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. ;)