Bookkeeping: Weekly Changes to Fund Positions Week 28

Week 28 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: 20.7% (vs 7.5% last week)
53 long bias: 62.4% (vs 72.6% last week)
6 short bias: 16.9% (vs 19.9% last week)

59 positions (vs 58 last week)
Additions: Shering-Plough (SGP), Arch Coal (ACI)
Removals: Smith International (SII)

Top 10 positions = 32.1% of fund (vs 39.9% last week)
31 of the 59 positions are at least 1% of the fund's overall holdings (52.5%)

Major changes and weekly thoughts
The market made a decent bounce early in the week on hopes for retail sales bounce (if you believe gasoline sales will save the consumer), and a Buffet bailout of bond insurers (if you believe handing the world's best investors a nearly risk free stream of cash will save the market). Reality hit Thursday when Paulnanke testified on Congress - strangely they said nothing new (to me at least) but the market was I suppose waiting to hear the normal Kool Aid of "we see no weakness in the economy and inflation is benign". When it did not get what it wanted it whined and whimpered like the 3 year old toddler it is.


We're seeing some very bad things in the bond market - which per usual the equity market will ignore until it's too big to ignore. Remember, it does not matter until it does. Hopes for bond insurer bailout trumps everything for the bulls now. But it is starting to feel eerily reminiscent of July 07 when the bond market was degrading badly and the equity market went on about it's business going to new highs in happy go lucky manor.

• The costs to insure bonds are skyrocketing,
• auction bond rate securities are failing,

Some wealthy investors got a jolt this week as Goldman Sachs informed them that they would be unable to withdraw their money from an investment considered “safe as cash.” These investments are so-called “ auction rate securities ,” credit instruments now caught in the latest liquidity squeeze. Banks and brokerage houses have sold these instruments to investors, claiming them to be safe. The fact is, they are long-term securities on which the banks hold weekly or monthly auctions to set prices and interest rates. This week's auction was a failure of major proportions.

• banks sponsoring private equity deals are literally being told it is cheaper to walk away from the business (pissing off their "customers") as opposed to taking on more risk,
• and hedge funds are refusing to give back their panicked investors money (something I promise I won't do) :). Now unlike me, these "smart investors" clearly got caught up in a once in a lifetime thing (just like they got caught up in the tech bubble once in a lifetime thing), so they will be given billions to run another hedge fund in 1-2 years. Because they are just that smart. And only screw up when once in a lifetime things happen. Even if its twice in 8 years. Because it won't ever happen again. And they're smart and pedigreed. Unfortunately I am neither so I have to go this route ;)

Citigroup suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to yank more than 30% of the fund's roughly $500 million in assets. To stabilize the fund, which had an 11% loss last year, Citigroup last month injected $100 million. The fund's longtime manager, John Pickett, has left, following a bitter dispute with Citigroup executives and complaints from investors that he put too much money into a single investment that went bad.


Other than those minor issues it is peachy out there, and remember to drink your Kool Aid: none of this matters because it just means more Fed cuts and as we all know (all together now) Fed cuts fix everything.


Technically, as we look at the S&P 500 we are in a narrowing range - it appears S&P 1320 on the bottom, and S&P 1370 on the top side. This is about a 4% range which we are ping ponging back and forth between, and really going nowhere fast. Until a clear trend is established, one way or the other, I remain in high cash and defensive posture.


Right now, nothing is holding a trend for more than a few days other than some commodities and agriculture. So riding a trend is very difficult and it's just a big slog to make money in this environment. If things go to form, commodities and agriculture will take the biggest hit sometime in the next few weeks because nothing works for a long time in this market. And so we'll keep going until (??). For the fund, most of what I am doing is changing allocations among cash and adjusting the short positions up and down. So it's not really stock picking, more allocation adjustments - although I am trying to branch out into areas that should zig when the rest of my type of holdings zag; I've picked up a few financials names of late and a drug company. But the best ideas are still the best ideas - and one day when the market stabilizes I believe they will be rewarded more than this +12%, -8%, +18%, -22%, +11%, -7% environment we are in, which only rewards daytraders. I look forward to that day, because it is a lot of work just to keep above the surface in this current situation. For now I simply am selling them when they make runs, reducing exposure, and trying to buy them back lower - even the best groups. Reflecting this, I have far and away the lowest amount of positions at 1% or greater allocation in fund - usually I hold 70-80% of positions with that stake; now it's close to 50%. And as always we have to risk with short exposure the threat of government intervention in our world renowned "free market capitalist" system.


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 reduced exposure to 2 favorite names, McDermott (MDR) and Suntech Power (STP) - Suntech Power reports this upcoming week and everything I model for the name shows a quite large beat of estimates. But the chart is showing a lot of weakness. So we'll see this week, if fundamentals trump chart. My one fear in this group now is some cautionary tales about early 2008 due to the Chinese storms, which short sighted investors would stomp out in droves upon hearing this "surprise". I still really like both names for the long run and expect to have large exposure later in the year.
2. After the 2 Indian banks I follow lost nearly 1/3rd of their value in the past month, I began rebuilding these positions (slowly), by moving ICICI Bank (IBN) and HDFC Bank (HDB) from 0.1% type of stakes to 0.6% positions. I am not in a rush to get into emerging markets at this time.
3. Every day of weakness this week I added 100 share lots to my crop exposure through Powershares DB Agriculture Fund (DBA), Tuesday morning on day 2 of the 3 day "Buffet/great retail sales!" rally I sold down 9 positions across most sectors, to lock in profits.
4. I don't update all my Ultrashort trades because there are a lot of small adjustments, $3K here, $4K there, but I do talk about the larger changes. After an oversold rally from last Friday in which I noted Technology looked like death, and was due for even a limp jump - the names did rebound, and I took the opportunity raise my smallish stake of Ultrashort Technology (REW) back up from 0.7% to 2.3% of fund; I also cut back on Baidu.com (BIDU) ahead of earnings.
5. Wednesday, I cut my 1% position in Blue Coat Systems (BCSI) to 0.5% ahead of next week's earnings. This name has been beaten down so badly we could see a 20-30% move up on earnings, but not worth the risk in this environment.
6. I began a new starter position in Schering Plough (SGP), as the name has been beaten up tremendously and probably offers a nice upside move in the next year - it won't be anything exciting but slow and steady over time; and doubles my "healthcare" stock allocation. I'll look to add to this position on a pullback.
7. Brazilian homebuilder Gafisa (GFA) jumped a ton for 3 days after a Cramer mention; I promptly handed most of my shares to these lemmings and cut my position; I'll await a pullback to rebuild.
8. I closed oil service name Smith International (SII) - despite oil holding up the oil service stocks have stunk of late. Will revisit the group at a later date.
9. I reduced 4 of my 6 infrastructure names for similar reasons as Smith International... no one loves these guys anymore despite very good fundamentals and bright future prospects. I don't want to fight the crowd, but will be back in scale at some point in the future.
10. I added to my starter position started last Friday in mortgage REIT, MFA Mortgage (MFA) after an earnings "miss", which I thought had a very positive tone to it.
11. Friday, I began a small stake in Arch Coal (ACI) on the Goldman Sachs downgrade of the group. I am hoping for a much stronger pullback to add more.
12. I let go some of my short exposure Friday (like many shorts did I am sure), especially Ultrashort Financials (SKF) which I cut in half, fearing the Nany state (government intervention) that can happen at any moment to "save Cramerica!" Viva free markets!

The Constant Flow of Kool Aid on Wall Street

One thing we talk about a lot is the constant "hopefuly optimism" on the Street in the face of facts. The truth is almost everything on Wall Street in terms of profits is based on luring in more and more people to make transactions, or at least stopping them from withdrawing so of course there is a bias to constantly sugar coat everything. The problem for those who drink the Kool Aid, is they get left with losses. I was reading an artcile about IndyMac (IMB), the nation's 9th biggest mortgage lender, who is promising PROFITS in 2008! Woo hoo! Unlike Thornburg Mortgage (TMA), IndyMac was full of subprime mortgages and the type of junk that eventually brought down Countrywide (CFC) so it's not exactly the best run company or one with any foresight. But the article highlights a few examples of MANY MANY Kool Aid moments we've enjoyed since last spring.... this is what makes the markets very tough. In Kool Aid moments, people are just wanting to believe any sliver of hope. And you can be intellectually correct, but your position works against you as a herd of Kool Aid drinking lemmings runs wild.

We just talked about this last week, when company after company in retail promised "2008 won't be that bad". The same companies who are missing estimates they issued 4-6 weeks ago. So we are to believe they can forecast all the macro effects in the economy by Dec 31, 2008 - when they are failing predicting a month and a half out. True Kool Aid. Just remember, this beverage can be very disastrous to your portfolio. The current Kool Aid is "we'll get through this rough patch but by 2nd half things will be rip roaring" - we hear this from company after company, and government official after government official - I'd like to hear these comments made under a lie detector environment. I think we'd hear a whole different reality. Eventually they will be correct - there WILL be a recovery in "6 months". The question is which 6 months? A few other examples (again of MANY!)

• An extraordinarily tight credit market. Gloomy assessments from economic policy makers about the state of the housing sector. A possible contraction in the nation's economy.
• Faced with those daunting obstacles, struggling mortgage lender IndyMac Bancorp still says it can turn a profit this year. Many analysts are skeptical. "With rapidly rising credit problems and an economic recession looming, we see little reason to be hopeful that earnings pressure will subside for IndyMac over the near term," said RBC Capital Markets analyst Jason Arnold.
• IndyMac, the ninth-biggest mortgage lender in the U.S., lost more than $600 million during a "terrible" 2007. The company expects a big loss in the first three months of 2008, but believes a recovery in the second half will lead a reversion to profitability.
• In the middle of last year, when problems with subprime mortgages became full blown, the company said it expected to remain profitable. It ended up losing more than $6.40 per share. (but let's believe them THIS time)
• At midyear, the company said it expected to remain profitable. In September, with a little more than three weeks remaining in the third quarter, IndyMac predicted it would lose no more than 50 cents per share for the three-month period. It lost more than five times that much. (so they could not forecast 3 weeks forward, but let's believe them THIS time)
• Because of the abrupt and volatile gyrations in the mortgage industry in the past year, many of the market's participants have issued forecasts for a recovery that have proven premature.
• Countrywide Financial Corp. initially predicted it would earn at least $3.80 per share for 2007, and lost more than $2 per share. In the early stages of the subprime crisis, the Calabasas, Calif.-based lender asserted it would be a beneficiary of the shakeout in mortgage lending. (and if you drank that Kool Aid, you lose about 80% of your money)
• Homebuilders were nearly unanimous in late 2006 predicting a rebound in the housing market for 2007. Instead, home sales fell almost 13 percent last year, according to the National Association of Realtors. (and if you drank that Kool Aid, you lose about 80% of your money)
• Executives at Bear Stearns Cos. and Citigroup Inc., hit with billions of dollars of mortgage-related writedowns during the summer, adopted a more optimistic tone in October, saying the market had begun to stabilize. November in turn was one of the worst months in Wall Street's history. (this was at the height of the Kool Aid craze because you don't want to "fight the Fed"!)
• Throughout much of last year, Federal Reserve Chairman Ben Bernanke repeatedly stated he believed the subprime crisis would remain "largely contained," (oh Ben.... I assume he meant contained on planet Earth)

Lesson: Don't drink the Kool Aid

Long Thornburg Mortgage in fund and personal account

Frozen Grand Central

Totally Unrelated to our typical topics but since human psychology is interesting and in many ways VERY related to markets - this is a fun and interesting peek into some madness. Most interesting is watching so many walk by so focused on their iPod or Crackberry they would not even notice what is happening around them.

Bookkeeping: 'Rising Tide' Performance Week 28

Week 28 performance of the mutual fund

Comments: Another week of marking time in the market. After a terrible effort last week, the market rallied the first 3 days of this week looking for any excuse to make CNBC cheer. Buffet bailout? Hoorah! "Better than expected" retail sales? Hoorah! Anything? Hoorah! Then Paulnanke had to go to Capital Hill Thursday and remind people of reality. Even if it's still a watered down form of reality. You know... the "we're going to be rocking in 2nd half of 2008" reality. Remember the 3 big IFs he mentioned as needing to come true for this 2008 rebound: labor holds steady, housing holds steady, credit markets hold steady. Sounds very plausible to me.

My prediction is the 'nanke' side of Paulnanke's credibility will be so shot by this summer he is going to have a very hard time keeping his job past this 1 term. People will go back to last spring and say "well subprime was not so contained after all ", and then by the end of 2008 will go back to this Thursday and say "so much for that 2nd half recovery". **

** Please note: my predictions assume the government will not step in and literally say to the banks "We stand ready to buy every piece of financial junk you have, give it to us". If this happens, it's all a moot point. Kool Aid for everyone (along with a $600 rebate check)

So anyhow we sit here waiting the bond insurer bailout, and then wondering why the financials are degrading so poorly with so many bailouts percolating. And we mark time. Looking at the S&P 500, we made yet another lower high this week but now it looks like we have S&P 1320 as a line in the sand on the downside. So we'll see how things work out once we get there.



Until then I keep staying defensive, but aware my defense could be blown to pieces at any moment by Washington DC. Hence it is not easy to be short (intervention risk) or long (reality) until we make a break one way or the other. We're just going up and down in the markets the past month, making no progress. But I suppose that's an improvement over the first 3 weeks of the year when we made a lot of progress.... straight down. We are definitely building a base here - and off bases come large moves. The only question is which direction.

The S&P 500 made a nice bounce off a horrific week last week and gained 1.4% with the Russell 1000 up 1.3%. Rising Tide Growth Fund had a good week both in absolute terms and relative to the indexes, gaining 2.7%. Not unhappy about that, considering much of the week was spent with large cash position/short position in a generally up market. So the remaining long exposure (60-70% of portfolio) was able to beat the indexes handily and we get back to beating the indexes by 20% from inception.

Price of Rising Tide Growth: $11.236
Lifetime Performance to date (vs Aug 3, 2007): +12.36%

Comparable S&P 500: 1,349.99 (-7.86%)
Comparable Russell 1000: 736.52 (-7.50%)

Fund return vs S&P 500: +20.22%
Fund return vs Russell 1000: +19.86%

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: Lightening Up Ultrashort Financial (SKF) Going into the Weekend

I am going to cut my Ultrashort Financial (SKF) in half going into the weekend. The reasons are obvious - we have headline risk at any moment - both good and bad. While most of what I could foresee being announced won't change any fundamentals, that's not what the stock market is about in the near term. It's all about perception. Plus many of the headline stocks in the financials are reaching January lows and are probably due for some bounce. If they don't this means we're gonna see some real doozy write-offs coming. I just don't want to be overexposed to a white knight named Paulnanke galloping in over the weekend to slay my dragon.

Again to be clear, I think we're going to see in the next 1-5 weeks a series of writedowns (promising for the 9th time that really this is the kitchen sink quarter), and a bevy of Arabs and Asians running to our defense with boatloads of cash (cash we send them daily, so they are just returning it to us - how kind). All the while hearing the seals on CNBC clapping about how this is great news since certainly it cannot get worse than this (like they said in August, October, December, and January). But literally at any moment, an "intervention" could burn shorts. So it is sort of an unfair market in many ways, because without the risk of "the invisible hand" the path would be much more easy.

If something like that does happen, I'll let the Kool Aid run through the streets and then once that wears off re-attach myself to this ETF in a larger way. But for now I am cutting 250 of my 500 shares here around the low $112s. This takes it from a 5% position to 2.5% stake. I've taken small cuts to the other Ultrashorts as well today simply because I sense desperation in the air and a Plunge Protection team backed into the corner is a very dangerous animal. ;) I'll probably add these shares back first thing Monday morning if nothing comes down from the heavens this weekend. If we go into another round of full blown sell off there will be plenty of time to make money in this issue, as the chart below shows.

Other than that we're just waiting... on one side we have the government waiting to bail out something, anything, anyone, at any moment... on the other hand we have all the economic reality in states not named Iowa, Nebraska, Wyoming, Indiana, Texas, and Oklahoma. So it's just a big waiting game. As I keep saying, I believe much of the smart money is patiently waiting for that retest of January lows...



Long Ultrashort Financial in fund; no personal position

DryShips (DRYS) Reports Excellent Number; Diana Shipping (DSX) Good But Not Enough to Beat Analysts

I thought both reports, from DryShips (DRYS) and Diana Shipping (DSX) were quite good; but it's a game of expectations on Wall Street. DryShips beat and was up solidly, before Diana Shipping reported this morning and didn't match expectations. DryShips is benefiting from having less of their ships tied up with long term contracts. Backing out a capital gain from a sale of a ship they earned $4.50, handily beating estimates. Considering next quarter analysts are expecting $4.36 they should beat that too.

• DryShips Inc., which owns and operates a fleet of drybulk carriers, said its fourth-quarter earnings soared more than fivefold as its expanded fleet benefited from significantly higher vessel rates.
  
• The company said after the market closed Thursday it earned $195.2 million, or $5.37 per share, compared with a year-ago profit of $35.9 million, or $1.02 per share. The 2007 period included a vessel sale gain of $31.5 million, or 87 cents per share. Excluding this gain, net income was $163.7 million, or $4.50 per share.
• Voyage revenue nearly tripled to $233.4 million, from $79.1 million in the prior-year period.
• Analysts expected profit of $4.04 per share on revenue of $208.8 million, according to a poll by Thomson Financial.
• The company said it owned and operated an average of 36 vessels during the 2007 fourth quarter, earning an average time charter equivalent rate of $67,587 per day. In the 2006 fourth quarter, DryShips owned and operated an average of 34 vessels, which earned an average time charter equivalent rate of $24,466 per day.

DryShips has now reversed nearly $10 today, it peaked at $90 and dropped to $80, where it sits now. This was about the area I wanted to see the stock break out too before buying [Dry Bulk Shippers - Time to Get Back In?] so it is enticing me yet again here at this level. However with the general market weakness, and an investor base full of daytraders who will run on any weakness, I am still deciding to hold off.

Technically the chart is quite nice, but I am going to see if I can get lucky and get the stock to pull back to it's 200 day moving average near $65. Probably is asking too much but no need to take outsized risk in this type of market. I could buy it at $80 and be $15 down within a few days.



No position in fund; long DryShips in personal account

What Happened to that Housing Rally?

Seeing multiple names starting to roll over. And so it goes... until the next rally... when again we can claim everything will be fine in 6 months. Or Cramer can tell us about the housing shortage we will have by end of 2008.

Only name of the top tier holding up is Pulte Homes (PHM) thus far. And by that I mean "relatively" holding up. We are seeing multiple names break back down beyond support. Remember, these stocks have had huge rallies multiple times the past 18 months, only to break down. EVENTUALLY, one of these rallies will hold. But do you really know when? When housing comes back it won't be a slingshot back like some people assume - we are going to have quarters of stagnation, and then hopefully some mild moves up. Think of your tech stocks from 2000, and how they acted in 2001, 2002, 2003, 2004.

With that said, I do try to allocate up to 10% of the portfolio for more short term positions so if we get another woosh down in the markets, I will probably try my hand in a homebuilder or two (and a financial) based on how quickly and strongly they bounce in Kool Aid times..... further as each iteration of weakness passes, I expect a serious government intervention to be announced.













Financials are looking even worse - the charts of Lehman (LEH) and Goldman Sachs (GS) are outright sick - no signs of strength at all. I guess we moved from Kool Aid stage back to "what? more write downs and financial injections anticipation" stage. Goldman is approaching January lows - wow. This company has been held up as the teflon investment bank - based on the stock action one must just assume they will have their first write off coming. And if they write off, everyone has to question their assumptions - since "no one will be safe" if Goldman actually has to take write downs.

It Finally Matters - Wall Street Journal Print Edition Front Page: Heartland Sees Boom With Grains in Demand

In a shocker to blog readers, there appears to be a farming boom out there! Wall Street Journal says so! :) I am wondering if this means we have reached a short term top - by the time we start seeing it on the cover of Business Week or page 1 of the Wall Street Journal it migh be time to flee (temporarily) to the hills. But I just wanted to point this out in case you missed the last 6 months of blog entries repeating the same thing weekly ;)

I was going to write a piece later today about the "regional recession" - this only supports exactly what I was going to write (the part about Albion, NE)

• The U.S. economy may be teetering on the brink of recession. But there's a bountiful harvest down on the farm.
• Grain prices are surging to historic levels. Spring wheat, a variety often used in bread, hit a record $18.53 per bushel yesterday. Corn is trading above $5 and soybeans are bringing in more than $13, all 25% or more above their year-ago prices.
• Net farm income is expected to hit $92.3 billion in 2008 -- a 51% increase over the 10-year average of $61.1 billion. Across much of the Great Plains, unemployment rates are well below national figures and housing markets remain robust. Robert Moskow, a food industry analyst at Credit Suisse, has proclaimed this the "golden age" of agriculture.
• With inventories strained, "We're not going to go back to $2.10 per bushel corn," says Mike Helmar, director of industry services at Moody's Economy.com.
• While the boom is reversing decades of decline in U.S. rural areas at an otherwise vulnerable time, it's also pushing global food costs higher. International wheat prices in January were up by 83% from a year ago, according to a new report from the Food and Agriculture Organization of the United Nations. Scarce and costly grains -- especially staples like rice, wheat and corn -- have caused riots in poor nations such as Senegal and Mexico, says the group.
• Here in Albion, a central Nebraska farm town of fewer than 2,000, such problems seem worlds away. People are building new, outsized homes or renovating existing ones. A new ethanol plant has created 55 jobs and a full-time dentist is on the way. A fine-jewelry store moved here in November and a coffee shop run by farmers' wives -- charging Starbucks prices in a town where coffee used to come in a Styrofoam cup -- just celebrated its first anniversary.
• Although he now faces higher rents for land and higher prices for seed, fertilizer and fuel, he's still turning a profit.
• "Farmers have a lot of money to spend," says Jerry Carder, a 49-year-old Albion corn and soybean farmer who recently bought a $40,000 2008 Mercedes-Benz ML350. Business for Mr. Carder has been steady in the past but has spiked in the past two years as grain prices have risen.
• Still, rural America remains such a small slice of the U.S. population -- and agricultural production just a sliver of the country's output -- that the strong farm economy can't do much to offset weakness in the broader economy.
• Many farmers are finding more money in their pockets at the same time that federal subsidies -- historically a main source of their income -- have remained largely in place.
• Mr. Beckwith and his wife bought a 4,000-square-foot house in August for $339,000. Since buying it, they've converted a bedroom into a formal dining room, finished the spacious basement to include a full kitchen and bar and installed a flagstone patio and hot tub. The finishing touch: a 65-inch television.
• Good times haven't sprouted for all farmers. Steep crop prices have made life more difficult for livestock farmers who must buy corn and other grains to fatten their cows and pigs.
• Kent Stowell, who grows soybeans, corn, wheat and alfalfa outside Vliets, Kan., says a lot of people in his area are buying new tractors and combines. He just purchased his first new washing machine in 30 years and is about to buy a 2008 Ford pickup, his first new vehicle in six years.
• Corey Lee, a Chevrolet dealer in Frankfort, Kan., population 900, sold 10 cars in December, compared with three in December 2006. And the first 2008 Corvette he sold went to a farmer. "The rest of the economy isn't doing well but it doesn't seem to bother these guys much."
• On a hill overlooking Albion, new McMansions are sprouting up. In town, older homes are being renovated and expanded.

I'll have a fun piece on this soon.... but folks, get your kids into farming school - we're going old school - back to America of the 1920s - farming and mining! :)

Chipotle Mexican Grill (CMG) Finally Gets Hit

I've been unable to participate in my bearish call on restauraunts [Sept 19 - Tough Times Ahead for Restaurants?] since I cannot short individual stocks; and there is no short restauraunt ETF. As good as performance has been it would of been really turbocharged with some of the short calls in retail and restauraunts.

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

One name I highlighted was Chipotle Mexcian Grill (CMG), since it is the 1 name in the sector with actual growth.... first in that Sept 19th blog entry when I wrote:

I have been looking at Chipotle Mexican Grill (CMG) due to demographic trends in the US, it's great fundamentals, management style, and move from a regional to national brand - however I think this might be a better play in a few quarters so I am going to hold off. Chipolte just spiked up to $115 today, so let's check back down the road to see if this caution was misplaced. Add to the fact its now trading at nearly 60x 2007 earnings and its hard for me to get excited at these valuations, but for the next 5 years it's one to watch.

Then in its own entry later [Oct 30 - Chipotle Mexican Grill (CMG) - The One Impervious Restaurant Stock]

Chipotle is apparently the teflon stock in the sector, with a super (considering the headwinds) report. That said, at >60x 2007 estimates it's priced as a teflon stock. And they didn't say much about the cost of inputs like cheese, but they are the growth stage of expansion where apparently they can laugh mockingly at the increases.

Just too pricey for me especially in this economy and the economy over the next 18-24 months. Hopefully analysts will question on the conference call just how much the rising food inputs are costing them, and if they are passing it along to the consumer and in what degree. And if their forecast for future food prices are part of the reason they are guiding so low in 2008. Or just a slowing economy... as people make McDonald's their sit down 'restaurant' of choice as we all get slowly poorer with our more useless pesos, err dollars.

Well the stock held up quite well despite watching all its comrades fall in this environment - but reality finally hit them last night in their earnings report. So I suppose if you played Russian Roulette and held the stock...and held... and held... and got out at the exact right time you did very well. But the risk/reward just was never there, as I said at $115 (Sept) and $135 (Oct).

• Shares of Chipotle Mexican Grill Inc. plunged in premarket trading Friday after the restaurant chain's fourth-quarter profit and sales fell short of Wall Street expectations.
• Chipotle's profit increased 62 percent in the last quarter of the year, while revenue grew 32 percent, but both totals were slightly below analyst estimates. The company also forecast more modest profit growth in 2008, saying it is aiming for improvement of at least 25 percent.
• At least three analysts, including Glen Petraglia of Citi Investment Research, lowered their price targets on the stock Friday. Petraglia said Chipotle is reporting higher spending and lower profit margins, and said he is concerned about the effects of the slowing U.S. economy and high ingredient costs.
• Other analysts appeared satisfied with the results, with David Tarantino of Robert W. Baird upgrading the stock to "Outperform" from "Neutral" despite the miss. Tarantino said Chipotle is doing well despite high ingredient costs, and noted that the company's same-store sales grew 10.6 percent for the quarter.

A few points:

1. Any analyst downgrading now is the typical Wall Street guy. Taking you out of the name after the fact. Gee thanks folks. The stock is down from $155 in December 07, and $135 a month ago. Where were you then?
2. Relatively speaking Chipotle is still doing very well. Best house on a very tough block. But, from a stock perspective expectation were (and probably are) still too high. If analysts are frightened of people abandoning cheapo places like McDonald's (MCD) due to the economy, how can they support Chipotle Mexican Grill which is more of a casual dining place? (or fast-casual as they like to say)
3. I continue to believe the entire analyst community in sector after sector is behind on this profit margin squeeze due to higher commodity costs. Just like they missed this first wave that has begun hitting. And I still believe 2008 estimates are too high - although when we rally we rally on "cheap stocks" and "CEOs assure us that they can hit 2008 estimates"; the same CEOs missing estimates they gave 3 months ago - but we are to believe them 9 months out. Kool Aid. And this goes for many sectors. This is why the market "looks cheap"; earnings for 2nd half 2008 are still a hoax in my opinion. As inflation pervades, either these companies are going to have to force feed higher costs down the struggling consumers throat (bad for consumer - and this will lead to demand destruction which eventually hurts producers) or they are going to have to eat the costs themselves (bad for producer). Neither is good for the economy and much like higher gasoline prices, inflation is a terrible tax on us all.
4. But none of it matters, because inflation doesn't matter as we have to save our banking system from their terrible decision and 'innovations'.

This 6 month chart is what we call a round trip ... and highlights why buy and hold investors are simply being crushed in this environment.

No positions

Bookkeeping: Beginning Small Stake in Arch Coal (ACI) on Goldman Downgrade

Goldman Sachs is out this morning with a downgrade of the entire coal sector.

• Goldman Sachs downgraded a number of coal firms, arguing that coal companies are trading at peak historical multiples and that coal supplies will come to the market faster than bulls may expect.

Myself, while I can agree with this call in the very near term (the stocks are very overextended) I disagree 100% long term - and although I've lightened up a bit on this large run in the sector I want a lot more exposure for the long run. I have been eyeing Arch Coal (which Goldman put on its Conviction Sell list) [I Keep Waiting for the Pullback in Arch Coal (ACI) That Never Comes], so I am going to use today's 5% pullback to begin a small stake near $49. I am only buying 200 shares so this is a 0.9% stake.

I am in no rush, and am hoping for a pullback to the 20 day moving average (near $47) or even better yet the $43s area (50 day moving average), at which point I will increase this stake. I believe a lot of fast money (i.e. Johnny come lately money) has come to the sector lately and in any downturn they will flee quickly like they always do, potentially creating much more attractive entry points.

Again, I lightened up this sector on this run, but I did want to add another name to my long held basket of Peabody Energy (BTU), Consol Energy (CNX), Massey Energy (MEE), and Mechel (MTL).

Long all names mentioned in fund; long none in personal account

Spitzer Sets Deadline for Bond Insurers; while UBS Warns of >$200B More in Potential Writedowns

Eliot Spitzer, has finally thrown down the gauntlet and it appears we will have some bond insurer resolution shortly. This should provide a near term bounce in the markets because the one thing the markets hate more than bad news is uncertainty. While it won't solve much it will at least create a sense of calm for a while anyhow. It seems the most likely solution now is these companies being split into pieces; the municipal bond side and the "junk" side. I don't know how separating the junk really helps in the big picture but I am sure the market will rally in a large way, as everyone claps like seals like they did when Buffet said "I want to take the good side of the business from you and leave the rest to rot" a few days ago. So if these companies get split up into 2 pieces, what do we do with the rotted piece? The more I read the more it looks like government might come in and swoop it up eventually. New York Governor Eliot Spitzer said bond insurers must obtain capital within days, and that he will step in if financial institutions fail to deliver a rescue plan.

• ``If these transactions aren't going to happen, then we need to act quickly,'' Spitzer said in a Bloomberg Radio interview today. ``The consequences are enormous and harm to investors and the marketplace will be enormous'' in the absence of a plan, he said.
• Regulators are pushing companies to raise $15 billion of capital to avert rating downgrades on MBIA Inc. and Ambac Financial Group Inc. that would throw doubt on the credit quality of $1.2 trillion of debt they insure. Regulators are considering splitting the bond insurers to protect their municipal bond businesses from losses linked to subprime mortgages.
• New York Insurance Department Superintendent Eric Dinallo began talks with banks, private-equity firms and sovereign wealth funds. The bond insurers probably need about $5 billion and a line of credit for $10 billion, Dinallo said in an interview yesterday.
• ``We are encouraging them to resolve these transactions quickly within a finite number of days,'' Spitzer said. ``Most conversations are with financial institutions who have the greatest exposure and the greatest interest in getting capital into those companies,'' he said, adding that he wouldn't turn away other sources of funding.

Will this stop housing prices from falling? Will it start consumers spending? Will it make the CDOs suddenly worth more? Nope, none of the above but the market won't be concerned with long term issues like that - it will just party in glee that "a solution has been found" (just like it did with the Buffet "solution"), rally - and then sell off later when they realize all the junk is still out there. Now, when the government probably steps in someday down the road - then I suppose they can cheer for real.

But until then, we await the next round of writedowns and foreign capital infusions - UBS is pegging a potential for $200B more. This is why I remain wary - the conventional wisdowm has been, $100B writedowns down, there can only be another $30-$40B more and we are in the 7th inning. I've been arguing - "huh, what planet is this Kool Aid coming from?" Now, I'll say with all the government parties swirling around with potential bailouts the situation changes by the hour - so I reserve the right to change my views based on how much the taxpayers of the USA are going to be be asked to bailout the system. But if the "free market" were allowed to rule, I think we have a long way to go down in terms of writeoffs. But I don't believe the free market will be allowed to rule when all is said and done; this is becoming more clear by the day.

• The world's banks ``remain at risk'' of up to $203 billion in additional writedowns, largely because the bond insurance crisis could worsen, UBS AG said.
• ``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.
• Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.

Once again, unprecedented times. And analyzing the situation I constantly need to make 2 scenarios - a free market scenario, and a government internvetion scenario. So gaming this becomes harder by the day as we lean more towards government inervention scenario. More transfers of wealth coming... from your pockets to "theirs".

Today's Import Report Continues to Support my Stagflation Thesis

The stagflation (slow/no growth - rising inflation) drumbeat only continues to gain steam. While pundits fall over themselves on the flawed monthly government reported CPI/PPI, I keep pointing to this import report as the true measure. I highlighted this in December [Real Inflation Showing in Reports Not Called CPI/PPI] and again last month [Another Myth Falling Flat - Exports Will Save the Economy] highlighting especially the first turn into IMPORTED Chinese inflation:

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.

This is only becoming worse now... (don't blame it all on petroleum either)

• Prices of goods imported into the U.S. rose more than forecast in January, pushing the increase for the last 12 months to a record, led by rising costs for energy products and food.
• The 1.7 percent increase in the import price index followed a revised 0.2 percent decrease the prior month, the Labor Department reported today in Washington. Prices excluding petroleum rose 0.6 percent.
• Higher import costs, sustained over several months, may increase the chances U.S. companies will try to follow their foreign competitors in increasing prices. Still, Federal Reserve policy makers remain focused on risks to growth and are prepared to lower interest rates further, Chairman Ben S. Bernanke told U.S. lawmakers yesterday.
• Import prices were forecast to rise 0.5 percent, according to the median estimate of 52 economists in a Bloomberg News survey, after being previously reported as unchanged in December. Forecasts ranged from a gain of 2 percent to a drop of 1 percent.
• Compared with a year earlier, prices of imported goods increased 13.7 percent, the biggest jump since record-keeping began in 1982. That followed a 10.4 percent year-over-year increase in the prior month. Excluding petroleum, prices rose 3.6 percent in the 12 months to January.
• The government is scheduled to release its measure of consumer prices on Feb. 20 and wholesale prices on Feb. 26. Both reports are forecast to show that excluding fuel costs, price pressures were contained. (yes very convientently)
• Prices of goods from China rose 0.8 percent, and were up 3.3 percent for the 12-months ended in January, the biggest year-over-year gain since the measure began in 2004.
• Prices of farm exports increased 5 percent, while those of non-farm exports rose 0.8 percent.

So think about how we import almost everything from China ... and how the worm has finally turned, after a decade plus of being a great deflationary salve on our economy, China has finally begun to export inflation.

Remember, even the Maestro himself is getting on board [Greenspan Jumping on my Stagflation Thesis]

I highlighted the issue of the coming Chinese inflation Sept 11, 2007, before it was fashionable [Chinese Inflation Highest in 11 Years - Why do You Care?] Now, within 6 months it's showing it's ugly head in actual reports.

Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation.

Silver 3 Months Later - I Picked the Wrong Horse

One thing that bugs me is picking a correct thesis but backing the wrong horse. Silver is a case in point; I bought silver exposure as falling dollar/inflation hedge back in mid November [Nov 16: Market Seems to be Holding - Adding 2 Weak Dollar Plays]. I chose Silver Wheaton (SLW) as opposed to going for the simple play with the Silver ETF (SLV). As the chart above shows, a rising tide did not lift all boats - I underperformed in this position by 20% as silver rocked and did what it was supposed to do in an inflationary/Fed cut desperate environment; but my silver exposure did zilch. By trading in and out a bit I've been able to eek out a 3% gain in Silver Wheaton but it would of been obviously much easier to of bought the Silver ETF and simply let it go on cruise control.

Some of it was bad luck, as although I have traded Silver Wheaton (SLW) from time to time over the years, I did not realize Goldcorp (GG) had a 48% stake which it might be looking to sell; this was speculated in very early January 2008 by a RBC Capital Markets analyst, and has provided a major overhang for the stock.

At last, today this Goldcorp sale has finalized and hopefully the stock can begin to rebound.

Silver Wheaton Corp. ("Silver Wheaton") (NYSE:SLW - News) is pleased to announce that Goldcorp Inc. ("Goldcorp") has completed the previously announced secondary offering of 108,000,000 common shares of Silver Wheaton at a price of C$14.50 per share for gross proceeds of C$1,566,000,000.

"Goldcorp was fundamental in the formation of Silver Wheaton, and is an excellent operating partner on two of our key assets, Penasquito and San Dimas. Goldcorp's sale of their Silver Wheaton shares represents an important and positive step in the development of our company," said Silver Wheaton President and Chief Executive Officer, Peter Barnes. "This sale removes a perceived overhang in our stock while increasing market liquidity significantly, making Silver Wheaton a much more appealing long term investment, particularly to institutional investors. With a strong shareholder base, this will now allow us to capitalize on our exceptional growth prospects, with nothing to hold us back."

I still like Silver Wheaton due to it's very unique structure [Seeking Alpha: Silver Wheaton's Innovative Structure Tweaks Pure Silver Profit], which is what attracted me to this name quite a few years ago, so I plan to hold from here and see how it plays out. However, I did lose out on earlier profit opportunity...

Long Silver Wheaton in fund; no personal position

Bookkeeping: Layering Up the Ultrashorts

I added a bit to all 6 Ultrashorts here after we've had a nice rally off oversold levels of last week. We are, as discussed yesterday, at yet another inflection point in this long series (since October 07) of lower highs. One day this will reverse and a breakthrough will be achieved upward, and short positions will get splattered. But the onus is on the bulls to provide that point. Short of a government intervention, or bond insurer bailout, I am not clear what will do it in the near term. Overall we seem to be in a range now over the past 4 weeks, and to break out we obviously have 2 choices: up OR down. I still think the prohibitive favorite scenario technically is down. So I'm positioning for that; and the bond market is telling us risk remains high.

Cash is now up to 16.8% of the portfolio

Ultrashort exposure as follows with today's layering on of new lots.
Ultrashort Real Estate (SRS) 6.0% [commercial real estate, not residential]
Ultrashort Financial (SKF) 4.9%
Ultrashort Emerging Markets (EEV) 3.3%
Ultrashort Xinghau China 25 (FXP) 3.2%
Ultrashort Technology (REW) 3.1%
Ultrashort Russell 2000 (TWM) 3.0%

I've also taken some more off the table in my top 2 fertilizer names: Mosaic (MOS) and CF Industries (CF) - following the same pattern of recent days of simply cutting back, even among my most favorite names, anticipating more market mess. From here I've cut back all my favorites to about as low as I'm going to take them, and if the market pulls back I'll have resources to buy them back lower. Unfortunately this is the market we have nowadays; no trend seems to last long so trading around a core position is the only way to outperform. This is a lot of work, and transactions, to make very little traction against the market - but it's not the market we enjoyed the past 4 years where the pickings were relatively easy and holding positions for months on end and enjoying a non volatile ride was the order of the day. So this is the adaptation I believe is necessary to not get sucked into a vortex of losses and give back even the minor gains. In essence this is like investing in quicksand.

Dryships (DRYS) reports tonight - since my time frame is longer than 2-4 days for holding a position I simply missed this trade. It ran too quickly on me, and at this point it is probably overextended - while more upside potentially remains all I would be doing is buying for a short pop, then cutting back immediately as I have done with everything else. Not worth the trouble. So this is just one to let go and see if we can catch on the next go around. I am assuming they will report a very good number. Same goes for Bucyrus (BUCY).

I'm simply going to sit and wait at this time, and wait for the market to come back to me and provide better entries. Again, defensive stance...

Long all names mentioned excluding DryShips/Bucyrus in fund; long Mosaic; Ultrashort Real Estate, Ultrashort Financial, Ultrashort Xinghau China 25, Ultrashort Emerging Markets in personal account

WSJ: Worried Bankers Seek to Shift Risk to Uncle Sam

Folks, I wrote about this late last summer - we will see more and more bailout plans, of increasing scope/size as each layer of (edited) is scraped off the surface. But now the crisis has shifted so quickly, the bankers are coming to Washington with hands out and asking us (the tax payers) to take the risk. This is what it is coming to. They make the profit in good times, the Fed thru rate cuts (enforcing bubbles, inflation, and weak dollar) bails them out in bad times, and in historically bad times, the government (taxpayers) will bear the ultimate risk. As things derail expect to see more of this talk. Quite sad, and pathetic but the the government for the corporation by the corporation is working its magic behind the scenes. Just want you to be aware of it so you know what your hard working tax dollars are eventually going to be doing. Remember this the next time "free markets with no regulation are so efficient!" and "America is the heart of free market capitalism" mantra surfaces....

Ironically this would be a boom for the stock market :) Just imagine, a world with no risk and all bad obligations shoveled off to those fools on Main Street. Nirvana. Stocks might rally 30% on such an outcome. This is the risk in holding Ultrashort Financials (SKF) in particular... at any moment the neutron bomb of government intervention can burn you to a crisp.

• The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.
• One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers. Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal.
• The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss. (not a problem!)
• The fact that the plan is receiving serious consideration suggests the level of concern in Washington as housing problems worsen and early efforts by the Bush administration fall short.
• Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.
• Several lenders are already considering the move, known as a "principal charge off," but are hesitant to move forward. Loan servicers -- the companies that collect monthly mortgage payments -- worry that if they take big write-offs, they might be sued by investors who hold mortgage-backed securities. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade.
• "Everybody is looking at everything," Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday after a speech in Washington. "The door is not closed on anything."
• The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. (which you forestall the eventual delinquency for.... another 1 year, and then who is on the hook? you.) Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association.
• Just a few months ago, such proposals would have been considered far-fetched, but these and other unorthodox ideas are gaining credibility.

Enjoy! :)

NYTimes: Mortgage Crisis Spreads Past Subprime Loans

The question we always have to ask is "what is priced into the market?" I do believe subprime loans issues are more than priced in at this point. What I don't think is priced in is "the next leg", and issue I was talking about last fall - the move up the food chain to prime borrowers (mortgages) and then the spreading out to other forms of credit (cards, auto loans, student loans etc). I've written a few times that what subprime was to 2007 I believe credit card debt will be to 2008. Subprime is just the tip of the iceberg - the easily visible part. I also believe people severely underestimate in "housing boom states" how widespread the mortgage damage will be to prime borrowers. Cheerleaders, who like to look at trailing data point out that "hey most people are still paying their mortgages" - but this fails to look forward. Everything backward looking was in a "booming" economy (remember Q3 2007 was nearly 5% GDP)? No one wants to think forward and think that most recessions are led by job losses - not vice versa which is the current scenario. How will these borrowers react as we just BEGIN to ENTER a recession? We are just entering the belly of the snake, not just about to exit. That's why this backwards looking analysis and flaming of those who are warning of the issues as fear mongering, is in my opinion - dangerous. So again, these foreclosure and default rates are rising in a supposedly benign (or "strong") economy of mid 2007. The recession had not even started. How will the statistics look in the midst of a full blown consumer recession circa early 80s?

I do not think this is next leg is priced into the market and why I believe this 6 months and rebound scenario is nonsense. Of course I could be 100% wrong, but this is my working theory. And why I sit here daily shaking my head at all these "retail recovery" stories. I just don't think pundits understand how credit extended the average American got themselves the past half decade. Read about Mr Doyle below... and think about how many Mr Doyle's are across the country - who are now underwater on their house and have no options to refinance. Even if Bernanke takes rates to 0%. Did the Mr Doyle's make good choices? No, but that is neither here nor there. We have to deal with the effects of countless Mr Doyle's across the nation. And this is why credit card usage is surging... why 401k hardship withdrawels are surging... why people are using gift cards for buying staples. And why many people will simply be turning in their keys and walking away. <--- this is something by next December you are going to be hearing "shocking news reports of this new trend".

The pundits do not realize, it is *ALL* about housing prices. As they fall, the contraction causes after shocks throughout the system. We have a housing based economy and this 4.5% of GDP is due to housing statistic is an utter joke. This is not your daddy's 1990-91 or 00-01 recession. But we continue to be in denial stage and search for any statistic (government provided of course) to find glimmers of hope that what is happening on the ground in many states (not all states) is simply transitory and will be fixed in half a year. Again, this is going to be a regional recession and some of you are not going to feel much, if anything. To you, this is going to sound like we're talking about another country or continent. But many of our highest populated states and cities are going to be the center of the tsunami.

Now, about 5 months after I began talking about it, it is starting to show up in the mainstream press.

• The credit crisis is no longer just a subprime mortgage problem.
• As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
• The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.
• Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.
• “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.
• But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.
• “Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”
• At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association. That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.
• An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition. Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.
• “The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”
• The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.
• And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier (again, in a so called 3-4% GDP year)
• About 7.1 percent of auto loans were in trouble, up from 6.1 percent (again, in a so called 3-4% GDP year)
• On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. (just getting started on this area)
• Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.
• In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”
• In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.
• The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000.

Again, if you think this is exaggeration or hyperbole simply ask around in the middle class of this country (and upper middle, and lower upper) and find out how many Mr Doyle's there are out there. The house was the ultimate ATM. But this $1200 rebate check coming this summer should fix everything....right?

Wheat Stories Hitting Both Wall Street Journal and New York Times Today

As always, we are early here... but by being early we can make some profits before news hits the main media outlets. We have some interesting news today, especially in the Wall Street Journal. Since the fall I've been following the food producers closely, mostly to see how much of the food inflation they are passing on to consumers. I was interested in Smithfield Foods (SFD) as a hog producer with potential to export to China but backed off when it was apparent all these companies gross margins are going to be trashed as their input costs went through the roof. This has borne true across the food chain (pun intended). Now these food companies are fighting back and as is the American way, crying their way to Washington for "relief". One solution? Restricting exports. The same exports that the rest of the world is desperate for. Remember, food is one of the things we actually export nowadays....

As I've stated, we are heading for a World of Shortages... and I expect cross border strife among countries to expand over the coming decade. Countries with resources will begin to horde their own under pressure from their populaces and "take care of their own". You are just seeing the top of the first inning in this, both in this story and others I have highlighted over the past few months. These measures will in most part fail now, but over the next 5-20 years, they will come to fruition and I see a heavy rise in protectionism.

• With the price of wheat and other grains soaring, food producers are calling on the government to help farmers ratchet up output.
• Some are calling for loosening a federal conservation program that compensates growers for leaving fields fallow. Others are calling for restrictions on exports, an effort that's unlikely to gain traction but that illustrates the depth of their concerns.
• So far, the government is resisting, but the growing chorus for government action signals a new phase in a long-term shift in the global grain markets. For years, U.S. farmers have groused about low prices brought on by overproduction. Now, surging demand from emerging nations and the biofuels industry have sent prices sharply higher.
• Meanwhile, the baking industry's lobbying group, representing giants like Sara Lee Corp., Kellogg Co. and Interstate Bakeries Corp., plans to gather food-company employees as well as smaller bakers for a march on Washington next month to lobby for reduced wheat exports and to loosen the conservation program.
• Whether supplies meet such dire predictions depends on conditions in the U.S. and elsewhere. Key wheat-producing nations such Australia and Ukraine have had poor growing seasons. Global wheat stocks are at their lowest level in 30 years, while U.S. wheat stocks are the lowest they've been in 60 years, according to the USDA. Hard red spring wheat, the high-protein variety used to make high-quality bread and pizza crust, among other things, is the scarcest of all.
• Millers and bakers might have to put up with high prices for only another three to five months; by then, the U.S. spring wheat crop will have been harvested and world wheat production is expected to increase, says Dan Basse, president of AgResource, an agriculture-research company in Chicago. After that, the price could soften. However, if there's a drought, the already-low grain reserves could go even lower, pushing prices even higher for a more protracted period.
• Over the past year, corn and soybean prices hit records. Now, wheat prices are on a tear. On the Minneapolis Grain Exchange, hard red spring wheat closed at $17.63 a bushel yesterday, up from $4.92 a year earlier. In the cash markets, some farmers are fetching more than $20 a bushel. Many farmers are sitting on their grain, waiting for the price to go even higher, exacerbating the jump in prices.
• Wheat prices have risen so swiftly that bakers can't adjust their prices fast enough to offset the impact, said Len Amoroso, executive vice president of Amoroso's Baking Co. in Philadelphia. "We are talking about prices that are just unheard of," he said. Tuesday, Mr. Amoroso said, he was quoted $48 per 100 pounds of flour from hard red spring wheat, which he uses to make sandwich rolls and other products. A year ago, he paid about $14.60.
• Whether Washington acts may depend on how much consumers are affected. Already, prices have risen for everything from steak to pasta. Food prices rose about 5% in the U.S. last year, the highest rate since 1990, while overall inflation rose by about 4%. Some analysts expect food inflation to rise faster this year.
• The average retail price for whole-wheat bread rose 12% to $1.78 per pound in November from a year earlier. Last month, food giants Kraft Foods Inc. and Kellogg said fourth-quarter profits declined because of higher ingredient costs.
• Mr. MacKie and other bakers are asking the Agriculture Department to curtail wheat exports until there's a guaranteed supply at home. They cite export tariffs in Russia and China, which have supply concerns. Wheat exports from July to December of last year were 74% higher than they were in the same period the previous year, and they're expected to run strong in coming months, the USDA says.
• Restrictions on exports are unlikely because of opposition from farm groups and U.S. trading partners. Such a move would be a throw back to the 1980s, when President Carter imposed an embargo on U.S. grain shipments to the Soviet Union, a move that was unpopular with U.S. farmers.
• Brian Leier, a 35-year-old grain farmer in Linton, N.D., said he favors freeing up land that has been idled for conservation. "It's either we release some CRP acres or there are going to be plenty of people starving around the world, I believe," Mr. Leier said.

From the NY Times "In Price and Supply, Wheat is the Unstable Staple"

• For decades, wheat was a commodity no American needed to think much about, except the farmers who grew it. The grain was usually plentiful and prices were low.
• All of a sudden, those assumptions have been turned upside down. With demand soaring abroad and droughts crimping supply, the world’s wheat stockpiles have fallen to their lowest level in 30 years, and stocks in the United States have dropped to levels unseen since 1948.
• Prices for common wheat are up nearly 50 percent since August, and they are up even more for the most sought-after varieties, leaving buyers, growers and longtime commodity traders shaking their heads.
• “Anyone who tells you they’ve seen something like this is a liar,” said Vince Boddicker of the Farmers Trading Company in Mitchell, S.D.
• Though this week’s prices were nominal records, the inflation-adjusted record for wheat was set in the mid-1970s, when it exceeded $20 a bushel in today’s dollars after huge sales to the Soviet Union.
• Foreign buying is driving this market, too, but these buyers include South Korea, Taiwan, Mexico, Nigeria and Venezuela. Economic growth abroad has given people the means to improve their diets, and they are developing a taste for products made from wheat.
• “We haven’t hit a price that has slowed the international interest,” said Joe Victor of the commodity research firm Allendale. “That is something that definitely has the market excited.”
• In a Jan. 30 conference call, the chief executive of Kellogg, A. D. David Mackay, said, “Everyone is feeling these inflationary pressures.” General Mills cited rising ingredient costs when it increased cereal prices last June.
• The United States Department of Agriculture’s 10-year forecast, released Tuesday, sees the wheat shortage as temporary. Stockpiles were predicted to fall this year to 312 million bushels, from 456 million bushels, before rebounding to about 700 million bushels by the end of the decade.

Again, my theory is we have rotating crop production - whatever is the highest one year, the next season will get flooded with new plantings. Why is there a wheat shortage now? Corn is everywhere due to the corn ethanol boondoggle. Next year? We will have a ton of wheat planted... causing issues with corn or sobyeans or (insert next shortage here!).

Even in my local paper I saw an article last night - amazingly MARKET FORCES work. Farmers respond to this gold rush the world over. The problem? Deforestation of the Brazilian rain forest is increasing rapidly to clear land for crops. Only exaggerating global climate change. 'Deforestation Surge Confounds Brazil'

• As deforestation in Brazil's Amazon rain forest declined during the past three years, the country's leaders crowed that they had found the recipe for stopping the destruction of the world's most diverse ecosystem. By expanding the area of protected rain forest by more than 60% while allowing controlled logging, Brazil's government said it had cracked down on the illegal clearing that has consumed a fifth of the rain forest.
• The celebration ended cold last month, however, when satellite images revealed that deforestation had exploded late last year in areas that regulators thought were under control.
• As much as 2,700 square miles of the forest were cleared during the last five months of 2007, an area bigger than Delaware and equal to more than 60% of the total deforestation registered over the previous 12 months.
• Even more worrisome, the deforestation intensified in November and December, a period usually marked by heavy rains and a drop in forest clearing.
• The nation's environment minister, Marina Silva, has blamed agriculture for the spike in deforestation and challenged farmers to halt all jungle clearing.
• Brazil is the world's fourth-biggest emitter of global-warming gases, almost solely on the strength of emissions from deforestation, according to the World Resources Institute in Washington, D.C.
• "This demonstrates that the government has less control than they realized," said Thomas Lovejoy, president of the H. John Heinz III Center for Science, Economics and the Environment in Washington. "They underestimated the market forces and overestimated the effectiveness of enforcement."
• Critics ranging from environmentalists to ranchers said regulators couldn't monitor a wilderness the size of the western United States, especially as the prices of soybeans, beef and other commodities produced on cleared forest land rose.
• "The government took some good actions, but the economics have more power," he said.

Again, it is a big big world out there - and our American centric way of life here really clouds us to what is going out there in the globe. What is fascinating from an economic point of view is how all these market forces are intermingled and 1 drip in the middle of a vast ocean leads to many many consequences the world over. I don't blame these Brazilian farmers - they see a market opportunity and are doing what humans the world over would do in the exact same situation. As prices continue to rise and shortages continue to grow, I expect to see more of the same.

And this is why I do believe the agriculture bull is where the oil bull was around 2003-2004. And why continued exposure to fertilizers and crop futures will remain part of the portfolio for a long while.

Long Powershares DB Agriculture Fund and a lot of fertilizer in fund and in personal account

New Oriental Education & Technology (EDU) Announced 1 Million Share Repurchase Plan

I normally don't get too worked up about share repurchase plans because (a) most companies who announce them don't follow through (b) the amount of shares being repurchased is small compared to the total shares outstanding/in float and (c) most companies that announce them are just giving top officers a ton of new options to offset the new shares they buy up - i.e. transfer of wealth.

However, this is an interesting announcement by New Oriential Education

New Oriental Education & Technology Group Inc. (EDU), the largest provider of private educational services in China ("New Oriental" or the "Company"), today announced that its board of directors has approved a share repurchase program. The board has authorized New Oriental to repurchase up to one million of its own American Depositary Shares ("ADSs") during the period from February 25, 2008 to December 31, 2008.

If they actually follow through and the detail on Yahoo Finance is anywhere near correct, this would be a huge amount of shares in relation to their float (for those of you unfamiliar with float, it is simply the amount of shares actively trading - i.e. some shares are held by insiders and/or in theory are not available to be traded). The float is listed as only 3.55M shares, so this would be the equivalent of taking nearly 30% of all floated shares out of circulation by the end of the year. [EDIT: Reader with Bloomberg access says Yahoo Finance is wrong and actual float count is 35M] Again, I take it with a grain of salt because some companies announce share repurchase after repurchase but never follow through. So we'll see at the next earnings release if they have started to buy back shares. If they do, this would be a good faith gesture and show the investing public they believe the investors of the world are undervaluing their shares.

I only have about a 1% stake in this name at this time since the stock is stuck below its 200 day moving average ($60). If we see some significant strength, it might be a name to focus on again. For now I am going to just let it simmer to the side while focusing on other opportunities in the portfolio.

Long New Oriental Education in fund; no personal position

Bookkeeping: Adding to MFA Mortgage (MFA) on Earnings "Miss"

MFA Mortgage Investments (MFA) is a position I just began last week with a 1% stake [Initiating MFA Mortgage Investments]. They reported earnings this morning and missed by 1 cent, but I like what I am reading (huge year over year increase in profits), so I am going to take my stake up by 500 shares in the $10.30s area, and make this a 1.5% stake. I believe the turmoil in credit markets will work to this company's advantage - companies who are desperate to raise capital and get product off their balance sheet will provide these mortgage REITs a lot of prey. The CEO said as much in the AP report today... and we have your government tax dollars backstopping this companies investments because as we all know, Freddie Mac and Fannie Mae will not be allowed to fail. Heck, the system is set up so even the worst home builders are not being allowed to fail.



The price I added today is near the 20 day moving average. As I stated when I opened my position I'd prefer to add to this stake lower, preferably near the 50 day moving average of $9.50 so I will see if I can get that price going forward before increasing the stake. Since the stock has slingshoted up, I didn't want to buy a huge slug when I first opened the position so we are getting the anticipated pullback now.

• MFA Mortgage Investments Inc.'s profit quadrupled in the fourth quarter as the mortgage investor capitalized on the turmoil in financial markets by buying cheap bonds, the investment fund said Thursday.
• MFA Mortgage earned $18.6 million, or 16 cents per share, in the fourth quarter, compared with profit of $4.4 million, or 6 cents per share, in the fourth quarter of 2006. Analysts polled by Thomson Financial forecast profit of 17 cents per share.
• The company collected $112.3 million in interest on its portfolio, compared with interest payments of $71.5 million in the fourth quarter of 2006. This was principally because MFA's portfolio grew to $8.3 billion from $6.34 billion as the company capitalized on the upheaval in credit markets by buying bonds at inexpensive prices.
• MFA turns a profit by collecting more in interest on its bonds than the company pays to raise money. In the fourth quarter, MFA collected 0.65 percentage points in interest on its portfolio more than the company paid in interest on its debt. That spread in the fourth quarter of 2006 was 0.36 percent.
• MFA has largely sidestepped the credit crisis plaguing many other mortgage lenders and investors because the company buys only the safest kinds of mortgage bonds, mostly those guaranteed by government-sponsored companies like Fannie Mae and Freddie Mac. These bonds are considered safe because people think the government would rescue Fannie or Freddie if they were to default.
• In fact, MFA's chief executive, Stewart Zimmerman, said the company is in a good spot to take advantage of the turmoil in the market. As lenders record billions of dollars in losses and are forced to sell their loans, there are a lot of cheap assets for sale, he said.

Long MFA Mortgage Investments in fund and personal account

Baidu.com (BIDU) Great Results, Some Warning Due to Chinese Storm

Baidu.com (BIDU), the "Chinese Google", reported outstanding numbers, soundly trouncing the analysts estimates. But in a sign of how far reaching this Chinese storm (that no one talks about) is, they are cautioning on next quarter due to power outages and some parts of the country having limited Internet access. Something I did not think about when pondering the storm. That said, this is a temporary issue and I continue to like this name. At what price is always the open question with this very highly valued name. Again, this company has scarcity value, and while not a monopoly - something near to it with Google (GOOG) a distant 2nd, and the Chinese government helping Baidu.com at every turn. They are making a push into Japan, but personally I see no reason for them to be distracted when they have the soon to be world's #1 Internet market to focus on.

Technically, Baidu.com has bounced smartly off its 200 day moving average (mid $240s) after closing below that level for 3 sessions (never a good sign). While I am confidant in the business, if the market falters this is a name that will be thrown on the fire. However, I try to buy smaller lots each time it dips, and let them go on these decent sized rallies. At some point the decent sized rallies will turn into a large rally and I do expect at some point in 08 for a very meaningful run in the name. But we don't appear to be there yet.

• China's top search engine, Baidu.com Inc (BIDU), beat expectations with a 79 percent surge in quarterly profit as it attracted more online advertising in the run up to the Beijing Olympics.
• But the U.S.-listed company said recent winter storms that paralysed wide parts of China and cut power would lead to a 4.3-7.1 percent fall in first quarter revenue. This would be the firm's first recorded sequential fall in quarterly revenue, according to JPMorgan.
• "We still like the stock in the long-run," said JP Morgan analyst Dick Wei in a research note. "But we believe there are some uncertainties in traffic and revenue growth in the first quarter of 2008."
• Although the storms may hit earnings in the short term, the medium-term outlook is strong thanks to Baidu's dominant position in the mainland over Google Inc (GOOG), the global search leader but which ranks a distant No. 2 in China. China will soon become the world's biggest Internet market by users.
• Baidu said fourth-quarter net income rose to 219.8 million yuan, or $30.1 million and 87 cents a diluted share, compared with 123 million yuan in the year-earlier period. (vs 71 cents estimate)
• The company also said it was still interested in listing shares in Hong Kong, but that a flotation was not likely this year, adding that any plan would have to benefit investors, employees and customers.
• The expansion into Japan cut reported profit by 10 cents per share in the fourth quarter, and Baidu planned to spend another $20-25 million in the world's second largest economy in 2008, but did not expect any contribution to revenue this year.

Long Baidu.com in fund; no personal position

Car Loans Being Stretched to 7 Years

They're getting desperate out there... anything to keep this game of consumer chicken going... how sad. And Toyota (TM) of all people leading the charge? I expected better sir... I am glad the press finally is pointing this out.

• Automakers and buyers are diving into extra-long auto loans, and they could drown from that plunge. Toyota Motor Credit brought the loans to light when it acknowledged at a meeting last week it is making 84-month loans — seven years — to cut buyers' payments and boost sales. It's been making them since August.
• "Definitely bad," says Kevin Tynan, auto analyst at Argus Research. Easing buying with long loans "is bubble-inducing, and the bubble's bursting."
• A reason for the sales-chilling effect is that vehicles depreciate fast, to about half their price in three years. Most people trade in in three or four years, before a typical loan is repaid, Hines says. At 36 to 48 months into a 60-month loan the vehicle might be worth a little more than the loan balance. That can be a down payment on a new car.
• That far into an 84-month note, the buyer still owes a lot more than the car is worth, "So that balance gets rolled into the new loan, making it virtually impossible to ever have equity in the new vehicle," Tynan says. "Down the road, and we could be there now, the consumer says, 'I have to drive this thing until it's paid for,' and there's a significant decline in (new car) demand."

I wrote about this in September [Is a 10 Year Car Mortgage Far Off?]

Some loans are even longer -- as long as eight years. According to JD Power & Associates, nearly 39% of loans made year to date had original terms of between 72 and 83 months, up from 31% in 2004. And 3.9% of loans made so far this year had original terms of at least 84 months, up from 2.4% two years earlier.

But auto loans of five, six or even eight years are risky for lenders because, unlike homes, cars and trucks depreciate rapidly. Most vehicles lose about a third of their value once they are driven off the lot. So the longer borrowers stretch out payments, the more time loans spend underwater -- a term meaning the balance is bigger than the value of the vehicle securing it.

And the longer the loan, the more likely owners will still be making payments when they want or need to buy a new car, a concept known as "negative equity." "At least one in four customers who trade in a car have negative equity," says Toprak. How much negative equity? The average is at least $3,000.

****
So there you have it... a nation of under water home owners, driving around in their under water cars, on 8 year term. Subprime nation. At it's best. Instead of living within our means - we keep falling into the siren call of "we deserve this", "we can do this" and "let's find a way to make this work so I can have my shiny toy". I don't blame them to some degree - many people have expected this lifestyle - to be able to afford the things they build, but that is going the way of the dodo bird [GM Offering Buyouts to 74,000 Workers] Wave by wave, we go into this phase where people are going to be making less (GM is not eliminating these jobs - it is asking people who make good money to "retire" so they can rehire new folks at $12-$14 an hour as replacements), and then somehow must keep up with the cost of life at these lower wages (combined with inflation). So they turn to things like ... 7-8 Year Auto Loans. Again, I call this the slow erosion. It happens slowly so it's not noticeable. But it is happening.

And the corporations are not innocent either - they know this is bad long term, but anything to help in the short run. Make quarterly profits. Let CEO make his multi millions. And skewer the working class on the roast. (Hmm, I am sounding more like a Democrat every day - eek). I said this year will be the the worst for auto sales in 2 decades [Nov 27 - Home Sales Plunge, Car Sales Next] and we know where this is heading right folks? We've seen this game before... no wait, we are seeing it as we speak in our homes, yet we continue the behavior like naughty toddlers behind momma's back [Dec 6 - Next Prediction Coming True - Auto Loans Going Bad]

Some points of "reality" to mull over while we celebrate today's reassuring retail figures....

A Couple of Notes from Surfing the Web Today for You Economic Geeks

First, let me preface this by saying (a) as I wrote earlier, I laughed off today's retail report because just about any government report is now making little sense when overlaid with what real companies in the real economy are saying and (b) people are forgetting a small word called "inflation". Even if sales are flat they will be "up" by using this report. So we (I am guilty I am sure) tend to cherry pick data to support our views (heck it works for the President, why not me?) :)

But, Barry Ritholtz, who carries a little more weight than me in the blogosphere agrees that everyone is missing the whole point about "inflation" and the "car sale" strength?

Note for price changes means that these are nominal -- not inflation adjusted -- numbers.

Hence, with Gasoline station sales up 23%, and non-store retailers (home oil delivery) up 10.6%, the surprise gains were all energy/inflation related.

I have to wonder about the boost in demand for cars, considering what we have heard from all the auto makers -- they almost across the board announced weaker sales. I don't know what the Commerce department is looking at, but I cannot figure how its a positive sign for the economy.

Take the Retail Sales EX Inflation (gasoline, food & beverage) and retail sales were DOWN. Excluding inflation, demand at all other retailers last month were unchanged to negative. Economically, speaking, how bullish is that?

I also cherry picked this entry from WSJ blog and only picked economists who were as indignant as me :) (and keep in mind if you throw 5 economists in a room, you will get 6 opinions!)

With the exception of a November result that was aided by an early Thanksgiving and early and aggressive pre-holiday discounting, retail sales have been on a weakening trend for several months. While the preliminary January result was better than generally expected, it was by no means any more than mediocre, particularly given that headline inflation in the month was probably roughly the same as the reported nominal increase in overall sales. –Joshua Shapiro, MFR, Inc.

Although headline retail sales were above expectations in January, the details are weaker: (i) there were small net downward revisions to November and December that should subtract 0.2% point from consumer spending, (ii) the strength in autos is flatly contradicted by the industry data, (iii) gasoline added 0.2% point to sales, which is price related (i.e. inflation) and, (iv) the gains were very narrow with department stores, electronics, eating and drinking, and furniture all down in the month. –Bear Stearns

The January retail sales data is not consistent with either same store chain sales or total vehicle sales during the sampling period. We are highly skeptical of … a 1.4% increase in clothing sales when major clothing department stores such as Nordstrom’s, Macy’s and teen retailers across the board recorded negative sales during the month. Perhaps the -1.1% decline in sales at department stores is a better indicator of the actual retail sales number once we get what will almost surely be a downward revision is the data next month. –Joseph Brusuelas, IDEAglobal

Weakness continued to be concentrated in sales of household goods, with furniture sales posting their sixth consecutive monthly decline. Meanwhile, after a November jump, electronic sales have fallen by 3.2% in December and another 1.0% in January. In a sign that U.S. consumers may be becoming more cautious in their spending habits, sales at restaurants fell by 0.5%, the first decline in this series since August… There is no reason for optimism in this report. –Drew Matus, Lehman Brothers

With that said, one could argue it is bullish we are rallying on such news. When the market finds an excuse to rally that is never a bad thing. Unless of course we are having a repeat of early fall. Oh dear readers, many of you are new so let me refresh - I had post after post during that huge 8 week run from mid August to mid October asking "why are the equity markets rallying when the bond markets are collapsing?" Bond guys are always the smarter set. But the market marched upward week after week after week, on "the Fed is on our side so don't fight the Fed" thesis... before November 07 happened. And then January 08 happened. Are we in for a repeat? Bond market seems to think so (again)? Conditions are identical to August... a very bad decline in the market.... then in the heart of the decline *BOOM* surprise Fed cuts. "Bottom is in" talk. "Writedowns will take care of the problem" talk. Bailout by Federal government solutions (Bush was proposing the first of 97 iterations of mortgage bailouts) back then. Are we simply repeating ourselves? So soon? Will we never learn? Or are these dismal scientists just trying to scare you?!

• If you were looking at stocks alone, you’d be cautiously optimistic about the economy: they have remained above the intraday low they hit on Jan. 22, the day of the Fed’s surprise 0.75 percentage point rate cut, and even clawed out some gains lately, notably today.
• An entirely different picture comes from the corporate bond market which is in full fledged flight. Investment grade spreads have widened steadily during the new year, according to Bianco Research, with only a fleeting rally after the Fed’s rate cuts. A glance at the Europe crossover index (credits straddling the divide between high yield and investment grade) isn’t much more encouraging.
• Who’s right: stocks or credit? Bianco thinks it’s credit: “The hallmark of the current environment is the equity market lags the credit markets. However, it is the equity market that sets the tone for everything else. So, no matter how bad the credit market gets, as long as the equity markets are holding together, no problems are perceived…. Last July we saw the same thing; the equity market was doing well but the credit markets were not. So as far as most people were concerned, there was no problem. In August when equities caught up to credit and turned sharply lower, it was called a crisis.”

Well I don't know - and remember we had 8 weeks of Kool Aid after that surprise discount Fed cut in August. I remember because I got smacked around with heavy short exposure the first 2 weeks of that rally, before turning into a See no Evil, Hear no Evil Kool Aid touting Bull (tm). As the commentary above says, a crisis only matters when it starts to hit people's 401ks. But the bond market always seem to be there first. And we seem to be in a very similar spot to last year. Hence, yet another reason to remain cautious. But that does not mean we cannot rally in "retail sales are great, really!" world for now. :)

As I keep saying, we have zero direction - we are headed for another enormous week UP. If we breach 4% (3.4% so far this week on S&P) that would be 4 out of 5 past weeks we have either moved up or down by 4% on the indexes. Amazing volatility. And you can't hold a thesis for more than 5 days, because whatever you thought one week, gets completely reversed the next.

So as I've said, I'm biased - so I am only giving you the bad stuff (while I do read some of the "butterflies and unicorns" stuff to make sure I am up to speed on the raging bull case) - and I could be 100% wrong and the bottom is in, housing is returning this fall, inflation is benign, malls to be teaming with rebate check toting consumers, and the credit issues will soon be gone, and most important for all of us as investors, "all the bad news is priced into the market". I always leave every possibility open; but right now I just cannot position myself for what I feel is simply fantasy. I truly think we are so levered to our homes, that until home prices start to bounce, the greater economy won't be seeing great times again. This last economic "boom" was borne of credit; not actually making anything new or expanding into new innovate businesses (except for mortgage backed paper); we were just servicing our housing based economy, and recirculating an ever increasing amount of paper dollars. So to create the new boom we either need to find the next big thing (farming? coal? stock bubble 3.0? rebuilding our entire infrastructure?), or return to the last big thing (housing prices need to start rising and everyone needs to get back on the flip that house treadmill). Until then... or at least until 6 months before that turn happens, it is just hard to be a raging economic bull :)

But I have altered my way of thinking after some deep pondering of late - and I do believe this recession will be a regional one. Those of you in the heartland, in agrarian areas, and those of you in natural resource rich (energy, mining) states - all of this doomsday stuff are simply things you can laugh off while reading on the computer (and that goes for you too Alberta Canada which is BOOMING). Those economies based on housing, financial, service, and old Midwest industrial base? We're going to have a lot tougher time in the next 18 months. So this might be the first recession that stops at state lines. So I'll have to better explain myself going forward when I speak of recession. It's now going to be labeled "regional recession". Pick the right state and you have clear sailing!

As Asia Food Prices Bite, Analysts Warn of Worse to Come

Something I've been speaking about for a long while... continues to percolate into the media... not that it matters because it's not about the United States ;) and of course only the US really matters in this globe, but there does appear to be a whole world out there (fathom that?)... and a lot at the bottom are going to be suffering madly... World of Shortages. World of Shortages. World of Shortages. Too many humans. Too few resources. Even the minor resources like... food. Perhaps just like we are getting "2 Americas", we will have "2 Asias" - those who can eat, and those who cannot... ? (pardon me for my socialist rant in a purely capitalistic blog) ;)

This could be the great debate going forward - food for food? or food for fuel? And from this article it sounds like the US is not the only place... Europe, Thailand, they all are embarking on similar plans, not realizing how tightly wound the world food supplies truly are. Truly looking like a coming crisis. Maybe I need to rethink not being in Monsanto (MON) ... even at this high valuation. Crop yields need to go up one way or the other.

• Rising food prices have hit Asia's poor so hard that many have taken to the streets in protest, but experts see few signs of respite from the growing problem. An array of factors, from rising food demand and high oil prices to global warming, could make high costs for essentials such as rice, wheat and milk a permanent fixture, they say.
• The agency's figures show food prices globally soared nearly 40 percent in 2007, helping stoke protests in Myanmar, Pakistan, Indonesia and Malaysia. Yet Asian economic growth is a key reason why prices rose, said Joachim von Braun, from the International Food Policy Research Institute. "High growth in per capita income, especially in Asia, is driving demand for food," said von Braun, the Washington-based group's director general.
• At the same time, Asia's growth has left many of its poor behind, he added. They spend between 50 and 70 percent of their meagre incomes on food, making price rises especially debilitating.
• Apart from overall higher food demand, changes in taste favouring meat are said to be pushing up prices, since farmed animals feed heavily on grain. Drought and bad weather, high oil prices stoking transport costs, spiking biofuel demand and low reserves have also played their part, experts say.
• "In Australia, we lost almost a year of wheat due to drought," said Katie Dean, an economist at ANZ Bank in Sydney. Cold weather caused grain crops to fail in Europe and the United States, while bird flu culls and disease outbreaks hit Asian poultry and meat supply, she added, citing as an example pig diseases in China.
• The price of rice rose around 70 percent in Bangladesh last year. It now stands at around 50 cents per kilo (2.2 pounds), but many Bangladeshis live on less than a dollar per day.
• Thailand, for instance, now requires that all its diesel fuel includes a component made from palm oil, which is also used for cooking. However, the new regulation has sent palm oil prices soaring, contributing to shortages amid shrinking supplies.
• The UN food agency's figures show the amount of US maize used for biofuel has doubled since 2003, and predict European wheat use for ethanol could rise 12-fold by 2016.
• Such trends have led worried Asian governments to address the rise in food prices following popular unrest. Indonesia has cut tariffs on soybean imports, a staple food it gets mostly from the United States, and wants to curb its reliance on imports.
• Vietnam said it would suspend rice exports, and India did so last year
• But while economists expect food supplies to rise somewhat in response to higher prices, Macintosh said others doubted it was that easy. Urbanisation and industrialisation in Asia were eliminating farmland and soaking up scarce water resources, he added.
• Meanwhile, government policies were trying to push people out of subsistence agricultural lives into the industrial sector and urban jobs.
• "The key is to increase the productivity per hectare right across Asia," he said. "But that is a very long-term fix."
• Financial speculators have even begun betting the price of items like wheat and rice will rise, making the picture still more volatile. (ahh, our friends the financial speculators - always exploiting some market) :)
• "Even if prices fall," cautioned Abbassian, "the chances they will come down substantially are perhaps not there." (now you're talking...)

This is where I post my daily comment about how I am buying yet more Powershares DB Agriculture Fund (DBA) ... ;)

Some charts
Corn
Wheat
Soybeans

Long Powershares DB Agriculture Fund in fund and personal account

Will Baidu.com (BIDU) Do for Tech what First Solar (FSLR) did for Solar?

Should be a very interesting report tonight from Baidu.com (BIDU). The high beta tech stocks are as beaten down as the solar stocks have been. I am curious if we get a similar reaction across the food chain in tech tomorrow if Baidu.com reports a quarter as they should. Much like First Solar (FSLR) I expect very good numbers. And much like First Solar, my only question is "will it beat heightened expectations". All it takes is 1 spark and you see the massive (over)reaction across a beaten down sector. Something to keep an eye out for.

As we can see from the S&P500 chart, we could rally to near 1400 before running into trouble (about 3% higher from here). But as the charts show, we continue to make a lot of swings up and down, and really we are getting nowhere fast. A lot of fun trading for daytraders I suppose, but for holding anything for more than 3-4 days, it is useless action. See-saw back and forth literally by the day. You can see we are right back to where we were in mid January - so 4 weeks of nothing happening except a lot of volatility each day and nothing to show for it.

But notice yet again a new "lower high" appears to be forming.... subject to change if we make a powerful 5-7% move farther from here, but thus far it just looks like we are setting up for another round of sucking people in, only to crush their hopes. The week to week volatility is just mind numbing. We've had a 5% down week, followed by a 5% up week, followed by a 5% down week (3 of the past 4 weeks) and at this pace we're going to have another 5% up week. No rhyme. No reason. Just huge swings. All to get to the same destination.

Bookkeeping: Reducing 4 of my 6 Infrastructure Stocks

I continue to sell into this strength and play defense - cash is now up to 20% of portfolio. As I stated yesterday I am not ready yet to apply much of this to new short exposure, since Kool Aid times can continue for a while. So I'll just continue raising cash and wait for the next leg of fear before buying more short exposure. I don't want to counteract all my gains with the short exposure (which has been happening the past 2 days).

Infrastructure has had a nice move in past few days, and once again I like all these names on fundamentals - these are purely technical trades in a traders market. Most of these names report in the next 2 weeks, as the calendar is chock full of infrastructure and solar names. Again, just like the solar names - we could have some very big moves off of earnings, but just sticking to a system and taking the conservative way out - recognizing I could be leaving good gains on the table. I expect most of these to continue to post great earnings but even the hint of some slowdown in backlog (even though these companies have nearly 2 years worth each of work!) will cause the endless parade of "projects are going to be cancelled any moment now" mantra.

I am selling 4 of my 6 infrastructure stocks as most are now bumping up against the 50 day moving average from below - 2 are peaking their heads over that resistance line - Foster Wheeler (FWLT) and Shaw Group (SGR). I'm cutting about 10-30% in most of these names. And will just have to look to buy them back at lower prices, and keep repeating the pattern - sell during Kool Aid, buy during End of Days.

1. Foster Wheeler (FWLT)
2. Jacobs Engineering (JEC)
3. KBR (KBR)
4. Chicago Bridge & Iron (CBI)

I already cut back on Shaw Group and McDermott (MDR) earlier so I don't have much left to cut there, so no need to reduce exposure any further.

Here is a representative chart for most of the names in the group; in fact it is how many stocks I am watching look. At an inflection point. They could continue to run up and then you'd get more constructive or they could fall back from fast approaching resistance which has been the pattern of late. I don't know which way it goes, but until proven otherwise I assume future failure.



Long all names mentioned in fund; long Foster Wheeler in personal account

Bookkeeping: Closing Smith International (SII)

Smith International (SII) is up from $54 to $60 in just a few days so I am going to sell the remaining 125 shares (0.7% position) at this point and will revisit oil services at a later date. I am booking about a $2k loss on this position which has not been held that long (6 weeks). As Mr Bolling says, take your losses and move on... this one didn't work out. Then again, buying almost anything the first week of January 2008 didn't work out very well. :)

What I find funny is all the recession guys playing of the 1990s playbook expected oil to be $70 by now. And they are perplexed as to why it remains in the $90s - hello 'World of Shortages' and real and persistent inflation. But that doesn't mean they still do not punish these stocks for no good reason assuming oil will get to $65 "any day now" (which has been the fear overhanging these stocks along with US weakness in all things oil).

Smith International, and all its cohorts are very cheap. But I want to see them trading OVER their 50 & 200 day moving averages ($61-$62 range). When I see that I will happily buy back, even if its the next few days. But right now, in this environment, valuation means nothing and the technical trade is to cut back as we approach heavy resistance. Actually this is a chart that screams sell. So instead of selling @ $54 a few days ago I can get a 11% premium and I'll file this under "sell when you can, not when you have to". If for some reason we break through these 2 layers of resistance and the "oil trade" is back on, I will reverse course and can buy the stock up near $63, and be in much "safer" position technically. This is solely a technical move as the stock is "cheap" at 16x 2008 estimates for well over 20x growth.

No position

Bookkeeping: Cutting Back Gafisa (GFA) Thanks to Cramer

I was perplexed as to why Brazilian homebuilder Gafisa (GFA) suddenly has made a huge move out of nowhere - the stock is up 16% in 3 sessions. Now I see... Cramer! Looks like it was mentioned last Friday, and the stock has moved from $31 to $36. Always a double edged sword since the Cramer lemmings jump in, and start creating "mad" volatility in the stock, but in this case since Gafisa was so under the radar I guess it is ok. I am going to take this opportunity to sell to Cramer lemmings...

I also learned Sam Zell had a 14% stake which makes me even more bullish long term. But in an anti "buy and hold" environment, I cannot turn down 16% in 3 days. So I'm selling here in mid $36s and will try to buy back lower, after Cramer effect wears off.

• Cramer saved his best Brazil pick for last, highlighting the homebuilder Gafisa on Friday’s Mad Money a play on a “money lending revolution” in the Latin American country.
• Brazil’s red-hot growth coupled with a stable economy has vaulted the South American country to the top of the list of best places to invest, as far as Cramer is concerned. But perhaps more importantly for Gafisa the country passed a new law that makes it easy for banks to repossess homes of buyers who have defaulted on their loans.
• In the past, it would take up to eight years to seize property and consequently led to banks tightening their lending practices. But now the law says banks can seize property in under a year, and consequently these banks are now much more willing to lend, which has led to Brazil’s booming housing market (the total number of mortgages issued in Brazil grew by 80% last year).
• So why Gafisa? The new lending laws have created a lower-income market for homes that has low supply and huge demand that GFA is tapping into. Also, billionaire entrepreneur Sam Zell’s private equity firm owns 14% of the homebuilder. He wouldn’t own it if he didn’t think it was going much higher, Cramer said.
• In addition to Brazil’s economic growth that led to poor and middle class Brazilians buying homes for the first time, Gafisa’s valuation is really the nail in the coffin. The company is expected grow its earnings by – get this – 203% in 2008 compared to last year and it’s expected to grow revenues by a substantial 53%. That doesn’t happen on the strength of the economy alone.
• The bottom line is that Gafisa is an unbelievably cheap play on one of the best secular trends in one of the strongest global economies, according to Cramer. Who wouldn’t want a piece of that?

It is really too bad - I really like India and Brazil but there are very limited ways to play both countries with individual stocks; instead we get 100 "me too" Chinese companies flooding the US markets because that's all anyone wants in the US - China, China, China (Marsha, Marsha, Marsha)...

Long Gafisa in fund; no personal position

Bookkeeping: Beginning Position in Schering-Plough (SGP)

In a continued effort to diversify across sectors I am adding drug manufacturer Schering-Plough (SGP) to the portfolio today, with a starter stake of 800 shares @ roughly $22.00. This makes it a 1.6% position.

A quick take on the technicals, before moving on to the story. Clearly, this is a broken stock, and not typical of my fare. But this is one of those few times you get to buy a quality franchise at a major discount (of course it is not without risk). While the stock did temporarily drop to $17 for a moment, it bottomed out roughly around $19, and now has added $3 with earnings behind it. Clearly the stock is below both its 50 ($24) and 200 day ($27) moving averages so it has some rough times ahead. I think, over time a move back to the $26-27 range should be in order. We'll take it from there.



I have been watching this stock for a while - and almost bought it a few months ago (even though I try to avoid drug/biotech stocks due to FDA risk), but this has always been on my radar since it has a lot more patent protection than peers, and solid long term growth. Even better, due to an issue with Vytorin (not a safety issue but an effectiveness issue), the stock has lost a serious amount of value, so much of the near side risk should be out of the name.

We just had earnings in this name Tuesday and it was "better than expected", and this is a CEO Cramer has always raved about - so I took the time out to watch him on Mad Money last night and I was very impressed. I was even more impressed the guy puts his money where his mouth is (unlike the bank executives) and bought $4M worth of shares already after this stock fallout, and will buy another $2M the next time he can. You can see the whole video interview here; it is worth a look if you are interested in the name. I wouldn't buy just on a video but I have been looking at this name on and off over the years so I was already familiar with the story. The main of the text is below:

• When a study released in mid-January showed that Vytorin – a combination of the drugs Zocor and Zetia – may be no more effective at reducing arterial plaque buildup than just taking Zocor alone, shares of SGP took a nosedive. But the company reported earnings with a narrower loss than expected Tuesday morning, a move that shocked analysts who had been expecting Schering to disappoint on the Vytorin news.
• Hassan told Cramer the company pulled off such a surprising quarter because it was able to convince people that its business extends beyond Vytorin. Also, Hassan said that analysts seemed to be so distracted by Vytorin that they forgot about Schering’s huge overseas business. It was its strong international growth that Hassan said accounted for the earnings upside surprise.
• But Hassan didn’t downplay the Vytorin issue. He threw his full support behind the drug, which is a joint-venture between Schering and Merck, telling Cramer that studies prove Vytorin can reduce LDL (bad) cholesterol. The particular study that brought on the skepticism was small and concentrated on a special population with very high cholesterol, Hassan said. Even then, the drug’s safety and tolerability profiles – two of the biggest indicator’s of a drug’s efficacy – remained normal.
• Hassan also spoke about Schering’s recent acquisition of Organon BioSciences from Dutch chemical giant Akzo Nobel. Organon is best known for its NuvaRing contraceptive – the first new birth control product to be released in almost 50 years. Organon also develops Sugammadex, a drug used to help patients rapidly recover from anesthesia that is gaining traction in hospitals and with anesthesiologists, according to Hassan. These drugs herald the type of innovation that Schering hopes will guide its business model going forward.
• These new drugs, in addition to some of Schering’s flagships like Nasonex and Claritin, give the company a long-term baseline for growth, Hassan said. And while most other pharmas must prepare for their major drugs to come off patent within the next few years, Schering enjoys patent protection well into the future. Cramer thinks this is sure to give the company and its shareholders an advantage over the rest of the sector, which is already suffering from bone-dry pipelines.
• When Hassan took the helm of a struggling Schering-Plough in 2003, he bought back stock as a way to calm the nerves of those who thought the company was headed toward a downward spiral. To reassure analysts and shareholders, Hassan told Cramer that at the next legal opportunity he gets to buy back more stock, he plans on picking up $2 million in additional SGP shares “whatever the price may be.”
• The choice is clear, Cramer said. Vytorin is not Schering’s only shtick. With a global footprint and a commitment to growth and innovation, SGP under the leadership of Fred Hassan is the only pharmaceutical stock he thinks is worth owning.

Some color on earnings

• Shares of drug maker Schering-Plough Corp. rose Tuesday after the company said its sales jumped 40 percent in the fourth quarter, exceeding Wall Street expectations. The Kenilworth, N.J., company reported $3.72 billion in revenue, surpassing expectations by more than $600 million. Its adjusted profit of 27 cents per share was also better than expected.
• Goldman Sachs analyst James Kelly said sales of most of Schering-Plough's key drugs were better than he expected. Cholesterol drugs Vytorin and Zetia topped his estimates, as did arthritis drug Remicade and the interferon franchise, which includes drugs targeting hepatitis C and melanoma.
• Prescriptions of the cholesterol drugs have fallen in recent weeks after a clinical study indicated that Vytorin is no better at reducing cholesterol buildup than Schering-Plough's Zocor, which is now available as a generic drug.

And today we got an upgrade

• A Banc of America analyst upgraded shares of drug maker Schering-Plough Corp. Wednesday, saying investors have overreacted to concerns about the effectiveness of Schering-Plough's cholesterol drugs.
• Chris Schott says it appears that sales of the drugs, Vytorin and Zetia, have decreased about 10 percent over the last month, since clinical data cast doubt on their ability to slow plaque buildup compared to older products. The stock is down 21.8 percent since Jan. 14. Schott says the decline decreases the value of the drugs too much.
• Schering-Plough markets Vytorin and Zetia through a joint venture with Merck & Co. The joint venture was responsible for 60 percent of the company's profit in 2007, he said, and there are no questions about the safety of the drugs.
• Schott said the company's recent buyout of Organon Biosciences bolsters its pipeline making it less dependent on its cholesterol franchise. He added that Schering-Plough is posting more rapid profit growth than its peers, and faces no major generic drug threats until 2015.

So again, I am trying to diversify some holdings and have some stocks that ying while others yang. Other than Illumina (ILMN) I have nothing in this sector of the market. Other than Gilead Sciences (GILD) there is probably no other better growth franchise than Schering-Plough (SGP) and now I can buy it at a 15-16x multiple. I am hoping for a pullback to the $20-$21 range to add more.

Long Schering-Plough, Illumina in fund; no personal position

Jim Rogers on Commodities

I like to have people this smart on the same side of my trade....

Blue Nile (NILE) - A Story I Never Understood

The valuation on Blue Nile (NILE), an online jewelry store, has reminded me of the late 90s era and euphoria. While it has shown tremendous growth, the stock was trading north of $100 last fall, on forward earnings of about $1. I'm not a math major but even I can figure that's a 100 P/E ratio.

I point this out simply because I see it is down massively today (and still sports a 40+ PE ratio!) on its earnings, and because of future guidance. While the market goes gaga over yet another useless government report out today... so let me get this straight.... last week we had store after store tell us how things are degrading, but because a government report says sales are up 0.3% we celebrate? When most of it is gas and autos? Autos?? Have you been reading the auto sales lately in the US? And we are to believe this report? Also keep in mind a nasty word called inflation - sales will be "up" simply due to inflation even if unit sales are flat. If inflation is 5% if you sell the same amount of goods, by definition sales will be up 5%. So anything less is degradation. Anyhow... I digress.

Blue Nile is interesting because of the type of merchandise it sells and the fact it sells up and down the food chain of consumer. And it clearly shows weakness is moving up the food chain to "upper middle class" and "lower upper class". But don't worry about it, because the government tells us retail sales are booming.. (eyeroll)

And we have yet another retailer who is telling us January degraded significantly from December. Hello Wall Street, may I interrupt the party to inject reality?

• Blue Nile Inc's (NILE) shares plummeted more than 20 percent on Tuesday after the online jewelry retailer's outlook for the first quarter fell way short of Wall Street expectations.
• Sales of its high-end jewelry priced above $25,000 took a hit in the latter part of December and January, Executive Chairman Mark Vadon said, as the hitherto-strong online jeweler also fell prey to a cutback in consumer spending.
  
• Vadon said he does not expect its high-end sales to sustain a 50-percent quarterly growth "right now" given tighter consumer spending and an overall retail environment.
• "Right now, we are seeing a very, very weak environment and frankly, we don't know what to expect," Vadon said in an interview with Reuters. "In that environment ... our mindset is to be very conservative."

Last, I want to point out (again) all these retailers surging on 2008 guidance last week... frankly have no clue what 2008 guidance will be. I don't know. They don't know. The only ones being honest are seeing their stocks slapped back to 2004. The ones telling fairy tales about rebounds in 2nd half 2008 or year over year growth, have no idea. How do you model the consumer in this environment? You don't. You guess. And Wall Street, in its quest to find any shred of good news to build a "2 quarters and rebound" thesis, is lapping it up like the obedient Kool Aid drinking dog it is. Blue Nile was honest. They don't know. Period.

But let's celebrate gas and cars (cars? really? have we no shame to report that car sales are going up, even when Toyota is beginning to struggle in the US market? Boggling) I continue to be perplexed by a market who takes government reports as gospel over what company after company is reporting on the ground. Even the best companies are saying the US stinks, thank god for overseas sales.

The one thing we have year over year sales growth in the USA >50% is Kool Aid.

No position

Interesting Timing on Initiation of Coverage on Blue Coat Systems (BCSI)

I normally ignore most analysts comments or at least take them with huge amounts of salt. However, when an analyst either upgrades or downgrades within a week of an earning reports (ahead of it) I take note. Analysts are very cautious beasts, and they almost never stick their neck out there. This makes today's initiation of Blue Coat Systems (BCSI) by Brean Murray interesting. Blue Coat and Riverbed Technology (RVBD) have just been beaten to a pulp but as I stated of late the valuations are getting interesting even for "value tech" investors. [Riverbed Technology Continues to Execute and the Stock Continues to Fall] And they continue to pile up great results but constantly get slapped down due to "fears of the future". So no matter what they say or do, it is not good enough because the boogey man of the future always lays ahead of them. These 2 names have been among the most frustrating I have held in a long time, because all they do is execute, and all they do after each great earnings report is sell off further. So doing good homework and identifying a subsector of technology that is performing through thick and thin has proven useless in this case, because "perception is reality" and perception is there will be future pullbacks by companies in a slower growth economy. Yet financials, home builders, and retailers are booming of late because of a booming future economy? It makes no sense, but no one ever said it did.

Blue Coat Systems reports next week so I am curious to see how it plays out with an analyst starting coverage this soon ahead of earnings. I have taken down this former huge winner for the fund (gains I've completely given back in the past 3 months) to a 1% position and am going to cut it down to 0.5% for now by selling 200 of my 400 shares as the stock approached resistance.

These stocks have been beaten so badly eventually we are going to see a huge upside move after one of these earnings report. Unfortunately the only people participating will be those people willing to risk capital because it will happen after hours. I don't know if it will be next week, but the chart is showing a very easy "game plan". Both the 50 day and 200 day moving average have now converged around $29.50. If the stock moves above that level post earnings - that "resistance" will turn into "support" (barring a market meltdown), and it probably is time to get back on this train. If not, it stays in purgatory and I'll probably just cut bait with both names until the market decides the world is not going to end in technology.

Long both names mentioned in fund; no personal position

Interesting Reaction to General Cable (BGC) Earnings

Very nice earnings from General Cable (BGC), but a potential miss in future guidance - yet the stock is up nearly 9%. Just shows, once again, it is not the news but the expectations that matters. Last week we had a fertilizer stock that beat estimates by 70 cents and the market yawned. Today we have a solar company that beat by 20 cents and gets taken up 20%+. And here is a company that might miss future guidance but is up nearly 10%. Many retailers completely miss and get taken up since "it's not so bad as we thought". Ah, the mystery of the market. General Cable is no longer a fund holding but is an interesting way to play the world infrastructure buildout, and a name I see returning to the fund perhaps later this year when more of a worldwide slowdown (if it happens) is priced into the markets. This is, like many companies, a story that is relying on emerging markets buildout to offset US weakness.

• Wire and cable products maker General Cable Corp. said Tuesday its fourth-quarter profit rose 32 percent as a recent acquisition boosted revenue. General Cable earned $46.6 million, or 84 cents per share, compared with $35.3 million, or 67 cents per share, in the same quarter of 2006. The latest quarter's results included charges related to the write-off of certain telecommunications equipment and an inventory-related charge. Excluding those items, the company posted an adjusted profit of $1 per share.
• Revenue rose 40 percent to $1.3 billion from $925.3 million. Analysts polled by Thomson Financial expected a profit of 87 cents per share on $1.23 billion in revenue.
• General Cable officials attributed the sales increase mainly to General Cable's exposure to global electrical infrastructure markets, a recent acquisition and favorable foreign exchange translation.
• Revenue from acquired businesses contributed $271.5 million in the recent quarter, the company said.
• For the full year, General Cable earned $208.3 million, or $3.82 per share, compared with $135 million, or $2.60 per share, in 2006. Revenue rose to $4.61 billion from $3.67 billion.
• General Cable Corp. on Tuesday predicted first-quarter profit that may miss Wall Street estimates. General Cable projected an adjusted profit of $1.05 or more per share for the period, while analysts polled by Thomson Financial expect a profit of $1.15 per share.

No position

Millicom International Cellular (MICC) Mixed Results

I've reduced Millicom International Cellular (MICC) going into earnings (as I've done with many stocks), and the results are an interesting mix. This is one of the few companies I can find to directly play Africa & "non Brazil" South America, so I decided to add it to the mix a few months ago [Nov 7 - Starting a Position in Millicom International Cellular (MICC)], and thus far it has performed quite well in a terrible market. Looks like the unit growth in cell subscribers continues to be outstanding, but at the expense of some near term profitability. I don't have a problem with that; it is quite normal but investors who are normally very short sighted and only care about "beating the number" and nothing else, usually don't like it. Thankfully, Millicom is a very unknown name and not full of daytraders and momentum traders so it should weather the "disappointment" better than if this were a more well known stock, chock full of people whose idea of long term is "tomorrow". The other issue is, in dealing in a lot of small countries (and a lot of unstable countries) there is always country specific risk for a company like this.

• Mobile operator Millicom International's (MICC) unexpectedly large rise in new subscribers offset disappointment over lower-than-expected fourth-quarter core earnings on Wednesday.
• A record net intake of new subscribers during the seasonally strong quarter took its subscriber base to 23.4 million at the end of last year from 20 million at the end of the third quarter and against analyst expectations of a rise to 22.3 million.
• "The result was lower than expected, but the inflow of new customers in the fourth quarter was incredibly strong, and that must be allowed to cost money," said one analyst.
• Earnings before interest, tax, depreciation and amortisation (EBITDA), excluding discontinued operations, were $307 million, up from $229 million a year earlier but below a mean forecast for $328 million in a Reuters survey.
• "The weak result could be explained to a large extent by the strong subscriber growth. Overall, this is marginally worse than expected," Redeye analyst Urban Ekelund said.
• The firm said its revenues in the quarter rose to $786 million from a year-ago $544 million, topping the $753 million average in the survey of nine analysts.
• "The strong growth recorded in the fourth quarter of 2007 demonstrates the gathering momentum within the businesses," the firm said in the results statement. And the group said it planned a dividend for 2007 and was considering further payouts. Millicom said it planned to pay $2.40 per share in a special dividend for the 2007 fiscal year, reflecting the firm's sale of its stake in Pakistani Paktel Ltd. to China Mobile Communications Corp. for $284 million early last year.
• Millicom, which runs mobile telecom services in emerging markets across the world, said its units in Central America posted a 71 percent increase in subscribers for the full year. In Africa, subscriber growth was 66 percent in 2007, with one million new customers added in the three final months of that year, the first time that had happened, the firm said.
• But margins were hit in Africa by the business in Chad, where the firm was forced to shut down its network in January due to a rebel attack on the capital N'Djamena. Millicom said its staff were safe and the network undamaged, and that it would resume its operations in Chad 'imminently'.
• "The dividend was a bonus, but at the same time what's happening in Chad, where they had to shut down, and the regulatory changes in Colombia, is worrying," an analyst said.
• Interconnect fees were halved in Colombia to $0.06 in December, which the company said would hit its margins and revenues in the country.

Long Millicom Cellular in fund; no personal position

First Solar (FSLR) Out With Another Great Set of Earnings

Following up on last quarter's blowout earnings [Nov 7 - First Solar (FSLR) Impressive Numbers] is yet another set of great earnings from First Solar (FSLR), and raised guidance. While this is pushing up the entire sector, First Solar is its own unique animal in that it is isolated away from the polysilicon shortage issues - but solar investors cannot be bothered with facts like that.

More appropriate as a guidepost for the rest of the sector (which does rely on polysilicon) will be this Friday's report from Yingli Green Energy (YGE). While the move up today in First Solar (+20%) is impressive, keep in mind the stock peaked at $200 yesterday before dropping late in the day, so it is essentially retracing all of yesterday's intraday loss plus another 5%. Either way, the stock report is very good and the company continues to hit on all cylinders. My one concern was a comment last quarter about 1st half 2008 being at par with 2nd half of 2007, which the company confirmed today. However, relieved investors again don't care about minor details like that. But this would assume relatively flattish growth for the next 2 quarters, which for a high multiple stock is not the best medicine. It will be interesting to see what the reaction will be once the euphoria wears off, since investors are so short sighted nowadays. While the full year 2008 numbers are fantastic, the 1st half 2008 will be a slowdown from previously unsustainable patterns of growth. Which will matter to investors?

My guess is for aggressive investors a strategy of shorting this gap up (once euphoria fades) will actually work quite well as people come to the realization that 1st half 2008 won't replicate current growth rates. I can't do that here in this environment, but just saying...

• First Solar Inc (FSLR), maker of thin-film solar equipment, said on Wednesday its fourth-quarter earnings jumped as it ramped up production of renewable electricity modules.
• Net income for the quarter climbed to $62.9 million, or 77 cents per share, from $8 million, or 12 cents per share, a year earlier. Analysts had on average expected the company to post earnings of 54 cents per share, according to Reuters Estimates.
• Net sales in the quarter rose to $201 million from $53 million a year earlier; analysts had been looking for about $180.2 million.
• The Phoenix-based company said it decreased its manufacturing cost per watt by 12 percent from the year-ago quarter to $1.12 per watt.
• First Solar Inc (FSLR.O: Quote, Profile, Research) said on Wednesday it expects to sell between 400 and 430 megawatts of its thin film solar modules in 2008 and post revenues of between $900 million and $950 million. (analysts currently at $820M)
  
• First Solar Chief Financial Officer Jens Meyerhoff told a conference call that revenues in the first half of 2008 would lag the 2007 revenues during the same period.

No position

Wheat is Being Ruined by.... what else... Hedge Funds and Speculators

We've been talking about wheat and the huge surge the past week; as predicted last year once the slowdown happens and people see crops will hold up, strength begets strength and strength means hedge fund computers scanning the globe for any pattern will start chasing each other into the commodity futures markets. While I do expect the trend to remain up, the volatility will increase (thanks hedgies!), and another interesting thing happened - the daily limits were increased so the intraday volatility will sharpen - cool! This allows wider ranges for daytrading for these futures, more fun for the hedge funds. Anyhow, Powershares DB Agriculture Fund (DBA) had (for it) a volatile day - it normally doesn't move more than 1-1.5% a day, so this is how I discovered the new trading limits imposed - I am hoping for another 3-5% drop so I can really load the boat. The pace of increase of late has been unsustainable so a pullback is more than in order. Further wheat had its worst 2 day performance since 2003. This is all part and parcel (unfortunately) that comes with the hordes of computers descending on the commodities markets. So expect a lot more volatility now that they have found a new plaything and the exchanges have been happy to expand the daily band of movement within the futures contracts.

Oh yeh, and the title of this story is "Wheat Falls as Increased Global Planting May Boost Inventories" - of course we need to find a "specific" reason to explain the fall...something like "Global hedge funds playing ping pong with Wheat futures" or "Wheat corrects after Historic Run Fueled by Hedge funds leveraged to the gill by Fed induced liquidity" wouldn't really sound quite so simple. And that huge bumper crop in 2007 really dropped corn prices, didn't it? ;) Remember as they plant more wheat, that makes a shortage somewhere else - creating higher prices, and then next year that crop with high prices will be planted, creating a shortage somewhere else (wheat ?) and so on and so forth. So all this new planting of wheat is just trying to get us back to where we were before the "corn ethanol" boom, pushed farmers into corn (creating shortages in everything else). And on and on we go... rotating from 1 shortage to another. This is why I want to be long an ETF with a good mix of crops - in any 1 year maybe 1 crop falls in production as farmers react to previous years crazy pricing in another crop, or a bumper crop is created but it will create a shortage somewhere else, driving something else up in price. Rising tide lifting all boats and all...

Agflation - it's a beautiful thing for an investor. For a human eating and purchasing food? Not so much. Goldman is now out with a forecast of wheat at $13.50 this year (remember it just broke through $10 last week, and as high as $11.53 early yesterday before falling back!)

• Wheat fell, capping the biggest two- day loss since 2003, on speculation that farmers will increase planting to take advantage of prices that have doubled to a record in the past year.
• U.S. growers planted 3.6 percent more acres with winter wheat from September through November, the government said last month. Sowing of spring wheat also may increase, analysts said. Global farmers planted 4 percent more winter wheat, the International Grains Council said in December.
• ``There's been a lot of wheat planted around the world'' after prices surged, said Tomm Pfitzenmaier, a partner at Summit Commodity Brokerage in Des Moines, Iowa. ``Talk about an economic incentive to plant something.''
• Wheat futures for March delivery dropped 41 cents, or 3.9 percent, to $10.07 a bushel on the Chicago Board of Trade. The contract reached a record $11.53 yesterday before closing down 45 cents, the first decline this month. Wheat fell 7.9 percent in the past two days, the biggest decline since Nov. 19, 2003.
• Prices have soared as adverse weather hurt crops globally, and importers increased purchases on concern farmers would fail to produce enough, accelerating food-price inflation.
• The exchanges in Chicago, Minneapolis and Kansas City doubled daily trading limits for wheat to 60 cents to create more incentives for holders of contracts to sell after futures surged by the maximum every day last week.
• U.S. growers of soft red-winter wheat, grown mostly in the eastern Great Plains from Missouri to Ohio and used to make cookies and cakes, seeded 21 percent more of the grain in the autumn. Hard red-winter varieties, grown mostly in the southern Plains from Nebraska to Texas and used to make bread, were planted on 1 percent fewer acres.
• Increased seeding may help boost global supplies expected by the U.S. Department of Agriculture to fall to 109.7 million metric tons in the year ending May 31, a 12 percent drop from the prior year. U.S. stockpiles may fall to 272 million bushels, or 7.4 million metric tons, the lowest since 1948, USDA data show.
• Winter varieties compose about 70 percent of all wheat grown in the U.S., the largest global exporter of the grain followed by Canada, Russia and Argentina, USDA data show.
• Egypt, the world's second-biggest wheat importer, canceled a tender for 80,000 tons of the grain, saying the price was too high. Egypt imported 7 million tons of wheat in the most recent marketing year, half its annual consumption of the grain, according to U.S. and Egyptian government statistics. Brazil is the largest importer.

I'm learning so much about agriculture lately - New Zealand is the biggest exporter of dairy [Milk is the New Wheat is the New Corn], Brazil is the largest importer of wheat, followed by Egypt, I learned about hogs last fall, chickens, cows, etc etc - I might be able to talk myself into a farming convention. Ok... well maybe at least a Farm Aid concert. Farm Aid? That's so 1990s. We're going to need City Aid concerts in the '00s. Can you imagine? Bono, Bon Jovi, and Willie Nelson banding together to help those poor city folk and upside down homeowners in Cleveland, Riverside, CA, Las Vegas, San Diego, Detroit. While farmers watching on their 61" plasma TVs across Iowa and Nebraska look on in dismay ... "What did those city folk get themselves into this time?"

"We are the World, We are the Children"....

Long Powershares DB Agriculture Fund in fund and personal account

Another Week, Another Mortgage Bailout Plan

Nanny State strikes again. The latest...

• Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes.
• Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that ``Project Lifeline'' would help stabilize communities disrupted by mortgage defaults.
• The program is designed to help a broad range of homeowners, not just subprime debtors who borrowed more than they could afford. (huh? wait. You told us this was a contained problem, and it was just those nasty "subprime people". Funny how the truth hurts - it is worse to think they lied to us (deceit) about how bad a problem it was, or they truly had no clue (incompetence) - either way, pathetic)
• In a statement, the banks said the program would start with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to ``pause'' the foreclosure process. The homeowner has 10 days to respond to the notice and give additional financial information so the lender is able to weigh new payment options.
• The Treasury chief said the six banks account for half of the U.S. mortgage market, and called on other lenders to adopt the plan as well.
• Paulson, who as recently as last month opposed a moratorium on foreclosures, wants lenders to go beyond earlier pledges to freeze subprime interest rates for five years. The deepest housing slump in a generation is threatening consumer spending and the job market, pushing the economy to the verge of a recession.

Now, the funny thing is many of these "nasty subprime people" is they are a lot smarter than they look. They took fre money from dumb institutions (0% down!) and now instead of slaving to pay for an asset that is dropping in value by the week they are simply walking away. Downside? A hit in credit. But these were SUBPRIME folks in the first place - by definition a hit in credit means nothing. So they walk away. And will... in droves. Why struggle under a frozen rate paying $2500 a month (or more) for something that is depreciating? That's what all these plans do not get.... heck it even makes "financial" sense for many people higher in the FICO score range. Take your 1x credit hit, get it over with, rent for 3-4 years, and by year 5 you can get a much lower priced home, your credit score will have recovered 90% of the way and the % of budget devoted to housing will be far lower - rather than struggle under the weight of Atlas for next 5 years. I've written about this last fall - we have a sea change due to this stupid 0-5% down rules on mortgages. In the past, people used to give up everything else to keep the house payment going - since they actually PUT MONEY into the house. Now we have a new generation.... they put little to nothing (want a house?! 0% down and we'll pay the closing costs!) down, so they have no reason to make the house payments. So they make the car payments, and the credit card payments - and live rent free until they get kicked out. Then they will go rent again. Magic! Financial innovation at it's best! See, people on Main Street are "innovators" too.

• Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."
• "The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.
• Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.
• A decade ago, most people started off with enough equity in their homes to make foreclosure irrational from a financial standpoint. Consider: If you made a 20% down payment on a house, prices would have to fall by 20%, almost immediately, before you lost all your money and had much incentive to walk away. This scenario was unlikely, particularly since an independent appraiser had assigned a clear value to the home. Foreclosure was remote, absent a personal financial crisis, for another reason: Every month your mortgage payment would reduce your debt and increase your equity, giving you more room for prices to fall.
• But over the past few years -- until last spring -- banks and the mortgage-backed securities investors who bought the loans the banks packaged weren't demanding substantial down payments; they were happy with 5% or even nothing down. They also didn't worry about whether or not borrowers were building up equity. "Interest-only" loans, quick mortgage refinancings to cash out any equity, and other inventions often led to just the opposite.
• Now the bloom is off the residential mortgage-backed securities (RMBS) rose. And some borrowers, even those who can theoretically afford to keep their homes, realize they owe much more than what comparable houses in the neighborhood are selling for -- and think that prices won't rebound anytime soon. So they're walking away, according to anecdotal reports as well as recent statements by top executives of both Wachovia and Bank of America.
• In most cases, once a homebuyer splits, the mortgage-securities investors are stuck with the loss. In some states, including California and Arizona, this provision is the letter of the law. In others, the bank forgives the balance of the loan -- a common practice that's unlikely to change now, given the criminal and civil investigations banks are already sweating through.
• Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.
• Yes, this behavior is new -- but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.
• Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can't lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn't. When the house was purchased not as a first home but as a rental investment, the decision is even easier.
• Of course, there's a price. Mortgage "walkers" will take a hit to their personal credit rating. Yet this once-forbidding punishment may be discounted. That's because, just as when markets change their behavior, people change, when people change their behavior, markets change also. Many walkers are going to want to buy houses again some day; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment). Investors searching for yield likely won't bypass what could be a large pool of borrowers.

Somehow there is some amazing irony in all this. And I ask again, all these lovely financials talking about kitchen sink quarters. Have you modeled the "walk away nation" you created in 2004-2006? Somehow, I think not.

I can just imagine the conversations:

Bank employee: Hello Mr Jones - great news! The Treasury Department has authorized me to lock in your $2500 monthly payment plan for 5 years! I realize your 4 months behind but we're gonna fix that - together!

Home "owner": Uhhh... my house just dropped in value from $425K to $350K... I think. My neighbor can't sell his for $315K. So maybe it's less. Uhhh.... I do realize my payment was going to go up to $3800 in 3 months but as you can see I am already behind.

Bank employee: Yes! Mr Paulson said it's ok! Hillary too! Let us help you stay in that home for just $2500 a month.

Home "owner": Uhhh... look lady I already have a place picked out I'm going to rent for $1100 a month. I was just going to sit here into you folks came and kicked me out. (snicker to self) And now you want to keep me here? Umm... no.

Bank employee: PLEASE!!! TAKE OUR DEAL!! WE ARE TRYING TO HELP YOU!!

Home "owner": They keys will be on the counter. I'll be out in 2 months; but you won't be seeing any money from me. So take your plan and shove it. (click)

Bank employee: *sob*

Bank employee Boss: So did you convince him to stay in the home and keep paying it off

Bank employee: *sob*

Bank employee Boss: Damnit!! Another house we're stuck with! What do we look like? Toll Brothers!!! *sob*

Bookkeeping: Adding Back to Ultrashort Technology (REW)

Another case of better to be lucky than good, I cut back my Ultrashort Technology (REW) last Friday, writing

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.

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.

Since I am not watching the market minute by minute, I did not have perfect timing, selling this down in the mid $74s (it peaked at $78 that day) but conceptually I think I got it right. I did not expect this move to happen so quickly - literally it has been 2 days. We've seen a nice rally in these tech "beta" names and this Ultrashort dropped from a peak of $78 Friday to $70 this morning. And many of the underlying stocks (aside from Microsoft (MSFT)) which is moribound) have bounced the 5-10% I was looking for, so I am going to get back into this name here in the $71s. (taking it from 0.7% to 2.3% of portfolio). So this is a quick 5% move and I lowered my cost basis, and if I were watching things hour by hour I could of done even better, lowering my cost basis closer to 8% or so. But conceptually it played out as anticipated.

Baidu.com (BIDU) does report tomorrow, and could light a fire under the technology names and this could prove to work against me. That happens. However, high beta stock, high value, in this market - I am taking the safer way out and assuming a sell off. So aside from adding to this Ultrashort I also cut back my smallish Baidu.com position below 1% by selling here in the mid $260s. I do expect great numbers out of Baidu.com but it's just a matter of the overall market environment, not the company itself.

Again, everything I am doing is with a conservative tact and I do expect to leave money on the table because by being "safe" I am by definition going to miss out on the upsides when they do happen. But the greater probability in bear market is not the upsides, but the downsides. So I want to protect capital throughout. As investors we are trained for bull markets, so my contention is one must simply throw out convention in this type of market and think opposite to how we are trained over the years (when 85% of the time we are in bull runs). Eventually, when we do one day turn back to a bull market, these conservative moves will be "wrong", and I will trail the market for a short time, while the market turns into a new bull and I still live under the assumption of existing bear. But when a true bull market appears it will be a lengthy move and missing the first 2-3 weeks of it won't hurt much in the long run. Especially if we limit losses by some degree during the bear.

Long Baidu.com, Ultrashort Technology in fund; no personal positions

Bevy of Solar Companies Reporting Soon

The only major solar name to report thus far is Sunpower (SPWR), and in the coming week we have a lot of the major tier 1 and tier 2 type of names coming down the pike. It should be very interesting. As I written in the past, these stocks can move 30-60% in just a few days up, or 30% down. Not my type of thing but for those who love the high of getting a big score (Las Vegas style investing), I am sure a lot will be placing "bets" (ahem, investing) ahead of earnings. I've cut back my solar exposure knowing full well I could leave a ton on the table if some of these move but its a risk/reward type of movement. I have been beating the market handily and I don't want to stupidly give away 30% overnight in a 3% type of position. Again, 10 years ago I'd be in there with the loonies making these pre-market "bets", but I now have graduated to trying to hit a lot of doubles, and singles, with a few triples and home runs and keep my strikeout ratio low (.300 hitter), as opposed to a .230 hitter who hits 40 home runs but strikeouts every 3rd at bat. Maybe it's my old age showing...

With that said, many of these stocks have been demolished in the January sell off so we might have more upside moves than down. But of 10 stocks in this space, 5 can gain 50% and 5 can lose 50% :) Just not my odds. Further, with this Chinese storm we might have some issues on Quarter 1 guidance which might spook the investor bases. Again, solar to me was a much easier space to invest in about a year ago when I was getting involved in the space - far fewer people were in it, the stocks acted relatively rationaly, there were far fewer public companies, and far fewer speculator and momentum traders. Now, it's a circus.

Let's see who is coming down the pike

Wednesday
First Solar (FSLR) - the non polysilicon player, and most highly valued name. They absolutely demolished earnings estimates last quarter - I do expect them to beat yet again but by how much is an open question and how will guidance look? The beat last quarter was so tremendous I am not sure such a feat could be repeated and as always it's not about what they report but what they report versus expectations. But this is a quality company; it simply trades at such a premium it is hard to really build a huge position in it. I am currently out of this name as I noted late last week; potentially giving up a large gain off of an earnings beat but content to not risk precious capital. From a peak of $280 its back down to the $190s.

Friday
Yingli Green Energy (YGE) - This is one of those companies whose size puts it right behind the major tier 1 names, but larger than most of the tier 2 names. I've had some issues with name simply on ownership structure, share counts not be fully disclosed etc, but small details like that has never stopped speculators from running this stock up. This has been a case of me being correct on the name, but my timing was off. In quarter 1 of my fund/blog, I infamously sold my large position in YGE in the teens - fully outlining my worries about the mgmt stucture/share count issues coming down the pike [August 10 - Closing Yingli Green Energy (YGE)], only to watch to skyrocket to near $40 within 2 months. So if I remained oblivious to the issues I would of had a huge gain. And now 5 months later?... well it was back to $18 last week. Just another example of how you can be correct conceptually but never (ever) underestimate the power of the herd (who never let facts get in the way of a good hype). YGE actually operationally reports some great numbers (solid gross margins especially) but due to the large share count (which last I looked I still could not fully quantify due to ownership structure) I thought their EPS growth would struggle to some degree in 2007.

Next Wednesday
Suntech Power (STP) - I consider this to be the highest quality Chinese PV maker - largest, deepest, strongest, scale, scale scale. It has been thrown in with the rest of the lower tier junk in this sell off, and even broke down below the 200 day moving average (which it has since recovered). I still hold this name and plan to hold it for the long run since it's the "safest" even if it does not promise the greatest long term return. From a peak of $90 we are now down to $50. Even with my sales along the way in this name, I'm flat on the position and have given back a very large gain in this stock.

Monday, the 25th
LDK Solar (LDK) - quite possibly one of the most controversial stocks (right up there with the Nutrisystems and Overstocks of the world) I've seen in a long while. I've kept buying this name on valuation but it's kept failing me. I still like it's spot as an arms merchant to the industry (wafers) and hope one day things settle down and a decent valuation is given to this name. From a high of $75 the stock is now $35.

Trina Solar, JA Solar also should be reporting in the next few weeks and Canadian Solar is in early March. Of all these names, Canadian Solar - a long time laggard - actually looks the most promising on a technical basis.

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

Bookkeeping: Taking Some Off the Table

Taking some small portions off the table (about 5-15%) in following names after some nice rebounds...

1. Mercadolibre (MELI) - flat
2. Mosaic (MOS) - a gain
3. CF Industries (CF) - a gain
4. Foster Wheeler (FWLT) - flat
5. Shaw Group (SGR) - at a loss
6. Research in Motion (RIMM) - flat
7. Mechel (MTL) - a gain
8. Trina Solar (TSL) - at a loss

I continue to operate under bear market rules. All rallies get sold even if this is part of a larger rally. I sell incrementally as we move up.... complete opposite of a bull market where I buy dips and hold for longer periods. I will leave some on the table all the time with this methodology but I do the same in bull markets. Buy and hold is dead to me at this point. So I continue to try to 'trade' within positions, when the market has it's Kool Aid moments, and buy in it's panic striken moments.

If I had a larger coal stake I'd be taking more off the table but I am going to stand pat. I am hoping for some correction in that space so I can build that allocation over time. EDIT: I did take some Consol Energy (CNX) off the table as well.

I am adding to my 'safety net' Powershares DB Agriculture Fund (DBA) since it corrected another 0.5%. :)

I am not adding to my sizeable short exposure at this time because as we see today even something quite innocent as a Buffet comment can move these "loser" groups a lot. So I am just keeping the extra dough in cash. Certainly at any point you can have a 5-7% move up within any bear market as we saw a few weeks ago. This "news" today is quite funny: essentially Buffet told the bond insurers: I want the best part of your business; the business you were founded on - the municipal bond insurance business. This is a business with almost no defaults and the insurance (while low margin) is just about the safest business in the world. It's a cash cow and perfect business for a guy like Buffet. So Buffet "generously" is offering to take it off the hands of the bond insurers, leaving the bond insurers with the junk business. What a deal :). Now pathetically, the municipal bond market is not the problem, yet the equity market is loving every minute of this "bailout'... even though today's news essentially means nothing since it has nothing to do with the at risk part of the market. But logic and the market never really coincide much in the near term. But this is the risk of holding any position betting against financials - any "bailouts" or "solutions", however superficial are seen as major Kool Aid.

Long all names mentioned in fund; long Mosaic, Foster Wheeler, CF Industries, Powershare DB Agriculture Fund in personal account

Monsanto (MON) Raises Guidance Yet Again

For the 2nd time in 2 months, raised guidance out of Monsanto (MON)

• Monsanto (MON) again increased its fiscal-year profit forecast, citing ongoing strength in its seed and herbicide businesses.
• The St. Louis company, which has been riding high on demand for its agricultural products, now expects earnings of $2.70 to $2.80 a share for the year ending in August.
• Just last month, Monsanto had raised its forecast to $2.50 to $2.60 a share from a prior view of $2.20 to $2.40. Analysts polled by Thomson Financial currently have an average estimate for earnings of $2.81 a share.
• The company, which gave its new guidance ahead of an investor conference Tuesday, said that growing adoption of corn and soybean products in the U.S. and Latin America is propelling its business. Monsanto said it has seen strong early-season order patterns for its U.S. corn seed and traits business
• In addition, Monsanto said its Roundup and other glyphosate-based herbicide businesses is seeing increased volumes and prices, and could deliver $1.3 billion to $1.4 billion of gross profit in fiscal 2008.

Long the agriculture complex, but no position in Monsanto

Potash (POT) CEO on 'Fast Money'

I did not see the show last night but Potash (POT) CEO appeared and here is a link

Below is the text; it hits on my comment about how leveraged this business is; the fixed costs are always there but incremental price increases almost all drop to the bottom line, hence you get extreme margin expansion and huge profit growth. Which we've seen. And will continue to. One of my favorite line items is gross margin - it is so key to profitable businesses and fertilizer just has the type of expansion you do not see very often. This is why the analysts are constantly wrong about their earnings estimates in this group.

Further as discussed in 'Potash King Shows No Mercy' it does sound like the CEO would be open to being acquired but at a very steep price. Considering how the mining names are consolidating and anything that is a natural resource is in short supply I could see the major potash names (potash needing to be mined) to be on the radar as buyout candidates in the years to come. Potash (POT) is the most expensive name in this space, but for a reason - they have the most excess spare capacity, but again it takes years to bring it online. Also have to like that share buyback, whenever the market gets silly and sells off these names arbitrarily.

Anyhow, in between the hand wringing about the end of days coming to fertilizer and this can't continue blah blah blah, all we see is continued fundamental strength and a hell of a macro environment for farmers.

*********

What’s the trade as agriculture stocks bounce after a rocky January? Find out from Bill Doyle, CEO of #1 fertilizer company Potash Corp.

Following is a synopsis of the main points made by Potash Corp. Chief Executive Bill Doyle on Fast Money.

You said in 2008 Potash gross margins will be 2.5 times larger than they were in 2007. How is that?

“It’s because we’re finally seeing leverage come into play,” says Doyle. “We have 75% of all the excess Potash capacity in the world and we’re bringing that excess capacity to market at higher prices.”

“Last year was our 4th record year and I think this year will be pretty good, too," he adds. "I the reason is that crop prices are up around the world. For example, for every dollar a farmer invests in palm oil in Malaysia and Indonesia they get back $9. Supply and demand fundamentals are very much in our favor. People don’t understand, yet, but there’s big demand out there.

What are you doing with all this money?
“We’re spending 5 billion over the next 4 years to bring back idle potash,” replies Doyle. “And we announced a share buy back.”

You’re buying back 5% of your shares, isn't that right?
“Amid this craziness we had in the middle of January when people said they wanted out of agriculture stocks, we bought back shares,” says Doyle. “(But) we buy back opportunistically.

Has anyone approached you about a buy-out?
I can’t tell you, says Doyle.

Traders, what do you think of this stock?
I like it, says Jeff Macke.
I think Potash could be a takeover target, speculates Guy Adami.

Long Potash in fund and in personal account

An Interesting Development in Natural Gas

A very interesting thing is happening in natural gas; the stocks are taking off. This raises the eyebrows... first, unlike crude oil (easily transportable) which is a global commodity, due to difficult nature in transport natural gas is relatively "local"; hence natural gas should be more of a direct tie to the US economy. However (second), as coal increases in cost many industrial customers (or utilities) switch to natural gas. Could a World of Shortages scenario be pulling in natural gas demand as coal is being used more and more for exports? Maybe.

So I am leaning to the second point since I doubt a massive economic revival is happening - but I had to dig out some old notes to review some names from the past (haven't traded a natural gas stock in probably 3 years) and below are the charts. Either way it is some very interesting action; both the moves off January lows (some of these stocks have been nearly dormant for years) and the positively tremendous action today in names up and down the food chain.













No position other than rampant curiousity

Another Constructive Day in the Dry Bulk Shippers

Mentioned these names last evening [Dry Bulk Shippers - Time to Get Back In?] - both names (Diana Shipping, DryShips) I've targeted are up around 6-7% today. So I grit my teeth watching. I think it still takes 1 more day to confirm an uptrend but they have made quite a huge move in a short time as well, so it's a tough decision.

Diana Shipping peaked just over $30 on first day of February which is where it is right at this moment - I'd like to see it go higher and create a new high. DryShips, identical commentary at $78. Since I am not daytrading these names and want to have a medium term position, I want to see a confirmation of a trend upward - we've now cleared the 50 day moving average in both with today's movement, so a clearance of a recent high would do the trick. In a normal bull market I'd be a willing buyer here, but in this unstable mess I'm still having a hard time pressing buy. :) Buying any former momentum names in this market, is like trusting a significant other who cheated on you - just hard to put any faith in them to stay faithful for more than a few days. ;) Notice both names cleared the 50 day moving average in early February as well, before being beaten back quickly into submission; another reason for some caution.

Last, I'm also debating whether I might as well simply stick with coal names to play the same trend. So a lot of thoughts on this group that conflict with each other. The coal move has been tremendous, and as much as I love this group long term if we get another day like this tomorrow I need to start cutting back a bit. Some of these names have jumped 15-20%+ in just a few sessions. The type of gains the market has been taking back quickly. But it was a nice day and good to see companies with good fundamentals rewarded again; almost like a normal functioning market.

No position (very close)

Personal Mortgage Insurers Send out Memo Highlighting "Danger" Areas

Grabbed this from Cramer on Realmoney.com

Apparently a reader sent him a memo that the private mortgage insurers sent out (basically they deal in any mortgage with sub 20% down payment) and it shows how restrictive lending is becoming. I've highlighted the comments from the realtor in blue but this goes to my greater point of "housing is not coming back in 6 months" brainwashing. The market always overreacts - and the lending market will go from overreacting to the "ease" side (hey you have a pulse? $500K mortgage can be yours) to "restrictive" side. It's again, all about confidence... but as so much of our financial system deals with flameouts from their egregious past behavior, they will overshoot to the conservative side.

So layer yet another restriction on top of the housing market. Interesting memo! Check to see if your market is in the "danger zone!"

Here's the memo, from the Mortgage Guaranty Insurance Company, with parenthetical annotations from the realtor:

February 6, 2008

Dear Valued Customer:

As a result of our ongoing evaluation of market conditions and loan performance, we are making a number of changes to our base underwriting guidelines and have created a new set of guidelines for areas exhibiting market weaknesses. The following underwriting guideline changes are effective for mortgage insurance applications received by MGIC on or after March 3, 2008.

(Then it goes on to break down underwriting guidelines. FICO is very important...and it better be above 660! And if the appraiser says that the property is in a declining market [see list below] , then many lenders wouldn't touch it, as these loans right now can't sell on the secondary market.)

Here is the list of restricted markets:

• Arizona -- Entire State
• California -- Entire State
• Florida -- Entire State
• Nevada -- Entire State
• Denver-Aurora, CO
• Greeley, CO
• Washington-Arlington-Alexandria, DC-VA-MD-WV
• Atlanta-Sandy Springs-Marietta. GA
• Honolulu, HI
• Coeur d'Alene, ID
• Chicago-Naperville-Joliet, IL
• Baltimore-Towson, MD
• Bethesda-Frederick-Gaithersburg, MD
• Hagerstown-Martinsburg, MD-WV
• Barnstable Town, MA
• Boston-Quincy, MA
• Worcester, MA
• Detroit-Livonia-Dearborn, MI
• Minneapolis-St. Paul-Bloomington, MN-WI
• Atlantic City-Hammonton, NJ
• Edison-New Brunswick, NJ
• Newark-Union, NJ
• Ocean City, NJ
• Nassau-Suffolk, NY
• New York-White Plains-Wayne, NY-NJ
• Poughkeepsie-Newburgh-Middletown, NY
• Portland-Vancouver-Beaverton, OR-WA
• Virginia Beach-Norfolk-Newport News, VA-NC
• Winchester, VA
• Tacoma, WA

Now if you overlay these cities/states with the areas of highest population you can see almost all the largest cities and metro areas are covered. Just out of curiosity one name I never heard of was " Coeur d'Alene, ID" - if anyone is familiar, please leave a comment, as I am dying to know why that is a danger area or in fact, what is there?? It is not near Boise which is the only "major" metro area... (when I google it it looks like a skiing area)

In some other reading this weekend, I read that California, Ohio, Michigan, Florida, Arizona, and Nevada account for about 25% of US GDP. I'd argue all are already recessionary either through industrial slowdown issues (Midwest) or reversal of home boom that accounted for much job creation. Throw in the Northeast, a pantheon of financial jobs (sure to be seeing large job losses as credit contracts and all these people creating stuff no one wants anymore are not needed), and this is why I just think we are on the bleeding edge here.

Positive markets? Farmers in the heartland; oil rich areas (TX? OK?), and places with natural resources like say a Montana (mining).

Again, these are more long term structural and economic issues - doesn't mean the market needs to go down or that it cannot in fact boom in an ocean of Fed liquidity in the coming quarters. But to be buying housing stocks on the assumption of a massive boom or even STABILIZATION (or shortage per Cramer) of homes by end of year 2008? Hardly.

Bookkeeping: Slowly Beginning to Rebuild the 2 Indian Banks

I had cut my exposure to the 2 Indian banks, ICICI Bank (IBN) and HDFC Bank (HDB) down to about 0.25% combined, as I have been quite wary of foreign markets for the past month. [Closing iShares Malaysia (EWM)] Remember, this was before "decoupling" was proven not to be that cool of a term after all. I wrote in mid January...

But I don't want to press my bets. A lot of "myths" have been busted of late. A couple of myths still left to be destroyed are "it is safe to buy Chinese stocks until the Olympics" and "emerging markets are safe havens". The latter is especially shocking - if you said that 5 years ago, you'd be laughed out of a room. Now it's conventional wisdom. This ties into another myth - that if 3/4 of the world's GDP is heading to contraction (US, UK, Western Europe, Japan) - especially consumer lead... that somehow the small sliver of middle class in India, China, Brazil will offset that. Hardly. So this leaves these markets a lot of room to fall.

Specific to India I wrote

I still have kept my India positions, but unlike the fall when I was very interested in this market since it was being ignored as US investors chased into any Chinese stock and ignored India [China v India the past 2 Months], I have pulled back my Indian exposure as well. Much like Malaysia, India has bucked the trend and its index was at all time highs in past few weeks. While I still like all these markets for 2010+ and believe this area of the world *IS* (and will continue to be) the next great growth engine over the coming decade(s), the very rich valuations more than support this view and once the myth of "decoupling" between emerging markets from developed markets is broken, we could be subject to a large sell off.

So this actually worked out to near perfection in timing. Sometimes you get lucky like that.

With that said, both these stocks have been demolished of late so I am now getting interested as both approach their 200 day moving averages. I am in no rush, since I don't like this market overall, but I am going to expand both position from roughly 0.1% to about 0.6% each (effectively moving 1% from cash to these 2 names)... much like Mastercard (MA) last week [Beginning to Rebuild Mastercard (MA)], I am going to use dips like this to slowly begin to rebuild positions in some of my long time favorites. But in very incremental fashion since I don't trust the market overall.

Technically, in a weak market it would be very easy for both stocks to break below their 200 day moving average - so this is why I am not in a rush, but with such sharp reductions (both have lost about a quarter of their value in a month) and my almost nil exposure I want to begin building now. I keep saying it's not a buy and hold market, and I'll keep repeating it. But we are getting some nice opportunities and values along the way.

ICICI Bank (IBN) peaked at $74 just about 30 days ago - while the US markets sold off these Indian stocks held up. It now trades at $54, or a 27% discount. Unlike the US banks chock full of financial innovation and in a saturated market, India is a whole different market. So I am going up to 0.6% exposure and if we can hold this 200 day moving average I would be more than happy to buy this sort of quality name in much larger quantities. I have done very well with this name in a NON buy and hold strategy - I was buying in the $41-$42 range in the first days of the fund and sold a lot in the mid $60s. Catch the top? Never. Catch the meat of the move. Definitely.



I've had similar strategy and success with HDFC Bank (HDB) and been able to book a lot of realized gains. The stock has dipped from $140 to $106 in about a month; a drop of 25%. So following the exact same strategy as above I am pushing this back up to 0.6% of the portfolio. If I can see this 200 day holding for both names, I'll be adding more. Again, I am probably not catching the bottom in either name, nor did I catch the top, but if I can catch the middle of a move a lot of the time I will enrichen my shareholders over the long run.



Long HDFC Bank and ICICI Bank in fund; no personal position

Farmers Wonder if Boom in Grain Prices is a Bubble

Thanks for the heads up by a reader for this article in the WSJ. It essentially formalizes everything I've been talking about since the blog started, but I have been interested to see something that was barely talked about even 6 months ago now pervading all forms of media. Also, as an aside in this month's SmartMoney magazine is an article about the agriculture boom. As always, mainstream investing magazines are about 12-24 months behind... par for the course.

And as I've said in the past, if there was someway for me to be exposed to futures for farmland (not just in the USA but across the globe) I'd be very interested in that too. Until then sticking with Powershares DB Agriculture Fund (DBA) - bought a bit more on this massive 1% drop today. ;)

• Come spring, Tim Recker plans to demolish two rotting barns and a dilapidated workshop on his 1,500-acre farm in Arlington, Iowa. In their place will sit about three acres of rich, black topsoil prime for capitalizing on the biggest global grain boom in decades. "Every acre is more valuable than it was five years ago," says Mr. Recker, a farmer and land excavator.
• With corn, wheat, soybeans, barley, sunflowers and other grains selling at or near record prices, U.S. farmers are preparing for a potentially historic planting season. A rush to make biofuels from crops and soaring demand for grains in China, India and other emerging markets have pushed up grain prices world-wide, helping drive food prices higher.
• Just yesterday, Kraft Foods Inc. -- echoing similar announcements earlier in the week by Tyson Foods Inc. and Hershey Co. -- said it will raise prices this year because of higher costs, and Kellogg Co. said its fourth-quarter profit fell because of higher commodity prices. (shhhh! Don't tell the Fed - inflation is benign and contained! Shhhh!)
• The shift has created huge opportunities in the Farm Belt as growers make their annual decisions about which crops to plant, how much land they need, which fertilizer and pesticides to buy, and how much of their crop to sell ahead of time on futures markets.
• But there are risks, too. Farmland prices have climbed more than 20% over the past year in many Midwestern states, so the many growers who lease land are shelling out higher rents. Some seed prices have jumped 30%, and fertilizer prices have doubled nearly across the board. Nocturnal thieves are stealing grains from unlocked bins. And ever looming is the prospect of a drought, which could push prices even higher, sending shock waves through global grain markets.
• Farmers are left to wonder: Could the grain boom be another bubble like dot-com and housing? Crop prices have been bouncing up and down in recent weeks: Wednesday of last week, corn trading on the Chicago Board of Trade dropped nearly 20 cents a bushel, the exchange-traded daily limit. The following day, corn was back up 20 cents, to nearly $5 a bushel, about where the March contract closed yesterday. (thank you hedge funds which surely are rushing into this area with tongues wagging!)
• Minnesota grain farmer Kevin Paap says he is excited by the "potential" in the grain markets. But he says his "stomach's in a little bit of a knot because of all that risk both on the upside and the downside." This year, he likely will plant half of his crop in corn and half in soybeans, a change from last year, when he planted more than half of his crop as corn because its profit potential was far more attractive than soybeans. Last year, the market was saying "we need more corn acres," says Mr. Paap. "This year, the markets are telling us they want more everything."
• He also says soybeans are looking better this year because they tend to withstand dry weather better than corn and because they are generally cheaper to plant, partly because they require less fertilizer. It was simpler last year. With ethanol plants sprouting across the Midwest, corn prices were running higher than farmers had seen in a decade and the price of land and fertilizer and other input costs hadn't yet spiked.
• Farmers planted about 93 million acres of corn, a 20% increase over the previous year and the most since 1944. Experts figured the big crop would push prices back down, easing pressure on livestock farmers, who feed corn to their animals, and helping ethanol producers remain profitable. Instead, corn prices stayed well above 2006 levels, in part because demand continued to grow and inventories were at near-historic lows at the end of the harvest.
• As farmers switched out of soybeans, wheat and other crops to plant corn, the prices of those crops rose, too. For instance, soybean acreage declined 16% as farmers opted for corn. The March soybean contract yesterday settled at $12.758 a bushel, up from $7.21 a year earlier. (and this is exactly what I have been preaching - there is a shortage of everything, not enough land period. When you switch from one crop to another, it creates a shortage somewhere else.)
• Keith Collins, former chief economist at the U.S. Agriculture Department, recently said he expected that planted corn acres in the U.S. would decline as much as 8% this year, while soybean acres would rebound to 70 million acres, up about 10% from last year.
• Most agricultural economists agree that key factors underlying the farm boom are likely to persist. "Once people enter the middle class and move up the income and food ladder, they rarely regress," says Rich Feltes, senior vice president and director of commodity research at MF Global. (Recession proof?)
• Landowners world-wide are trying to get as much as possible out of their fields. Farmers are looking to expand fields in Canada, where growers tend to idle more land, and Brazil, where large tracts lie uncultivated. Russia, Algeria and South Africa all have expanded their grain production. In the U.S., farmers like Mr. Recker are razing old barns, ripping up sod and grassland, and uprooting fences -- some in a routine attempt to improve land, others in an effort to make room for the grain boom. "They're trying to squeeze everything they can" out of their land, says Kent Cramer, an excavator in Belmond, Iowa.
• While seed suppliers see robust sales continuing, Dan Basse, president of Chicago-based AgResource Co., an agricultural-research firm, says this is evidence that the farm economy and the overall economy are still "tied at the hip." He worries that any recession in the U.S. could spill over into Asia and curb demand for food in those places that are driving demand here.
  
• That resonates for Kip Tom, who farms 12,000 acres in Leesburg, Ind. He decided to sell 80% of his 2008 corn crop on the futures market -- locking in a price at more than $5 a bushel -- even though he hasn't planted a seed yet. Normally, he says, he might have sold only about half of his crop this early in the year. "We just think this rally is too good to be true," he says.

If I did not know better, I'd say the WSJ writer has been reading my blog.... ;) all of it sounds so familiar. But now that it is in the Wall Street Journal, the story is getting out among the masses.

Long Powershares DB Agriculture Fund in fund and personal account

Australia Looking to Raise Interest Rates Again in Future

I feel really bad for Australia... and Europe. And South America. And Asia. Somehow all these regions have inflation. It is very strange because in America we are "inflation free!". I guess they have not learned to manipulate their economic reports to the degree we have mastered. It really is a simple solution - keep chanting inflation is benign and contained and *POOF* inflation is benign and contained. Until then you have problems like this...

• The Australian central bank bluntly warned Monday that it probably would need to raise interest rates again to restrain inflation, even as it trimmed its outlook for economic growth.
• The unusually explicit warning from the Reserve Bank of Australia lifted the Australian dollar above 90 U.S. cents as the market priced in a greater risk of a further rate increase, perhaps as soon as March. The bank "is on the warpath," said Rory Robertson, an interest rate strategist at Macquarie. "It certainly highlights the fact they're thinking seriously about going again in March."
• Just last week the central bank bucked the global trend by lifting its benchmark cash rate by 25 basis points to an 11-year peak of 7 percent, a level it said was on the "restrictive side of neutral."
• It cautioned then that the economy would have to cool significantly to restrain core inflation, which hit a 16-year high of 3.6 percent in the fourth quarter of 2007.
• The bank "clearly has no more tolerance for upside surprises on inflation and are concerned about it feeding through to wage and price expectations," Ong added. "The new inflation forecasts show they don't even get near their target until 2010, which leaves no room for policy errors."
• The central bank lifted its forecast for underlying inflation for the year to June 2008 to an annual rate of 3.75 percent, up sharply from 3.25 percent in its November statement and well above its target band of 2 percent to 3 percent.
• "Most importantly, if it is not reversed reasonably quickly the recent pick-up in inflation carries the risk of generating an upward drift in inflation expectations, which could feed back into wage and price-setting behavior," the bank warned.

I can only imagine what central bankers worldwide (many who have been raising rates - both in Asia and South America) to combat inflation must be thinking about our jolly band of rate cutters here in the US of A. :)

I've been debating the Australian Dollar (FXA) as a hedge (again) but have just decided to stick with my crops and gold. I just wake up every morning thankful I live in the 1 country in the world where inflation is negligible. We truly are blessed here. ;)

WSJ - New Hitches in Markets May Widen Credit Woes

This article in today's Wall Street Journal describes some of the "next shoes" to drop that I was speaking about last summer when everyone was saying "well it's just a subprime thing; it's contained; this is the kitchen sink". Again, as I like to say, "it does not matter until it matters". Wall Street can pretend none of this matters (which it did for many months), but now it appears they start to recognize the next issues coming down the pike so *POOF* now it matters. Funny. This is why being early to the game can really ruin your portfolio - when you bet against a market that ignores what is coming down the pike, you lose a lot of money. I lost quite a bit of money in September and October by holding a large stake in Ultrashort Financial (SKF). Why? I saw these things coming - but the market ignored it, and jumped on the "Fed Cuts Solve Everything Bandwagon". Only later in the year did I make up those losses (and more) when reality hit - thankfully the losses in share price in these bank stocks were so severe it paid me back in spades. So not only do you need to be intellectually correct, you need to have your timing in line with when the market begins noticing things you notice. Which makes this (equity investing) such a tricky endeavor.

One thing I have read over the years that I truly believe is once everyone starts talking about a subject ad nauseum, well it is most likely priced into the market. Subprime? I think it's priced into the market. Bond insurer bailout? Probably 90% priced in but I am sure we will get a knee jerk rally for no good reason once it is official. All the other credit issues from student loans, auto loans, credit card degradation, corporate spreads, commercial real estate issues, mortgage issues spreading up to prime borrowers? I hear drips and drabs of it from a few sources - but the mainstream press either ignores it or says its "doomsday" types who think these are real issues. So I don't think any of it (if it all comes to pass, which I think it will) is priced in. Hence why I continue to hold specialized Ultrashorts such as Financial (SKF) and Real Estate (SRS) <--- commercial real estate. In between the oversold rallies where "buy buy buy early cycle" mantra is screamed from pundits on CNBC, I still think we have a lot of issues to work through. Just like a 7 year bubble in housing does not get worked through in 18 months, I don't think a 20+ year bubble in credit gets worked through in 6 months. But as always, I could be wrong, and in times like we experienced at end of January when the "worst of breed" sectors rallied hard on the upteemth "time to buy the financials!" rally, it is hard to stand by your convictions when an army of computers say "Fed cuts 125 basis point, we need to buy early cycle plays". I do think by end of 2008 you will be hearing about credit card defaults, auto loan defaults, mortgages among the "well off" (prime) defaulting - much like 2007 was the year of "subprime". But for now, it's all generally dismissed... so it will be interesting what exactly comes to fruition and more importantly for investors, when "denial" turns into "acceptance" of these issues. As I stated a few weeks ago in 'Is it Time to Adjust Strategy', I'll be interested to see how the market reacts to the NEXT round of writeoffs, and foreign capital infusions which I assume should be coming by late March. We've had >$100 B in writeoffs and conventional wisdom (most of which never assumed we'd ever get anywhere near $100B) now says we are 80% of the way through... maybe $20-40B more and we're done. We'll see; if things really degrade $250B+ would be very easy to do in my book.

Last, if banks at these "fire sale" prices were such a great value - where are all the mergers and acquisitions? (and no I don't count government pushed acquisition of Countrwide Financial (CFC)) If things are so cheap, and things are so rosy and banks are SO undervalued - why are the stronger banks not eating up the "undervalued" ones? Where is all the massive insider buying? I just don't see it. So I don't buy this "great value" thesis. Remember it's all a big interconnected web based on Kool Aid and confidence. Once Kool Air or confidence leaves, then things contract. And it is all very leveraged - so contraction begets 10:1 contraction elsewhere. Think of it as your stock on margin - this is what all these "smart guys" have done - leveraged themselves to the hilt, so they are getting the equivalent of massive margin calls, which forces them to sell at bad prices, which causes another leveraged "smart guy" somewhere else in the world into a margin call, which forces him to sell, and so it goes. So I still believe we have a lot of interesting times ahead of us, despite what CNBC screaming heads say. And once again, nothing straight down (or up) - certainly we will have pockets of irrational exuberance like we saw 2-3 weeks ago, when these companies at the heart of all the issues rally and people are giddy that the "Fed fixes everything". So timing is key... trying to catch the meat of the downdrafts but being less levered against these parts of the market during "Kool Aid" phases.

• A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession.
• In the past few days, low-rated corporate loans -- the kind that fueled the buyout boom of recent years -- have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.
• Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings.
• Behind the latest problems are some common themes: Investors bought some of these debt securities with borrowed money, or leverage. As prices have declined, lenders have forced the sale of some of these securities. The cash being pulled out of the market by these sales has magnified the losses from rising defaults.
• After years in which banks and investors have lent money on especially easy terms, "You've had the biggest credit bubble -- probably the biggest credit bubble we have ever had," says Jim Reid, credit strategist at Deutsche Bank AG in London. Part of the bubble has already been unwound, he says. The problem is, "nobody quite knows where that ends."
• Especially hard hit: the market for loans to big U.S. companies with low credit ratings. Problems in this market have been percolating for months. These loans, known as leveraged loans, were a popular way to finance the multibillion-dollar private-equity buyouts of recent years that have wound down amid the credit crunch. During the past two weeks, prices on many of these loans have fallen to levels that in a normal environment would indicate that the market expected the corporate borrower to restructure or seek bankruptcy protection.
• Investors are also fleeing leveraged loans because the payments they make to investors are tied to short-term interest rates. With short-term rates falling, thanks to the Fed's rate cuts, those payments are shrinking. "The yields are just not all that attractive especially if you fear that [interest rates are] going to fall further," says Christian Stracke of debt-research firm CreditSights in London. "That just means that the yield you are going to be receiving is going to fall further."
• This week, UBS Securities and Wachovia Securities will be trying to sell portfolios of loans that may be held by a class of collateralized loan obligations called market-value CLOs. Both investment firms were lenders to these CLOs, which depend heavily on borrowed money. Now, with the market value of the loans behind these securities falling, the firms are liquidating a total face value of more than $700 million of them.
• Fitch Ratings last week cut the credit rating on pieces of 24 CLOs, putting several of them deeply into junk territory, with ratings in the triple-C or double-C range. Fitch also says it is reviewing its methodologies for rating market-value CLOs. These investments have triggers in place that force banks to liquidate loans being used as collateral when their prices fall by a certain amount.
• Having to liquidate portfolios of collateral is an added burden for banks, which already had $152 billion of loans they were trying to sell from buyouts of recent years. As the values of the loans they are holding decline, they could need to take additional write-offs. Market-value CLOs account for about 10% of the estimated $300 billion market for CLOs, according to research by J.P. Morgan Chase & Co.
• Related investments called total return swaps have also been hurt. These instruments are set up by banks for hedge-fund clients or other investors to buy loans with borrowed money. The loans serve as collateral, and when the values of the loans decline, the banks' clients can be driven into forced sales.
• Problems are cropping up elsewhere in credit markets. Money-market investors in the past have been large buyers of short-term instruments backed by tax-free municipal bonds and student loans. But they have been shunning these instruments -- known by such names as auction-rate securities and tender-option bonds -- because they fear the debt used to back the instruments will default or get downgraded by rating services.
• More than half of the nation's $2.6 trillion of municipal debt, meanwhile, is guaranteed by bond insurers like Ambac Financial Group Inc., MBIA Inc., and Financial Guaranty Insurance Co. Because these insurers are also on the hook for billions of dollars in troubled subprime-mortgage-related bonds, their guarantees are no longer worth as much. Concerns about the credit ratings of the bond insurers are filtering into muni markets.
• Commercial real estate is another segment of the market that is showing cracks. There were no new offerings of commercial mortgage-backed securities in January, and the cost of protection against default on such securities issued in 2005 and early 2006 has more than tripled, according to Market Group's CMBX index. Goldman Sachs estimates banks could write down $23 billion from CMBS losses this year.

There are a lot of acronyms here, and it all sounds complicated. Hell, new acronyms pop up each week - some of which I have never heard of. But to simplify it, just remember it's all a big interconnected web. Full of junk. And it all depends on (a) confidence and (b) fake ratings from rating agencies that have a major conflict of interest and total lack of rigor.

But aside from that, things are peachy...., homebuilders are bottoming since we will have a housing boom by end of year (or a shortage if you listen to Cramer), malls will be packed by summer, and banks will be saved by Fed cuts.... buy buy buy.

Long Ultrashort Financial, Ultrashort Real Estate in fund and in personal account

I Keep Waiting for the Pullback in Arch Coal (ACI) That Never Happens

I've stated a few times in the past week I want to add some more coal exposure, and Arch Coal (ACI) is the logical candidate, as it is the last major US producer I don't own. This chart tells the story. However, I like to buy on pullbacks... this stock refuses to pullback. Amazing strength in a terrible market over the past 6 sessions. Since I've been watching for an entry it's jumped from $45 to $53, or nearly 18%. Ugh.

No position

Bookkeeping: Reducing Suntech Power (STP) and McDermott (MDR)

I spent this weekend reviewing the charts of each position in the portfolio. Considering how bad the market is, we actually have a lot of good strength. But quite a few breakdowns as well.

These are 2 of my favorite names, but both now have violated the 200 day moving average (closing below this key technical level). So I am going to simply cut back these positions as both are up 2-4% this AM, and wait for better days. I'd rather buy some relative strength, meaning I'd be willing to buy these names at higher prices when they start reacting better. Otherwise stocks can continue into downward trend indefinitely and what looks cheap today can remain cheap for a long time (dead money at best, losing position at worst) Apple (AAPL) and Google (GOOG) are clear examples of this; once they broke their 200 day moving average they simply weakened and at best make sideways moves. Doesn't mean the fundamental story changed; just investors appetite for these names.

This is where my strategy differs 100% from "patient value investors" - who have been gobbling up these names, and keep averaging down and waiting, and waiting, and waiting. #1 you need to have endless pockets of money to do this strategy because each stair step down in price you buy the stock even cheaper and #2 you have a lot of opportunity cost wasted - while you are sitting in dead stocks, other stocks are performing so you give up that gain. The value guy arguement is "I am getting a great price". I don't disagree, but who knows when the reward will come. There have been people buying homebuilder stocks as "great values" for 2 years now. So I'd rather buy at a higher price when the market is ready to reward these companies for their intrinsic value. That could be tomorrow, 2 weeks, 2 months, 2 quarters, or 2 years from now. I'll let the market dictate that timing.

I sold down 175 of 275 shares of infrastructure name McDermott (MDR) near $45; this reduces this 1.1% position by 60%.



I sold down 200 of 400 shares of solar stock Suntech Power (STP) near mid $47s; this reduces this 1.6% by 50%



These were both positions I made a good amount on in the fall, but have given back a ton of gains, especially in Suntech Power. Both also have earnings upcoming which is another risk (or opportunity depending on how you look at it).



Long McDermott and Suntech Power in fund; no personal positions

Investment Banks - Are you, Dear Investor... the Sucker?

While this Bloomberg article speaks to the 5 major investment banks (Goldman Sachs, Merrill Lynch, Bear Stearns, Morgan Stanley, and Lehman Brothers) - I'd argue our whole public market system is based off the same theory. Outsized rewards for the few, and shared risk by the many. Risky bets are fine, because in this era of compensation that is so enormous as long as you hold a top position for a 3 year period you have generational wealth built for your family. [You're Fired! Now Here is $160M to Help Ease the Pain] There are very few true geniuses in the executive suite. Certainly very few that deserve to be paid 5,000:1 ratio in relation to the average worker. Get fired? Even better - huge compensation for that too. So there is no way to lose.

So, are we all suckers? One day I think we will look back and say, yes those people were. But it might be decades before people realize it. Anyone who brings up such subjects is suddenly anti-capitalist as capitalism decrees the top 2-3 people in a corporation by birthright deserve hundreds of millions. (much like anyone against Iraq war wants the terrorists to win?) Somehow companies in Europe seem to survive without the same compensation packages. And each time a subject like this is brought up, people say "leave it to the shareholders" - as if all of us with 250 shares in a stock have any power.

• Less than a decade after Wall Street's last major partnership went public, stockholders are paying the price for bankrolling the industry's expanding risk appetite.
• Four of the five biggest U.S. securities firms lost about $83 billion of market value last year, almost 90 percent of their net income since 1999, data compiled by Bloomberg show. That cut the annual average return for Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. during those nine years to 9.7 percent from 16.8 percent
• The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers, said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs Group Inc. Since raising money from the public, many of the biggest firms have abandoned that caution.
• ``If you're betting with other peoples' money, you're more willing to take risk than if it's your own,'' said Anson Beard, 71, who retired from Morgan Stanley in 1994 after 17 years at the New York-based company, where he ran the equities division and helped with the initial public offering in 1986. ``You think differently if you're paid in cash and not in ownership. It's heads you win, tails you don't lose.'' (Bingo)
• Merrill, which went public in 1971, outperformed the Standard & Poor's 500 Index in just five of the past 10 years. The largest U.S. brokerage paid more to employees last year than it collected in revenue. Morgan Stanley, public since 1986, beat the index in four of the past 10 years. Both New York-based companies diluted investors' stock last year when they sold stakes to foreign governments to shore up capital.
• ``Shareholders share in the downside and not necessarily in the upside, that's the whole story,'' said John Gutfreund, 78, who ran Salomon Brothers in the 1980s when it was renowned for the size of its trading bets. ``It's OPM: Other People's Money.''
• To be sure, the firms have been good investments over a longer period. Merrill rose at an average annual rate of 14.7 percent, including dividends, from 1980 through the end of 2007, according to data compiled by Bloomberg. Bear Stearns returned an average 15.2 percent since the end of 1985 and Lehman's average annual gain was 25.5 percent since it became a separately listed company at the end of 1994.
• While none of the companies are more than one-third owned by employees today, senior executives typically receive at least half their pay in shares. At Merrill, top managers get 60 percent of their compensation in stock; they're required to keep three quarters of it each year and are prohibited from hedging it, according to the brokerage's proxy statement.
• James E. ``Jimmy'' Cayne, who stepped down as Bear Stearns's chief executive officer last month after the firm reported its first quarterly loss, is the company's fourth- biggest shareholder, according to Bloomberg data. The value of his 5.7 million shares has dropped to about $460 million from $971 million at their peak in January 2007.
• Cushioning the blow are the millions in cash bonuses that Cayne and other Wall Street executives took home during the profitable years. While he forfeited a 2007 bonus, Cayne collected almost $40 million in cash payouts in the prior three years on top of salary, stock options and restricted shares, according to company filings.
• `We're essentially running all these investment banks and even the large universal banks on the same basis as if they were hedge funds,'' said Smith, the NYU finance professor. Executives ``make big gains on any gains in the firm's income, whereas they're not exposed, they don't have to pay it back in the loss.''
• ``The firms had to go public because to do these businesses you need so much balance sheet,'' Beard said. ``When the firms were private partnerships, you had to worry about how you were going to replace the capital'' when a partner retired. ``After we went public, we upped the cash compensation dramatically.''
• Merrill's then-CEO, Stan O'Neal, was forced out in October after the company reported a third-quarter loss that was six times what it had forecast less than two months earlier. Rather than fire him, the board allowed him to retire so he could keep $161.5 million in restricted stock and options he'd been awarded during his tenure. In the prior two years, he'd also received $32.6 million in cash bonuses.
• ``There are no partners of Merrill Lynch, there are employees,'' said Peter Solomon, a former Lehman executive who's now chairman of New York-based investment bank Peter J. Solomon Co. ``So they don't share in the losses and gains the way they should, they are able to shed those on to shareholders.''
• ``The partners at Lehman Brothers and the partners at Goldman Sachs and the partners at Morgan Stanley didn't take risk that was disproportionate to their resources, and when they did, they paid the consequences so they tried not to,'' Solomon said. These days, ``shareholders and the customers are the people who are financing these guys. They're financing casino operators.''

Head you win, tails you don't lose. Financing casino operators. Classic.

And the saddest statement is at some point you need to be long these names because the whole system is rigged for them. Banks in trouble? Federal Reserve on white horse. Bank losses? Issue more shares - always a new sucker somewhere. Losses? Send them to the people, keep rewarding insiders? Gains? Give a little to the shareholders, but keep rewarding insiders.

Again, the article is about the investment banks but the truth is it is our whole public capital system. Aside from a few guys like Costco's CEO who takes a modest salary - this is massive redistribution of wealth at it's best. And of course I am un-American for saying it. Let me be clear, if you start your own business from scratch you deserve every reward you could imagine. You took the risk, you put your capital and sweat equity in. Enjoy. But if you are simply installed in the CEO post to keep things running? Well most of these people are just stealing from the coffers. Many guys making $70K in middle management can make the same decisions and run the same company.

No position

Dry Bulk Shippers - Time to Get Back In?

I was quite negative about all the hoopla surrounding the dry bulk shipping stocks back in early October [A Chorus for Dry Bulk Shippers - Enough Already?]. Mania conditions were apparent in both the stock action and the breathless love for all things dry bulk. Now, 4 months later, the Baltic Exchange Dry Index, which represents spot rates for these ships, has been cut by nearly 45%, and a lot of speculators in these stocks have lost a lot of money; the vast majority of which of course bought at the top and sold at the bottom.

I did try a quick foray myself into Excel Maritime in November, since the stocks had dropped so precipitously [Adding Excel Maritime (EXM)], but quickly cut my losses as there was no end in sight in the downturn. There are a multitude of names in this sector, but the "momentum favorite" and stock most affiliated with spot rates is DryShips (DRYS). While most of my concerns still remain in the "long run", I could see a potential medium term trade developing here as most of the speculators have been burnt and probably view dry bulk with utter disdain right now (much like they view Google, Baidu.com or Apple), and the emerging weather related crisis in China [China has Power Outages; South Africa has Power Outages] could provide a nice catalyst; along with the coal and agriculture themes I talk about nearly daily. So with the prices more reasonable we might have an opportunity here.

Hence, I turn to the technical picture - I am going to focus on DryShips and Diana Shipping (DSX) - again there are many names in the group, but I'd prefer to stick to the better known companies. Plus they have some interesting technical situations. [Excel Maritime (EXM) has some overhang from a recent acquisition]. As we can see, both stocks have reversed off long multi month breakdowns, and now have crossed back above their 200 day moving averages. All that is left is to break above their 50 day moving averages and we could have ripe conditions for a move.





Above are 5 month charts. So of course we missed catching the bottom, and the stocks made large moves off those bottoms; but tell that to the countless people who tried to catch what appeared to be bottoms in November, December, and January. So we have a clear rebound, and much like the S&P 500 (or really any index) we show a series of lower highs - in fact these charts are almost carbon copies EXCEPT these stocks did not fall off a cliff last week like the indexes. So we might have conditions for a new breakout, and finally a move higher than a previous high. DryShips seems a bit more advanced than Diana Shipping but both are in similar condition.

While dangerous to buy anything from the long side of late - we might have an interesting sub sector move here, and certainly some relative strength of late. Diana Shipping (aka the more "stable" name) even after this rebound is still down nearly 40% from highs reached last fall, and DryShips (more volatile and tied to spot rates) about 45%. So we have a lot of room to move up, if this move is indeed pure. How long would I hold them? With the shortages in crops, coal, fertilizers, and the like & potential iron ore negotiations finalizing (which has been an issue) - maybe longer than I'd consider in the past. I will be watching these 2 closely this week and on a 5%+ move up, we'd have a confirmation of a technical breakout, and I'd begin a position. Or, if the market continues to break down, and these stocks hold "relatively" steady and can at least hold their 200 day moving averages - this would also be a good sign of relative strength; something in short supply in this market.

No position

Earnings Preview Mon-Wed

We're starting to come into the back stretch of earnings season, a few more weeks of hot and heavy to go. Most of what is left for the fund are the infrastructure and solar names, along with a few others. And once we are done with earnings we can move on to "whining for surprise Fed cuts" stage along with "more financial writedowns, and we promise and pinkie swear that *these* really are the last ones (the 5th kitchen sink!); by the way thank you Arabs and Asians for another $5 Billion of capital infusion so we don't implode" stage.

Here's what I'm watching...

Monday

A quiet day so I'll take a peek at Fording Canadian Coal (FDG) which is a Canadian royalty trust dealing in... coal. Unfortunately for Canadian exporters the currency is not falling through the basement so they don't have quite the same benefit of the US coal exporters.

Tuesday

Alpha Natural Resources (ANR) - I used to own this one myself a few years ago, but have not been looking at it lately - I already have quite the basket of coal names, and am not sure if this would be the first name to add if I added another, but still worth a viewing.

Expeditors International (EXPD) - a logistics (transport) company

General Cable (BGC) - a former fund holding which I still like over the long term, but in a slowing growth (global) scenario I decided to sell it.

Wednesday

Agrium (AGU) - part fertilizer producer/part retail arm involved in all things agriculture. I prefer the pure play fertilizer stocks myself, but should have good things to say about ag in general.

Baidu.com (BIDU) - a smaller fund holding; my personal wish is some miss or disappointment that rocks the shares so I can scoop these up at much lower prices - even if I take a near term hit. I have never been able to build up a large position in this name simply due to my cringing at its valuation. But it's starting to get interesting now; however its chart is a disaster with the stock breaking below the 200 day moving average. I would be very interested in owning more of these shares at the prices I bought it back in August 2007 around $160s - $180s. Buy and hold investing, anyone? (this stock was north of $400 6 weeks ago). It still would not be cheap at those levels, but I like buying duopolies, especially government supported ones. [Welcome back Home Baidu.com]

Genzyme (GENZ) - a medical related stock holding it's 50 day moving average; have to respect that even if not the most exciting company out there. Better than a sharp stick to the eye.

Rio Tinto (RTP) - one of the few large world mining concerns; currently trying to be bought by BHP Billiton. I've avoided this group for the past few months because I felt a potential global slowdown would hurt base metals (i.e. copper), more than precious metals (i.e. gold). However, the iron ore, and steel names are still firing on all cylinders. Interesting to watch.

Don Coxe on Inflation

A few weeks ago a reader sent me an article featuring some thoughts by Don Coxe, an economic strategist for Bank of Montreal. [One Lonely Voice Agrees with Me on Food Inflation] Since then, I try to see if I can find an article from him here or there, as we seem to be "on the same page". Again, I also try to read items that are in complete disagreement with me as well, but frankly thsoe people have been so wrong for the past 9 months I am having a hard time reading some of their stuff with a straight face. But I continue to try.

Coxe seems to agree with me on the stagflation thesis I have presented over the months. I have also noticed some people are pointing to potential deflation which is a more sinister affliction - pointing to housing values and the contracting credit markets. While this could be a potential future event as well, it would actually be a far more sinister outcome than stagflation, which in and of itself, will be debilitating. So I am going to stick with a 1970s/early 1980s scenario (stagflation) for now, and keep the 1930s scenario (deflation) still on the back burner. Stagflation also works with my World of Shortages theory the best. Either way, we have some of the most interesting economic times ahead of us I believe, in many generations. Keep in mind, all the data used below is "official government statistics" which I find to be baloney, especially when having to do with inflation, so when I read articles like this I overlay real inflation numbers like we see from companies themselves [More Economic News from Companies Themselves] or realistic trade figures which show for example imported goods are up >11% year over year [Real Inflation Showing in Reports Not called CPI/PPI] or quite frankly just walking around this country in an upright position, with a heartbeat, and observing reality.

As always, I am early, and probably considered an outlier. Just as my "recession" calls were both early, and an outlier last summer. There is a lot of talk below of my new favorite term - 'agflation'

• Inflation, that retro economic scourge of the 1970s, has embarked on a bit of a comeback tour. While core inflation figures remain low in the U.S., the consumer price index (which includes food and energy) rose the most in 17 years in 2007, jumping to 4.1% from 2.5%. That lends credence to the warning by a group of economists that the road ahead will be marked by good old-fashioned ’70s-style cost-of-living increases once the current downturn is done.
• It’s been a generation since general increases in annual prices were a part of the national conversation. But back in 1979, when inflation hit double digits and drove the purchasing power of $100 down to just $87 in a year, it was a major concern. Middle-class citizens fretted about the clear and present danger to their standard of living, and policy-makers worried western societies were going to be gutted economically.
• But Armageddon never arrived. Inflation relaxed through the early ’80s and eventually faded as an issue in the ’90s — the result of a combination of factors, according to Donald Coxe, global portfolio strategist of BMO Financial Group. The mining and oil boom during the ’70s brought a flood of energy, metals and food onto world markets; Ronald Reagan tamed the unions; and there was plenty of low-priced goods manufactured offshore coming into the West. All of which put a cap on price increases and ushered in a 25-year golden age of low and stable prices that has stretched almost to the present day.
• The problem now, though, says Coxe, is that this era of disinflation is coming to an end. In a new report, Commodities After the End of Deflation, Coxe updates the prescient call he made five years ago about the beginning of the commodity bull market that has dominated this decade. Resource investors will be glad to know he still thinks the current bull has another five years to run, but now that run will be in an inflationary environment, rather than a deflationary one.
• A recent trip to India convinced Coxe that 25 years of global trade has allowed many of the world’s formerly poor to increase their consumption of food and energy and take on a more western lifestyle. A global boom in protein consumption means more grain is fed to animals to manufacture meat, causing a structural change in the demand for those food grains. “The burgeoning Chinese middle and upper classes’ demand for meat and dairy products means that growth in China’s consumption of feed grains is much faster than its famously growing demand for oil and metals,” reports Coxe.
• The result is that global grain prices are rising even though the world has just experienced two bumper crops, something that hasn’t happened since the Second World War.
• The result? There were food riots last year in Yemen, China and Mexico, while all-in inflation has been running ahead of core inflation (a measure of inflation that doesn’t factor in food and energy) in North America for some time.
• And while food may not make up much of the average western household budget, the larger worry is that the globalized trade networks set up over the past 20 years have also begun to pass along inflation. “The ability of China and India to continue to export deflation is being weakened by the high percentage of foods in their CPIs (consumer price indexes),” says Coxe.
• There’s also a global boom in biofuel production. “The supply in relation to consumption is at an all-time low in terms of grain. And now corn for ethanol is crowding out other crops, and so you have a situation where you have even more limited land for wheat and rice and whatever,” says Coxe. “In an environment that is already very tight, that’s a recipe for increased food prices, food inflation.”
• U.S. food inflation is already running at 4.9% in the consumer price index, the highest since 1990. But Avery Shenfeld, an economist at CIBC World Markets expects that to go even higher. “By the end of [2008], we predict that food inflation will be running well over 5%, and as ethanol production rises to nine billion gallons in 2009, food inflation will rise to 7%, its highest level in more than 25 years,” he says.
• Taken together, the strange entanglement of macro forces — rising living standards across the developing world, new biofuel production, depleting traditional energy sources and attempts to cut greenhouse-gas emissions — suggests the world has become inflation prone in a way it hasn’t been in a generation, says Coxe. “It won’t be as bad as the ’70s,” he assures. “But there is a real worry we could see over the next couple years the most painful global inflation we’ve seen in three decades.”
• No less an authority than Alan Greenspan, former Fed chair, has suggested as much. In his recent book, The Age of Turbulence, he states his replacement, Ben Bernanke, will have a tougher job than he did. Poor Bernanke will have to manage through an era in which rising living standards around the world will lead to real inflation, volatility and economic instability, and possibly, according to Greenspan, double-digit inflation.
• Oddly enough, that change in focus will add to the problem ahead. Some suggest that M3 U.S. money supply — a broad measure of the total of money outstanding (no longer calculated by the Fed, much to the consternation of conspiracy theorists everywhere) — is expanding at its most rapid rate ever. And that has to be taken into account by inflation watchers. “There is too much of the ’70s to ignore here,” says Coxe. “Now we’ve got banks like the Fed forced to print more money to try to restore liquidity at a time we’ve got the money supply growing faster than the production of goods and services, which, by the way, is the technical definition of inflation.”
• Worse yet, the Chinas and Indias of the world are cranking up the money-printing presses to keep their currencies from rising too fast against the U.S. dollar. “Russia, the world’s seventh-largest economy, is realizing monetary supply growth of over 40% now,” says Coxe. “Anybody who thinks inflation is still going to be measured between one and three percent 12 months from now isn’t reading the story. This is going to become an inflation reality show.”

So again, these tie into themes I have been espousing.

1. A World of Shortages, especially food
2. Printing presses across the world going full steam as countries refuse to allow the business cycle to happen (the Greenspan rule), and due to "financial innovation" it is almost a necessity in the USA to flood with liquidity as US bank balance sheets are eaten way by the bacteria of their own devices.
3. M3 Expansion at record levels - while hidden away from view [What is M3 and Why do you Care?]
4. All the while government reports telling you nothing to worry about - as long as you exclude the volatile energy and food component, it's all good.
5. People's wages increasing 3% in general, and falling more and more behind each year in a cost of living adjusted world

What does it mean to you dear stock investor? It could mean a rising stock market (world full of worthless paper dollars chasing a fixed amount of stock), while the economy continues to crater. A true dichotomy. In the meantime, as I've been stating crop commodities are due for some correction (nothing goes straight up), but each correction I believe will need to be bought - for many years. Fertilizer should also rise in tow, but I assume at some point farmers will push back on fertilizer and say enough is enough on the price increases... I just don't know when and at what price point.

Keep in mind, if we have a drought in the US heartland one of these growing seasons, we will have a true catastrophe in the globe. Stockpiles are already at multi level decade lows, even with the "best of times" of late in terms of growing seasons here in the US.

Long DB Market Vectors Agribusiness in fund and in personal account

Bookkeeping: Weekly Changes to Fund Positions Week 27

Week 27 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: 7.5% (vs 5.6% last week)
52 long bias: 72.6% (vs 70.9% last week)
6 short bias: 19.9% (vs 23.5% last week)

58 positions (vs 57 last week)
Additions: Sohu.com (SOHU), Thornburg Mortgage (TMA), MFA Mortgage Investments (MFA)
Removals: Solarfun Power (SOLF), First Solar (FSLR)

Top 10 positions = 39.9% of fund (vs 39.6% last week)
37 of the 58 positions are at least 1% of the fund's overall holdings (63.8%)

Major changes and weekly thoughts
Using the S&P 500 as a proxy for "the market", we continue to see prolonged weakness [S&P 500 Still Looks Putrid]. While we did have quite a counter trend rally the past 2 weeks, especially in the most beaten down sectors, my contention has been its a rally within the context of a bear market and thus far this is holding true. Not much more to say for the market - it just continues to struggle to find footing as it finally accepts a slowdown is here; now the next phase is deciding what sort (depth/duration) of slowdown we are in, and have coming.

For the fund, considering we have 70% type of long exposure I was happy to escape the week relatively unscathed, as the indexes faltered badly. Unlike the past few weeks when financials, home builders, and retailers flew, aside from 1 day (Thursday) when many retailers jumped on "well it's not as bad as we thought, even though a couple companies beat forecasts they lowered 4-6 weeks ago" thinking - most of these names did fall this week; but just about everything did. Some pockets of mild strength in coal and fertilizer, the former on large macro trends of power outages and higher prices, and the latter off of sterling earning reports in the sector (however some stocks were still sold off on great earnings). My crop ETF (DBA) also added another 4%. As I wrote a few weeks ago this is essentially my "money market", safety stock all rolled in one. This does not mean it cannot go down, but crop prices just seem to have no quit in them. Wheat went from below $10 to nearly $11 a bushel just this week alone - outrageous moves. These crops are overdue for a pullback, but the "long long" term to me, points to some serious issues in crop production that I've outlined many times, so I plan to stick with agricultural commodities for the very long term.

I continue to stay in a defensive posture (for a mutual fund anyhow) - while we may have some rallies along the way I still expect a retest of January lows at some point. Further, I am trying to find some names that I can hold for more than 2 weeks to partake in the times the "early cycle" financial/retailer/home builder trade is on, which can provide more balance in the fund.

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 closed the last of a position in Solarfun Power (SOLF) @ $17.90; mostly due to a convertible debt offering. I also don't want that much solar exposure at this time. This is the type of name that can be up 40% in the blink of an eye post earnings, but holding a solar stock into earnings carries a big risk.
2. I added to 2 coal stocks, Massey Energy (MEE) as it mulled production hikes, as well as Consol Energy (CNX)
3. I cut back Research in Motion (RIMM) quite heavily around $94, and Apple (AAPL) less heavily around $132, as the stocks were technically damaged, but at recent highs. I wrote even as these stocks presented some good values, it was very possible RIMM could fall to $80s and AAPL in the $110s. However I did not expect that to happen within days.
4. Tuesday in a tape that turned very bad later in the day, Mosaic (MOS) and Potash (POT) got an upgrade from Citigroup so, in this trading market, I took some off the table as the stocks bounced.
5. I began a starter 1% position in Chinese search/gaming stock Sohu.com (SOHU) - the company has reported very good earnings of late, and raised guidance yet again. Going into the Chinese Olympics this name has a lot of momentum, but of course the invariable question is how will business be after the Olympics. I suspect still good, but of course this could create an overhang for the stock. The technical position is neutral so I don't want to put more of the portfolio towards this name until it improves.
6. I added more to Latin America "Ebay" Mercadolibre (MELI) as the stock seemed to find support in the mid $30s. This suspicion was false, as the stock weakened further in the week as the stock market weakened.
7. Wednesday, I began a stake in "high end" mortgage lender Thornburg Mortgage (TMA) in the $12.60s/$12.70s, after a solid earnings report earlier in the week. The "stimulus" package, to stuff Fannie and Freddie full of $500K, $600K loans should really help open the spigots for Thornburg. I added a bit more to this stake later in the week.
   
8. I cut back my 2 oil drilling names ahead of earnings as most stocks reporting are getting pummeled the minute they open their mouths in this environment. However, I did add to CF Industries (CF) ahead of it's earnings.
9. Thursday, I began the first steps of rebuilding a Mastercard (MA) position as the stock fell about 10% from where I last sold. This is still a less than 1% stake, and I hope to see lower prices (in a general market pullback) to add more to this stock at cheaper prices.
   
10. I took Mosaic (MOS) back up to a 6% stake and CF Industries (CF) up to a 4% stake ahead of the latter's earning report. CF really came through with an incredible earnings report which it was rewarded with a minor pop and then flat opening Friday - at which point I added about 0.5% more to take it to a 4.5% position.
11. Friday, I decided to cut back Ultrashort Techonology (REW) quite severely (75%). While I add/reduce these Ultrashorts often, this was a very big slice. While the technology stocks could of course falter even more in another leg down in the market, some of their charts are looking a lot like retailers, and financials did about a month ago so I want to reduce some exposure if we get a dead cat sore of reflective bounce of 5-9%.
12. I also cut back Ultrashort Russell 2000 (TWM) as the small caps have seen some relative strength of late. But after thinking through it more in depth, I did add some of that exposure back later in the day. (so you can call me a flip flopper) As I stated this week, it is very hard to figure out what subsector of the market to short right now because it literally changes by the hour, based on the market mood of the day. The worst sectors are relatively washed out (although they rallied hard the past 2 weeks), and the best sectors I actually like the fundamentals. But of course since they have not fallen as much as the junk, they could fall much farther - so it's a quandry.
    
13. I closed another solar position, First Solar (FSLR) - again we head into earnings season for these names, and this is not an environment for high valued stocks announcing earnings. It is always a risk to hold such stocks into a round of earnings, but the risk is heightened by a factor of 10 in this time frame. Further, solar has very little institutional support and seems to be the home of the retail trader which makes volatility that much worse. This sector is high risk/high reward - but more like gambling than investing much of the time. I would like to buy this name back at a lower price point.
14. I asked readers Thursday for some help in pointing out some stocks showing ANY sign of strength in this market - so very few stocks still trade above their 50 day moving average - and I got some great suggestions which I will continue to work through and investigate. (My watch list is about 3x as big as my "portfolio") One area mentioned was the mortgage REITs, and Friday I decided to begin a starter position in MFA Mortgage Investments (MFA). The stock has had a huge run, so I am hoping to see a pullback to the $9.50 - $10.00 range to add to this position but began a stake near $10.90. While in the past decade I've bought/traded just about every sector - this is a first for me, so I'm still digging through and learning about the space each day.
    

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