Bookkeeping: 'Rising Tide' Performance Week 30

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?

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

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

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

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)

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

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

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

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

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.