Friday, February 29, 2008

Bookkeeping: 'Rising Tide' Performance Week 30

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Week 30 performance of the mutual fund

Comments: This week summarized the market over the past month and half quite perfectly. Direction-less. Volatile. Completely bipolar. After a huge rally last Friday in the last 30 minutes, the markets started slow this week but then did another huge parabolic rally on S&P confirming the AAA status of the bond insurers (it is quite laughable that companies in need of a bailout and who have to offer 14% for someone to buy their bond issuances are rated the same as GE or Berkshire Hathaway, but I digress). The market could care less about those details, and economic report after economic report about how badly things are degrading....good feelings of warmth covered the bulls. It continued Tuesday as S&P 500 level of 1370 was finally breached, as more bad economic news was laughed off - and Wednesday as more bad news was smothered under a pillow, we seemed poised to break out; you could hear the trumpets playing in the distance... then Ben came on TV and actually was half way honest about the situation and people said "this is not the company line, what is going on here?". But more importantly, the 50 day moving average of 1390 was not able to be broken. Yet another rally was revealed as nothing more than shorts forced to cover as CNBC breathlessly reported about bond bailout after buyout rumor after political bailout. No real buying after all. Then Thursday and Friday we went back to the bottom of our endless ping pong range. And the whines for Fed cuts began anew. Some things never change.

I've been positioned to try to be as neutral as possible... realizing I'd be trailing if the market shot up quickly Which happened in the last 30 minutes last Friday and Monday and Tuesday of this week. Honestly, I was not really sure what exactly was moving the averages so strongly because aside from a few retailers and homebuilders not much that exists on my watch lists were making strong moves early in the week. But my short exposure worked against me during the Kool Aid drinking sessions early in the week. However, staying consistent with these positions and not bailing out on them (which any good CNBC viewer would of done after hearing the Hosannas early in the week), helped out later in the week. Most of my positions really did not do much this week, it was more about asset allocation. High cash positions and short exposure held me back early in the week, but got me ahead of the market during the latter part of the week. Considering I took two high profile hits with 5% of my portfolio (3% with Foster Wheeler, and 2% with Thornburg Mortgage), and after really lagging the indexes early this week, I am very content with the final result of the week.

I did spend most of Friday throwing aside short exposure and dropped the allocation about 10%, going from low 20%s to low teens. Cash is back up to 19%, and I have about 10% in commodities from the crops to gold to a sliver of silver. So I am still not that hot on equities, BUT we are at the bottom of our "range". (until the range breaks of course) I still have the same problem I've had for a few weeks now. Most of my favorite names have had huge runs and are due for a pullback, and other names of interest have terrible charts. So there are not many areas to apply money, although I picked at spots here and there. Overall, my position remains the same it has been for a long while now. Sitting as neutral as possible (for a long biased mutual fund at least), waiting for a clear direction of the market. Frankly it is quite pathetic to see the market rally on the same news/hopes week after week, but it is like waiting out a 4 year old child who insists on an alternative view of reality. So I'm trying to remain patient. As stated earlier, if we break down past technical resistance I plan to apply this cash right back into heavy short exposure to hedge the long exposure.

The S&P 500 lost 1.7% and Russell 1000 lost 1.6% this week. Rising Tide Growth Fund was flat for the week.

Price of Rising Tide Growth: $11.341
Lifetime Performance to date (vs Aug 3, 2007): +13.41%

Comparable S&P 500: 1,330.63 (-9.18%)
Comparable Russell 1000: 726.46 (-8.76%)

Fund return vs S&P 500: +22.59%
Fund return vs Russell 1000: +22.17%

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

How Quickly Things Change - Where is Charlie Gasparino?

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Amazing how things change that quickly, eh? Bear markets.

Wednesday at this time, I wrote an entry in which I put out this chart of the S&P500 and said a picture is worth a thousand words. We were at S&P 1382 level and right below the 50 day moving average. Champagne corks were being uncorked around NYC. The bottom is in folks were crowing. (for the 50th time). "Everything will be fine in 6 months" everywhere you went. Traders were dancing to "Conga"



I wrote:
Once again, people have no clue about the tidal wave of inflation coming in my opinion and just how awful this is going to be to a consumer lead economy. Profits are going to be punished for any company tied to the US consumer, no matter what the stock prices are doing today. It's simply denial. We are in full Kool Aid stage, which happens for a period every 3-5 weeks where bad news is great news. We are simply conditioned to believe the Fed does fix everything and I think sometime in the next 9-12 months people will finally come to the realization it cannot. But they won't believe it until they see it.

Now, exactly 48 hours later to the minute we are down at S&P 1334. And the chart looks like this.



So in 2 days, we're right back at the bottom of this never ending range. At this time 1 week ago is when our buddy Charlie Gasparino broke news of the pending Ambak (ABK) bailout and when all the above mentioned partying began. So again,this is like Groundhog day since August 2007. Bad news comes out... market goes down. Some sort of Fed induced bailout, Bush induced bailout, Paulson induced bailout, Fed cuts, or Buffet buyout news comes out, market goes up. Repeat. Rinse. Over and over and over. Months on end of this. *yawn* When facts come out, market goes down. When interventions come out to stop the inevitable, markets go up. One can only imagine where the market would be without all these bailouts, Fed cuts, speaking tours, etc.

Eventually these people will be right, and the bottom will be reached. But they've been calling it for half a year now. Credibility is shot. And people who listen to them are down a ton. Then when they actually are correct, they will crow about it - not mentioning the 49 previous turns they called too early. Again... bear market. Broken technicals. It is not to be believed until we make a clear uptrend up.

Right now, as the market faces falling off a cliff (again) is when they usually trot out good ole Charlie on CNBC to save the market. I don't have a TV so I'll wait for the market to skyrocket 200 points for no good reason like it did twice (Friday and Monday)... *yawn*. Either way I am dumping (as written this morning) Ultrashorts left and right into this firestorm.

We still remain in this gosh forsaken trading range: S&P 1320 on the bottom and the 50 day moving average (1390) on the top - at least we broke S&P 1370 which was the top for past few weeks. So we have a slightly wider range.

What next? Well for the last 6 weeks pattern, we will bounce soon (just like I wrote last week around almost the exact same level). Groundhog day. The problem is we continue this pattern over and over, and eventually it will break. And the longer a pattern is the more strength the break will have - meaning we are going to have a tremendous move once we exit this range. If it is up or down is an open question but since all this mumbo jumbo trading is below all key technical averages, you have to believe down. But for now, since I fear the ability of Buffet to heal the sick children with a touch of his hand, I am cutting back on my Ultrashorts and simply moving 90% of it to cash. But .... if we break below those key technical levels of late (S&P 1320) it gives credence to the thought that we will be breaking down (not up) and that retest of January lows I've been waiting on is in order. And I'll be buying back all this short exposure (and more) that I am letting go this afternoon.

So it is hard to press shorts here with Buffet-palooza coming to CNBC Monday morning, plus such a swift degradation in 2 trading sessions. But hard to be too bullish based on reality of the economy, and technical condition. So we continue into limbo....

p.s. from the Department of Pathetic Facts: The drug addicts on Wall Street pushed up probability of 75 basis point cut at March Fed meeting from 30% range yesterday to 60% today. These people really are sad. The first 6 cuts really did the trick, eh? I believe the last 50 basis points satisfied the market for an entire 45 minutes before the drug addicts turned against their dealer and pushed the market down. The "fix" is lasting shorter and shorter amounts of time. Do they really think this is a salve for everything. It is so old. But we can begin rallying any day now for that mid March meeting (more Fed cuts coming! Yee haw!), because as we all know (all together now) "Fed cuts solve everything".

They need their drugs (rate cuts) and they need it now. 75 basis points. At some point Ben will look into his gun and realize he is out of bullets. And we're going to be Japan. I'm wondering what the drug addicts will ask for then?

Faced with Mortgage Default, some US Homeowners Walk Out

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This article is something we've been discussing for quite a few months; it should hit the mainstream media by next fall when it becomes more and more rampant. As I've said in the past, taking the morality away, it's actually the "right" financial decision in many ways. Instead of having an albatross of debt around one's neck, just take the 1x hit to credit, and get back to a reasonable rental cost. This is the dirty secret of all these bailout plans - for many people it makes no sense to have a "frozen" rate to keep paying for an overvalued asset. Further as each week passes, more and more are underwater. We've talked about this many times in the past, so nothing new to blog readers.

But.... every time the pundits cheer their Kool Aid about how housing inventory numbers are finally showing signs of bottoming out, just remember all the walk aways that will be coming. Until house prices stop falling AND the cost of living stops increasing quicker than wages; they won't stop walking away. This is what you get when you give people homes that they don't have to put a dime into. And these are the type of people most of these bailout plans will target... that's the irony. Bought at the top? Nothing down? Tax payer money coming to help you!
  • When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried. In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford.
  • Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.
  • Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender's problem. "They took the negativity out of my life," Zulueta said of You Walk Away. "I was stressing over nothing."
  • In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure has changed, economists and housing experts say.
  • Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home to cover closing costs.
  • "I think I could make a case that some borrowers were 'renting' (with risk), rather than owning," Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.
  • For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one's credit record, but not one that involves the loss of life savings or of years spent scrimping to buy the home.
  • Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. "I've had people say to me, 'My house isn't worth what I owe, why should I continue to make payments on it?' " Newhouse said.
  • "There's a whole lot of people who would've been stuck as renters without these exotic loan products," Sinai said. "Now it's like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble." (this is a GREAT explanation)
  • In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.
  • The value of homeownership, then, has increasingly shifted to the home's likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.
  • Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Menegatti said, 20 million households will owe more than the value of their homes. (think about that for a moment...)
  • When homeowners see houses identical to their own selling for much less than they owe, Menegatti said, "I wouldn't be surprised to see five or six million homeowners walk away."
  • "It's not a moral decision," Maddux said of foreclosure. "The moral decision is, 'I need to pay my kids' health insurance or my car payment so I can get to work.' They made a bad decision, but they shouldn't make more bad ones just because they have this loan."
  • "I know in a few years my credit's going to be fine. If I want to get another house, it's going to be there. I'm not the only one who went through this. I know I'm working the system, but you got to do what you got to do. There's always loopholes."


Bookkeeping: Adding Coal Exposure

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Traders market... all of these names are in nice uptrends but have pulled back in past 2 sessions, so I am beginning to re-expand positions, and buy back shares I sold off of late. $5-$6K type of additions to all 4 of my primary coal names
  1. Peabody Energy (BTU)
  2. Consol Energy (CNX)
  3. Massey Energy (MEE)
  4. Arch Coal (ACI)

Wishing the fertilizers would pull back more - solid as a rock...

Long all names mentioned in fund; long Massey Energy in personal account


Bookkeeping: Trading Stake in DR Horton (DHI) Engaged

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I don't believe in any homebuilder recovery. I don't believe in these stocks. I don't believe in the Kool Aid. That said, I don't need to believe... I just need everyone else to believe.

I have 10% of my portfolio open for "trading" positions, of which I am going to throw this purchase of DR Horton (DHI) in, along with DryShips (DRYS). Why DR Horton? Nothing specific. It could of been Toll Brothers (TOL), Pulte Homes (PHM), Lennar (LEN), blah blah. I am staying away from the worst of breed, Hovnanian (HOV), Standard Pacific (SPF), and the like simply because they are truly junk, but they could of course go up the most. Instead of buying an ETF to buy a basket, I just bought 1 representative stock - they all act the same since people are not differentiating.

DR Horton is down 19% in 2 sessions, when we were in full Kool Aid mode. At some point in the next few weeks we will be back in full Kool Aid mode. I'll set a sell price at $17 or so to offset my purchase today @ $14.25. That would be a 20% gain. Downside risk is a return to the $10.50s-$11s, but I'll still keep the position because at this point bad news does not push these stocks down - people are convinced they are early cycle plays so when the market goes happy, these stocks bounce. So even if it breaks to $11, it will bounce back at some point, so if this one goes against me in the short run I will just sit on it and wait for happiness to return to Oz.

Again pure trade, and a "yin" to my normal "yang" in terms of portfolio holdings. Any bond insurer bailout, Buffet happiness or government bailout will send this type of stock screaming. Not that I agree with those thesis but one only needs to observe. Go forward I plan to trade "a" homebuilder stock on and off until maybe 18 months from now when the real homebuilder rally should begin... when the stock shoot up in anticipation of the bounce in home purchases.... of 2011. Until then, going to act like a pure trader with these names. When they fall, buy - when Kool Aid flows, sell. Repeat.

Last, the risk with any of these is the market finally looks in the mirror and sees the truth, but no risk is without trade and I won't sell this at a loss, because I am of firm belief that when the market rallies (even from a meltdown) people will again run to this type of junk early cycle thesis. Again, not my typical fare nor my typical strategy. But this is simply put a traders market, nothing else. So I am putting on this trade, while waiting for the market to either break out or break down (I am betting on breaking down)

I bought 2000 shares for a 2.5% stake in the $14.20s. I'll be gleeful to pass this along to some Kool Aid bull (or hedge fund computer) at $17.00 sometime in next weeks/month or two.

Long DR Horton in fund and personal account

Bookkeeping: Adding to Huron Consulting (HURN) as Poor Man's FTI Consulting (FCN)

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Off the back of yesterday's great report by FTI Consulting (FCN), I am going to add to my position in peer Huron Consulting (HURN) here in the $50s. I did review the numbers again yesterday from Huron's earnings report and they were not that bad at all; simply guidance was not as great as the market wanted and the stock has been punished tremendously.

The chart is an unmitigated disaster and I do not like buying stocks in such a position because they can continue to fall with no bottom in site, but we *might* have some sort of bottom here. Or it could simply be a weigh station before the next leg down. However, we've seen some strength here in the $48-$51 range for a few days at least and I'll add here, and see if we can show some resilience. If this level does not hold there is no support until $40 range, which would take the stock back to late 2006 levels.. a bit silly considering Huron Consulting is growing at a good clip (just not good enough for Wall Street) The stock is off 25% since earnings which is way overdone in my book; we are still talking a company that should be growing 25% a year for the next few years, and targeting over $3.00 in earnings in 2008. And as dislocations grow in the US economy their services "should" be needed more. However, the counter arguement will be as corporations feel squeezed they will cut back on consultants. So I can see both sides of the story, but I believe most of the fears are priced in at this point. Further, the valuation is much more attractive than it was just a few months ago in the $80s.

I've doubled my stake today by buying 150 more shares, and Huron Consulting is now a 1.3% position. If I see some signs of strength I'll add more, but we will have a lot of resistance up ahead in the $60s range.

Long Huron Consulting, FTI Consulting in fund; long Huron Consulting in personal account

Mark vs Buffet vs Ultrashorts

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As we have mentioned each of the past few Fridays, I plan to lighten up on the Ultrashorts as we get near the weekend. We always have to fear government interventions. I watched one show on Fox Business last night, and the first 20 minutes literally was devoted to (I kid you not) comparing about 7 different "intervention" plans, 3 from Dems, 2 from Republicans, and 2 from Hillary/Obama. It is sickening to be blunt, but something we talked about last summer... as the situation worsens we will get bailout proposal on top of bailout proposal by these panderings *edited for content* ;) Now when one of these passes eventually, the market will scream higher, because after all, we are all about free markets here in America right? Right.

Anyhow, I do fear all these invisible hands and worse yet Buffet is on CNBC for 3 whopping hours premarket Monday. Last time he was on, he said he'd be happy to kill off the bond insurers by stealing their municipal bond business, and leave them to die on the side of the road.

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.

Just imagine what would of happened if Buffet actually said something that would of HELPED the bond insurers. This market is so desperate for any Kool Aid, they ran the market up 200 points. While ridiculous, you can't reason with Kool Aid drinking bulls. So Buffet was able to run up the market 200 points in 12 minutes. Now they are going to give him 3 hours. 180 minutes. So by my math that means the markets could rally 3000 points (200 points for every 12 minutes Buffet is on CNBC) Monday. So I don't want to be in front of that.

As we all know
  1. Buffet makes puppies happy
  2. Buffet will be happy to bailout all bond insurers
  3. Buffet will buy all homes from all underwater home owners
  4. Buffet makes little children happy
  5. Buffet can make credit problems disappear with his little pinkie
  6. Buffet makes Chuck Norris look weak
  7. Buffet will buy out Singapore's sovereign wealth fund
  8. Buffet will buy the entire United Arab Emirates
  9. Buffet will buy Yahoo for his buddy Bill Gates
  10. Buffet walks on water while riding a unicorn and butterflies and chirping birds follow him around everywhere he goes

So for these reasons, 3 hours of CNBC will get the Kool Aid bulls shaking with joy and we'll probably see Dow +3000 premarket. So I'll be cutting back Ultrashorts throughout the day fearing the Kool Aid that will literally be gushing out of my TV, not to mention the saliva running down the shirts of CNBC hosts while we hear about unicorns, butterflies, and little puppies.

Anyhow the market is down 2 days in a row, and it's been 48 hours since we heard of bond bailout talk so by 3:30 PM today expect CNBC to trot out Charlie G and tell us about how the bond insurer bailout is going to be here any minute now (for the 40th time). And the bulls will roar. And we'll keep repeating this ridiculous game until someone, somewhere decides to face reality. Until then... more Kool Aid coming next week. Frankly, this charade is all a bit tiring; if we'd face reality we could drop hard, wash out, and then build a case based on reality. But we refuse. So we keep repeating the same up and down, as we toggle between "reality" and "6 months from now everything will be great" - whatever the flavor of the day is, we trade up or down on.

Short Kool Aid


Natural Gas Focused Exploration & Development Companies Continue to Shine

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We mentioned a few weeks ago how the charts for the exploration & development companies, specific the ones with more focus on natural gas, were doing extremely well [Feb 11: An Interesting Development in Natural Gas]. Since then I've been keeping an eye on this space for news flow and everything coming out of this space has been quite bullish.

Some examples.... yesterday EOG Resources (EOG) rose nearly 20% on updates on some finds
  • Shares of EOG Resources Inc (EOG) surged 18 percent to a new high on Thursday after the independent oil producer said it may have discovered one of the largest accumulations of natural gas in Canada so far.
  • It also raised its production forecasts, touting success in the Barnett Shale play in Texas and its lands in northwest Colorado, but did not factor in any volumes in the early-stage Canadian play.
  • Houston-based EOG said drilling on its acreage in northeastern British Columbia may have uncovered 6 trillion cubic feet of natural gas, which one analyst said would rank it among the largest gas resource plays in Canada.
  • EOG also said it is raising annual average production growth estimates for 2009 and 2010 to 13 to 15 percent from its prior forecast of 10 percent.

Southwestern Energy (SWN) had a very impressive earnings report

  • Southwestern Energy Co. doubled its profit in the fourth quarter and set a two-for-one stock split as the natural gas producer capped off a month of big gains in its stock price.
  • The company said late Thursday that net income in the period rose to $71.6 million, or 41 cents a share, more than twice the $33.8 million, or 20 cents a share, it posted a year ago.
  • The company said most of the gains came from a 68% increase in oil and gas production and higher energy prices. Revenue climbed to $402.7 million from $214 million.
  • Friedman Billings Ramsey on Friday raised its price target on Southwestern Energy to $75 a share from $64 a share following the company's profit update. The move reflects FBR's higher net asset value for Southwestern.
  • "With shale production continuing to grow, expectation of average initial production rates continuing to improve, and a good possibility of more strong initial production results in weekly...filings (given the increased use of seismic and longer laterals), we believe that the positive news flow will continue," FBR said.

These are just examples of similar type of news flow throughout the sector. I'm continuing to review these names and revisit this space, which I haven't looked at for 2+ years. I don't really want to chase these names after such massive runs, but most likely with the world energy stresses, I'll be looking to get some exposure here when (if) the stocks pull back. There are just a sizeable amount of names in the space, so figuring out which to include in a mini basket is what I am working through now.

No position


Thursday, February 28, 2008

London Hedge Fund Goes from +87% Return to Out of Business in a Span of Months

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This clearly shows just how dangerous some of the strategies out there truly are. But I am sure they will be handed more money because they were able to provide 87% return last year. So clearly they are brilliant; except they have no risk management skills ;) And this "once in a lifetime" problem won't happen again. Until it does somewhere else in our financial system 7 years from now... just as it did 7 years ago. We are just a global financial system of rolling bubbles and implosions right now....

Well it was a good 2.2 year run? Gosh I cannot even raise $15 million and geniuses like this who can lose all their investors money can raise a billion+. Must be nice... I really need to go get a Goldman pedigree - anyone trusts you when you have that I supose.
  • Peloton Partners, the hedge fund founded in 2006 by Ron Beller, a former Goldman Sachs partner, has told investors it is being forced to liquidate a $2 billion fund of asset-backed securities.
  • Beginning the liquidation process for the Peloton ABS Fund represents a massively life-threatening situation for the company, which last year was one of London's best-performing funds.
  • Run by Mr Beller and Geoff Grant, another ex Goldman Sachs partner, Peloton posted an 87 per cent return last year in large part thanks to the success of its bets against sub-prime.
  • But the continued deterioration of the credit markets appears to have gone against the fund in recent weeks. Mr Beller and Mr Grant said they were "working night and day" to secure the future of the fund. The two managers said they had been forced to actively seek a buyer.
  • Speculation mounted that Citadel and GLG Partners, two rival hedge funds, were among several parties to have declared interest. (who else but Citadel which is EVERYWHERE)
  • When the market stalled in recent weeks, the ABS fund, backed by a ratio of four-to-five times leverage, chose an "orderly liquidation" to pay off lenders, one source familiar with the fund's recent activities said. (oops)
  • Peloton also wrote to investors today to tell them it was suspending dealings in the Peloton Multi-Strategy Fund and would no longer try to calculate net asset values.

Leverage works great on the way up, when your 15% return turns into 75% when you borrow 5:1 or 10:1. On the way down? Not so much. Folks this is no different than your margin calls on your online brokerage accounts - but instead of borrowing 1.5:1 like you can - they borrow much much much more. Because they're smarter than you. After all they worked at Goldman. But don't you worry - send them another billion and they promise they won't make the same mistake twice. Scout's honor!

Somehow I don't think this will be the last. I am sure Citadel has billions sitting around waiting for hedge fund after hedge fund (full of very sharp managers with great MBA degrees, who will promise this won't ever happen again) to implode this year. :) Citadel always wins in the end.


FTI Consulting (FCN) Continues to Prove to be Best of Breed

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FTI Consulting (FCN) has been range bound for half a year after digesting a huge move last August. While very pricey, the company continues to execute as proven by today's earnings; and raised guidance for 2008. I don't have a major stake in this name at this point, but investors appear to be happy, taking the stock up 6% in after hours. My other position in this sector, Huron Consulting (HURN) is clearly not best of breed... but I still retain a minor position there as well despite a horrid chart. FTI has more exposure to the area I want to focus on with these stocks, the 'restructing' (aka bankruptcy) business.

From Reuters:
  • FTI Consulting Inc (FCN) reported a 77 percent increase in quarterly profit, which also beat market expectations, and forecast a strong 2008 as the business advisory firm continues to benefit from the turmoil in the credit market.
  • The Baltimore-based company posted a fourth-quarter net income of $30.8 million, or 60 cents a share, compared with $17.4 million, or 42 cents a share, in the year-ago period.
  • Revenue increased about 29 percent to $280.5 million.
  • Analysts expected earnings of 58 cents a share, before special items, on revenue of $261.5 million, according to Reuters Estimates.
  • FTI, which derives 83 percent of its business from the United States, saw revenue from its corporate finance/restructuring consulting segment grow 27 percent to $73.6 million in the fourth quarter.
  • The company expects 2008 earnings of $2.40 to $2.50 a share on revenue of $1,275 million to $1,315 million. Analysts see 2008 earnings of $2.34 a share, before special items, on revenue of $1,153.1 million.

From the CEO:

  • Mr. Dunn concluded, "On a final note, from a business driver perspective, the global credit crisis cannot be ignored. What began as a virus in the U.S. sub-prime mortgage sector has erupted into a financial and economic plague - destabilizing world-wide economies, roiling credit markets and whipsawing stock markets. This plague is attacking transparency, liquidity and, most importantly, confidence in the world's financial markets and the institutions and enterprises that rely on them. Transparency, liquidity and confidence - the very issues our skills are designed to enhance - are vital to enterprise value, which our mission statement calls out for us to protect. We are seeing broadly-based demand in every one of our segments from credit related engagements - and that demand appears to be accelerating."

I was hoping this "rising tide" would help lift even a laggard like Huron Consulting, but so far, not so good on that end. Huron is far cheaper on 2008 estimates (north of $3) but far less reliable, so they are getting their deserved lower multiple.

Long both names in fund; long neither in personal account


Bookkeeping: Taking Some Silver Wheaton off the Table (SLW)

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It is funny how quickly the worm can turn. I was kicking self just 2 weeks ago that I picked the wrong horse by choice of exposure to silver [Feb 12: Silver 3 Months Later - I Picked the Wrong Horse]

At the time the stock was $15. Now 2 weeks later, after an "ok" earnings report [Feb 25: Silver Wheaton (SLW) Ok Results, but Some Massive Expansion Opportunities] we're in the $17.60s. I believe this has more to do with the boom in commodities (along with the overhang of Goldcorp selling finally gone), but this is a 17%+ move in a very short time so I am going to lock in some profits. This is not a major position and I'd like to add back at lower levels now that Silver Wheaton is acting "normal" again (plus I will increase my exposure when I do buy to a larger % of portfolio); but I am going to cull some today. While this position might ying (go up) while the general market corrects, I still don't want to lose such a nice short term profit to the bears....

p.s. Taking a little Kinross Gold (KGC) off as well...the chart looks identical to SLW in the past 2 weeks... that is "vertical". I don't want to take too much away from my core position, because the Fed is playing right into precious metals hands as a 'store of value' vs fiat money printing press.

Long both names in fund; long neither in personal account

China Raising Minimum Wage

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Why do you care? Again, it's all about exporting inflation to you. (but not to worry says our Fed chief) [Rising Factory Costs Erode China's Edge], [China's Inflation Hits American Price Tags]

In a global world, me must keep in touch with what is going on. As I've been stating lately, capital will move from Chinese coasts (where those "rich Chinese" who make $0.85/hour), to inland poorer areas... and then once those people start making massive waves like $0.33/hour... we'll move those factories over to Indonesia and Vietnam. Always a labor force to exploit on this Earth so we can buy things 4 cents cheaper at Walmart.

How much is $120 a month? $4 a day. Or $.50 per hour. Remember, that is the RICHEST province in the country. But we can do much cheaper in Vietnam folks, let's get those factories out of China - those people are making too much money!
  • In an effort to calm grousing consumers as prices rise to 11-year highs, China is raising minimum wages across the country, a move analysts fear could further stoke inflation.
  • Guangdong, China's richest province, said it plans to raise minimum wages by as much as 18% in some cities starting April 1. The decision followed similar actions in other areas, notably the major cities of Shanghai and Beijing.
  • The wage increases, aimed at relieving food and other price pressures, could instead fuel inflation, analysts said. Higher wages are also likely to raise prices of U.S. imports from China, and possibly reduce China's attraction as the world's manufacturing center. (all things we've been talking about since last summer)
  • As an example of higher prices, McDonald Corp.'s China stores recently raised the chain's Big Mac price to 12 yuan ($1.7), up 14% from just seven months ago, reflecting higher meat and wheat prices.
  • In December, Kentucky Fried Chicken, owned by Yum! Brands Inc. also raised prices in its China stores for the first time in more than three years.
  • Since last year, Chinese residents have seen prices of food and other staples increase more than their pay checks, a factor analysts said could potentially unleash social unrest. In light of that, some fear the minimum wage increase came too late. (I always wonder why we never have social unrest here, we just seem to grin and take it - might just be the American mind set of soldiering through, in thick or thin. Now in this country we won't be able to get wage increases to offset inflation because of the threat of moving jobs away from the US - so unlike the 70s when people demanded higher wages to compensate for inflation that won't be so easy this time around - gonna be very interesting to see how it plays out)
  • Guangdong will increase the province's minimum wages by an average 13% on April 1, the province's labor bureau said in a news release last week. The southern China province produces about 13% of China's economic output, the most among the country's 32 provinces.
  • Minimum wages in the capital city Guangzhou will rise to 860 yuan ($120) per month from 780 yuan, an increase of 10%. Wages of other cities in the province will also get a boost, with those in some inland cities up nearly 18%.
  • "The current consensus view is that this year's inflation should peak in the first quarter (that's when Ben says for us too!)," said Lan Xue, an analyst at Citigroup, in a separate research note. However, Xue said "we are getting nervous that not only may we not see a moderation in the second quarter," but that inflation could even continue rising into second half or even 2009. (I doubt it, that would go against what Ben says! Ben would not deceive us!)

Again, we read these stories from country after country. Middle East, Europe, Asia, North America. It's the same story over and over; just change the name of the country. But it does not register with those in power in this country. In fact they continue to preach the exact opposite of what is happening on the ground. Amazing to watch. But hey, we can continue to prop up asset classes (equity market included) with paper money, so we can keep the sheep distracted. Thank god there is no such think as the Dow Jones Inflation Average to keep track of inflation on a day by day basis, or people might notice what is really going on behind the scenes.


The Hedge Funds are Coming! The Hedge Funds are Coming!

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I wrote a few weeks ago about the coming crush of hedge funds that are coming into commodity markets (I have zero proof but I know any hot market will draw in their computers like blood in shark infested waters) [Feb 12: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] I wrote:

... 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.

Again I am not a CBOT trader, never traded a future directly in my life but I know human psychology and the pure and utter greed and avarice on the Street - so I knew this would bring in the hedgies.... and the comments below by experts seem to confirm my guess from a few weeks ago.

Yesterday was apparently the most crazy day ever in wheat futures, a swing of 25% in 1 day! If it is "good" or "bad" I will leave that decision up to you, but you can see how these quant computers truly ruin any market (unless you are a daytrading dynamo). Wherever they go, it is like locusts - they will chew it up, spit it out, spin it, kick it, push it, punt it... and make sure volatility increases by a huge magnitude. And as Ben continues to cut and flood more liquidity into the world, as I stated many times, more and more is going to go into relatively small commodity markets because this is where "hot money" is going; so we will have a bubble - and I fear it will be epic. There is no shame investing in a bubble. It's just a matter of making sure you are not the last rat standing at the party when everyone piles out the door at once. I don't think we're even close but unfortunately the volatility of my once "stable" Powershares DB Agriculture Fund (DBA) is going to increase by a serious amount. Again, this was predicted but it's sort of like having a nice quiet society party, and the wedding crashers (hedge funds) show up with their tattoos, spiked hair, and brash attitude. Damn kids.... I do feel bad for the humans who have been in this market for decades, doing their things and then seeing "this" suddenly arrive.

Remember folks, all this macro thinking and fundamental analysis we try to do? It's is mostly useless in the short term as computers drive 70% of all trading. So when you sit there and ask "why the heck is this the outcome; it makes no sense in light of the news", try not to get too frustrated... it is not human decisions that makes most of the trades nowadays - simply computer programmed algrorithims churning out 100s of decisions by the second across the world. We're just along for the ride in most cases. And these markets are simply TOO small for all the fiat dollars now chasing into the system.

Welcome to the Jungle.

  • The largest price swing in the history of Chicago Board of Trade wheat futures on Wednesday baffled market analysts and sparked frustration among long-time traders who have used the market as a tool to hedge risk.
  • The CBOT March wheat contract traded in a range of nearly $2.70 in a single day, from a low of $10.65-1/4 up to $13.34-1/2, a record spot price for wheat on the 160-year-old market. The contract ended up nearly 7 percent, settling 80-1/2 cents higher at $12.80 per bushel.
  • Until two weeks ago, the normal daily trading limit for CBOT wheat was 30 cents a bushel, either up or down.
  • "This is why a lot traders won't trade this market anymore. This kind of volatility, and lack of connection to what's happening fundamentally in the market, have a lot of traders saying there are other things to trade that have less risk," said analyst Shawn McCambridge at Prudential Financial.
  • "You can't afford to participate in these markets if you're a small or medium-sized guy, as far as an elevator or producer. You could be doing everything 100 percent correctly, and the market trades like this, you could get annihilated," McCambridge said.
  • Yet CBOT floor traders said the market's latest violent gyrations reflect the increasing influence of hedge funds which have been pouring money into CBOT grains.
    The price action on Wednesday, they said, had more to do with fund maneuvers than with bullish fundamental factors.
  • "There is an enormous amount of bitterness down here," one CBOT wheat floor trader said.
  • "When I first started, we had 1/4-cent moves and an 8-cent range, and everybody was happy. Now we have $1 swings, and everyone is mad at each other," a longtime CBOT trader said.
  • He added of Wall Street investors: "Multi-trillion-dollar markets moving money into these type of markets ... exacerbates the problem."

Bloomberg adds....

  • Wheat futures rose more than 25 percent from today's low to their high, a gain that was bigger than all but seven annual price increases for the grain since 1973 on the Chicago Board of Trade. The volatility increased the potential profit and loss on every transaction, discouraging some traders.
  • ``A lot of players are just packing it in or drastically reducing positions because you just can't control the risk,'' said Jack Lablonde, president of Benchmark Trading Inc. in Cedarburg, Wisconsin.
  • ``It's a free-for-all,'' said Tomm Pfitzenmaier, a partner at Summit Commodity Brokerage in Des Moines, Iowa. ``I don't know if it's money management or fear. There's no fundamental justification for prices being limit up yesterday and down the limit today.''
  • ``All technical analysis and fundamental analysis is basically obsolete when the markets start to trade like this,'' said Marcus. ``Bulls and bears are both scared and are in a high-stakes game of hot potato right now.''

Again, I wrote last fall we will have a Bubble 3.0 - caused by Ben. Repeating same policy of Al. When people wrung hands that the Fed won't cut rates due to inflation I laughed. I remember literally saying so on the Halloween cut when "pundits" opined the Fed would be restrained. That's now how it works anymore - we cut, cut, cut - and the fact the financial problems were far bigger than anyone at the time cared to acknowledge would just cause them to continue to cut. Now at the time I said 3% by the spring (when we were around 4.75%) and I never envisioned 1.25% in 9 days. But the destination is the same. And why I think 2% is all but in the bag now as panic over takes the Fed. While they lie about how everything is just dandy.

I didn't know where the next bubble would be, but guessed either foreign markets or commodities. It could still be both. But commodities is such a smaller market, so this onrush of paper money is going to take this bubble to severe heights. Despite tremendous moves, I still think we're in the early innings. And the speculation in the agriculture commodities, is going to be felt the world over -- most likely with some famine. But hey, we bailed out the bankers in NYC, and we're creating some great profit opportunities for some of the richest men in the country (hedge fund managers in CT) and that's all that matters to this Fed. So smile away Ben... ignore Ron Paul and his sense... just smile away, and talk to us about how inflation will be gone when the US economy slows. And keep printing worthless pesos while you smile. In a year from now people will see the light. Until then, CNBC will clap at your actions. And people like me will be accused of Chicken Little tactics.... we'll revisit Spring 09.

Long Powershares DB Agriculture Fund in fund and personal account


Smithfield Foods (SFD) Continues to Struggle With Input Costs

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Smithfield Foods (SFD) is a stock I considered adding very early in the fund, but with the huge run up in grain costs even back then, not to mention how it's gotten much much worse since, I just have a hard time investing in anything that is related to a cow or a pig (I do have one, but it is based on China). I do think however (and today's news reinforces this thesis), this is what you will see a year from now: We are going to see cows slaughtered now because they are getting too expensive to feed. So what will that lead to down the road? You guessed it; a (relative) shortage of beef. And what does that mean for our pocketbooks? Inflation. Even more than we see now. Right now producers are passing along the grain costs - but at some point it's just going to get to a point where they raise less livestock... and for a country (world) increasingly loving protein that causes more issues.

On the bright side, we've won the votes of the farm block with our ethanol push. Always a great thing!

Smithfield Foods out with earnings today.... if not for the darn grain costs, I'd really be interested in this one as a pork exporter play. As with the retailers, and the like, expectations have been beaten down so badly that it is becoming easy to "beat" the number. So while year over year results are degrading they are "better than expectations".
  • U.S. meat company Smithfield Foods Inc (SFD) on Thursday reported lower quarterly earnings due to a big loss in hog production, but the results beat Wall Street forecasts by a wide margin as an acquisition and strong pork exports more than doubled profits in pork processing.
  • The Smithfield, Virginia-based company reported earnings for its fiscal third quarter ended Jan. 27 of $54.6 million, or 41 cents per share, compared with year earlier results of $60.4 million, or 54 cents per share.

  • The hog unit, the nation's largest, lost $80.7 million on an operating basis versus a $4.5 million year-earlier profit, as higher production costs and lower hog prices weighed. The hogs may be a drag on fourth-quarter results too, the company said.

  • "We enjoyed very strong fresh pork margins that were much higher than historical levels as a result of lower hog costs and strong industry exports," Smithfield Chief Executive Officer C. Larry Pope said in a statement.

  • "Our fiscal fourth quarter will likely be very difficult, as our hog production operations probably will not achieve profitability," Pope said in a statement. "Meanwhile, pork exports are expected to continue to grow, which will lend support to the hog and pork markets."

  • Smithfield is the largest U.S. hog producer and earlier this month said it was reducing by 4 to 5 percent its breeding herd because of high feed prices.

  • On Thursday, Smithfield said hog prices averaged $37 per 100 lbs for the quarter, down from $44 a year earlier, while production costs rose to $49 from $42 a year earlier. (now that's a problem; a huge one)

So let's check back in a year; you are going to see a lot of questions as to why meat products are skyrocketing... and probably we'll drag a few executives up to Congress to question them ;) No one will look into the mirror there in DC and ask, why do I continue to burn food for fuel in a world headed for food disaster? But for now they are too busy proposing bailouts for house speculators and those who bought at the top.... they will only investigate after something turns from huge problem to unmitigated disaster. That comes next year in food.

No position


Bookkeeping: Cutting Apple (AAPL) on Rally

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This is purely a technical call on Apple (AAPL). I am cutting back my position to around 0.3% of fund and selling near $128.60, as the stock is rallying "up" to resistance of the 20 day moving average (roughly $129). This still remains a broken chart to me, and a potential to see sub $110 in the near future. So I'll look to rebuy at a lower price, if offered.

If I am wrong, and this is part of a broader tech rally, than so be it. I'd have to see Apple north of its 50 day moving average ($145) to believe this is a true move with staying power. So I'll either buy north of that level or back down where I think Apple could be headed, sub $110. Anything between those 2 levels, to me, is simply a "white noise" trading range - good for traders, but useless for investors. I do find the value compelling here; again simply a technical trade in this case. I also find the obsession with iPhone misplaced; this is a Mac story.
  • Shares of Apple Inc. rose Thursday morning after the iPod maker reiterated expectations to sell 10 million iPhones in 2008, leading an analyst to maintain a top rating.
  • Goldman Sachs analyst David C. Bailey met with Apple's operating chief, Tim Cook, at the Goldman Sachs Technology Symposium Wednesday, and said that growth opportunities remain for the company.
  • "While there was no breaking news on the financial side, the meeting reinforces our view that Apple's industry-leading product cycles should help it overcome softer seasonality and sets the stock up for a strong second half of the year," Bailey said in a client note.

  • Sales of Apple's Macintosh computers should continue to outpace the overall personal computer market, and the iPod Touch should help improve the music product line's revenue even though iPod unit growth is dipping, he said.

Long Apple in fund; no personal position


Rick Santelli is Quickly Becoming my Hero

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I love this guy... one of the few people who actually speaks the truth. Check out this interview from this morning where he rips into a Kool Aid drinking bull.

Also, saw Ron Paul go off on Bernanke again yesterday - love it, 1 voice of truth ... sadly most of the other congressman and women probably have no idea what Dr. Paul is even talking about. Heck some of them don't even know where he worked before he came to the Fed... sad.

Last, as an aside, I notice Buffet will be on premarket CNBC Monday. You know what that means right? We will find a reason to rally as whenever Buffet speaks it means a bailout is around the corner. All you have to do is say "Buffet is sniffing around (insert troubled company name here)" and the whole market can party. Or he will make the bond insurers party. Or if he sneezes a certain way we can party. Or with a magic wave of his pinkie he can make all our problems go away. All I know is whenever he speaks, the market finds an excuse to find some sliver of hope in any phrase and call for a party. Remember about 4 months ago there was a rumor he was buying Bear Stearns.... about $30 higher of course. But if you drink the Kool Aid, you can make a rally out of a rumor. So once again late Friday I will have to cut back short exposure, with expectation that Kool Aid bulls will find any twitch in Buffet's face as a reason to buy.

Ctrip.com (CTRP) Continues to Impress

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We just have an avalanche of earnings to go through today - going to be busy. Ctrip.com (CTRP), is a Chinese online travel company I've been trading for many years; this is one stock I should of just bought and hold as it's been a tremendous asset for shareholders. Further, it is probably among the most reliable stocks I've ever encountered. I always think "this is the quarter they will say something that speculators will hate and drive it down 40% for no good reason" but they chug along, consistently year after year. I continue to be amazed how a competitor of Ctrip's, eLong (LONG) constantly screws up, while Ctrip.com executes. Since eLong announces first most quarters, it always plants a seed of doubt in my mind, but then Ctrip comes along and says "we're #1". It is just sort of funny to watch, as it has been going on for years - this is again a case where a rising tide would theoretically lift all boats, but does not.

I don't have a major position at the time, and the stock was acting very poorly yesterday ahead of earnings which made me more suspicious that something bad was leaking out, but once again, they do come through with solid earnings. Frankly, they's gotten the Wall Street (short sighted focus on 90 days at a time) game down to a tee, and a lot of other Chinese companies could learn from them - under promise each quarter, and over deliver. And they always deliver. Constantly confounding doubters. And even anxious longs (myself included)
  • China's top online travel agent, Ctrip.com International Ltd (CTRP), said quarterly net profit doubled, beating expectations due to higher bookings and pushing its share price up in after-hours trade.
  • Ctrip.com, which is benefiting as a wealthier and expanding Chinese middle class spends more on travel, said it is growing faster than its competitors.

  • "We did increase market share in 2007," Chief Executive Min Fan told analysts on a conference call.

  • For full-year 2008, Ctrip said it expects to continue year-on-year net revenue growth of around 35 percent.

  • Shanghai-based Ctrip said fourth-quarter earnings doubled to $18.6 million, or 27 cents per American Depositary Share, easily beating the $14.8 million profit analysts had forecast.

  • Fourth-quarter net revenue rose 58 percent to $49 million, as hotel reservations, flight bookings and package tours all posted strong growth, the company said.

  • Ctrip had forecast year-on-year net revenue growth of about 35 percent for the fourth quarter, but the firm has a history of publishing conservative forecasts.

  • Full-year 2007 profit rose 66 percent to $55 million.

  • The stock has gained more than 80 percent in the past 12 months, while domestic rival eLong Inc (LONG), majority-owned by U.S. online travel company Expedia Inc (EXPE), has lost more than a quarter of its share value.

  • To help meet rising demand, Ctrip plans to spend $40-$50 million on a second call centre near Shanghai, to complement the 3,500 employees at its first centre.

Long Ctrip.com in fund; no personal position


Fluor (FLR) With a Great Report, and Boosts Guidance

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The dichotomoty between infrastructure stocks who rely on the US market and those who rely on overseas markets continues - much like equities in general. Fluor (FLR) is out with a great earnings report, and boosted guidance range. Much like Foster Wheeler (FWLT), Fluor has tremendous overseas exposure along with heavy concentration on energy resources. Note, due to a tax treatment the real earnings estimate was $1.47, still a huge beat vs analysts expectations. Backlogs continue to explode upward, with $6 Billion of new awards this quarter, and $30B in backlog in total. Again, as with many of these infrastructure names, this is nearly 2 years of visibility we have with contracts already locked in.
  • Engineering and construction company Fluor Corp. said Thursday its fourth quarter profit more than tripled on higher sales and a large tax benefit. Net income for the three months ended Dec. 31 rose to $259.5 million, or $2.82 per share, compared with $80.7 million, or 90 cents per share, during the same period a year earlier. The most recent quarter included a tax settlement from the Internal Revenue Service of $123 million, or $1.35 per share.
  • Analysts expected the company to earn $1.18 per share, on average, according to a survey by Thomson Financial.
  • Revenue jumped to $4.71 billion from $3.63 billion. Fluor attributed the growth to improvements in its oil and gas, industrial and infrastructure, and power segments. Analysts predicted revenue of $4.55 billion.

  • Engineering and construction company Fluor Corp. on Thursday raised its 2008 profit forecast, moving the estimate closer in line with Wall Street expectations. The company said it now expects to earn $5.10 to $5.50 per share, up from a previous range of $4.90 to $5.30 per share.

  • Full year new awards rose to an all-time high of $22.6 billion, up from $19.3 billion a year ago, driven by increases in Oil & Gas, Power and Global Services. Fourth quarter new awards of $6.3 billion set a record for a single quarter and drove year-end backlog to $30.2 billion, the companys ninth consecutive quarterly increase and up 38 percent from the end of last year.

  • Fluor expects continued strength in downstream oil and gas, polysilicon production, power generation and pollution reduction, mining and operations and maintenance businesses.

Long Fluor, Foster Wheeler in fund and personal account


Outsmarted Myself on Thornburg Mortgage (TMA)

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Ugh, some bad news this morning at Thornburg Mortgage (TMA) as the mortgage issues climb up from subprime to alt A... unfortunately, I out-thought this one. I wanted exposure to the mortgage/housing market without direct exposure to home builders whose rally I found suspect, since it was based on the housing market coming back "within 6 months". So instead I went with Thornburg Mortgage to play the same trend but without the direct exposure to needing consumers to buy houses en masse - instead this was a way to help play the refinance boom. But this move certainly backfired, at least in the near term.

I've long held that people who think this is only a subprime issue are missing the whole boat, and that problems will spread up the food chain to alt A mortgages and prime mortgages, but every time these darn homebuilders and financials rally on "hope", I feel underexposed so hence the move to Thornburg - but this one did not work out. I was already having second thoughts yesterday morning based on the plunge in mortgage refinancing [Fannie Mae, Toll Brothers, and Mortgage Applications], so now I have to review the situation and see if it is worth holding. I still think the original thesis is sound in terms of catering to "upper income" Americans and avoiding the mass market, but the more Ben cuts, the more the dollar falls, and the more inflation gets stuck in our system, and this will continue to put pressure upward on mortgage rates, so I don't know if my original thesis is still fully intact. Once again shows what a land mine investing in anything with any exposure to the financial world is, despite bulls insistence that all will be fine in 6 months. Much of this is a crisis of confidence which is impossible to model. I continue to be astounded the equity markets ignore the deteriorating situation in credit markets....

Sadly it would of just been more profitable to buy a darn home builder and drink the Kool Aid that housing will rebound by next fall. The herd wins again...
  • Thornburg Mortgage Inc., a mortgage lender, said Thursday it has been the subject of margin calls on a portfolio of securities backed by alt-A mortgages.
  • Alt-A mortgages are loans given to customers with minor credit problems or who cannot document their income or assets to get a traditional, prime mortgage. Margin calls force borrowers to repay loans or put up more collateral to secure them.
  • Thornburg said in a regulatory filing it is facing margin calls because the value of the alt-A mortgage-backed securities has plummeted between 10 percent and 15 percent since the end of January. The margin calls come amid "a sudden adverse change in mortgage market conditions in general" that began on Feb. 14, Thornburg said in the filing.

  • Thornburg said in a filing with the Securities and Exchange Commission its securities face a very low threat of future downgrades, which would reduce their value further, and even less risk of actual losses tied to the securities.

  • So far, Thornburg has met margin calls totaling more than $300 million, which has reduced its available liquidity to meet future margin calls. If available cash cannot cover future margin calls, the lender said it may have to begin selling assets to raise cash.

  • In August, Thornburg was forced to sell some of its assets at a steep discount to shore up its capital reserves during a similar period where the value of securities the company held dropped precipitously. The company was able to manage through that period, while dozens of other mortgage lenders shut down.

Long Thornburg Mortgage in fund; no personal position


Wednesday, February 27, 2008

McDermott (MDR) Solid Results

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Yet another of the infrastructure holdings is out after hours; McDermott (MDR) has a solid, if not spectacular report. Of the two main divisions, Offshore Oil & Gas continues to impress while Power Generation Systems continues to be the laggard. Backlog up to $9.8B, from $9.3B in the previous quarter. Again, as with many of these infrastructure plays, this level of backlog represents nearly 2 years worth of future business.

McDermott used to be the #1 holding in the fund back last August, but only holds a minor position at this time; I'd like to see both divisions running on all cylinders. But expectations were quite low, so the company was able to beat estimates by a nickel. McDermott does not break out sales by region in the earnings report, but from memory quite a bit is outside the US.
  • McDermott International, Inc. (MDR) today reported net income of $160.0 million, or $0.70 per diluted share, for the 2007 fourth quarter, compared to net income of $125.5 million, or $0.55 per diluted share, for the corresponding period in 2006.
  • McDermotts revenues in the fourth quarter of 2007 were $1,526.0 million, an increase of 16.7 percent compared to $1,308.0 million in the corresponding period in 2006. The $218 million improvement in Company revenues, compared to a year ago, was a result of the Offshore Oil & Gas Construction segment which increased revenues by approximately $257 million, or 54.1 percent.
  • At December 31, 2007, McDermotts consolidated backlog was $9.8 billion, compared to $7.6 billion and $9.3 billion at December 31, 2006 and September 30, 2007, respectively.
  • Revenues in the Offshore Oil & Gas Construction segment were $733.3 million in the 2007 fourth quarter, compared to $475.9 million for the same period a year ago. The year-over-year increase in revenues resulted from a higher workload in worldwide marine activities, including revenues from Secunda International Limited whose assets were acquired in July 2007, and from increased activities within the Caspian, Middle East and Americas regions.
  • Revenues in the Power Generation Systems segment for the fourth quarter 2007 were $608.0 million, compared to $676.8 million reported in the fourth quarter of 2006. The year-over-year reduction in revenues resulted from lower activities on new fossil utility steam systems and retrofits of existing facilities compared to a year ago, partially offset by higher levels of replacement parts and increased activity on nuclear steam generators.
Long McDermott in fund; no personal position

$2 Trillion of Petrodollars Needs a Home This Year

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A staggering figure in this article from the UK Telegraph.... "reverse colonization" looks to continue, and this is the type of money that *WILL* put a floor beneath equity market as Sovereign Wealth Funds go hunting for prey. Even if only 20% ever makes it into equity markets that an astounding $400 Billion. Even in this day and age of $8 billion write offs, that is some serious change. Think US stimulus plan x 2.5. Yet another reason I could see a "decoupling" in equity markets vs real economy later this year.

And just think... this tax on the world...will continue next year... and the next... and the next... and the next... all while we dither away, not willing to even fathom a Manhattan Project for Alternative Energy. Maybe crude $120 will wake us up? $150? $3.75 gas at Memorial Day 2008? I don't know what it will take, but nothing for this current administration I suppose.
  • The surge in the price of oil is set to unleash a tsunami of petrodollars onto financial markets, according to Morgan Stanley.
  • With the price of crude oil skirting the $100-a-barrel mark, strategists at the investment bank reckon as much as $2 trillion of petrodollars earned by the world's oil exporters will need to be invested this year.
  • Petrodollars are "big, and getting bigger," according to Morgan Stanley's Stephen Jen.
  • While Mr Jen estimates that oil exporters, particularly the Gulf states, will choose to spend about 10pc of the petrodollars upgrading their infrastructure, "a tsunami is coming."
  • At $100 a barrel, Morgan Stanley estimates that the value of the world's proven oil reserves stands at $121 trillion. That compares with Russia's gross domestic product of $1.2 trillion, Britain at $2.7 trillion and the US at $14 trillion.
  • Mr Jen writes "The financial arguments for transforming underground oil wealth into above-ground financial wealth are quite compelling."
Again this was part of my 13 Outlier 2008 Predictions; that equity markets would confound bloggers (like myself!) and finish relatively flat for the year based on a 2nd half liquidity surge, combining Fed induced printing of dollars shoved into the system, along with foreign infusions. However, at the time I did not expect 125 basis point to happen within 9 days, so maybe my time line needs to be moved up... these numbers are simply staggering.

This also makes yet another case for global inflation - this world is awash in petrodollars and they will drive up the costs of finite assets the world over. Oh what a conundrum!

Moving Cash from Fertilizer to Powershares DB Agriculture Fund (DBA)

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For the first time in a while the crops futures actually fell... knowing Uncle Ben will be dropping more coin from his helicopter and creating more speculation - I expect many of those dollars to continue to head into commodities.

I still love the fertilizers but in a market pullback they get hit pretty hard; we are now at the very tip top of a range - S&P 500 has resistance at 50 day moving average of 1390. So if we get a pullback, I expect the fertilizers to pull back, so I am just making a bit of a switch from 1 part of the food chain (pun intended) to another.

As I've stated in the past, I plan on using Powershares DB Agriculture Fund (DBA) as both my safety stock and literally my money market. The past few days remind me of another reason I like this ETF - it has no earnings report which short sighted investors can use to knock 20-30% of its value away in an hour. Uncle Ben is making this play act even better than I anticipated and the world's hedge funds are taking his (our) money and running with it.

I've sold about $5K-$6K worth in all 3 of my fertilizer names: Potash (POT), Mosaic (MOS), and CF Industries (CF) as the charts are beginning to look toppy and frankly the run has been massive, and pushed most of that into more Powershares DB Agriculture Fund. So I keep my food inflation exposure consistent, just in a different way. I hate having this low of exposure to the fertilizer group, but I just want to be able to buy these names at lower prices.

I'm also adding further to my Ultrashort ETFs here. We've had a lot of "great" news thrown at the market of late, bond insurer bailouts, more Fed cuts assured, (not that there was any doubt on *this* end but the babies and toddlers in the market need explicit assurance every 3 days), and heck we can even stuff more mortgage down the throat of Fannie and Freddie (why those 2 stocks rally on such news is beyond me) but we'll see how much more resilient the market is from here. We can constantly go down this path of "6 months everything will be fixed" but it just appears to be a big pile of denial to me.

Technically, picture = 1000 words. If we break through these levels, than I have to change my tune and turn Kool Aid Bull myself ;) Remember, "Wall Street" economy is not "Main Street" economy although I still think 2008 corporate profits for non foreign based business units will be seen to be a total fairy tale in retrospect, so as they go down, values should go down.



Once again, people have no clue about the tidal wave of inflation coming in my opinion and just how awful this is going to be to a consumer lead economy. Profits are going to be punished for any company tied to the US consumer, no matter what the stock prices are doing today. It's simply denial. We are in full Kool Aid stage, which happens for a period every 3-5 weeks where bad news is great news. We are simply conditioned to believe the Fed does fix everything and I think sometime in the next 9-12 months people will finally come to the realization it cannot. But they won't believe it until they see it. Again, frankly, I expect Ben to not last more than this 1 term and when we look back in 2010 he will be blamed for massive inflation. It is ironic in a way.

Long all names mentioned in fund; long Mosaic and Powershares DB Agriculture Fund in personal account

Some Funny Cartoons I Grabbed from CBSMarketwatch

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If you can't laugh, then you can only cry. So better to laugh...

Fannie Mae (FNM) Makes Huge Reversal on OFHEO Increase in Allowance

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Well the hits just keep coming for the stock market - bond insurer bailout finalizing, more Fed cuts coming, and now OFHEO has found it in their heart to raise the cap on how much Fannie (FNM) and Freddie Mac (FRE) can own in their portfolio. Ahem. Another free market move I am sure. Either way, this news is making investors forget about this morning's terrible news in Fannie (FNM) and is taking Thornburg Mortgage (TMA) up (+7%) with it as well.
  • The regulator to Fannie Mae and Freddie Mac will remove limits on their $1.5 trillion mortgage portfolios, bringing an end to a restriction that hobbled their ability to provide financing for the housing market.
  • The cap, imposed in 2006 after the mortgage finance companies uncovered $11.3 billion of accounting errors, will end on March 1, the Office of Federal Housing Enterprise Oversight said in a statement today. Fannie Mae today reported a $3.55 billion fourth-quarter loss and Freddie Mac plans to issue results tomorrow, releases that Ofheo characterized as ``timely.''
  • ``These steps constitute an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements,'' Ofheo Director James Lockhart said in the statement.
  • Ofheo also soon may ease requirements that Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, hold 30 percent more capital than normal as they fix their book-keeping, according to the statement.
So in summary, two companies that have been among some of the most poorly run in the past, and are bloated with junk loans, are now being allowed to take a lot more junk into their portfolios .... because the rest of the mortgage market is acting in very risk averse manner. That's the reality, but that last phrase won't be mentioned - they are saying "it's due to good behavior" :)

What is happening is these mortgages have lost their market - the banks who actually hold loans on their own books are putting a lot of scrutiny on borrowers because they actually now care that a person has more than a heartbeat - they actually want to know that the borrower has the means to pay back the loan. But for the rest of the mortgage market, there are no more suckers left to buy bad mortgages, sliced/diced and securitized. So the mortgage market is shrinking. So how are we solving it through back channels? Since we can find no one with a brain who wants to buy this securitized junk... we are going to feed said junk it into our two quasi government institutions. And if they go bad? Well that's ok - there is always the backstop of the US taxpayer. Let's check back in 2 years to see how this turned out....

But it is good news for mortgage originators. We now have a huge new supply of "dumb money" willing to buy new mortgages.

Long Thornburg Mortgage in fund and personal account

Bookkeeping: Adding more Foster Wheeler (FWLT)

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As Foster Wheeler (FWLT) continues to suffer from overreaction to yesterday's report, I continue to layer in positions. Adding more here around $64.

The stock's 200 day moving average is just north of $62, which is also the January spike down low in the worst of the market conditions so I would be expecting a move there. How it reacts there will be tell tale.

Again, nothing has changed for 2008 - we had some quarter specific issues that affected earnings, not revenue or contracts or any of those things that matter to an infrastructure stock. That said, we're taking a big hit here, but from these over reactions come good profit opportunities if the thesis is correct. This is almost a carbon copy reaction to what happened last summer in the name. Split adjusted it went from $85 to $150 in a manner of 2 months, once the panic subsided. If we can get half that this time around I'd be thrilled. But that's the logical take - logic never got in the way of a good hype or fear moment. So we'll see how it goes. If the stock breaks the 200 day moving average than I'll probably cut back (not out) and wait for money flow to return to this name.

Foster Wheeler is now a 5.1% position


Chicago Bridge & Iron (CBI) Mixed Report

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Chicago Bridge & Iron (CBI), another in our infrastructure basket, had a mixed earnings report today. They beat revenue quite soundly but missed earnings estimates. However, some nice guidance for 2008. The stock has been acting a bit poorly on fears of exposure to a certain debt laden, currency devalued, crony government, financial innovating country, but only about 1/3rd of business is from that backwater. Plus from all I am told that country will be BOOMING in 6 months ("Fed Cuts Solve Everything") so I don't understand the concern. Ironically, this quarter was hurt by underperformance in the European, African, and Middle Eastern division, not the US. But again, these infrastructure companies have very lumpy quarters so it is hard to judge them on Wall Street's obsession of 90 day time frames.
  • Engineering and construction services company Chicago Bridge & Iron Co. NV said Wednesday its fourth-quarter profit rose 15 percent on new contract awards and earnings from a recently acquired business, but the profit missed Wall Street's expectations.
  • The company earned $44.2 million, or 46 cents per share, compared with $38.6 million, or 40 cents per share, in the year-ago quarter.
  • Revenue surged 51 percent to $1.32 billion, from $873.5 million in the prior-year period.
  • Analysts were expecting a profit of 51 cents per share on revenue of $1.19 billion, according to a poll by Thomson Financial.
  • CB&I said the quarter was boosted by the integration of oil and gas production unit Lummus Global, which it bought from Swiss power transmission and automation company ABB Ltd. in November. However, CB&I said the quarter was hurt by an underperforming project in its Europe, Africa and Middle East region.
  • New contract awards for 2007 totaled $6.2 billion, an increase of 40 percent over 2006.
Guidance
  • Engineering and construction services company Chicago Bridge & Iron Co. NV on Wednesday issued a 2008 earnings prediction above Wall Street's expectations.
  • The company expects earnings of $2.40 to $2.65 per share, on revenue of $5.9 billion to $6.2 billion. Analysts expect CB&I to report a profit of $2.39 per share on sales of $5.97 billion.
  • The company predicts new contracts will total $6.5 billion to $7 billion, compared with $6.2 billion in 2007.
Now compare results from this sort of company or others I hold with very large global exposure to URS (URS) which is another infrastructure stock but dependent on that before mentioned debt laden, currency devalued, crony government country (which will be booming in 6 months). Even in infrastructure it pays to avoid the US of A. How sad; especially in a country with massively sagging infrastructure. Your tax dollars are too hard at work going to special interests, fighting wars or paying for national debt interest to take care of roads, bridges, and minor things like that. Keep in mind as LOCAL governments (who cannot print money magically) and must balance their budgets get hit by a drop in revenue from tax assessments cut backs will be coming in a large way in 2008-2009. Thankfully our federal government doesn't need to bother with such constraints - so we can spend into a black hole.

URS Sees Difficult 2008
  • URS Corp., an engineering and construction company, on Tuesday offered fiscal 2008 guidance below analyst expectations amid a difficult public infrastructure spending market.
  • The company predicted earnings between $2.24 and $2.36 per share, or $2.61 and $2.73 per share excluding costs related to URS' November acquisition of Washington Group International Inc. Analysts polled by Thomson Financial expect earnings of $2.89 per share, on average.
  • "We expect a near-term slowdown in public infrastructure spending as a result of the current economic downturn and the increasing budget challenges facing state and local governments," said Martin M. Koffel, company chairman and chief executive, in a statement. "It is prudent to assume that, as a leading infrastructure firm, our 2008 results will be tempered by the weakness in this market."
Long Chicago Bridge & Iron in fund; no personal position


Homex (HXM) with a Very Nice Earnings Report

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Homex (HXM), a Mexican mass market home builder, is a former fund holding that has really taken off in the past week, ahead of earnings. Another example of no leaking out of news, I am sure - that type of chicanery never happens in the stock market. This is actually a chart that a momentum chasing technical trader would dream of, but I'd rather buy it on a pullback, as it's just put on a 11% move and this is not a stock that has huge volatility so that is a substantial move for this type of stock. However, I am glad to see the name on track again after a tough year in 2007 - this was a very good stock for me in 05, and especially 06. I continue to look for opportunities outside the US, in stable countries such as .... Mexico. ;)

The full detailed earnings report can be found here, some highlights below
  • Mexican homebuilder Homex (HXM) posted a 149 percent leap in fourth-quarter net profit as sales rose solidly amid a local housing boom and operating profits also jumped.
  • Homex said on Tuesday its October-December net profit was 734 million pesos ($67 million), up from 294 million pesos a year earlier.
  • The Culiacan-based company, which specializes in mass-produced houses that sell for less than $30,000 each, said revenue jumped 22 percent to 5.516 billion pesos.
  • Homex said it sold 16,393 homes during the quarter, 18.4 percent more than in the same quarter in 2006.
I'll be interested in beginning a position anew in the mid $50s.

No position


Fannie Mae (FNM), Toll Brothers (TOL), and Mortgage Applications

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I am awaiting to hear the spin on these issues... as we now know every bad piece of news is now discounted with "well that's the past, just wait 6 months from now when everything booms". Ironically, this was the same commentary we got last August, September, and October during the boom in equity markets. So 6 months from "then" is February, March, and April so the "boom" they told us to watch for back then should be happening any minute now. But if that doesn't work just keep pushing the boom out another 6 months and tell bears to stop whining so much... keep repeating this process until eventually you are correct. This is the stock market right now for the bulls.

So all the bad economic news items, can be washed away because that's already priced in and just you wait, the economic boom starting in August 2008 is going to blow you away. Also ignore such news as below because housing shortage begins by end of the year. Just you wait...

Credit Woes Spank Fannie Mae (FNM)
  • Fannie Mae(FNM) swung to an fourth-quarter loss of $3.56 billion on spiking credit-related costs, including a steep increase in money set aside for loan losses, the government-sponsored entity said Wednesday.
  • Fannie, the nation's largest mortgage buyer, lost $3.56 billion, or $3.80 a diluted share, vs. a profit of $604 million, or 45 cents a diluted share in the year ago period. Analysts polled by Thomson Financial had expected a loss of $1.24 a share.
  • The biggest factors driving the declines in the fourth quarter were a $3.2 billion loss to the value of derivatives used to hedge its net assets and a $2 billion increase to reserves for credit-related losses. For the full year, Fannie increased its loan loss provision to $5 billion from $783 million in 2006.
  • "We are working through the toughest housing and mortgage markets in a generation," said President and Chief Executive Officer Daniel Mudd. "Our results for 2007 reflect the challenging conditions in the market we serve. While we are pleased that demand for our mortgage guaranty businesses has surged as we respond to the market's urgent need for liquidity and stability, this positive trend has been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices, and extraordinary disruptions in the credit markets."
My take: Don't you worry. Just wait 6 months. Housing will boom as we have a shortage of housing stock by end of year 2008. And on a serious note, Fannie is only surviving due to the government's implicit backstopping (it won't fail) and you - the tax payer have a good chance of bailing out this company if things continue down this path for another 18 months. Also, remember Congress' bright idea to stuff this institution with even bigger loans since those markets are frozen, and what do you do when the market is frozen? The government rides to the rescue.

Toll Brothers (TOL) Wishes People Would Stop Talking about Recession because if they did Housing would be BOOMING
  • Luxury home builder Toll Brothers on Wednesday swung to a fiscal first-quarter loss and said "ceaseless talk" about a recession is dampening the mood of consumers.
  • Toll Brothers said it posted a loss in the fiscal first-quarter to Jan. 31 of $96 million, or 61 cents a share, after $153.3 million in write-downs. It earned $54.3 million, or 33 cents a share, in the year-ago quarter.
  • Revenue dropped 23% to $842.9 million, and its backlog fell 42% to $2.4 billion. Excluding write-offs, it would've earned 35 cents a share during the quarter.
  • Toll said "ceaseless talk" of a recession is dampening the consumer mood, though it noted "glimmers of hope" in a few markets, including Naples, Fla. and suburban Washington D.C.
  • "Ceaseless talk of a recession continues to dampen the mood of consumers in general, whether or not a recession actually occurs. For home buyers, we believe this drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines," said Robert Toll, chairman and chief executive, in a statement.
My take: The stock should rally between 50-80% in the next week due to "glimmers of hope". Further, if people would stop being such downers and instead talked about unicorns, mermaids, and four leaf clovers the housing market would be booming. So if we all just stopped talking, housing would be booming. Thankfully, we've isolated the problem in housing... nothing to do with overpriced homes, and useless lending standards.... it's talking. Too much of it. Less talk. More buying of overinflated assets. Solves everything. So get to it.

Last, going back to item 1, I have been buying Thornburg Mortgage (TMA) because of the government's hair brained idea to stuff Fannie Mae and Freddie Mac with $500K, $600K, 700K mortgages. Unfortunately, Uncle Ben's helicopter drops are causing massive inflation expectations and the long bond (on which 30 year rates are dependent) continue to rise. Which is the opposite of Greenspan's conundrum (when he was increasing rates, the long bond stayed low). So now we have the opposite issue. So Ben cuts, but long term rates continue to go up as the smart people (bond traders) see inflation ramping. The tantrum throwing toddlers (equity traders) just cheer and are glib over each rate cut. More bad economic news! Yee Haw! More rate cuts!! Gimme gimme!

Anyhow, mortgage refinances are one of the main themes in my Thornburg investment, and they are getting shafted the past 2 weeks as mortgage rates spike. That's a problem. So I have to think this thesis over further - it was based on both the stuffing of our quasi government institutions with high priced loans along with massive refinancing of desperate homeowners who need cash flow. So the latter is becoming an issue as Helicopter Ben continues cutting rates. And people, no matter what the pundits say, or what lip service the Fed folks put to inflation - THEY DO NOT CARE. They are going to cut rates. Period. But this looks like it is just going to continue to drive the long term rate up as the non toddlers realize inflation is going to sky rocket.... oh what a box Ben is in!
  • Mortgage application volume tumbled 19.2 percent during the week ending Feb. 22, according to the Mortgage Bankers Association's weekly application survey.
  • The MBA's application index fell to 665.1 from 822.8 the previous week. It was the third straight week application volume fell. During that time, volume has dropped 39 percent as interest rates have risen steadily.
  • Application volume fell as refinance volume plummeted 30.4 percent during the week. Purchase volume increased 0.2 percent. Refinance volume accounted for 52 percent of total mortgage applications. Refinance applications accounted for 73 percent of all application activity about a month ago.
  • Application volume declined as interest rates continued to rise. The average rate for traditional, 30-year fixed-rate mortgages increased to 6.27 percent from 6.09 percent. In 2008, the average rate was as low as 5.49 percent during the week ending Jan. 18.
My take: I am trying to think like a Kool Aid Bull, and how to spin this. I have nothing. All I can tell you is just wait 6 months, because it will improve and all this current refinance nonsense, is what bears want to scare you with. Just wait 6 months. Please. Just remember.... in 6 months, everything will be better. I know I told you that last fall, but I was kidding. I meant the next 6 months. And if I am wrong in 6 months. Well, just wait for the next 6 months. Ok? It will all be better. In some 6 month period in our life. Trust me.

Long Thornburg Mortgage in fund and personal account

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