beating numbers they issued in the past 4-6 weeks. Big deal. What is more alarming are the number of misses versus what companies were guiding even 4-6 weeks ago. That shows you how bad the degradation is.
3. Walmart (WMT) accounts for $1 out of every $10 spent in the USA in retail. Sales were still up 0.5% but below expectation. The weakening there is troubling to me, because my expectation is people would be moving downstream and spending at lower end retailers i.e. a substitution effect. But it appears things are even worse than I assumed - or at least the degradation is happening quicker than I thought. I found one thing extremely troubling, the gift card issue. It does dovetail with my thoughts I have been espousing especially in my Mastercard (MA) rants... that people will INCREASINGLY be using credit cards for day to day expenses - food, gasoline, heating, et al. We are now seeing that happening with the gift cards - instead of spending the gift cards as they normally do in January, people are hording them and will be using them over time to pay for groceries and gasoline. This is the "pooring" of America I talk about, and how inflation is ripping at people. It's already doing it to the lower socie-economic and I contend it is moving up the food chain into the middle class.

“Gift card redemptions were below expectations, and customers appear to be holding gift cards longer and using them more often for food and consumables rather than discretionary purchases.”

So whatever the spin is, these are the things I am looking at. I don't find much good out there from what I am seeing. The warehouses are doing well, but again thats the move downward down the food chain as people buy in bulk to save in costs.

I don't buy the raging bulls arguement that you buy retail now because it's an early cycle play. That assumes we are in a 01-02 or 91 type of recessionary environment (which were not led by consumer contractions), and this slowdown will be short and shallow. Will retailers have easy year over year comparisons 12 months from now? Yes. But I am not buying retailers in February 2008 for easy year over year comps in February 2009. Way too early.

Again, that rally in the past 2 weeks in homebuilders, financials, and retailers was a lot more strong than I anticipated. I felt dumb for not participating, but I was using small things like... facts. The people running up these stocks were using small things like... playbook. Playbook trumps facts in the short run, and we suffer for a few weeks. But now reality sets in. Again, I cannot stress the misses you are seeing today in 70%+ of the retail numbers are off ALREADY SHARPLY reduced estimates, that were just SLASHED in the past 4-6 weeks. That is how quickly things are degrading no matter what the SPIN is today by the media. Walmart (WMT) and Target (TGT) are the economic tells; not Abercrombie or Gamestop (GME).

Last point - as I wrote yesterday in the Macy's post... we have too many stores. More layoffs coming across this sector coming in the the next 1-3 quarters. They have to "right size" - which is a pretty term for "fire people".

Interesting Hedge Fund Story - Clarium Sees "Long Goodbye"

I am not so interested in the returns, although they are great - but more interested in the "why", which dovetail with a lot of what I write. I am just glad that some smart money with real stakes in the game (i.e. investors cash) are thinking like me. It is so easy for TV pundits who have nothing at stake to constantly blabber junk.

Interesting blurb on CBSMarketwatch.com

• Clarium LP, a $4 billion hedge fund run by PayPal co-founder Peter Thiel, surged 24.4% in January as bets against leveraged U.S. companies and the dollar paid off, according to an update that the firm sent to investors recently.
• Clarium's positions in U.S. equities contributed most to the gains, while bets that overseas currencies would appreciate against the U.S. dollar also boosted returns, the firm said in the update, a copy of which was obtained by MarketWatch.
• Clarium tries to make money from distortions in global markets created by the collapse of the 1990s technology bubble. The firm's main $4 billion hedge fund returned 40.3% in 2007, enjoying a particularly strong surge in the fourth quarter. It's gained more than 400% since it was set up earlier this decade.
• Clarium sent a gloomy assessment of western economies, real estate and stock markets to investors in August. The firm argued that the developed world has entered a period of lower returns in which interest rates and economic volatility increase while growth in corporate profits and global expansion decline. This "Long Goodbye" follows two decades of falling rates and reductions in economic volatility that Clarium calls the "Long Boom."
• "We have begun a post-Long Boom phase that can be called the Long Goodbye," Clarium wrote in its August letter. "Returns during the Long Goodbye will be lower -- perhaps half as much -- than those of the Long Boom."
• To adjust to this new reality, the firm explained that people must work more, consume less and compensate for lower returns by using more leverage -- borrowing more, that is. The prudent response would be to work longer and cut consumption, but so far the reaction has been just to borrow more, Clarium said. (Bingo! How sad! Wouldn't be prudent to consume less or save, would it?)
• That higher leverage has made markets much more vulnerable to outside shocks that will force "painful" de-leveraging and a reduction in liquidity, Clarium predicted in August.
• The firm put that outlook to work in early October, building short positions -- effectively betting that the price of a stock will go down -- against highly leveraged financial-services companies.
• At the end of January, Clarium exited its short U.S. equity positions, leaving the fund with a long position in U.S. stocks.

Interesting to see they have exited short US equity positions, whereas I've remained bearish now that the technicals are such a disaster. But I feel less like an outlier now that I see stories like this... p.s. where were these stories in September? October? I guess when the market is up we can't be bothered to read about the other side of the trade.

Anyhow Cisco (CSCO) guidance out poor... they saw a sudden downturn in January as the negative psychology effect turns on itself. Ralph Polo (RL) also said the same thing about the consumer - how swift and dramatic the shift has been...and it's now heading to London.

COO Roger Farah said that "the change in consumer spending patterns from fall are unprecedented." In the Q&A, he said that he picked the term "unprecedented" carefully, saying that he was looking at the swiftness of the December decline and how it affected all income groups. He said that he did not see what could stimulate the consumer to buy and sees no reason for a consumer upturn 12 months from now. He has seen weakness from the financial market-related spending in London during the holiday shopping season.

No consumer upturn for 12 months? But Cramer says buy the early cycle stocks - retail stocks - BUY BUY BUY! Hmm, listen to CEO and COO of the companies themselves...or TV pundit. But hey MBIA (MBI) got a $750M (peanuts) injection of capital through yet another stock offering tonight and that made people happy. Well all people except people whose stock just got diluted yet again...

So tomorrow AM we can look forward to a total overreaction to a weekly jobs number that again, means little. These data points week to week mean little alone - the trend is so very clear. If the weekly jobs claim comes in "great" tomorrow, does it change a thing in the "real world" of job losses? Hardly. But like a room full of 3 year toddlers the market banshees will wail one way or the other and overreact. And we have to deal with this EVERY Thursday folks - joy joy joy. A number given little attention to will now take on huge magnitude every week as people strive for every clue ... about a very obvious situation - yes Dorothy, we're in recession. But they'll keep looking for data points to say we are not... and tomorrow is yet another.

Well let's see if the fertilizer companies can pull through this morass - always a bull market somewhere as a great philosopher of our time likes to say.

Macy's (M) Cutting 2300 Jobs - White Collar - out you go

Well here we're now seeing more of the large scale layoffs in the "service economy" courtesy of Macy's (M). We had already seen it in retail in Ann Taylor (ANN) and Home Depot (HD) but on smaller scale. This is what economic contraction is all about... I am sure the unemployment rate will somehow fall to 4.7% of you listen to government reports but the reality is the reality. We have too many stores - our retail culture was built on overspending credit induced over indulgence. The Fed is trying to push us back into that bad habit with their easy money. But it's going to be tough with home prices falling and people feeling unease about their jobs... along with inflation that the government denies exists affecting their real day to day purchases.

Even more sad is usually when a company announces "cost savings" (aka hatchet jobs on employees) the stock rallies. Macy's is actually down today. Not good at all. Well I guess they used up all the rallying in the past 2 weeks on the "Fed cuts solve everything" rally.

Now people can say, but cmon now, they have nearly 200K employees, whats 1-2% jobforce reduction mean? Nothing! I say... these are not teenagers and retirees working part time jobs in the stores - these are the management types who own $250-$450K homes across America, making good "service job" salaries - $50, $60, $70, $80K+. Not $13/hour selling perfume behind a counter. So it does matter. As a % of all white collar jobs, I am sure this is a significant number. And it matters to Minneapolis, St Louis, and Seattle. But hey, they are adding 250 jobs making $13/hour - always a silver lining.

Can Nordstrom (JWN) and Saks (SKS) be far behind?

• Department store operator Macy's Inc. said Wednesday it will cut about 2,300 management jobs as it consolidates three regional divisions and decentralizes buying in a bid to reduce costs and boost sales.
• The Cincinnati-based retailer said it will immediately begin consolidating its Minneapolis-based Macy's North headquarters into its New York-based Macy's East, its St. Louis-based Macy's Midwest organization into its Atlanta-based Macy's South and its Seattle-based Macy's Northwest headquarters into its San Francisco-based Macy's West.
• The consolidation of the office organizations expected to be completed in the second quarter of 2008 will affect 950 positions at Macy's North, 850 positions at Macy's Midwest and 750 positions at Macy's Northwest in Seattle.
• The company said executives currently in the those offices will be considered for positions in the new local market organization or for open positions elsewhere, Macy's said. Laid-off employees will receive severance benefits and outplacement assistance, Macy's said.
• At the same time, it said it will add 250 new positions at its stores to better tailor its product offerings to specific regions.
• Macy's also says it expects to reduce expenses by about $60 million this year and by about $100 million a year starting in 2009.

Remember the evil in a service economy where you produce very little of value outside the country is each 100 people gone from Macy's white collar means less money to go to the entire service web - dog groomer, nail technician, grocer, hair stylist, lawn cutter, snow shoveler, etc etc. It's the vicious opposite of a virtuous cycle you have when the service economy expands.

No positions

Reader Challenge

Ok folks, I need your help. We have about 6000 stocks. I want to find some with relative strength - so for those of you with all your watch lists I'd like to find stocks with technical strength outside my watch lists

This is defined by

1. Trading over its 50 day moving average
2. It's 50 day moving average is higher than its 200 day moving average

Further, I am seeking

1. >$10 stock price
2. >$500 M in market cap
3. >100K average trading volume

And outside of coal or agriculture sectors
EDIT: Nothing that is gold related (I've got a gold play), Nothing that is unprofitable, Nothing in biotech (I find that to be the scariest sector on earth since the FDA can destroy you in 1 fell swoop)

I have about 6 names, ILMN, SID, PBR (about to fall below 50 day), CLF, SDTH (I'm waiting for a pullback to add this one!), WMT, MA (BLK just broke the 50 day moving average today - sigh)

Here is the type of chart I'm looking for, so if you got one please add a comment with its symbol and if you know much about it, please write why you watch/own/like it.



It is pathetic that there are so few names that fulfill these minor requirements - this is true bear market action. Procter Gamble, Altria, MedcoHealth, etc - all safe stocks - don't even fulfill this... only Walmart ! :)

So if you've got any you're hiding that fulfill these requirements, please share it with the rest of us. My watch lists are running empty of candidates.

Earnings Beat Wed-Fri; Cutting Back Oil Drillers Ahead of Earnings

Tonight is going to be dominated by Cisco (CSCO) - I don't see too much more that is too interesting

Tomorrow is a big agriculture day. In fertilizer two of the Tier 2 type of names report: fund holding CF Industries (CF), and non fund holding Terra Industries (TRA) - these two focus more on the nitrogen end of things as their predominant sales piece.

Further in agriculture is equipment maker Agco (AG), which I just closed out as a position recently due to worries about how the market was treating this subsector. Still like the name from a fundamental point of view. Other names in ag tomorrow are Syngenta (SYT) & Bunge (BG).

Fund holdings and deep sea oil drillers Atwood Oceanics (ATW) and Diamond Offshore Drilling (DO) report. Since these are oil related, and everything oil related is being unfairly drilled (I love puns!), I am going to lighten up ATW and DO going into these reports. ATW I am dropping from a 1.0% position to 0.4% (selling 75 of 125 shares). DO I am dropping from 1.3% position to 0.9% (selling 40 of 130 shares). Let me reiterate I like this space, and these names focus on INTERNATIONAL deep sea drilling but any hint/whiff of exposure to US markets (which they do have) makes people run for the hills, along with the whole "oil going to $85 issue". Market overreaction and it makes little sense, but we still lose money when people flee. Simply not worth holding heavy stakes in most sectors going into earnings nowadays, so I'll put this in the ever growing "better safe than sorry". If for whatever reason something good happens and the stocks pop, well that happens sometimes. However, these names are starting to approach some nice longer term support areas - when the market retracts from its shell of fear they will provide great entry points near these prices.

Note: I am not lightening up on fertilizer going into earnings simply because the valuations in these names are ridiculous and I also believe the analyst estimates are constantly utterly wrong and have been for the past 12-18 months. So I find much less risk in that sector, and that is why I am not being consistent in "selling down a position ahead of earnings" in this environment.

EDIT: I am actually buying some CF Industries (CF) today ahead of earnings... this was at one time my top position in the fund; just took a look at 08 estimates and I think analysts finally are understanding the picture. The thing is dirt cheap and should be >3% of the fund.

Other names of interest....

Activision (ATVI) - video game maker

DR Horton (DHI), MDC Holdings (MDC) - homebuilders

Friday, not much of interest

Some Color on Toll Brothers (TOL) Earnings/Guidance

I am almost fell out of my chair as I read a few days ago Cramer saying due to all the Fed cutting we might have a home inventory shortage by the end of the year. I'm not sure what brand of gin he drinks on his linoleum floor but it must be Kool Aid infected. Anyhow, while this run up in housing stocks has been impressive and from a technical angle a few names have actually made some serious progress, I still think (as I keep stating) it's too early for "buy and hold" in this sector. If stocks supposedly discount 6 months out that is. I don't see any recovery in home sales by this fall. But maybe all these stocks need to run is for a dead period i.e. everything to stop falling off a cliff, and just go sideways. But either way I still find the group only useful for a trade.

Toll Brothers (TOL) is one name I always watch in the group since they cater to the top end. Let's see what they are saying (it seems to differ from Cramer's "Fed Cut Solves Everything" and "We could have a home shortage by fall scenario") Not to pick on Cramer, but some of this stuff I hear is simply outrageous :)

• Toll Brothers Inc. doesn't see any end in sight to the U.S. housing market's woes as the luxury home builder said Wednesday that first quarter home-construction revenue fell 22% compared to the same period last year.
• "The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and CEO.
• Toll also said its backlog fell to $2.4 billion, down 42% from the first quarter of fiscal 2007, as the number of signed contracts on homes fell 46% from last year. In addition, the average price of a house sold by Toll fell, while the average price of canceled houses rose. (that last piece is interesting - I think it shows people are saying "Why should I buy this asset now when a year from now it will be far cheaper.")
• The company's outlook comes a day after analyst Daniel Oppenheim at Banc of America Securities upgraded the company's shares to neutral from sell, saying he had a more positive stance on home-building stocks due to improving affordability, reduced construction and less risk as adjustable-rate mortgages reset because of lower interest rates.
• Tomlinson at Majestic Research said it's too early to tell yet if the recent rally in home-construction stocks means the worst is behind the battered industry. "It depends on the spring selling season, but sentiment is still pretty bad out there," the analyst said.
• However, he said federal plans to temporarily raise the limit on conforming loans would particularly help luxury-sector builders such as Toll. The higher selling price means buyers of Toll homes would be more likely to use so-called jumbo loans, which are more expensive and don't conform to standards set by Fannie Mae and Freddie Mac. Still, Tomlinson said if raising the loan limit does have an impact, it will take a while to show up in Toll's orders.
• Analysts at Deutsche Bank in a research note Wednesday wrote the view for Toll's order trends remains bleak. "We admire management's conviction in its pricing discipline, but given our view that home price declines are likely to worsen, we still think Toll Brothers is just delaying the inevitable in pricing and impairments," they said.
• "We suspect customers may be trading down to lower price attached product for affordability and/or mortgage qualification reasons," Bear Stearns analysts wrote. "Also, the higher average price of cancellations indicates that buyers of Toll's single-family homes could be experiencing significant buyer's remorse as they watch home prices fall and grow fearful these trends are likely to continue." (Bingo)
• "We continue to think Toll needs to lower prices more aggressively near-term to regain volume and work through its long land supply," added Banc of America Securities.

Again, I remain cautious on this group. However, based on how fast they rocketed on this last rally - if we get another serious downfall in the market, I will probably buy a small basket of homebuilder names for a "trade". But as I've stated many times, its not about low rates (although that helps people on the margin), it's about affordability [Analysis - What Should Median Housing Prices Be Today]. Rates can be 0% (ask Japan), but if the monthly payment is >40-45% of your income, it still is unaffordable - at any rate. Home prices still need to come down before Cramer's "housing boom" of fall 2008 plays out. Or home prices can stay "here", but median incomes will need to start jumping 7-10% a year.

No position

Bookkeeping: Beginning Stake in Thornburg Mortgage (TMA)

I've been talking about this name recently [Thornburg Mortgage (TMA) Earnings - Good Enough] and the technical pattern is quite impressive so I am creating an initial stake in this stock today. This position will do a few things for the portfolio

1. It should ying (to some degree) when other sectors yang (I am very underweight financials for obvious reasons, so in weeks like the past 2 when those dog sectors are in favor I will have some benefit)
2. I want to play the mortgage refi angle without going into housing, which for now still remains only a short term trade, so this is a way to have exposure to the "Cramer says housing is bottoming although he has no idea, but the stocks still go up for no good reason other than 'Fed Cuts Solve Everything' thinking"
3. Allow me to benefit from political idioticy of stuffing Freddie and Fannie with larger and larger mortgages. (<$417K)
   

There are very few mortgage pure plays - I've looked at some of the others and while they might offer some better potential return, they are far riskier. Thornburg seems to be run very well, and even though it has bounced 50% off its recent 'death spiral' lows it is still well over 50% below old highs.

My price strategy is as follows - begin a position here in the $12s range. The stock has support in the $10-$10.50 range (20 day and 50 day moving averages). If the market tanks, I will be adding to this position in a much larger way at those price points. This stock has little resistance on the upside until near $17 which is its 200 day moving average. If/when we get there, I will re-assess what I want to do.

I am starting Thornburg Mortgage as a $15K position, 1200 shares, or 1.35% of the fund. Price point is $12.60-$12.70s. (I had an itchy trigger finger to try to buy near $12 yesterday but did not do it). My hope is to see a pullback to $10.00-$10.50 as stated above, where I'd be more than willing to make this a 3%+ type of position. If the stock continues to break out say, over $13.50 I'd probably add more on strength as well.

The mortgage business is not going away, and the options of playing it are very limited as most mortgage operations are either (a) poorly run smaller outfits or (b) hidden within larger banks who have a lot of other issues. So this appears to be the best option, a nice solid $1.5 B company with good management which focuses on higher end customers (not subprime), and the potential for government intervention as a bonus.

While I might consider some financials, or home builders for the 10% of the fund I allocate to "short term trades" (which I have not been utilizing much of late), I can see TMA sticking around in the fund for the longer run since it does not really require a housing rebound - simply people desperate to get out of ARMs and into fixed rates, along with some decent about of purchasing activity in the $300-$500K+ market to which it caters. People who can truly afford that level of purchase without resorting to ridiculous exotic loans of the past 5 years, won't be affected as badly from the recession as the "common man".

Long Thornburg Mortgage in fund; no personal position

Wheat Goes Above $10 a Bushel

I like this term I found in this story - "agflation" - I am going to start using that one!

• U.S. wheat prices surged to more than $10 a bushel on Chicago futures exchanges Tuesday, while hitting a record on the smaller Minneapolis Grain Exchange, as Canada reported tight stockpiles and millers scrambled for supply.
• Overall, wheat prices have doubled since last June at the Chicago Mercantile Exchange (CME), which owns the Chicago Board of Trade. Prices have been pushed higher by surging world demand and bad weather in some major producing nations.
• "For the near-term price, it's still heading higher," says Joe Victor, vice president of marketing at Allendale, a commodity research firm. He says prices will stay elevated until the markets get a better handle on potential production in coming months. "If we have good weather, plenty of plantings, then there's likely a price correction," Victor says. "If it's bad weather … (prices will) continue their upward trends."
• At the Minneapolis Grain Exchange, the March contract for spring wheat closed at $14.63 per bushel — an even steeper price gain. High-protein spring wheat, prized by millers and bakers for its quality, is forecast to have the smallest surplus in at least 30 years, and harvest doesn't start till August.
• Trading was influenced by a Canadian government report showing the wheat supply in that nation plummeting 30% from December 2006 to December 2007. The sharp drop was mainly caused by a more than 20% dip in wheat production last year.
• The U.S. Department of Agriculture expects the U.S. wheat surplus this year to be the smallest in 60 years. Despite higher prices, U.S. plantings of winter wheat rose only about 4% from last year. Farmers had been expected to increase plantings by far more. (They're too busy planting CORN!)
• Prices for corn, soybeans and other grains have also surged in recent months. That helped push U.S. food inflation up to 4.9% in 2007 from 2.1% in 2006. The impact has been far greater in less-affluent nations, where people spend more of their income on food.
• Merrill Lynch analysts in a recent report said the rate of what they call "agflation" could slow if economic growth cools. But costs will remain elevated. "Longer term, however, we remain convinced that agflation will be an important issue for consumers and policymakers alike," the Merrill Lynch report said.

I don't really see how agflation SLOWS if the economy slows - people cut back on eating? Cows worldwide get slaughtered since they are too expensive and people go vegan again? But I do agree policymakers need to start looking into this (not that it will help)... considering policymakers have been exaggerating the problems. Anyhow, agflation... I like it.

Long Powershares DB Agriculture Fund in fund and personal account

National Oilwell Varco (NOV) - Solid Quarter

A solid quarter from National Oilwell Varco (NOV) - slight beat on it's numbers. Right now I've pulled back from the oil service area - one issue is a "worldwide slowdown" scenario could push oil prices into upper $70s to mid $80s, and in the very short sighted manner of investors - they tend to push down the value of all companies across the food chain along with crude prices. Even though some subsectors such as deep sea oil drilling won't be affected if crude is $65, $85, or $105. Further those companies heavily weighted to the US are showing weakness, but even the companies with little US exposure get sold off in sympathy. So yet again another case of 'perception is reality'. NOV just continues to perform very well operationally, but I did cut the position weighting back lately [US Markets Continue to Ravage Oil Service Stocks], based on how so many other oil service names have been getting trounced - the risk/reward in this part of the market is just not in our favor right now.

• National Oilwell Varco Inc (NOV) said on Wednesday fourth-quarter profit rose 57 percent as high energy prices lifted demand for its drilling equipment and services.
• Net income increased to $376.7 million, or $1.05 per diluted share, from $239.2 million, or 68 cents per diluted share in the same period a year earlier. Analysts on average had expected a profit of $1.04 a share, according to Reuters Estimates.
• Revenue rose to $2.66 billion from $2.08 billion a year earlier.
• Fourth-quarter revenue for the Houston company's rig technology unit rose 40 percent from a year ago to $1.59 billion, while operating profit was $410.5 million, up sharply from $225.5 million a year ago.
• Backlog for capital equipment orders for the company's rig technology segment at the end of 2007 increased to a $9 billion, compared to $8 billion at the end of the third quarter.
• New orders during the fourth- quarter were a record $2.2 billion.

So we continue to see backlog growth and continued record new orders... but the market could care less right now. After all crude is down from mid $90s to upper $80s, therefore all these stocks must be sold... (that's the logic)

Long National Oilwell Varco in fund; no personal position

Finally. Ultra, and Ultrashort Commodity ETFs Coming

Well our world just became that much more interesting and complicated ... according to an article on SeekingAlpha.com our friends over at Proshares.com will be introducing 24 commodity based ETFs

Each of the following 8 indexes will have 3 ETFs: (a) Ultra (b) Short and (c) UltraShort

• Dow Jones-AIG Commodity Index
• Dow Jones-AIG Precious Metals Index
• Dow Jones-AIG Industrial Metals Index
• Dow Jones-AIG Agriculture Index
• Gold
• Silver
• Natural Gas
• Oil

My mind is already spinning with the possibilities... it appears only to be a SEC registration now but this is essentially going to be a wonderful way to leverage away from equities (especially in times like this). Of course it also allows you many more ways to lose money if you invest incorrectly.

So we will essentially have Powershares DB Agriculture Fund (DBA) on steroids, x 8. Oye! Going to take a few months to wrap my mind around how to use these toys.

Further, it is a very nice options for those of us investing in retirement accounts.

**Let me add this caveat from the article and a popular misconception about the Ultra and Ultrashorts of any type: It is important to understand that these funds provide double the daily return of their benchmark, not double the long-term return. If gold goes up 1% today, the leveraged fund should go up 2%. But if gold rises 10% this year, there is no guarantee the fund will rise 20%. Thanks to the magic of compounding, the long-term returns do not match the 200% goal, and have tended recently to be more in the 120%-170% range.

Long Powershares DB Agriculture Fund in fund and in personal account

Condom and Cat Litter Inflation - Only Female Dog Lovers Who Don't Wash Their Clothes Seem Immune from Inflation

Folks, there is no escaping the tax that is inflation. It's even hitting condoms and cat litter. Church & Dwight (CHD) as I mentioned yesterday is a mini Procter & Gamble (PG). But with the same commodity inflation in its inputs and the need to pass those costs on to you, so they can maintain their margins and make investors happy. Enjoy! (and remember, inflation is benign and contained)

• Consumer products maker Church & Dwight Co. Inc. said Tuesday its expects its 2008 earnings per share to just beat Wall Street estimates, helped by price increases and laundry detergent sales.
• Church & Dwight said its profit growth will be driven by revenue gains and gross margin expansion. Specifically, the company said it will be helped by sales of its liquid laundry detergent concentration and February price increases on Trojan condoms, Arm & Hammer baking soda and Arm & Hammer cat litter.

No position

Riverbed Technology (RVBD) Continues to Execute and the Stock Continues to Fall

Riverbed Technology (RVBD) is one of the classic "perception is reality" stocks. No matter what it says, there are fears of pending slowdowns so the stock gets hit. Sadly, there appears to be no way to win with a few of these names, despite continued performance. Another fantastic quarter... beat on the top line, beat on the bottom line... and the stock is down in after hours. I don't see any guidance out in the report so they will probably address it in the conference call.

Before the report, Yahoo was out with a story 'explaining' the weakness.

• Shares of Riverbed Technology Inc. fell Tuesday ahead of the company's fourth-quarter report scheduled for after the closing bell, amid investor worries over how the uncertain economy will affect its forecast.
• Riverbed's wide area network optimization technology helps boost the performance of applications shared over networks. Analysts expect solid results for the quarter, as the company dominates the WAN optimization market, where demand is strong.
• Riverbed "continues to enjoy a feature performance and scale lead over its competition and continues to win a majority of contests," wrote ThinkEquity analyst Jonathan Ruykhaver in a client note. He expects Riverbed's first-quarter guidance to meet Wall Street projections.
• "Although we believe that WAN optimization has a high (return on investment) for enterprises and, hence, its long-term secular trend is strong, there is always the potential of enterprises delaying spending in light of economic uncertainty," Ruykhaver wrote. "However, we believe consensus expectations appear reasonable in light of fundamental trends."
• Wedbush Morgan analyst Rohit Chopra expects Riverbed to "slightly exceed" estimates for the quarter. He rates the stock "Hold," and said there is evidence of growing competition in the WAN optimization market, which has "turned into a two horse race between Blue Coat and Riverbed."
• "Guidance will be key to the stock, but we recommend staying on the sidelines as macro headwinds increase and WAN optimization threatens to become a discretionary item," Chopra wrote.

So as you can see, a slowing economy sinks essentially all boats. We have yet to see any slowdown in either Riverbed Technology or Blue Coat Systems (BCSI) but just the threat that "some day it might happen" has been enough to halve both stocks. It remains a very difficult area to be long, so I am sitting on losses on both names ... they constantly disprove critics but constantly get hammered. Again "Perception is Reality", and that is all that matters at times in the market. The valuations are now getting "cheap" in light of the heady growth rates, but in a market like this, value means nothing. So I'll have to think and re-assess these 2 names. Not due to their fundamentals but the perception that overhangs them now has no reason to go away for the next 2 weeks, 2 months, or 2 quarters in fact. It seems a bit ridiculous that these stocks continue to sell off at these values.

• Revenues for the fourth quarter of 2007 were $76.3 million, an increase of 126% from the fourth quarter of 2006 and a 21% increase over the third quarter of 2007.
• Excluding the impact of stock-based compensation and related payroll taxes in all periods, the non-GAAP net income for the fourth quarter of 2007 was $14.6 million, or $0.20 per share, compared to non-GAAP net income of $2.4 million, or $0.03 per share, in the fourth quarter of 2006.
• Revenues for the year ended December 31, 2007 were $236.4 million, a 162% increase from $90.2 million of revenues in the prior year. Riverbed posted its first full year of profitability in 2007.
• “Over the past year, we have continued the rapid expansion of our business, growing revenues by 162%, adding over 1,800 customers and building a business that generated over 18% non-GAAP operating margins in 2007 compared to losses in 2006,”
• “GAAP gross margins reached 75% for the first time in the fourth quarter, significantly ahead of plan and reflecting reduced costs and a positive product mix. We have continued to invest in building out our R&D and sales marketing organizations given what we believe continues to be a large and growing market opportunity,” said Randy Gottfried, Riverbed chief financial officer.

Long Riverbed Technology, Blue Coat Systems in fund; no personal positions

Bankrate (RATE) - Another SEC Investigation Needed

I've brought up similar situations in the past and after you do this for years, you notice ridiculous things in the market more and more. Things that the SEC never gets around to enforcing.... let me show you Bankrate (RATE) which held up all day today... until the last 30 minutes. You see a huge spike in volume, and the stock falls off a cliff. Then the company comes out after hours and misses it's earnings.

I only noticed because I had this on my radar due to its incredible strength of late and potentially a way to play the refinance boom that is coming. So someone was tipped off, someone got out early and if the SEC was doing its job it would be tracking down who was clearing out at 3:30 (and even 2:30 PM which was another huge spike that dropped the stock momentarily).

And they say it is not a rigged game. A picture tells a thousand words.

Position: Cynical

Classic Bear Market Action

As I wrote this weekend

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.

This is classic behavior. I know I was frustrated last week watching things ramp up "without me". And for those who "believe" in constant bull market they jumped in last week after things had already made a huge dead cat bounce. And now they are very quickly underwater. And so it goes.

This is how it works. And it is very different than the environment since early 2003. It tends to sap your strength and joy if you are a long. Each time you are teased with a move up, you first resist, than the pangs of greed take over, people tell you "this is the bottom", "Fed cuts solve everything" and you buy... right before the market corrects.

Like I said in the past being long right now is like a trout swimming upstream - it can be accomplished but (a) it is a ton of work for very little reward and (b) buy and hold investing is now dead - nothing is working for more than 2-3 weeks at a time - and what works 1 week is totally disavowed the next. Financials that were celebrated the past few weeks are now being dismembered again.

It is certainly not easy, and the movements have been so very violent. We just had the best 1 week period (last week) in 5 years, that followed (2 weeks earlier) the worst 1 week period in 5 years. As I've stated the most logical move, if we broke down again (which appears to be the case) would be to be a retest to our January lows. What we do there (bounce or fall through) will determine a lot of the mood and underlying strength of this market.

S&P500 is currently 1350ish. The retest would be way down at 1275... or 5.5% down from here. I plan to hold the majority of my Ultrashorts to offset the damage on the long positions until we get to that area. I doubt it will be straight down but each rebound will be met with "hey the bottom is in, buy those financials and retailers folks, we are going to boom in 6 months" nonsense. The problem with these vicious falls and just as mad rebounds are no support levels are built... and we have this massive volatility. These continue to be amazing times. For those of you who have the stamina to make it out the "other side" - you will then truly be able to appreciate the type of low volatility environment we enjoyed in 2004-2006. "Buy and hold" era.

Last, if you haven't already go read that ISM blog entry from this morning again. It is key. We are a service based economy. People focus on the employment reports but these are LAGGING indicators. What happens now in ISM shows up in employment reports this summer. Maybe at that point people will recognize this is a recession. Only when the facts are staring them in the face. Just like when we rebound into the next expansion the labor reports will be lagging and still not show the rebound until well after the fact. This ISM report, especially if confirmed in next 2-3 monthly reports with similar sub 46-47 readings, is extremely troubling as that's the whole basis of our economy. Service.

LDK Solar (LDK) Warns on Revenue Due to Bad Chinese Winter

I can see this massive storm becoming an issue for quite a few Chinese names. Again this weather issue we've been highlighting [China has Power Shortage; South Africa has Power Shortage] and [Serious Food Inflation Hitting China Due to Storm] was not even a blip to US media or investors. Quite amazing. Maybe it has to hit a coastal city like Shanghai to matter.

Aside from hurting individual companies, the other shoe to potentially fall in this end game, is "strength in foreign markets will offset US weakness". What will scare people is to see a sharp drop in Chinese GDP - while healthy for the country to retract to a more normal type of growth rate (6-8% down from 11-12%), I don't think that sort of reduction is priced into the market at all. What would the myriad psychological effects be of a GDP 8.5% Q1 in China? Still incredible growth but the "emerging markets is immune" myth would be fractured. Even if for the wrong reason (weather rather than economics). Hence why I have been blown away no one is paying attention to this story. Much of the bull theory right now is any US recession will be offset by booming foreign markets.

As I always like to say... it does not matter... until it does. Maybe it won't matter until April earnings reports when companies fall short, and China prints their GDP number. Or maybe it begins to matter now as companies begin to warn. All I know is until now, it's been conveniently ignored by the media.

First warning I can see is from LDK Solar (LDK)

• Chinese solar wafer maker LDK Solar Co Ltd (LDK) on Tuesday forecast first-quarter revenue below Wall Street analysts' estimates due to severe winter weather that disrupted shipments to its customers.
• Despite the revenue shortfall, LDK gave an earnings forecast that was in line with analysts' expectations.
• "The severe winter conditions that China has experienced in the past few weeks are likely to have some impact on most of the publicly traded solar companies," Oppenheimer analyst Adam Hinckley said in a client note. "We believe most estimates are still achievable, but upside for (the first quarter) may be more limited."
• Hinckley said weather was still impacting companies in China's Jiangsu province, including Canadian Solar Inc (CSIQ), Suntech Power Holdings Co Ltd (STP), Trina Solar Ltd (TSL), Solarfun Power Holdings Co Ltd (SOLF) and China Sunergy Co Ltd (CSUN).
• DK forecast first-quarter revenue of $195 million to $210 million, below Wall Street's average estimate of $228.5 million, according to Reuters Estimates.

It's not terrible news for LDK Solar, and the stock has been beaten to a pulp in the interim anyhow and trades at a low value. As the analyst says, it probably limits upside surprises however during earnings season next April/May.

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

CME Group (CME) Impressive as Always

CME Group (CME) is a former fund holding, but a name I still like. Technically, it has been range bound between its 50 and 200 day moving averages of late. We'd like to see a move above $630 (50 day moving average) to signify it is ready to "go". The chart looks far superior to Intercontinental Exchange (ICE) - another former fund holding.

But earnings wise - impressive as always.

• CME Group Inc.'s profit nearly doubled in the fourth quarter as its acquisition of the Chicago Board of Trade helped boost volume at the world's largest financial exchange company.
• CME Group, which also operates the Chicago Mercantile Exchange, earned $201.1 million, or $3.75 per share, in the last three months of 2007, up 96 percent from profit of $102.6 million, or $2.91 per share, in the fourth quarter of 2006.
• The profits topped the consensus estimate of analysts surveyed by Thomson Financial, who had forecast $3.62 per share.
• Revenue, which CME Group collects by charging fees for hosting and clearing trades, surged 88 percent to $529.5 million from $281.3 million. Analysts expected revenue of $535.3 million.
• CME Group hosts trading of contracts that derive their value from an underlying commodity or event. Investors use these contracts to shelter their investment portfolios from swings in interest rates or gyrations in the stock market.
• Trading volume on the Chicago-based company's exchanges surged 23 percent in the fourth quarter to average 10.6 million contracts a day. Full-year trading volume jumped to nearly 2.8 billion contracts worth more than $1.2 quadrillion, the company said.
• So far in 2008, volumes have grown 65 percent compared with the same period last year, the company said.
• Banc of America Securities analyst Christopher Allen said in a note to investors that CME had a "solid quarter as revenues continued to benefit from strong activity levels and a higher-than-expected rate per contract." He and other analysts said CME is clearly off to a strong start in 2008.
• CME Group last month confirmed it is considering offering about $11.3 billion for Nymex Holdings Inc., which hosts trading of energy and metals contracts.

If not for this buyout offer for Nymex I'd be very interested in adding this name back. I still might be. But I'll let the chart tell me when to go. The stock is building a very nice base here between $600-$630. The longer the base, the more powerful the move (when it happens). The question is what direction....? :) But with volatility so extreme, these exchanges are just printing money hand over fist.

Valuation is rich, but again there is scarcity value here (CME deals in commodities, interest rate contracts, index futures, just about everything not just plain vanilla stocks) and tremendous growth. Analysts believe $19.31 for 2008, so let's use $20 as a nice round number. A price point of $600 is obviously a very rich 30x forward estimate. In a market that does not treat rich stocks very well. But the stock is holding up quite well in the market carnage and remains of high interest to me, now that it has pulled back from the $700+ level. This won't be a high flier returning 60% in a year, but a nice core holding.

No position

Bookkeeping: Adding to Mercadolibre (MELI)

Mercadolibre (MELI) has been beaten down of late. I am going to use this opportunity to expand the position by 40%, from 500 shares to 700 shares. There seems to be some good long term support here in the mid $30s as this is the area the stock bottomed out in during October and November. Valuation is extreme, but MELI has scarcity value - there is no other MELI. I do believe Ebay or someone will buy Mercadolibre out and I doubt it will be a public company within 2 years.

The volatility in this name has been extreme, and thus far it has been a losing position for me, but I have a lot of confidence in the business - the stock price is arbitrary from week to week. Mercadolibre tested $35 yet again today and has bounced smartly to $37, where I am adding another 200 shares to take this position up from 1.7% to 2.4% of the fund. This was near the price point I discovered this name in the fall, but since it was not in the Marketocracy.com database I could not buy it at the time. So now, half a year later, I am getting the same price so I am going to begin to take advantage of it, even with misgivings on the market as a whole.

The market has been rewarding washed out sectors of late, and the way technology is going - a lot of names are looking incredibly washed out.

Long Mercadolibre in fund and in personal account

Bookkeeping: Initiating Sohu.com (SOHU) "Starter" Position

I mentioned Sohu.com (SOHU) yesterday [Sohu.com (SOHU) Also Impressive]. This stock just can't get out of it's own way - each time it raises guidance or performs well the market rewards it with a sell off. This is my plan with the name.

I began a starter position today, 250 shares near $46, as the stock is down about 6% today. This gives me a 1.0% allocation - starter position. I will either buy more on (a) a pullback to the 200 day moving average (upper $30s) or (b) a breakout over and above the 50 day moving average (nearly $50). Stocks in between these 2 moving averages are sort of in no man's land for me, so I don't want to make a huge commitment since the stock has a 50/50 chance of moving in either direction. Technically the chart is quite ugly with a series of lower highs; another reason I don't want to get too frisky in starting a large position now.

Analysts currently peg $1.54 for 2008 estimates, but Sohu.com already commented that they will beat next quarter's $0.32 by $0.11-$0.13, so that already takes us to $1.65-$1.67 full year territory. The one risk with this name is the Chinese Olympics should drive advertising business for the next few quarters, but then the hand wringing will begin about what drives business afterwards? That's a perception issue but the internet is very young in China and this is a cheaper way to play the online ad market than the very well known (and dominant) Baidu.com (BIDU). Sohu.com is still a bit player (tiny bit player) - but a tiny bit of a growing pie is still growth. As for the gaming side of business, well it is a wildcard to me.

If we assume Sohu.com can create earnings of $1.70 for 2008 that is a forward PE of 27x. Not cheap, but not too expensive for this sort of growth. So perhaps we can get a drop in price to upper $30s and find a more opportune price point to build this position.

Long Sohu.com in fund; no personal position

'Rising Tide Growth' Fund Doing Well versus Marketocracy.com Peers

I have been mentally beating myself up over the past month's performance, but it appears the fund is doing very well against peers. Now that we are 6 months old a new feature has appeared which is called "Fund Rankings". I am not sure why it is not showing a 6 month figure but in the 3 month period Rising Tide Growth beat 99.5% of other Marketocracy.com funds, and in the 1 month period (where I've felt it has been a big struggle) we still beat 99.0% of Marketocracy.com funds. The chart below shows this data, and it's a neat new feature. So while it's been a tough month, I guess it's not so bad as I thought (I tend to be a perfectionist). I'm still not happy about the performance vs the indexes in the past month, but short of turning into a financial, homebuilder, retail mutual fund for a 3 week period I don't think I would of been able to do much better.

Further, I try to run a fund similar to what a real world mutual fund would be like, i.e. I don't buy 10 tiny gold stocks or 5 under $10 solar stocks, so I would never expect to be in the very top for any short period of time like some of the competition on Marketocracy.com. But hopefully over the longer run I will stay near the top, as those risky short term strategies generally don't do well over longer periods of time.

More important than beating Marketocracy.com competitors is to beat the real world competitors, and thus gain the interest of readers to create a real fund.

EDIT: I figured out why I am doing so well in the 1 month and 3 month periods despite a shaky January. The date measured for the fund was Dec 31, 2007. So it was 1 month from Dec 31, 2007 and 3 months from Dec 31, 2007. So it does not reflect rocky January. I assume this will update every quarter so I have until March 31, 2008 to make up for lousy January.

(click to enlarge)

Citigroup Upgrades Mosaic (MOS), Potash (POT)

I am actually going to take a little profit (small sales) off these 2 names today on the Citigroup (late to the game) upgrade, as they have bounced nicely (but I still feel Mosaic is about $20 too cheap). Both stocks have very nice charts, but in a market susceptible to profit taking (in between shots of Kool Aid) and throwing baby out with bathwater I will raise a bit of cash.

• A Citigroup analyst upgraded fertilizer makers Mosaic Co. and Potash Corp. of Saskatchewan Inc. late Monday, expecting higher contract potash prices to China and India to benefit both fertilizer companies.
• Analyst Brian Yu upgraded both companies to "Buy" from "Hold" based on "a more bullish" outcome from ongoing potash contract negotiations with China. Potash is a fertilizer made from wood ashes used mostly in agriculture to fertilize crops and other plants. Demand has been strong because of factors that include growing demand for ethanol.
• Yu said contract potash prices to China and India may rise by $150 per metric ton in 2008, versus prior expectations of around $100 per metric ton.
• "We do not expect China to be able to increase domestic potash production before 2010, thus it remains 70 percent to 80 percent reliant on imports to satisfy the domestic demand," Yu wrote in a client note.
• For Mosaic, Yu hiked his share price target to $121 from $93, representing upside of nearly 23 percent to Monday's closing price of $98.45. Yu raised his price target to $178 from $141 for Potash, suggesting upside of 23 percent from Monday's closing share price of $145.

I agree with the Potash target, but think Mosaic should be higher. But I'm biased. Again, if this were a buy and hold market I'd just increase these positions even larger and sit and wait for the money to come in, but this bipolar market where good is evil, and people have no memory of the day before is not that type of market. Someday we'll go back to a more sensible time. But we're not there yet. So until then, I'll try to make some sales, and buy back at lower prices as the stocks ebb and flow with the market.

Long both names in fund and in personal account

ISM Services Contract Sharply

Again, don't take too much out of any 1 number, but the trend is so very clear. Keep in mind what the US is now - a service economy. But hey, Fed cuts solve everything. We "should be out of all of these issues in 6 months" (blah)

And let the drumbeat for "surprise" intrameeting Fed cut in about 3 weeks begin now.... we are heading for 2% rates people.

• U.S. service industries unexpectedly shrank in January at the fastest pace since the last recession as the housing slump deepened and consumer spending cooled.
• The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A reading of 50 is the dividing line between growth and contraction.
• The worst housing slump in a quarter-century is spreading throughout the economy, hurting businesses such as builders, retailers, wholesalers and mortgage lenders. The report adds to concern Americans are spending less as job losses mount, raising the risk the economy may tip into a recession, economists said.
• The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. The index has averaged 57.6 since its inception in July 1997. (put 100 economists in a room, and you still get the wrong answer, or 101 wrong answers)

But remember, DON'T WORRY! Housing, banks, and retailer stocks are flying because the Fed solves everything with cuts! KOOL AID all around.

Thornburg Mortgage (TMA) Earnings - Good Enough

I have kept one eye on Thornburg Mortgage since August [Thornburg Mortgage (TMA) An Interesting Stock]

While eventually these mortgage lenders (whomever survives) will be great stocks to own, in general its far to early to own these. However, I am watching with great interest TMA. I saw on CNBC last night where out of 30,000 some mortgages they have 50 some defaults. While that number will probably rise significantly in the upcoming months/year its still a very low default rate. This company serves the jumbo loan market (which I believe is $417K+) - a market that will slow but generally caters to pretty wealthy individuals. Now I don't know there entire story but if they are not doing no doc loans to people making $45,000 who are trying to buy $600K homes, than it could be an interesting story.

Today they had their earnings and it was "good enough" - they had a terrible year but this quarter was not that bad. Most important is the provision in the "stimulus" bill to stuff $500K, $600K, $700K mortgages into Fannie Mae and Freddie Mac. Aside from helping keep home prices far higher than they should be, it should be a boom to Thornburg. That part of the market has really frozen as no one wants the (gasp) risk of actually holding loans they originate. What a concept to a lender eh? Make a loan and be forced to actually care about the credit worthiness of the borrower. Shocking business idea. Well, that's how it used to work before securitization. Anyhow, this company would really benefit if this provision indeed is in the final bill. So I'm keeping an eye out - it is up 12% in after hours as the earnings seemed to appease people.

Since I need some contrary financial plays for times like the last 2 weeks when "financial stocks are god's gift to investors", and I don't want to touch credit card issuers or regional banks who are going to be fighting it out with a slowing US consumer, Thornburg might be one to delve into. Not that $500K, $600K mortgages are safe in this environment but if you can shuffle them off to Fannie/Freddie - well it's all good for Thornburg. If those mortgages default? Well that's an issue for the US tax payer someday. Thornburg was enjoying a sleepy life as a $27-$29 stock until August 2007 when life changed forever. After crashing to $8, it's back to $11s-$12s and seems to have no clear resistance until $16s/$17. I'm mulling this one... deeply. The mortgage business is not going away, so the remaining players are going to be splitting the same pie over far fewer players - and most major players are part of much larger banking institutions so it is hard to find a pure play on simply mortgages.

• Mortgage lender Thornburg Mortgage Inc. said Monday it swung to a profit in the fourth quarter, after posting a $1 billion loss in the third quarter due to the fallout in the mortgage markets.
• Thornburg posted a fourth-quarter profit of $64.8 million, or 33 cents per share, versus $80.3 million, or 68 cents per share, during the same quarter a year before. Analysts polled by Thomson Financial expected a profit of 27 cents per share.
• For the full year, Thornburg reported a loss of $915.4 million, or $7.48 per share, compared with a profit of $286.9 million, or $2.58 per share, in 2006.
• Thornburg Mortgage makes jumbo loans -- mortgages larger than the $417,000 cap at which government-sponsored entities Fannie Mae and Freddie Mac are allowed to purchase loans. (not anymore!)

From TheStreet.com

• The significant drop in LIBOR rates was just what the company needed. The portfolio yield during the fourth quarter increased to 5.75% from 5.40%, while the average cost of funds decreased to 5.04% from 5.26% in the prior quarter. This combination created the backdrop where the average net interest margin of 0.96% for the quarter was considerably higher than the 0.31% in the prior quarter.
• "Our return to profitability in the fourth quarter during a period of continued unprecedented industry turmoil is testament to the strength of our business model and our conservative approach to risk management, as well as further validation of our focus on quality across all aspects of our business," President and CEO Larry Goldstone said in a company statement.
• The company's balance sheet was also stabilized by the proceeds from the sale of equity during the quarter. This capital provided an additional source of liquidity during the quarter and helped to strengthen the balance sheet, support its mortgage loan funding operation and facilitate the limited acquisition of mortgage-backed securities.
• A believer in the stock, Chairman Garrett Thornburg had purchased a million shares in October at $9.50 a share.

No position (yet)

Sohu.com (SOHU) Also Impressive

I've been watching Sohu.com [Dec 5th- Sohu.com Raises Guidance] and am very interested in this name. The stock was in the mid $60s in early December when it raised guidance and all it got as a reward was a smack aside the head; it traded down to the upper $30s in the January swoon. It has now recovered back to upper $40s, and technically sits right at its 50 day moving average of just under $50. Each time I want to buy this, I remember how all Chinese stocks are thrown in a stew together and either viewed as good or bad. Poor Sohu.com. But I do like the business momentum and if the stock can build off these nice earnings.... and raised guidance (again), we should see a nice move. (if the market were willing of course)

There are quite a few Chinese online video game makers, but Sohu.com has the advertising arm that intrigues me.

• Chinese Internet portal operator Sohu.com Inc. said Monday fourth-quarter profit more than doubled on strong brand advertising and online game revenue. For the quarter ended Dec. 31, net income rose to $15.1 million, or 39 cents per share, from $6.1 million, or 16 cents per share, in the prior year quarter. Excluding stock-based compensation charges, the company earned 43 cents per share.
• Analysts polled by Thomson Financial expected earnings of 31 cents per share.
• Revenue rose 90 percent to $65.3 million from $34.4 million in the fourth quarter of 2006. Analysts predicted revenue of $55.4 million.
• Advertising and non-advertising revenue both rose substantially in the quarter, helped by a 46 percent rise in brand advertising revenue and soaring online game revenue.
• For the year, net income jumped 35 percent to $34.9 million, or 90 cents per share, from $25.9 million, or 68 cents per share in the prior year. Revenue rose 41 percent to $188.9 million from $134.2 million in 2006.
• Chinese Internet portal operator Sohu.com Inc. said Monday its first quarter profit would rise above Wall Street analyst estimates. The company said it expects earnings per share between 43 cents and 45 cents for the quarter, excluding share-based compensation expenses between 8 cents and 9 cents per share.
• Analysts polled by Thomson Financial expect earnings of 32 cents per share.
• Total revenue in the quarter will likely be between $66.5 million and $68.5 million. Analysts predict revenue of $59 million for the period. The company estimated ad revenue between $33.5 million and $34.5 million and non-advertising revenue between $33 million and $34 million.

No position (yet)

Illuminia (ILMN) Keeps Performing

I was hoping for some sort of disappointing news out of Illumina (ILMN) so I could buy this stock at a discount - doesn't look like it based on the +7% move in after hours. Aside from hefty valuation I just cannot find much to knock about this company, who grew it's revenue 100% last year. Quite impressive stuff.

• Illumina Inc., a developer and marketer of life-sciences tools, said Monday it expects to swing to a first-quarter and full-year profit. The company expects first-quarter profit between 33 cents and 36 cents per share on revenue between $110 million and $115 million.
• Analysts polled by Thomson Financial expect first-quarter profit of 26 cents per share on revenue of $111.2 million.
• For the full year, the company expects profit of $1.45 to $1.60 per share on revenue between $500 million and $525 million.

Analysts are in for 2008 at $1.23. Now that's a beat. Bravo.

Long Illumina in fund; no personal position

China Small Cap Speculation is Back

Ahh, it has been many moons since our old friends showed any life. All it takes is a week or two of market bounce and we go back to our old haunts...

I think Cramer started it this time with his bullish call on Gushan Energy (GU) - never heard of it! But it opened the floodgates to Chinese small cap speculation. Ah, the spirit is in the air.

China Precision Steel (CPSL) +22.1%
China Natural Resources (CHNR) +22.1%
Gushan Energy (GU) +16.9%
China Architectural Engineering (RCH) +14.6%
China Direct (CDS) +12.8%
China Finance Online (JRJC) +12.8%

A pretty quiet day for these guys... when they really move, the (ahem) investors in them can push them up 40-60% in 1 day.

So for those of you new to the blog, not that I'd ever do this but what worked day after day all October was to buy the 5 highest returning chinese no name stocks who were up the most, and the very next day the basket would be up 30%. Sadly this worked for about 4 weeks straight. ;)

And we try to pretend this is any different from Las Vegas... eh?

Bookkeeping: Reducing Research in Motion (RIMM) by 40%; and a bit off Apple (AAPL)

This is purely a technical move; I find valuations in this whole former teflon tech stock area compelling but until the market deems these to be buys, I want to use lifts to reduce exposure. Research in Motion (RIMM) has been trading in between $90-$95 for the better part of this rally. Not really much ... I guess if they opened a subprime arm the market would of rewarded them with a 30% move the past week and a half. After all the Fed saves all financials. I continue to use Google (GOOG), and Apple (AAPL) as my bellweathers... they have no lift at all.

Research in Motion is above its 200 day moving average ($82ish), but below the 50 day ($102). I've charted the 20 day moving average above... so you can see what RIMM is doing... butting up against it constantly and not breaking through. So I am cutting back. My future moves with this name are to either buy it back on weakness or buy on a breakout over the 50 day moving average (north of $102). Right now it is in no man's land, as are many of the stocks I hold - listless. So I want to protect from a larger fall.... if the market pulls back these very weak technology names (despite being great values fundamentally) will trend down. See Google (GOOG) for a great example. So I am going to take a smallish loss here to protect against larger ones.

Apple (AAPL) is in even weaker position (below 200 day moving average and range bound $126-$137), so I took a smaller sale there as well to reduce exposure a bit - all the same reasoning as for RIMM. Right now fundamentals mean little, so I am going to let the charts tell me when to get back into these names. What appears cheap today, can be far cheaper a weak from now.

I am still approaching this market with a bearish tone as the above moves display. If I am wrong (which is a 50% probability) I will be happy to buy these stocks at higher prices when the technical condition improves. I will miss the beginning of their moves up, but when the market comes back to embracing these names, the moves upward should allow for a long ride. I continue to play defense even if it costs me in the near term in performance.

So I'm making a sizeable sale in RIMM @ low $94s (100 of 250 shares), and a smaller sale in AAPL @ $132s. I think fair value for both are higher but that does not mean we cannot see RIMM in the $80s and AAPL in the $110s.

Long all names mentioned in fund; no personal position

Stifel Nicolaus to Market: Banks? You're Nuts

Interesting to see the brokerages reactions to the "new bull market in financials" - again take anything the analysts say with huge amounts of salt but....

Morgan Stanley Cuts Wachovia, Wells Fargo

• Morgan Stanley downgraded Wachovia (WB)
  and Wells Fargo (WFC) to "underweight" from "equal-weight,"
  saying it was concerned about the increasing deterioration rate
  in housing values and the relatively large exposure that the
  two stocks have to housing assets.
• "We are underweight large cap banks and expect higher loan
  losses and reserve hikes to drive down EPS through 2009,"
  analyst Betsy Graseck wrote in a note to clients.

I liked the Stifel Nicolaus call even more - the language is so true (at least from my vantage point but of course I am biased)

• The rally in regional-bank stocks since the Federal Reserve's emergency rate cut two weeks ago is overdone, Stifel Nicolaus & Co. said Monday.
• The gains are "bordering on euphoric and occurring at a time when fundamental deterioration is accelerating, not stabilizing or even showing signs of slowing," wrote analyst Christopher Mutascio in a note to clients Monday.
• Regional bank stocks overall have added about 25 percent in the nine trading days since the Fed cut the target interest rate three-quarters of a percentage point, he said.
• Mutascio downgraded shares of Wells Fargo, U.S. Bancorp and SunTrust Banks Inc. because their stocks are approaching all-time highs.
• The analyst is concerned Wells Fargo does not have enough reserves to cover bad consumer loans, particularly home equity lines of credit.

If I had to buy a bank it would probably be US Bancorp (Buffet is in it) and Wells Fargo (save for the fact they are so tied to California) - but they seem to be run very well. That said, this move is "euphoric" and bizarre. But this is the playbook - buy on panic Fed cuts, and benefit. The question is, and has been, is this your mother's 2 quarter's and done recession. If so, those were trough lows. I somehow think not since this will be the first US consumer led "slowdown" (recession) we've had since early 80s. People are using the playbook of the early 90s and early 00s - which were business led slowdowns (consumers kept astounding all the pundits with their unrelenting spending). While I can't see this downturn becoming as severe as the early 80s due to the "proactive" government we have nowadays (we will do anything to support asset prices and keep Americans spendings and getting into more debt), I do think it will be worse than what we have been conditioned to.

Again, that does not mean the stock market needs to go down. Asset prices of all forms will be INFLATED by easy money. Including stocks. But as for the economy - I am not bullish at all. Once again, parts of these companies (banks) business won't be returning at all. Period. So people thinking earnings will just go back to what it was in 2004-2005 are kidding themselves. But this will take a long time to come to bear, and stubborn bulls will continue their hopeful commentary.

So let's review this folks - back in late summer banks had a boost on first cuts as people were discounting no real economic slowdown, just a financial hiccup - 6 months from now things will be fine. Then by fall we began discounting just a 1 quarter "kitchen sink", still no US slowdown, and then financials back on their feet - 6 months from now things will be fine. Then early winter, well the financial situation is serious but no real US slowdown - 6 months from now things will be fine. Now we are to the point we have a recession risk, and serious financial risk but it's STILL OK! The Fed cuts solve it all. So you can see the pattern. No matter what the news people discount "great things" within 6 months. And since the market discount ahead of time, we constantly get these hope rallies... since in 6 months everything will be fine. We are Pavlog dogs and we are trained in "heavy Fed cuts = everything will be fine". Maybe it will be. But one of these times the continued "Fed cuts creating new bubbles" will blow up in our collective faces.

I will say, being a US bank executive is the best job in the world - when you (bleep) up, the entire US government is behind you to make sure you can print money hand over fist. With the yield curve as is, any monkey can make money now in banking. So this will alleviate some of the issues... but again, at a major cost to us all on Main Street. Inflation.

Funny (or Not?) Craigslist.org Posting "Wanted: Your Toys"

Thanks to James Altucher at Thestreet.com for pointing this one out. I just have to copy it over verbatim because it succinctly summarizes all the things we've been talking about on this blog since inception. Enjoy!

Wanted: YOUR TOYS

You: an average American. You are deeply in debt and still continue to borrow every day to feed your habit. You walk into Wawa and, for a measly $2.99 coffee and breakfast sandwich, you rip out the credit card because you have no cash (that’s me behind you in line). The concept of buying only those things you can actually afford is foreign to you. You feel that a $500k home with a big screen TV and BMW in the driveway are entitlements you deserve … even though you never finished college and earn about $45k/year. Going back to school … improving your skills … these are also distasteful to you. Math was not your favorite subject and, when the mortgage brokers told you that you could borrow your way to riches, you bit hook, line and sinker. Your mortgage rate has reset …you’re on the verge of foreclosure, making minimum payments on your credit cards and the Yellow Pages book on your kitchen table is opened up to “Bankruptcy Attorneys”. Gas prices and utility bills are killing you. Your job is not as secure as you thought. You are panicked. You are desperate. And the liquidation of assets (toys) such as your Beemer, your Big Screen, your fancy electronic toys, your Sea Doo, that nice new diamond ring bought with home equity cash … is going to be necessary to buy food and heat.

Of course, it’s all someone else’s fault. That someone else is …

Me: I sold my home at in late 2005 knowing full well that this massive housing bubble was unsustainable (I was a math major – that geeky guy you hated and despised in high school). And, no, you can’t copy my test answers. I put over half a million in the bank (less than $100k in any one bank to have complete FDIC insurance coverage). I didn’t have a mortgage because I always spent less than I earned and aggressively paid off my mortgage in just 7 years. I also didn’t pay a Realtor commission when I sold – who needed a Realtor to sell ANYTHING in 2005. I could have sold an outhouse for $250k to you dopes back then. I am a renter and I rent a 3-bedroom home cheap ($1600/mo) because the landlord has no pricing power. Rents are going to get even cheaper as more housing supply comes on the market and desperate flippers will rent at almost any price to soften the negative cash flow a bit. While you were buying your McMansion, I paid cash for everything, have no debt whatsoever and SAVE almost $30k/year. I don’t own a big screen TV or a boat. I have never bought a new car and I never will (not an investment – a depreciating asset). I am clearly *NOT* doing my part to support the US economy and you can blame me all you want for not pulling my weight. I am going to be a homeowner again but not for a few years. Housing is going to take a 50%+ haircut no matter what “stimulus” Bush provides in the form of rebates and regardless of whether Bernanke cuts interest rates to ZERO. The bond market will negate any interest rate reduction in hours or minutes. That ¾ point cut last week was swallowed up by the bond market in just 3 hours. It won’t matter a whit as there is too much debt and leverage in play for this not to unwind very painfully. I am not in the stock market either as that haircut will be equally painful. In the meantime, I want to enjoy life so I’m in the market for a few toys; specifically *your* toys (I don’t pay retail for anything). At the right price, my son would love to watch sports on a nice big screen. I’m thinking of riding your jet skis this summer (cheap, of course). I met a wonderful woman this past autumn and we are hitting it off amazingly. She and I are like-minded with regard to the above. So, she would not mind at all wearing that nice diamond ring even if it’s second hand (she’d probably **EDITED** if she knew I got it for dimes on the dollar). My Jetta still runs nice but your BMW would be a great addition to my driveway. I don’t care what you owe on it – I’m not paying that much. But I am paying CASH. What have you got?

Massey Energy (MEE) Mulls Production Hikes

And suddenly I feel like I do not have enough Massey Energy (MEE) as the stock bursts to new 52 week high. I am going to add about 100 shares here (not a major buy), as this looks impressive and I want to get back to a >1% exposure; I am also adding to Consol Energy (CNX). I traditionally don't buy 52 week highs but it's a very popular investing method and I feel underweight the space. Still waiting for Peabody Energy (BTU) to wake up, but it has some company specific issues which appear to be weighing it down.

Massey Mulls Production Hikes

• Massey Energy Co. says it's considering additional production increases to meet strong demand for U.S. coal overseas.
• Massey already announced plans in October to add 8 million tons of production by 2010. Now the company is considering ways to up coal output even more and to do so by 2009, Chief Executive Don Blankenship said during a conference call Friday with Wall Street analysts. Blankenship said his focus has been on producing more metallurgical grade coal, which is used to make coke for steel manufacturers.
• Blankenship said strong demand for imports to China, India and Eastern Europe will combine with high ocean freight rates and the weak dollar to support strong prices for Central Appalachian coal even if the U.S. economy goes into a recession. "The bottom line is that while we may go through a recession that slows economic growth in the U.S., we don't expect the demand for coal to suffer in 2008."
• Massey is the nation's fourth-largest coal producer by revenue, and operates 19 mining complexes in West Virginia, Kentucky and Virginia.

I'm a broken record. Pricing power. Cash rich customers. World demand. I see a lot of parallels to the fertilizer group about a year ago - quiet bull market that no one is noticing and the few that do, doubt it. Old conventions about "so goes US economy, so goes coal" are still pervading. The new reality is not yet hitting people. If/when it does, hopefully we get some multiple expansion. I am still waiting for some of that multiple expansion in fertilizer names not named Potash!

Long all names mentioned in fund; long Potash in personal account

Visa (V) IPO Seeks Mastercard (MA) Riches

We've talked about this in the past (click here for previous posts on Visa), but as we get closer to the IPO date, just want to keep the news flow in front of you. This is definitely a name (if this were a real fund) I'd be asking to get IPO shares in the initial offering. With that said, since Mastercard has established a "fair value", the upside surprise in Visa won't be anything akin to the huge run of Mastercard since IPO, since the stock will be more accurately valued from day 1.

Re: Mastercard - again my thesis, now in the minority, is that a slowing economy and stressed consumer, will in fact HELP (not HURT) the company. People will be desperate to pay for day to day things any way possible. If they default down the line? Oh well, that's not on Mastercard's books. Again it's a minority view but I think down the road the skeptical analyst community will come around to it as they see this play out. And the refinancing boom inspired by Helicopter Ben? Even better. This allows the house ATM to come back into play for 2004 and earlier homes - move credit card debt to home equity by refinancing and bada boom! What do you have? A credit card whose balance is back down to $0. And then you can play the game all over again. Windfall!

• MasterCard(MA) once again reported blowout earnings last week, bolstering predictions of a smooth ride for the much-anticipated IPO for its rival Visa.
• Observers say Visa could go public sometime in the second half of the year, despite some market chatter that the offering date could be put on hold or that the pricing could be lower than observers initially hoped for, due to the general malaise in market conditions and concerns about the stalling consumer.
• But while consumers seem to be struggling with payments on everything from cars to mortgages these days, it's clear that their use of plastic has not diminished -- and likely won't.
• "For investors, this is the perfect time to be considering purchasing this stock," says David Menlow, president of IPO Financial Network, based in Milburn, N.J. "I'm not concerned the talks of consumer problems is going to be a detriment to the market. If you look at [consumers'] tendency to live on their credit cards when times get rough that may in fact be an offset to some degree. I don't believe that people are going to want to miss another MasterCard."
• Visa plans to list the stock under the symbol "V" on the New York Stock Exchange. While the company declined to comment for this story and few details have been made public so far regarding the initial public offering, Visa expects to raise up to $10 billion, according to the preliminary registration statement filed with the Securities and Exchange Commission.
• "People like the convenience of the cards," Gillen adds. "Transactions are moving downstream a little bit. People are using [cards] for $5 transactions. What the major payment card brands are trying to do is to go deeper into transaction sizes to get smaller ticket payments -- where cash is still used today -- and convert that into cards."
• More importantly though, neither company keeps consumer debt on their balance sheets, as opposed to rival American Express(AXP - Cramer's Take - Stockpickr), which was forced to set aside a large provision for loan losses last quarter as consumers began having trouble paying not only their home loans but their credit card bills and auto loans.
• MasterCard's "magnitude of EPS upside was a positive surprise to the market, as was the realization that with these numbers, there really are no signs that a slowing U.S. consumer is impacting the model negatively at this time," writes Christopher Mammone, an analyst at Deutsche Bank. "We think the shares could continue to outperform as Street numbers are likely to go materially higher after this print, and so we are raising our price target to $250."
• CEO Robert Selander acknowledged during a conference call that while revenue growth will likely slow this year, "a mix shift in consumer spending" is actually helping the business. "Over the past several months, consumers have moved away from discretionary items such as jewelry, full-service restaurants and home furnishings toward everyday purchases including gasoline, grocery and personal health care items," Selander said. "This movement to everyday purchases aligns well with where MasterCard is broadly positioned in consumers' wallets. For us, the shift in spending patterns has translated into higher fourth quarter."

I believe the CEO, in that last point, is confirming my long held thesis. One day analysts will come around to this view too.

Long Mastercard in fund; no personal position

Bookkeeping: Closing Solarfun Power (SOLF)

I've had little luck in the solar space outside of Suntech Power (STP) - these stocks are too driven by retail hands - they go up 90% in 4 weeks for no good reason, and then fall 60% in 4 weeks for no good reason. Just panic driven retail momentum traders who play these, and that style does not mesh well with my timing of entries/exits.

Specific to Solarfun Power (SOLF) I mentioned this over the past few weeks - when it announced its convertible debt I didn't want to stick around. Just a personal preference due to institutions who love to short common against the debt, along with it not being a very shareholder friendly way of raising money. Instead of selling at $14 on the panic drop, I sold half around $17 and was hoping for mid $18s or better for the rest, but I am content to get rid of the rest here as we approach $18. Solar is perking up today, as risk takers now venture back into the market slowly but surely...

I am selling the remaining 650 shares at $17.90, and exiting the position. (with a substantial loss)

Technically the stock bounced nicely off its 200 day moving average of $15.50 or so, and the 50 day moving average is near $20 (and falling daily). I will be interested to see how the stock reacts when it inevitably tests $20. Will it fall back or just push right through? I suppose it depends on how much Monster Energy drink the retail investors are drinking that day...

Now keep in mind, SOLF is the type of name that could be $40 tomorrow, as it's the playground of retail investors who really don't care much about fundamentals. (not all investors in this name, but many of the retail variety). As long as it moves up, it's a "great company", and when it moves down "it stinks". That's about the depth of 'analysis' for many stocks in this sector. This was a much easier sector to invest/trade in in late 2006 to mid 2007 before it become the sexy sector full of momentum players who care nothing other than what the stock did the past 24 hours.

I'll keep focused on a 2 tier strategy in this sector buying either leaders (Suntech Power, First Solar), or deep value names (Trina Solar, LDK Solar). I find the valuations much more attractive now across the board than I did in December when I warned this group was valued at levels that made no sense. That said, it is a bit disconcerting both on the way up (and down) how there is no discerning on quality versus junk. People run up all the stocks, or trash them all - this makes me not like the sector as I once did. It makes stock picking useless - you might as well buy any 1 stock, since they are all treated the same. I've said countless times, at some point people will recognize there are winners and losers coming to the sector, and the winners should separate but we are still not at that stage. When we do get there I will feel more comfortable in individual stock selection. At this point, you might as well throw a dart because that's how retail seems to do it. Institutions do not appear to be heavily involved in these names judging by the cratering of these stocks on each downturn.

Last, most of this group reports earnings in the next 3 weeks and the stocks usually enjoy what I call "bipolar" outcomes - meaning they can be up 35% or down 30% in an instant. There is no way to game it, this is simply Las Vegas, and not my cup of tea. It is just the nature of the beast in this sector due to the type of investors involved - whose idea of "long term investing" is "next week". So as I said, SOLF could be $40 post earnings or $12. Depending on the amount of Monster Energy consumed by said "investors". With that said, if you plot these stocks as a group, they are at an "ebb" stage so aggressive/risk tolerant traders could potentially make very lucrative "bets" during this trough period, understanding that "Wall Street gamblers" will return to this group at the first hint of market stability.

Long all names mentioned except Solarfun Power in fund; long Suntech Power, Trina Solar in personal account

China's Inflation Hits American Price Tags

We have been talking about this since day 1 in the blog as a "future event" that will be a next shoe to drop - in more recent blog entries we mentioned 'well it's now here' [Another Myth Falling - 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.

Nice to see that the mainstream press is beginning to recognize it. Meanwhile, the government says there is (all together now) very little inflation.

Expect to begin hearing the terms "cost push inflation" bandied about (haven't heard that since college text books)... so it begins... and again folks, this is not a 2 quarter issue that the Fed can solve with higher rates in 2009. This is the beginning of the "World of Shortages" playing out. And as I keep saying, expect to hear about people fleeing "high cost China" in a few years to places they can find workers for half the rate --- i.e. Vietnam. But again these takes many years to play out. Mexico took nearly a decade to clear out as a mfg base for US... the irony of it all is the more successful you become, the more your people demand better wages, and the less desirable you are in a world where capital looks to exploit labor. If Africa were safer and politically stable trust me we'd have a world full of factories there too.

• China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months. Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.
• The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States.
• Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.
• In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China’s rise from the lowest rungs of global manufacturing.
• “China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.”
• Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing.
• Even when the market share held by Chinese goods is relatively small, their low prices put pressure on other producers to keep costs down.
• Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say.
• But companies that operate in China or buy from here are already reeling from mounting cost pressures that they say will weaken their profits and could disrupt their supply chains.
• “This is what I call the perfect storm,” said Alan G. Hassenfeld, the chairman of Hasbro, one of the world’s largest toy makers, during a recent visit to China. “We’ve got higher labor costs and labor shortages, plastic prices have gone way up and we’re doing more safety testing.”
• While no reliable figures exist on average Chinese wages, experts say that factory wages have risen 80 percent or more in many coastal areas in recent years, with the lowest wage about $125 a month.
• But the actions are also part of Beijing’s desire to move China higher up the global manufacturing chain — away from the least- finished products, like plastic children’s toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles.
• Whatever the government’s motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with problems that included power shortages, higher raw material costs, rising wages and inflation in other areas.
• Many Chinese factory owners say a tough new labor law, which went into effect on Jan. 1, complicates the hiring and firing process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages. Some factory owners say there have already been strikes and other turmoil over the interpretation of the new law and how it should be applied.
• Analysts say Beijing is also stepping up its enforcement of environmental laws, putting added pressure on factories that had long skirted regulations. Adhering to those often ignored rules increases cost, too.
• All in all, toy producers are among the hardest hit by the changes in law and prices. They rely on large quantities of plastic. They face heightened regulatory scrutiny after the product safety scandals last year. Indeed, some toy factories went bankrupt, squeezed between rising local costs and pressures from foreign customers to deliver a better product at an even lower price.
• To reduce costs, some factory owners are considering moving to inland China, where wages are lower, or to other parts of Asia, like Vietnam and Indonesia.
• Li & Fung, one of the biggest companies for supplying products worldwide, says its customers are already responding to Chinese inflation. “There’s a shift in sourcing driven by higher prices in China,” says Bruce Rockowitz, president at Li & Fung. “We’ve already seen a big move in furniture to Indonesia.”
• Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing.
• “Companies are now ordering for the spring of 2009,” says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. “Factories are coming back and asking for 20, 30, 40, 50 percent price increases.”

Remember, every step to modernization requires more costs. Better wages. Better safety of products. Better environmental backdrop. All of it costs money, and makes products more expensive. Until we can build a new series of factories in a new country that could care less about environment or safety or labor wages.

Again as I've stated the past year, I eagerly await the Vietnam ETF. Capital has no feeling; it flees to the cheapest place to produce. It's a flat world and am amazing era we live in.

Earnings on Tap Mon - Tue

Monday is a pretty quiet day...

Archer Daniels Midland (ADM) - lately has been an ethanol/ag play.

Illumia (ILMN) - fund holding which I've cut back since the huge spike off of the patent settlement. I am hoping for something investors don't like so they cut the stock down at the knees so I can re-enter lower.

Manitowoc (MTW) - a darling of 2007 as its cranes were found throughout Asia and the Middle East

Sohu.com (SOHU) - a name I have considered adding to the fund as a cheaper way to play online search (along with gaming) in China. Still looking.

Thornburg Mortgage (TMA) - no seriously. If the rescue plan for housing goes as is, and conforming loans that are allowed to be stuffed into Freddie, and Fannie goes to $700K+ - this is *THE* name to play. I have my eye on it.

Yum Brands (YUM) - a restaurant stock (KFC, Pizza Hut, Taco Bell) which is trying to offset US slowdown with foreign growth.

Tuesday

Bankrate (RATE) - this helps people get mortgages. With the housing boom going on (or will be this summer) this is a stock to own. It is at its 52 week high; at 40x earnings. I kid you not.

BHP Billiton (BHP) - market darling of most of the past few years. I think a great long term stock but it ebbs and flows in this bipolar market. When the market thinks global growth is booming it goes up; when the market thinks global growth is slowing it tanks. And sometimes the market thinks both of these within the same trading day. Currently encumbered with a potential takeover plan.

CB Richard Ellis (CBG) - I will keep an eye on this one, because they are essentially a transactions broker for commercial real estate. And if you have not heard, real estate is back baby!

Chicago Mercantile Group (CME) - former fund holding and still love the business; essentially a play on equity/commodity transactions. Been a bit range bound though and quite rich.

Church & Dwight (CHD) - mini Procter & Gamble

JDS Uniphase (JDSU) - I was just surprised to see this stock still exists ;) Anyone who was around in the late 90s, knows the story.

Nabors (NBR) - this was a stock Cramer pumped most of 2007. It is a land driller in North America - just the part of the food chain you do not want to be part of. I have not heard him pump it the past 2 months. However, when one of these report a bad quarter they usually take down deep sea oil drillers because after all a driller operating in Indonesia waters is the same as the someone drilling for natural gas in Oklahoma. Or at least by market logic it is.

Riverbed Technology (RVBD) - fund holding beaten to pieces. I expect this stock to be either up 30% or down 30% after this earnings report. And if it's up 30% is just a shame on the market. They beat down these stocks on "fears" for 12 out of 13 weeks, and then when the company reports a fine quarter the stock goes up... but that doesn't offset the 12 weeks it goes down. Same will apply to Blue Coat Systems (BCSI). Perception is reality never held more true with these type of stocks. We perceive you are struggling so therefore you are - we don't care what numbers you have been reporting.

Walt Disney (DIS) - curious to see if theme parks start to slow in 2008/2009 as the US consumer slows. No wait... Fed cuts solve everything. US consumer is fine.

148 Stocks Returning >13% This Week

This week's list will be fairly obvious - I am calling this market the Forgiveness of Sinners market. The losers of 2nd half 2007 are now forgiven as all their issues have faded into the woodwork - consumer will roar, homes will be snapped up, and malls will be bursting with rebate checks. As a forward looking mechanism this is what the market will be telling us is happening by Labor Day 2008. If this happens I will come to the blog and say "I was utterly wrong". I don't buy it. I think much of America economy is now based on asset inflation - for some that means equities, for the common man that means home prices. Without home prices increasing, and the ability for people to hide their debts in their home equity I don't see a "boom" anywhere. But I will be the first to say I am wrong when/if this changes this fall.

As always

1. >$2 Billion Market Capitalization
2. >100K shares traded daily
3. >$10 Stock Price

We own green (a big fat zero this week); we have owned or discussed blue

Symbol	Company Name	% Price
TUP	Tupperware Brands Corp	36.30
WM	Washington Mut Ord Shs	35.40
LXK	Lexmark International Inc	34.50
YHOO	Yahoo! Inc	29.40
LAZ	Lazard Ord Shs	29.20
CIT	CIT Group Ord Shs	27.60
CXG	CNX Gas Ord Shs	26.60
OI	Owens Illinois Ord Shs	26.20
LEN	Lennar Ord Shs Class A	26.00
RMBS	Rambus Inc	25.90
CROX	Crocs Inc	25.70
AXE	Anixter International Inc	24.60
DRYS	DryShips Inc	24.50
SGMS	Scientific Games Corp	24.30
HAR	Harman International Industries Inc	24.00
LEA	Lear Corp	23.90
BCO	Brinks Co	23.60
SOV	Sovereign Banc Ord Shs	23.40
UA	Under Armour Inc	22.70
SNA	Snap-on Inc	22.60
COF	Capital One Financial Ord Shs	22.50
FLEX	Flextronics International Ltd	22.30
OC	Owens Corning	22.20
JLL	Jones Lang LaSalle Inc	22.10
CENX	Century Aluminum Co	21.60
KBH	KB Home	21.60
SCS	Steelcase Inc	21.50
IFX	Infineon Technol Depository Receipt	21.30
BPOP	Popular Ord Shs	21.20
PHM	Pulte Homes Ord Shs	20.90
MDC	MDC Holdings Inc	20.80
NETC	Net Servicos de Comunicacao ADR	20.60
HBAN	Huntington Bancshares Inc	20.20
CA	CA Inc	19.90
ACI	Arch Coal Ord Shs	19.70
ORI	Old Republic International Corp	19.60
ZMH	Zimmer Holdings Inc	19.30
RTP	Rio Tinto ADR Each Reptg Four Ord Shs	19.30
BARE	Bare Escentuals Inc	19.10
TCB	TCF Financial Corp	19.00
DSX	Diana Shipping Inc	18.90
WSM	Williams-Sonoma Inc	18.90
FDO	Family Dollar Stores Inc	18.80
FAF	First American Corp	18.50
TSU	Tele Celular Sul ADR Reptg 10 Pref Shs	18.50
MC	Matsushita Electric Industrial ADR	18.50
CNO	Conseco Ord Shs	18.40
MOT	Motorola Inc	18.30
SID	Sid Nacional ADR Repstg One Ord Shs	18.20
AGO	Assured Guaranty Ltd	18.10
NYT	New York Times Ord Shs	18.10
UAUA	UAL Ord Shs	18.00
RHI	Robert Half International Inc	17.90
SBAC	SBA Communications Corp	17.60
TNE	Tele Norte Leste ADR Reptg 1 Pref Shs	17.60
TRN	Trinity Industries Inc	17.50
BKD	Brookdale Senior Living Inc	17.50
ASBC	Associated Banc-Corp	17.50
BHP	BHP Billiton ADR	17.50
AF	Astoria Finance Ord Shs	17.40
CYT	Cytec Industries Inc	17.40
ODP	Office Depot Inc	17.40
FLS	Flowserve Corp	17.00
SMG	Scotts Miracle Gro Co	16.90
XMSR	XM Satellite Radio Holdings Inc	16.90
JEF	Jefferies Group Inc	16.80
ZION	Zions Bancorp Ord Shs	16.80
CLWR	Clearwire Corp	16.70
SFI	iStar Financial Ord Shs	16.70
HTZ	Hertz Global Holdings Inc	16.70
USG	USG Corp	16.60
CNB	Colonial BancGroup Inc	16.50
PETM	Petsmart Inc	16.50
BRP	Brasil Telecom Participacoes ADR	16.50
AN	Autonation Inc	16.40
PXP	Plains Exploration & Production Co	16.40
CECO	Career Education Corp	16.30
FNF	Fidelity National Financial Inc	16.30
TRW	TRW Automotive Holdings Corp	16.20
ACV	Alberto Culver Co	16.20
BHP	BHP Billiton ADR	16.20
BUCY	Bucyrus International Inc	16.10
SFD	Smithfield Foods Inc	16.10
KTC	KT Corp Depository Receipt	16.10
CELG	Celgene Corp	16.00
CVC	Cablevision Systems Corp	15.90
MI	Marshal & Ilsley Ord Shs	15.90
CZZ	Cosan Ltd	15.80
LFL	Lan Airlines ADR Rep 1 Ord Shs	15.80
SLM	SLM Ord Shs	15.70
THO	Thor Industries Inc	15.50
DFS	Discover Financial Services	15.40
SFG	Stancorp Financial Group Inc	15.30
MBI	MBIA Ord Shs	15.20
CBD	Companhia Brasileira de Distribuicao ADR	15.20
AMP	Ameriprise Financial Inc	15.10
KEX	Kirby Corp	15.00
SSL	Sasol Level II ADR	15.00
THG	Hanover Insurance Group Inc	14.90
CNA	CNA Financial Corp	14.90
VCP	Votorantim Celul Depository Receipt	14.80
BKS	Barnes & Noble Inc	14.70
FITB	Fifth Third Bancorp	14.60
FTO	Frontier Oil Corp	14.50
WYN	Wyndham Worldwide Corp	14.50
SNV	Synovus Ord Shs	14.40
LEG	Leggett & Platt Inc	14.30
DAL	Delta Air Lines Inc	14.30
AVY	Avery Dennison Ord Shs	14.30
EL	Estee Lauder Ord Shs Class A	14.30
ELN	Elan Depository Receipt	14.30
TIN	Temple-Inland Inc	14.20
JCP	JC Penney Co Inc	14.20
RIO	Companhia Vale Do Rio ADR	14.20
LEH	Lehman Brothers Holdings Ord Shs	14.10
BAC	Bank of America Ord Shs	14.10
MHK	Mohawk Industries Inc	14.00
CX	Cemex ADR	14.00
CMC	Commercial Metals Co	13.90
SYMC	Symantec Corp	13.90
LULU	lululemon athletica inc	13.80
MCRS	Micros Systems Inc	13.80
RCL	Royal Caribbean Cruises Ltd	13.80
BKC	Burger King Holdings Ord Shs	13.70
CSE	CapitalSource Inc	13.70
AAUK	Anglo American ADR	13.70
CAL	Continental Airlines Inc	13.60
SEE	Sealed Air Corp	13.60
UNM	Unum Group Ord Shs	13.60
ISRG	Intuitive Surgical Inc	13.60
FCL	Foundation Coal Holdings Inc	13.50
JWN	Nordstrom Inc	13.50
MT	ArcelorMittal ADR	13.50
FLO	Flowers Foods Inc	13.40
R	Ryder System Inc	13.40
CHRW	CH Robinson Worldwide Inc	13.40
NCX	NOVA CHEMICALS CORP	13.30
DDR	Developers Diversified Realty Ord Shs	13.30
CMA	Comerica Inc	13.30
LTD	Limited Brands Inc	13.20
JOYG	Joy Global Inc	13.20
ABV	Companhia De Bebidas ADR	13.20
ARG	Airgas Inc	13.10
ROST	Ross Stores Inc	13.10
HRS	Harris Corp	13.10
LIZ	Liz Claiborne Inc	13.00
FHN	First Horizon National Corp	13.00
DOV	Dover Corp	13.00

Bookkeeping: Weekly Changes to Fund Positions Week 26

Week 26 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: 5.6% (vs 5.9% last week)
51 long bias: 70.9% (vs 73.7% last week)
6 short bias: 23.5% (vs 20.4% last week)

57 positions (vs 55 last week)
Additions: Kinross Gold (KGC), Powershares DB Agriculture Fund (DBA)
Removals: N/A

Top 10 positions = 39.6% of fund (vs 37.3% last week)
40 of the 57 positions are at least 1% of the fund's overall holdings (70.2%)

Major changes and weekly thoughts
A strange week all around at least from my viewpoint. Much like the past year we have a very narrow leadership, only at this time the leadership (ahem) is in the most beaten down sectors of 2nd half 2007. I hesitate to call it leadership because my going assumption is a large part of the move is a short covering rallying, combined with computers who know nothing else other than the programmers who coded them saying when the Fed cuts so heavily it's time to buy so and so sectors. I still have a lot of doubts with these names. The irony in it all is the groups running are early cycle names - names you buy coming out of a recession. A recession? We haven't even BEGUN a recession yet... or if we have - it's been a 5 week recession. But now we are buying stocks that the playbook says you buy as we exit a recession? Strange. Very strange.

The irony is I did call for this sort of action 3 weeks ago (Jan 13th), however the ferocity of the rally in these groups is beyond belief. I was thinking 20% type of rallies; we are getting 40-60% type of rallies.

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

Let's look at where we stand technically on the S&P 500. As discussed in 'S&P 500 in Worst Condition in Half Decade' we have a series of 5 bottoms created from Aug 2004 to Aug 2007. This trendline, formed by connecting a straight line from all these bottoms was broken in the January 08 selloff. And we still trade below that level. If/when this trendline is cracked and we get back above this level, we can become more constructive on equities. We'd have to trade above S&P 1450-1460 area for this pattern to change. Now, by being cautious now, we are falling behind the indexes - but if this is simply a bear market rally we will do better than a 100% long exposure on the coming pullback. So I retain a cautious stance. Further, as mentioned in December [Like a Moth to a Flame - S&P 500 and 1490], we had begun making a noticeable series of lower highs (bearish), and that pattern has also not been broken. You can see below from the 6 month chart we are still far from making a higher high, than the last peak - if you draw a line from the (a) early Kool Aid Fed cuts save everything Oct highs to the (b) Fed inspired Halloween high to the (c) Fed inspired (more cuts on the way mid December) December high, to the (d) end of year fake markups so we can get our year end bonuses high - the pattern is still intact. It looks like, once again a move to S&P 1450-1460 is probable without breaking this trend. That would begin to break the pattern and it would be confirmed if we break past S&P 1500. (the late December high)



Now if this happens I will be poorly positioned, but this would be an atypical type of breakout. That said, everything the past 6 months has been quite atypical so I leave every option open. I just find it a bit mind boggling a market that was about to fall off the cliff can now figure everything is fine, due to 125 magical Fed basis points. Quite a story.

In a big picture sense I just have to say I am amazed at the market - we have the biggest writedowns in financial history, we have the most serious threat to our housing asset class, we have a contracting consumer, we have rampaging inflation, yet we are higher than we were during the March 2007 selloff. So essentially we've shrugged it all off. This shows you the power of liquidity and central banks determined to flood the world with currency to inflate assets. But while this feels good for the investor class there is a very high cost to pay for Main Street. Liquidity is a very blunt instrument - not a fine tool. It inflates everything - not just equity assets. Gas a year ago was in the $2.10s and gold was near $600. So approximately 50% increases in both in 12 months - all the while the Fed claims no inflation. :) More important, this is the price we all pay as people who need to eat, consume energy, and live - to bail out the financial system. It's not a free lunch (speaking of food....). As I keep saying 12% return on stocks in a 10% inflation environment (and folks, it is very close if not over 10% annual), is a 2% real return. Anyone in a money market or a CD trying to get 3-5% is simply burning money because you are losing value each and every day. Your paper money becomes more worthless. All of our paper money is becoming more worthless; once people wake up to that fact then the genie is out of the bottle and inflation begets inflation - circa late 70s/early 80s. It took some tremendous steps from the type of man as Fed Governor that would not be accepted in today's day and age... 15% Fed funds rate?? Laughable in this environment where traders cry for mommy when rates even get near 5%. And this is why I continue to be very worried about the US consumer. In previous years his 3-4% annual wage increases were causing him/her to fall behind on month to month bills. This past year? It's gotten much much worse. 2008 will continue the trend. If you don't believe how high rates once were look here (courtesy of Bespoke blog) The AVERAGE over the past 40 or so years was 6.55%. But we've been below average since Greenspan really hit his full stride in the early 90s. Anything to keep this charade going. I simply ask - what happens in my "World of Shortages" scenario with persistent inflation? Will any Fed Governor (it won't be Bernanke) be allowed to do the things Volcker did? Again I am talking years out... 2010-2012. But it could get that... bad. And none of that is priced in. Not a bit. I'm firmly in my stagflation camp, as I've been for a long while - but my worry is what happens after this next asset "boom". I am of the mind the powers that be simply are buying time in the hopes home prices start rebounding by 2009-2010 at which time we can continue a weaker charade of what happened in 2002-2006. But each injection of crack works less than the last, as the patient builds up immunity. So we can continue these games for a few more years I suppose. Heck maybe a half decade or more. One day however, the patient will need to go cold turkey; and that will be a very ugly era.



I actually did not do that much this week for the fund. While we made money, we lagged the indexes big time this week. We have had 2 incredibly enormous weeks in January, a 5% down week and a 5% up week. Quite breathtaking action and for buy and holding it's a very difficult environment. Simply a traders market at this point. I have taken a big step back to re-assess everything as I do in times like this and I simply don't see much sense in what is happening at this point. The irony is the companies most affected by the issues at hand (both financial and economic) have gone through 50-60% type of corrections. In the past month, many of my type of holdings who are relatively immune to these issues have gone through 40-50% type of corrections. So what the market is saying is, if you are the heart of the problem you are going to be hit with about 10% more of a correction than innocent standbyers. Interesting.

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

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

1. Monday, I mentioned I wanted to get some gold exposure even though I was late to the game, so I was eyeing Kinross Gold (KGC), but wanted a bit of a lower price which did happen later in the week. In an ironic twist, as the Fed cut, gold prices actually fell into the end of the week so I added more.
   
2. Tuesday, I trimmed a bevy of positions to raise more cash. In retrospect it was not a bad move even though the market continued to rally because aside from Mastercard (MA), the market wanted nothing to do with most of the stocks in the list I trimmed, so they sat their shunned all week. I trimmed Mastercard much heavier last week in a "better safe than sorry" move, but in this case it did not work out.
   
3. I sold down my National Oilwell Varco (NOV) position due to the savage beating the oil service stocks have taken of late - Smith International (SII) was hit this week based on some softness in the US, and Cameron International (CAM) [not a fund holding] also took the same pain later in the week.
4. Wednesday was Fed day, but Thursday was Google (GOOG) evening, so I wanted to trim my smallish Google position (I've never really had it more than 1% of the fund), ahead of earnings. I do believe no matter what Google said, they would of been sold off as anything not financial, retailer, or homebuilder is now eyed with suspicion. I actually like the valuation of Google here, but we've never seen Google go through a potential ad slowdown (recession) period, so it will be interesting. That said, I like the value of most of my names but that does not stop them from going nowhere since they are not in the holy trinity of sectors.
5. Wednesday was a strange day that pretty much represents everything this market is - directionless, nonsensical, and moving based on rumors and innuendos. The Fed cuts, the market cheers. 1 hour later rumors of bond insurer issues, the market swoons. Next day, rumors of bond insurer bailouts, the market cheers. And so on and so forth. Anyone want to talk about individual company fundamentals anymore? Apparently not. I did add some short exposure into the rally post Fed, which proved to be fruitless as the market was happy on Kool Aid Thu/Fri.
6. Thursday, I added to coal position Peabody Energy (BTU) near $50 as it sold off 10% on its earnings. This proved to be fruitful as by the end of the week the stock had regained all the losses. Based on all I am reading worldwide about energy issues [China/South Africa were the latest] I am simply even more bullish on coal than I was even in September when I turned positive on the group.
7. Friday, I finally bit the bullet and started Powershares DB Agriculture Fund (DBA), an ETF I've been watching since late summer, but never pulled the trigger on. While I think the "easy money" has been made in this name, I think in a general market pullback or generally choppy market this type of vehicle should hold up quite well. Hence, I expect it to ying when the market yangs and can provide some offset to the day to day fluctuation in the markets. I plan to keep this position as my "safety" stock, combined with Philip Morris International once it IPOs in March.
8. I decided to cut back the last of my Mastercard (MA) to take advantage of the ramp up. I'm still not a believer in this rally so I'll take profits when I can get them. If this is an inflection point and we are in an liquidity driven equity boom 3.0, well I am going to miss the front end, and will need to make it up later in the year, plain and simple.

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