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.

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

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)

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

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!

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

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

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

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

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

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 company’s 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)

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

McDermott (MDR) Solid Results

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.
• McDermott’s 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, McDermott’s 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

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)

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

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

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)

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

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

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

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

NY Times: Rising Inflation Creates Unease in the Middle East

Thanks for a reader for pointing me to this article... my research team of 1 human and 10 hamsters can't catch it all (rodents really are quite lazy), and I've been sagging on my NY Times reading. Ironically, the first paragraph has a striking similarity to a certain 1st world country that rhymes with... Cramerica. But as investors most of us are too busy clapping and cheering Fed cuts, because they always seem to make the market happy, for a few hours/days/weeks anyhow - without taking a step back and thinking of what is really being created on Main Street.

For any Realmoney.com readers Tony Crescenzi has been stating M2 (a measure of money supply) has exploded upward in the past 2-3 weeks ... apparently the Fed is realizing the first 30 steps of its 31 step credit binge recovery plan have not worked. Hmm, this has coincided most perfectly in timing with the most recent explosion upward in commodities. Related? Nah... of course not. This is the pickle for the Fed - it can create magic money out of thin air; it just cannot control where that money goes. Ironically it is either being horded on bank balance sheets, or used to speculate (run up) commodities that are already off the chart. Not exactly what they meant to do... oh well. It's only inflation... out, nothing for the working class to worry about, now the high flying elite who create financial innovations and are paid huge sums for these works of brilliance. (Mona Lisa's of capital destruction!)

• Even as it enriches Arab rulers, the recent oil-price boom is helping to fuel an extraordinary rise in the cost of food and other basic goods that is squeezing this region’s middle class and setting off strikes, demonstrations and occasional riots from Morocco to the Persian Gulf. (replace the words 'Arab rulers' with 'upper 0.5% country club financial elite' and the blurb works perfectly for our country too)
• Here in Jordan, the cost of maintaining fuel subsidies amid the surge in prices forced the government to remove almost all the subsidies this month, sending the price of some fuels up 76 percent overnight. In a devastating domino effect, the cost of basic foods like eggs, potatoes and cucumbers doubled or more. (this is essentially what the Chinese government has been doing as well; subsidizing costs as they spiral out of control - thankfully Americans send them their money every day so they can afford to continue this - who said we don't rub their back?)
• In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached an official level of 6.5 percent, though unofficial estimates put it much higher. Public protests and boycotts have followed, and 19 prominent clerics posted an unusual statement on the Internet in December warning of a crisis that would cause “theft, cheating, armed robbery and resentment between rich and poor.” (sounds vaguely familiar)
• “Now we have to choose: we either eat or stay warm. We can’t do both,” said Abdul Rahman Abdul Raheem, who works at a clothing shop in a mall in Amman and once dreamed of sending his children to private school. “We’re not really middle class anymore; we’re at the poverty level.” (this is already happening in lower tranches of American society - the only difference is it is now moving upstream in the socio-economic food chain so people on local TV news actually might pay attention now)
• Some governments have tried to soften the impact of high prices by increasing wages or subsidies on foods. Jordan, for instance, has raised the wages of public-sector employees earning less than 300 dinars ($423) a month by 50 dinars ($70). For those earning more than 300 dinars, the raise was 45 dinars, or $64. But that compensates for only a fraction of the price increases, and most people who work in the private sector get no such relief.
• The fact that the inflation is coinciding with new oil wealth has fed perceptions of corruption and economic injustice, some analysts say. “About two-thirds of Jordanians now believe there is widespread corruption in the public and private sector,” said Mohammed al-Masri, the public opinion director at the Center for Strategic Studies at the University of Jordan. “The middle class is less and less able to afford what they used to, and more and more suspicious.”
• In a few places the price increases have led to violence. In Yemen, prices for bread and other foods have nearly doubled in the past four months, setting off a string of demonstrations and riots in which at least a dozen people were killed. In Morocco, 34 people were sentenced to prison on Wednesday for participating in riots over food prices, the Moroccan state news service reported. Even tightly controlled Jordan has had nonviolent demonstrations and strikes.
• In Bahrain and the United Arab Emirates, inflation is in the double digits, and foreign workers, who constitute a vast majority of the work force, have gone on strike in recent months because of the declining purchasing power of the money they send home. The workers are paid in currencies that are pegged to the dollar, and the value of their salaries — translated into Indian rupees and other currencies — has dropped significantly. (thanks Ben!)
• In the oil-producing gulf countries, governments that are flush with oil money can soften the blow by spending more. The United Arab Emirates increased the salaries of public sector employees by 70 percent this month; Oman raised them 43 percent. Saudi Arabia also raised wages and increased subsidies on some foods. Bahrain set up a $100 million fund to be distributed this year to people most affected by rising prices. But all this government spending has the unfortunate side effect of worsening inflation, economists say. (sound familiar folks? anyone? the only difference between them and a certain first world country is that country borrows its money to create more inflation..errr... create stimulus... where these countries actually use cash)
• Even so, the inflation of the past few months has taken a toll on all but the rich. (ahem)
• A new class of entrepreneurs, most of them with links to the government, has built gaudy mansions and helped transform Damascus, the Syrian capital, with glamorous new restaurants and cafes. That has helped fuel a perception of corruption and unfairness, analysts say.
• “Many people believe that most of the government’s economic policies are adopted to suit the interests of the newly emerging Syrian aristocracy, while disregarding the interests of the poor and lower middle class,” said Marwan al-Kabalan, a political science professor at Damascus University.
• The same attitudes are visible in Jordan. Even before the subsidies on fuel were removed this month, inflation had badly eroded the average family’s earning power over the past five years, said Mr. Tawil, the former economic minister. Although the official inflation rate for 2007 was 5.4 percent, government studies have shown that middle-income families are spending far more on food and consuming less

*******

Takeways?

#1 If you took away the names of the cities and countries, and just read the text and the problems, you could be talking about the US. It is amazing really - we sit so high and mighty as if we have cornered the market on a rising tide lifts all boat with "free market capitalism", but the outcome appears to be no different then in corrupt dictatorships. Humans are humans. Greed is greed. The world over. Whether it's socialist Russia, dictatorship Middle East, or democratic US of A, more and more world wealth is concentrated in fewer and fewer hands. Only those damn Norweigens, Swedes, and Danish seem to have pulled away, but what do these people (happiest on earth) know?

#2 I offer as a solution to these governments a bright idea. Create for an example, a system, where almost anyone with a heartbeat can own a home. They can get a mortgage, put nothing down, and then convince their lenders to let them draw home equity against their homes, or heck go to 120% Loan to Value. Sounds good? I know... I know.. it's flipping brilliant. It should get you guys through for 5 years or so. All you need is a world full of stupid investors willing to buy the loans. My recommendation is to package them into groups of 1000, and tell said stupid investors that when you package 1000 bad loans together, it turns into a AAA loan. What? No one would buy that line of reasoning. No really - just get a ratings agency to slap a AAA rating (how? Well you pay them off, for every rating you pay them - so they have incentive to give you AAA ratings). See how it all works? I know... it sounds almost outrageous in it's stupidity but what if I told you, it worked beautifully in the greatest country in the world? Yes... if we can do it, you can do it. And when it all breaks down, you will use your central bank to print dollars to bail out the system and you can use the excuse that "so and so bank is too big to fail." Yes we have the entire blueprint ready for you. Now get to work so your "middle class" can borrow themselves into a grave to buy the basics of life such as... food. While the ruling elite laughs at the absuridity of it all during their weekend's at Martha's Vineyward. That's how it works here... you sound like you are well on your way there to American capitalism.

Welcome to the club!

(please note the above scenario does not take into account the fact the Muslim faith, frowns on debt - clearly this would be a problem passing my proposals of financial innovation - however the snake oil salesmen of Wall Street could potentially create a new financial innovation called tbed.... you see debt is the opposite of tbed.... so they could somehow sell this with their brilliance as not being debt... but beind tbed; therefore religiously ok. These folks can sell anything, I am sure they can find a work around)

p.s. to your ruling elite - we have some beautiful $24-$32 million townhouses in Manhattan for you, once you've milked your people for all they are worth. Yes, most Americans cannot afford it, so you are welcome at it. I know... it's brilliant. You can pay me later for my solutions once you see how great they work.... but note, I only accept Euros not that trashy US dollar.

Kool Aid Bulls Twist Inflation into being a "Good Thing"

I almost have to laugh at some of the absolute snake oil salesmanship on Wall Street - the more I see this over many years, these are essentially used car salesmen with MBAs (no offense to you hard working used car salesman who may read the blog).

After ignoring inflation for quarters on end, these salesmen ... err.. analysts and pundits... have now embraced inflation. Why? The sales job being put out there since last week's CPI is that inflation, both in the here (through data) and an increase in future expectations of inflation (through TIPS, through 10 year bond rates stubbornly going higher) is a GREAT thing. Why is it great? Because there is no way that inflation would be going up, if the economy was going to be weak in the 2nd half.

That's what is being sold and why inflation, which has been feared for a long time, is now EMBRACED.

Folks, I am in my mid 30s... most of these snake oil salesman are 10, 20, or 30 years older than me. They should know far better than I, because I was just a kid when there was another era where inflation was able to be sustained while the economy was weak. So for them to say with a straight face that higher inflation expectations must therefore mean a great economy coming in "2nd half 2008" is truly shameful.

This is why you are seeing rallies in the same tired groups that bet on 2nd half recovery. Would I buy retailers here? *Bleep* no. I'd be restarting short positions on individual names if I could. I'd submit retailers are where homebuilders were about a year ago - after a huge drop, hopes rise that "this is the bottom" and "it cannot get worse" and "we've seen the worse, time to get in" and we get these incessent hopeful rallies, that lead to another round of drops as reality washed over the dreamers in the coming months. People in NYC do not understand the corrosive nature of inflation on the consumer. They do not understand the real struggles that are happening *now*, not to mention in 6 months when their "recovery" thesis happens, as inflation continues to ramp. They conveniently put aside that 70% of GDP is based on consumer - the same consumer who is going to be eaten by inflation, that they are cheering.

My view has been made very clear on inflation - and well before any of these guys were even saying inflation was an issue... we are going into a World of Shortages. Our US centric viewpoint (narcissim at it's best) kept the blinders on all the smart folks in NYC as to the possibility of commodities ramping while the US economy falters. These same folks are today scratching their head at $100 crude when the most powerful nation on Earth is in recession (a recession they all denied until December 2007 - again the smartest folks on the planet). Too few resources chased by too many people...the definition of shortage, and the nexus of this new era of inflation .... and now with a world awash with US pesos, this imbalance will be exaggerated even further. And a stressed US consumer, whom retailers are dependent on, is going to retract further. Yet we're supposed to buy retailers here? Laughable. Macys (M) in fact today said they will stop offering quarterly guidance on sales or earnings. Sounds like a very confidant retailer. Of course they are sticking to full year guidance. ;)

If anyone wants a fun project - take the top 20 retailers in America. Plug in their full year 2008 analysts estimates today, and check back next February (2009) when we have the truth. You will, in my opinion, see a huge drop (from already heavily discounted levels) as throughout the next 10 months we hear retailer after retailer, warn and then "beat" lowered guidance - just like they've been doing the past 2 quarters. But over time, we will see 08 full year drop significantly. (but the pundits will clap about "beating estimates"). So all these great values on full year 2008 we hear about today, are going to look very different by the time we actually get there. But we can't be bothered with that now since $600 rebate checks are going to fix it.

Now one of my thesis for a 2nd half market (not economic) recovery is all this Fed liquidity will inflate all assets. One asset is stock prices. So I could certainly see that asset inflating... because more worthless dollars will be propping it up. And it will create an illusion that all is well in the real economy, because "the market foreshadows the real economy by 6 months". But no, it will be mostly billions of dollars swirling the world trying to find a home. And US equities, by default are going to get some of those dollars. While Main Street buckles under the inflation exaggerated by these moves. Truly a sad state when you really think about it, but we know whose side the Fed is on...

Anyow, just wanted to update you on the latest "consensus" of the brightest minds... "there is no way inflation expectations could be rising if the US economy won't be rip roaring later in the year...."

"What's that? 1970s and early 80s?"

"Put a sock in it, and stop raining on our parade. If you ignore that era than our thesis works perfect! Inflation is *GOOD*! Pass the Memo!"

KBR (KBR) has a Solid Quarter, but I am Selling

Ironically, I am less impressed with KBR's (KBR) earnings than I am with Foster Wheeler's(FWLT), but the former is up and the latter is down. KBR actually missed on apples to apples continuing operations (28 cents vs 32 cents analysts)- but expectations were so low, I suppose the stock could rally. Typical. But I think the wrong company is taking the big hit today. People only seem to look at headlines these days on Wall Street, not look at the numbers so they see a big "beat"....which is not accurate.

Backlog is solid but only rose 5%. My worry with KBR is the focus in Iraq; while the company has been branching out into a lot of other areas to provide diversification its bread and butter is still Iraq. If... errr... when Obama gets elected, this could pressure the stock. But the trends are a bit troubling to me; profits are up, but full year revenue has been quite flat this year. On the positive side, due to Cheney connections I could see this company getting a lot of high level business opportunities, especially in the Middle East (i.e. Saudi Arabia)

Technically this is actually a chart that is improving as the stock broke back above its 50 day moving average in the past few days. But with the stock up from $30s to near $36 in just over a week, I am going to break one of my rules and sell a vastly improved chart. While the stock could continue to run, I don't see myself allocating much money to the name go forward so having a small stake in a name I have questions about probably doesn't make sense. So while I could see a run to $40, I just don't have enough skin in this game to make it worthwhile.

Again, if you take away the stock action all the numbers in the Foster Wheeler report were much more impressive to me (plus FWLT trades at a lower valuation)... but it's all about results vs expectations and KBR clearly had a lower bar to hurdle. So I am a bit mixed on how to treat this stock... but we'll sell for now and see how the next 3-4 quarters play out.

I am selling my 0.7% stake in KBR, 225 shares, in the low $36s. I've held KBR since August 10, 2007 as part of my large basket of infrastructure stocks - buying as low as the upper $20s and as high as low $40s; all in all I lost about $1500 on this position over the 6+ months, as the stock gave back all of its gains by mid January.

• Former Halliburton subsidiary KBR Inc. said Tuesday fourth-quarter profit rose 65 percent, lifted by contributions from natural-gas projects, work in Iraq and a tax benefit related to a 2006 asset sale.
• The Houston-based military contractor and engineering and construction firm said profit for the October-December period was $71 million, or 42 cents a share, up from $43 million, or 28 cents a share, in the prior-year period. The most-recent quarter included income from discontinued operations of $23 million, or 14 cents a share, due to tax benefits from the 2006 sale of its production services group. Wall Street expected KBR to earn 32 cents in the quarter, excluding one-time items.
• Revenue for the final three months of 2007 amounted to $2.4 billion, topping the Wall Street forecast of $2.27 billion. Revenue in the year-ago quarter was $2.3 billion.
• The company, which split from Halliburton last spring, said income from continuing operations amounted to $48 million, or 28 cents a share, versus comparable income of $45 million, or 30 cents a share, a year ago.
• KBR said operating income in the fourth quarter of 2007 was partially offset by $22 million in charges from potentially disallowable costs incurred under U.S. government contracts in the Middle East in 2003.
• KBR is probably best known for providing food and shelter to U.S. troops in Iraq, thought Utt has said the company is likely to continue to do less work in Iraq as troop levels decrease.
• KBR has announced several new contracts in the past year, both in the U.S. and overseas. They include a pact to manage construction of a chemicals and plastics production complex in Ras Tanura, Saudi Arabia -- a plant that's expected to be among the world's largest petrochemical facilities.

Long Foster Wheeler in fund and personal account

Bookkeeping: Taking Some off the Table in Mechel (MTL); Moving More into Deep Sea Oil Drillers & Oil Service

This run in Mechel (TML) has surpassed all my expectation; the chart is amazing and it would be wrong not to take some off the table at this point. Up 30% in just a few weeks. Selling about 20% of my position here at $130. I will look at add back on (hopefully) a pull back.

I mentioned yesterday that the oil service stocks seem to be on the verge of life here - both of my 2 deep sea oil drillers, Atwood Oceanics (ATW) and Diamond Offshore Drilling (DO), are looking nice today, so I am going to add a layer to both these positions on positive momentum. I find both dirt cheap and undervalued; and finally the technicals seem to be improving... also added to some National Oilwell Varco (NOV) and Core Laboratories (CLB).

As oil holds up and people realize crude is not beholden to the US economy, perhaps these stocks will finally get their due. I am still a bit worried about adding at the top of a bear market rally phase, but these stocks have really lagged the underlying commodity so hopefully that will provide some cushion.

Long all names mentioned in fund; no personal positions

Bookkeeping: Beginning Position in DryShips (DRYS)

We've been talking about DryShips (DRYS) a lot lately

1. Feb 15: DryShips Reports Excellent Number
2. Feb 11: Another Constructive Day in Dry Bulk Shippers
3. Feb 10: Dry Bulk Shippers - Time to Get Back In?

With the stock pulling back to it's 20 day moving average ($78) I am creating a new position in this name with a relatively large initial buy of 250 shares in the $79s. This is a 1.75% stake.

I already have talked about the fundamentals, but due to the volatility of this name, I have a very simply technical strategy. The 50 day moving average is $76; I want to see DryShips continue to hold that level. If the stock breaks to $75 or so, I will be out with a loss... simple as that. I keep about 10% of my portfolio for more shorter term opportunities, of which I'd place DryShips into that category because I still have some unease about the "very long term". But with the stock down from a high of $88 yesterday and coming off a fabulous earnings report, we take a stake here and see how things pan out. For my personal style this is exactly the type of chart I love. A stock in an uptrend which has pulled back to a key support level. Other people like to buy 52 week highs, but I prefer this sort of set up. I have a clearly defined support level not too far lower, so if this is broken I can exit with a contained loss....

Long DryShips in fund and personal account

Yahoo Finance Did Not Take Kool Aid Swig This Morning

I just had to have a quick laugh this morning when I went to Yahoo Finance and saw the top 5 headlines, and then notice the market is BOOMING this morning ;) Quite a divergence in headlines versus Kool Aid equity market - just find it a hilarious dichotomy and quite honestly, a perfect example of all the magnificent things about this magnificent puzzle that is the stock market. Remeber, it is not the news, but the reaction to the news that matters. So when the financials rocket up higher on their coming writeoffs don't scratch your head just drink some Kool Aid and remember "this is the kitchen sink quarter, it will all get better from here, the Fed is fixing the system, Fed cuts solve everything, an economy which is based 70% on consumer spending will not weaken much after all from a consumer recession, we'll be booming by the 2nd half of 2008, and I need to buy more stocks"

Please note I don't follow most of these figures, surveys, and government junk reports - all I care about is what the companies themselves say, but I just found the headlines amusing when amassed in 1 spot so this is why I highlight it.

Job Worries Sink Consumer Confidence

• Consumer confidence plunged in February as Americans worried about less-favorable business conditions and job prospects, a business-backed research group said Tuesday.
• The Conference Board said its Consumer Confidence Index fell to 75.0 this month from a revised 87.3 in January.
• The reading was the lowest since the index registered 64.8 in February 2003, just before the U.S. invaded Iraq, researchers said, and was far below the 83.0 expected by analysts surveyed by Thomson/IFR.
• The expectations index, which measures consumers' outlook over the next six months, fared even worse. The expectations index dropped to 57.9 from 69.3 in January. The February figure was a 17-year low, the Conference Board said, standing just a bit above the 55.3 of January 1991.
• "The weakening in consumers' assessment of current conditions, fueled by a combination of less-favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggest that the pace of growth in early 2008 has slowed even further," Franco said in a statement accompanying the report.

Home Prices Drop 8.9% in 3 Months

• U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index
• "We reached a somber year-end for the housing market in 2007," said one of the index's creators Robert Shiller. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak."
• The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.
• Home prices also plunged 5.4 percent from the previous three-month period, by far the largest quarter-to-quarter decline in the index's history. The previous record was the revised 1.8 percent drop in the third quarter of 2007.
• Miami continues to lead the weakest markets, posting a 17.5 percent annual decline. Las Vegas and Phoenix followed with a 15.3 percent drop each. Los Angeles, San Diego, San Francisco, Detroit and Washington, D.C. all recorded double-digit annual declines.
• Only three metro areas -- Charlotte, N.C., Portland, Ore., and Seattle -- showed year-over-year increases in prices, but Seattle's growth was up a slim 0.5 percent. (go Seattle! Got a lot of readers there!)

US Home Foreclosures Soar in January

• The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.
• Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier
• The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions
• January's tally represented an 8 percent hike from December. (that's a heck of a sequential increase, thankfully it will be all fixed by 2nd half 2008)
• One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007. "It suggests that there's little or no equity in a lot of these homes, because they're not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales," Sharga said. (remember, we are going to a country full of upside down home owners, people who are UNDER WATER - they owe more than their home is worth - and it's getting worse by the DAY)
• A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.
• Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said. Rounding out the top 10 states with the highest foreclosure rates were California, Florida, Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan.

Wholesale Prices Jump in January

• Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.
• The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.
• The January inflation surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years.
• Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.

Again, I don't take stock in government reports, surveys, and the like - they are all inaccurate and subject to clever subtle changes to make things look better than they are. But it certainly is some amusing reading when overlaid to a market running hard and fast. People will say it is all priced in... highly doubtful. In the end, stock prices are a reflection of corporate profits. The Kool Aid of the past month or so has been, yes we're in a rough patch but by 2nd half of 2008 things will be all fixed. Sometime in the next 4 months that will change to (mark my words) yes we're in a rough patch but by 1st half 2009 things will be all fixed. So we will rally on a false belief in the Fed's power to fix everything, and a false belief in full year 2008 estimates based on a roaring economy/consumer coming back like magic to the economy once we hit July 4, 2008. So as long as this is the religion on the Street, we can get counter trend rallies of large proportion.

We went through the exact same thing in September/October 2007 when the market rallied in the face of continued bad news on "this is a 2nd half 2007 issue, everything will be better by 1st half 2008" mantra. Notice how the theme never changes, only the dates? :)

Again, we'll let the charts tell us when to change views and join the Kool Aid drinkers in full "see no evil, hear no evil" stride. If the S&P 500 can make it out to 1420+ or so, then a longer term downtrend will look to be broken. We did break S&P 1370 which has been a thorn in the side of bulls for a while now. The next resistance level is the 50 day moving average at S&P 1390. 10 points away - we'll see how the market handles that point.

While I am a bear on the economy (Main Street) I always respect Wall Street works in it's own parallel universe - when the technical condition of the market improved in September 2007, I put my "see no evil, hear no evil" googles/earlplugs on and went into Kool Aid bull phase - it is useless to fight a stampeding herd of Kool Aid toting bulls, so if we get to a similar stage I will go find my goggles/earplugs once more. But first the technicals must confirm the Kool Aid.

Oh, Google (GOOG)

It is funny, I was looking at some of the top performing mutual funds for 2007 and reviewing their top holdings - most were chock full of Google (GOOG) and Apple (AAPL) in their top 5 holdings. And judging by their year to date performance in 2008, I assume they made no adjustments since Jan 1, 2008 since many of these funds are down nearly 20% for the year, on the backs of these 2 names along with a few others. Lack of adaptation - which in my book is deadly.

While I've held both these names, Google has never been more than a 1-1.5% stake and Apple was actually the name I liked better; however when the technical stock action breaks down I act relatively heartless (don't get attached to any stock), and began reducing exposure. I am a big believer in a very uneven playing field on Wall Street - those with connections get information first no matter what the SEC assures us... and this is reflected in the stocks with deteriorating price action. So once a stock breaks key technical levels, I try to cut back exposure - no questions asked because it means someone, somewhere has information I don't. Period. Does it work 100% of the time? No. Nothing does. But it works a vast majority of the time, and on the Street that is a huge advantage.

I've been watching these 2 names very closely, as without them I just don't see any great rallies in the stock market that are meaningful ... and on each Kool Aid rally these stocks barely do anything. Which makes me not want to add to them, even at these "value" levels.

Specific to Google (GOOG) I wrote back in August [August 30: Google (GOOG) Can't Get any Traction - is this Why?] I was worried about the potential for this stock to finally suffer in a US recession - people called it recession proof at the time, but I found it hard to believe that anything reliant on advertising is recession proof.

financial advertisers account for more than a third of all web advertising, and as the plunging share prices of investment banks clearly demonstrate, the mortgage crisis is affecting a lot more than the mortgage sector.

And online revenue doesn't have to collapse the way it did in 2000 for online companies to get hurt and Internet stocks to get crushed. It just has to experience a normal advertising recession.

Very interesting points and they have some serious merit in my book. You don't notice all the ads because at some point you just begin ignoring them as white noise but based on how many refinance offers I get in the mail each week, plus all this advertising on the web that is EVERYWHERE for getting a mortgage or refinancing.... this has to be pulled back.

Now today's news is not about financial advertisers pulling back but simply a dramatic drop in click thrus. Personally I am immune to internet advertising - I click on no ads at all; it is all white noise to me. But I guess many of you do click and that keeps the advertising world happy. But as Americans get poorer, they are going to be forced to consume less, which means less pull into clicking on those ads for those "must have" shoes, Coach (COH) bag, that new book, that new this, that new that. People have to pay for things like food and gas after all.

This is yet another of countless examples of why the stock market is so difficult. You can be intellectually correct, but if the herd on Wall Street ignores reality you can be out of money by the time your thesis proves correct. So let's say someone thought Google would slow down due to recession in August - and shorted the stock; well after the big rally in teflon tech stocks (the "4 horsemen") through Dec 31, 2007... they'd be much more poor, and unable to get much of the benefit of the crash Google has been going through since. Even though they were right intellectually. So not only do you need to be correct in THEORY, you need to time it correctly. Very difficult. This is why it is not easy being a short - you need to fight Kool Aid. Another parallel is the current issue with inflation - the Street is laughing it off and going with the Kool Aid thought that by 2nd half 2008 it will be fine and Fed cuts fix everything. When in fact it is going to be corrosive to a CONSUMER LED economy. But people don't get that now, nor will they believe it. So they trust in 2008 estimates for all these consumer based companies. And they will be proven wrong later in the year. But between now and then, just like with Google and a host of other examples, we are subject to Kool Aid love and rallies... inflation will "take care of itself" and the "consumer will be roaring by 2nd half 2008".

I still own Google (GOOG) but it is a minor position, around 0.5% of the portfolio. I was actually debating mentally whether to cut it cold turkey based on its action the past few days (no rally when the rest of the market was bouncing on bond insurerer Kool Aid), but at this point the stock is now at long term support levels $440-$450, so I'll just sit on what is left. I really don't have any urge to add more here even at this "great discount". I did mentioned a Google miss as one of my 13 Outlier Predictions for 2008, which already proved true [Jan 31: Google (GOOG) Misses], and today's news reinforces this theme - proving once again I need to listen to myself more, even though the sirens of the Kool Aid bunch constantly whisper sweet nothings about how great everything is...

Google is finally hit by an earnings miss by Q3 2008. It won't be a major miss, but enough to rock psychology. Advertising slowdown, led by US recession... err not a recession but a "slowdown" (its a political year folks), finally hits Google, despite secular growth. Google will be seen as human and a company that is not immune to the business cycle, driving the stock down.

Long Google in fund; no personal position

Adding to Foster Wheeler on Earnings Miss

We are taking a hit today on the Foster Wheeler (FWLT) earnings miss, but I believe this is simply the Cramer-ites jumping off the bandwagon who expect the constant "beat and promise more" of classic momentum trading. Foster Wheeler and cohorts are in a business that is very lumpy - contracts are recognized in batches; it is a very different bidget than "produce widgets, sell widgets, repeat". So when something goes awry people panic and cry. In fact we saw an instant replay a few quarters ago last summer, the stock sold off huge, and created an enormous buying opportunity.

Now I did step on a mine as I took Foster Wheeler up from 1.8% to 3.5% allocation in the past week; and broke one of my own rules - don't build up a position going into earnings because the Street acts like a 3 year old brat if they don't get everything as they wish, but what's done is done. I am in fact adding another 100 shares this morning on the 8%+ selloff. I wasn't online this morning so I missed the low below $70, but I am adding in the $72s. This $72 level is also the 50 day moving average so I see it as a sign of strength that the stock already rebounded back above this level. I could certainly be wrong and this is part of a bigger trend, but I heard the same doom and gloom the last time Foster Wheeler missed, and the stock went on to more than double from those oversold levels within a few months. I continue to watch this bursting backlog, and that is key #1 to my eyes. $4.6 BILLION in NEW ORDERS Booked this quarter alone - wow. That is almost equal to the entire amount of business they did in year 2007. Staggering.

This remains a company which grew 50% last year, and trades at roughly 20x forward earnings. While 50% won't continue, 25-30% future growth (over 2-4 years) seems very plausible.

• Foster Wheeler Ltd. said Tuesday fourth-quarter profit rose, but missed expectations due to the repeal of a tariff in Italy, contract issues with a client and fewer bonuses and incentives.
• The engineering and construction services company's profit rose nearly 24 percent to $78.1 million, or 54 cents per share, from $63.1 million, or 44 cents per share, a year earlier. Revenue jumped to $1.47 billion from $1.19 billion.
• Analysts expected profit of 76 cents per share on revenue of $1.42 billion, on average, according to a Thomson Financial poll.
• Full-year profit rose 50 percent to $393.9 million, or $2.72 per share, from $262 million, or $1.72 per share. Revenue climbed 46.1 percent to $5.11 billion from $3.5 billion.
• Milchovich noted, “We reported solid results for the fourth quarter of 2007. However, EBITDA was below the average of the first three quarters of the year because of reduced EBITDA in our Global Engineering and Construction (E&C) Group due to three factors. First, E&C experienced an $8.3 million negative impact due to the repeal of an Italian power price tariff, which had been enacted in the third quarter of 2007, as a result of a court ruling in the country. Second, we experienced fewer profit-enhancing opportunities such as bonuses and incentives during the quarter as compared to the early part of the year due to portfolio mix and contract timing. Finally, E&C took a $5 million reserve on one reimbursable contract due to issues with the client over project scope growth. We’re hopeful that this matter will be favorably resolved in future periods but felt that it was appropriate to reserve for it at this time.”
• Milchovich added, “As we look at 2008, we continue to be very positive about the markets that both our businesses serve and about our position as we enter the year. In our E&C Group, consistent with what we’ve been saying for months, we expect meaningful organic growth and sustainable margins. We’re hopeful that this can be complemented by growth through strategic acquisitions during the year as well. In our Global Power Group, as we’ve previously stated, we remain confident that we will enjoy a material level of margin improvement and revenue growth during the year given our position and momentum entering 2008.”

Long Foster Wheeler in fund and personal account

LDK Solar (LDK) Reports Solid Numbers

LDK Solar (LDK) with a decent report tonight and based on how pummeled the stock is, decent is good enough to offer some contentment for bulls. Revenue showed solid sequential growth, gross profit margin continued to suck wind, down to 30.1% (from 30.8% previous quarter and way down from the 43% of a year ago), but they beat estimates by 3 cents ($0.44 vs $0.41). In terms of guidance, first quarter is "better than expected" @ $0.41 - $0.45 but considering they warned on earnings just a few weeks ago due to the Chinese storms it's sort of silly to see them do that, and then push estimates right back up. (Analysts in @ $0.39)

For the full year 2008 they are sticking to the $960M to $1B target (below analysts target) with previously announced 26-31% gross margins. That continues to be an enormous range and means 2008 earnings estimates are still a huge guess; 27% gross margin average for 08 would derive a very different result than 30% would. I would of liked to see a narrower range or at least a narrower range for the 1st half of 2008 i.e. 28-31% for first 2 quarters and then 26-31% in second 2 quarters. Right now, it makes it just impossible to model an earnings estimate.

This is still an interesting long term story; if/when they get their polysilicon plant off the ground (1+ year) their gross margins should expand dramatically and each unit of revenue should produce much more profit. But there are still a lot of ifs between now and then.

Long LDK Solar in fund; no personal position

Bunch of Food Related Stories in FT.com as DBA Hits $42

I just mentioned last week Powershares DB Agriculture Fund breaking $40 for the first time [Powershares DB Agriculture Fund (DBA) Hits $40 for First Time - Soybeans Now a Shortage]; it is already $42; this is not just a financial instrument - its increase reflects a serious crisis brewing that we've been predicting for a long time but now appears to be gaining urgency by the day.

The Financial Times is all over the coming food crisis issue today... let's hope this stock market continues to rally so the upper 20% can continue to eat ;) the lower 80%? Let them eat cake! No wait... they cannot afford to eat cake. Well.... Let them imagine they can eat cake!

I mentioned Kazakhstan earlier today in another post; don't let any Borat references make you snicker. These Eastern European/former USSR satellite countries are very similar to the US heartland. These 2 areas provide much of the world's grain exports. So when these type of countries pull back it's dangerous. By dangerous, I am not being a sensationalist - many of the world's poor, lower, and now middle class (remember what is middle class there might be considered lower poor here) are going to be in a very serious situation as prices continue to rise.

#1 Wheat Prices Hit All Time Highs

• Prices of top-quality wheat jumped 20 per cent on Monday, the largest one-day increase ever, to a record high as Kazakhstan, one of the world’s largest exporters of the grain, said it would impose export tariffs to curb sales.
  
• The move, which follows similar export restrictions in Russia and Argentina, is likely to put further pressure on already tight global wheat supplies, analysts said. Akhmetzhan Yesimov, Kazakhstan’s minister of agriculture, said the government wanted to limit exports as it battled against rising domestic inflation of nearly 20 per cent.
• “Whatever happens, we will soon limit exports,” Mr Yesimov said. Kazakh grain, prized for its high protein and gluten content, is similar to some of the scarce top-quality North American crops that jumped in price on Monday.
• The price of spring wheat, used to bake bread, has more than doubled since January and has risen fourfold in the last year, contributing to a rise in global food inflation.
• Gavin Maguire, of Iowa Grain in Chicago, said consumers such as mills and bakers, who needed wheat, were “panicking”. “Historical references are useless. We are breaking all the rules,” he said.
• Iraq and Turkey said they were planning substantial wheat purchases to replenish inventories and analysts said China could be forced to follow because of drought damage to its next crop.

#2 High Food Prices Might Force Aid Rationing

• The United Nation’s agency responsible for relieving hunger is drawing up plans to ration food aid in response to the spiralling cost of agricultural commodities. The World Food Programme is holding crisis talks to decide what aid to halt if new donations do not arrive in the short term.
• Josette Sheeran, WFP executive director, told the Financial Times that the agency would look at “cutting the food rations or even the number or people reached” if donors did not provide more money.
• “Our ability to reach people is going down just as the needs go up,” she said.
• WFP officials hope the cuts can be avoided, but warned that the agency’s budget requirements were rising by several million dollars a week because of climbing food prices.
• The WFP crisis talks come as the body sees the emergence of a “new area of hunger” in developing countries where even middle-class, urban people are being “priced out of the food market” because of rising food prices.
• The warning suggests that the price jump in agricultural commodities – such as wheat, corn, rice and soyabeans – is having a wider impact than thought, hitting countries that have previously largely escaped hunger.
• Hunger is now “affecting a wide range of countries”, she said, pointing to Indonesia, Yemen and Mexico. “Situations that were previously not urgent – they are now.”
• The main focus of the WFP to date has been to provide aid in areas where food was unavailable. But the programme now faces having to help countries where the price of food, rather than shortages, is the problem.
• Ms Sheeran said that in response to rising food costs, families in developing countries were moving in some cases from three meals a day to just one, or dropping a diverse diet to rely on one staple food.
• In response to increasing food prices, Egypt has widened its food rationing system for the first time in two decades while Pakistan has reintroduced a ration card system that was abandoned in the mid-1980s.
• The US Department of Agriculture warned this week that high agricultural commodities prices would continue for at least the next two to three years.

#3 Shoppers Warned Bigger Bills on the Way

• When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.
• His warning that a strong wave of food inflation is heading towards the world economy was met by nods from agriculture traders, food industry executives and western’s government officials at the USDA’s annual Agricultural Outlook Forum.
• Larry Pope, chief executive of Smithfield Foods, the largest US pork processor, warned delegates of a wave of “real food inflation” just at the time central banks were under pressure to cut interest rates. “I think we need to tell the American consumer that [prices] are going up,” he said. “We’re seeing cost increases that we’ve never seen in our business.”
• The comments highlighted one of the conference’s main concerns – that rising agricultural prices have reached a stage at which the impact will be felt not only on fresh food but will also filter through the supply chain and raise the cost of processed food.
• Tom Knutzen, chief executive of Danisco, one of the world’s largest ingredients companies, said rising vegetable oil costs made it more expensive to produce preservatives, colourings and flavourings.
• He said that wheat prices had previously moved from $3 to $5 a bushel without significant pain for consumers. “But now the wheat price has jumped to nearly $20 a bushel. These large increases will show up [in consumer prices].”
• Some people hope a slowdown in the US or global economy would push down agricultural commodities prices. But Mr Glauber said that would have a limited impact on agriculture commodities prices. “I am more concerned about higher prices than lower prices.”

#4 Demand for Wheat Puts India at Risk

• India is at risk of sustained food price inflation as domestic production of key staples such as wheat and edible oil fails to keep pace with rising demand, according to the country’s top official on commodities trading.
• B.C. Khatua, the chairman of the Forward Markets Commission, which regulates futures trading for food commodities ranging from wheat and rice to dried beans, said India urgently needed to improve agricultural productivity to stem food price rises, which hit the nation’s poor majority the hardest. “India has a deficit of oilseed, a deficit of many pulses and now a deficit of wheat – all the major staples are now getting hit by the demand-supply gap,” said Mr Khatua.
• Food inflation is one of the most politically sensitive areas of the Indian economy, with the World Bank estimating 29 per cent of India’s 1.1bn people live below the national poverty line.
• Mr Khatua said India needed to address infrastructure problems such as the lack of rural roads and warehouses, cold storage and processing facilities to lift productivity and help reduce wastage, which he estimated at 15-20 per cent of agricultural output.

Whew. As happy as I am intellectually to have nailed this long ago before it was front page news; it is quite heart breaking to see it play out due to the impact of so many people. Fuel inflation hurts only so many - keep in mind much of this world is still rural and poor. Many could care very little about how much petrol goes up. But food affects everyone.

Long Powershares DB Agriculture Fund in fund and personal account

Another Spike Off Same Issue

I am not sure how many times we can have 1-2% spikes intraday off the same bout of news but once again, the market goes straight up off bond insurer news. Much like a drug addict I believe the more times we use this drug, the less effective its high will be. How many more times can we use this parlor trick. And note with all this great news thrown at the market about ratings confirmations and bailout plans, the S&P does not go above 1370. It's getting a bit tiring; I just wish the bailout would be done and the rating agencies would confirm that no matter what happens, even if the bond insurers would go bankrupt they'd sit and smile and award them a AAA rating.. because that's what they've essentially done the past 6 months. So let's make it official so we can move on with the rest of the reality.

• Wall Street bolted higher Monday after Standard & Poor's affirmed its ratings for Ambac Financial Group Inc. and MBIA Inc., raising hopes that troubled bond insurers will emerge from the credit market crisis on solid footing.

Myself? I'm going to be re-adding some short exposure on this "surprise" news.

More Writedowns Across Financial Spectrum says Goldman Sachs

In news that is a surprise to no one reading this blog for more than a week, and in fact we've been predicting since the day of the last major round of "kitchen sink writedowns", more are coming down the pike per Goldman Sachs. Further, also as predicted long ago, these won't have as much to do with subprime as all the other parts of the credit chain. As I've been stating, subprime is the tip of the iceberg and simply a symptom of the disease; not the disease itself. Although it is conveniently blamed by those in power i.e. "if not for those subprime people..." Look for some of their former CEOs on Capital Hill this week...

The infection will move up the food chain to alt A mortgages, to prime mortgages, and then across to other parts of credit - student loan, auto loan, personal loan, commercial loans, and credit cards. These are the things they are going to be writing down the coming year. Why this is a surprise to anyone would be beyond me... but I am sure someone is aghast at this 'surprising news'. Probably someone who watched CNBC all day and listens to the seals clapping.

But remember, WAY back last August we were told "THIS" was the kitchen sink quarter by both the companies and the financial press. Never forget that as this plays out and the hypocrisy is shown. At the time (and I'm not financial expert, simply someone with a brain still intact within the skull), I was writing we have an entire house full of sinks, and sinks will be found in rooms we did not even know existed. That will be the story of 2008; and why all earnings estimates for these companies for 2008 are a complete waste of time, and anyone telling you financials are cheap on 08 estimates needs to be put into a straight jacket or at least needs to stop managing money. And can I just say, Citigroup (C) is simply an unmitigated disaster.

Also, as I've been stating, we're going to see another round of foreign infusion - in fact we must for some of these companies to remain going concerns. Or the Fed will literally be forced to buy the junk right from the banks themselves so they can maintain capital ratios. Either or.

• Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.
• Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cos. all the way up to a whopping $12 billion projected for Citigroup Inc.
• "Although many of the write-downs in the back half of 2007 focused primarily on subprime and CDOs, we expect first-quarter 2008 write-downs to be spread across all aspects of residential mortgage-backed securities including subprime, Alt-A and prime, commercial mortgage-backed securities and leveraged loans. We forecast first quarter write-downs of approximately $1 billion to $12 billion for each of our large-cap companies across all of these categories," the Goldman analysts concluded.
• On Citigroup - "Our new estimate assumes about $12 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities. We believe write-downs from its asset-backed CDOs will account for the largest percentage of the overall write-down. Citigroup has also been one of the least aggressive in terms of its write-down of these assets, in our view," Goldman's analysts said.
• On JP Morgan - "Our new estimate assumes about $3.4 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities as well as our assumption for no private-equity gains in the quarter (previously we assumed about $700 million in gains) based on most recent management guidance," Goldman concluded.
• On Bear Stearns - "Our new estimate assumes about $1.4 billion of additional write-downs across Bear's portfolio (although the primary drivers are likely to be from Alt-A and commercial mortgage-backed securities). Absent these write-downs, our forecast would have still had earnings down 10% year over year, a clear indication the firm is suffering from a global slowdown in mortgages," Goldman said.
• On Lehman Brothers - "Our new estimate assumes about $3.5 billion of additional write-downs across leveraged loans, residential mortgage-backed securities, and commercial mortgage-backed securities. Lehman has the largest absolute commercial mortgage-backed securities exposure of the group at $40 billion, and we expect this asset class to contribute close to half of the write-downs this quarter," the Goldman analysts said.
• On Morgan Stanley - "Although Morgan Stanley will likely have some meaningful negative valuation adjustments this quarter on leveraged loans and commercial mortgage-backed securities, we do not believe the firm will be as impacted as some peers as it appears that the firm was more aggressive on its subprime write-downs last quarter, it has less Alt-A exposure than some of its peers, and its commercial mortgage-backed securities portfolio is more of an international concentration, which has been less impacted than the U.S., in our view. "Our new estimate assumes about $3.1 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities," Goldman concluded.
• On Merrill Lynch - "Our new estimate assumes about $4 billion of additional write-downs across leveraged loans, CDOs and commercial mortgage-backed securities. We also assume a smaller write-down on the firm's remaining Alt-A and subprime residential mortgage-backed securities portfolios. Merrill was one of the more aggressive firms in writing down its CDO exposure in the fourth quarter of 2007," Goldman said.

This will most likely be the quarter even likely Goldman Sachs might need to do a writedown or if nothing else bring expectations for 2008 down quite a bit.

And after these writedowns, the companies will insist (for the 5th time I believe already) that this is indeed the kitchen sink quarter and then analysts will come onto CNBC and cheer and clap and tell you financials are so dirt cheap and the Fed is printing money and you need to buy these stocks because we can't fight the Fed and everything will be fine in 6 months. You will continue to ignore these people. Why? They said the same thing last August. Eventually they are going to be correct, as all blind squirrels are. But entire lines of business are disappearing for these companies and once again, without home prices stopping their fall and the consumer shielded from real inflation and cost of living stress, none of these things improve in the near term.

No positions

Bookkeeping: Continuing to Add Infrastructure Exposure

I continue to like the relative strength in this sector today... I am adding in $4-$6K lots to the following positions

1. Jacobs Engineering Group (JEC)
2. McDermott (MDR)
3. KBR (KBR)
4. Shaw Group (SGR)
5. Fluor (FLR)

Again, many of these names report later this week... as I've stated I am in a dilemma overall as most of the groups I like are either (a) on an extended run and I don't want to chase the names upward and onward or (b) in terrible technical condition on their charts. Infrastructure is the one group, that while showing good strength of late, is still well below previous levels, and combine that with rapidly improving charts - just about every name in the group is now breaking back above their 50 day moving averages. So this is exactly the point I like to add, and about the only group that has both things going for it.

Some of the oil related names are potentially nearing that point too but still too early to tell...

Long all names in fund; long Fluor in personal account

China Medical (CMED) - What Stock Market Correction?

If you took away the stock symbol, I'd think China Medical (CMED) were a gold stock or agriculture crop. The chart is fantastic and the relative strength impressive. It doesn't make huge week to week moves so it does not show up on my weekly "big movers" list, but I've followed this name since it began trading in the US, and after an initial huge "China medical stock" euphoria, it went and did nothing at times for quarters on end (most of 2006 and half of 2007) - but now is in the middle of a huge run.



I don't want to chase this name, and earnings are out later this week so we'll see how they do. My main concern has been valuation as the stock is now trading at nearly 30x next year's estimates, but the proof is in the pudding - people want into this name.

Zachstocks.com wrote a nice piece on China Medical (CMED) back in November. It does have nice revenue mix, a bit similar to Intuitive Surgical (on a much smaller scale) - sell the hardware with 1x bonus, but then enjoy aftermarket benefits from selling consumables needed to continue to operate said hardware. I like that.

• As China emerges into a modern economy, demand for services that most Westerners would consider basic is on the rise. China Medical (CMED) is hard at work filling the healthcare needs from both the treatment side as well as through its diagnostic products. Last year the company received 60% of its revenues from its High Intensity Focused Ultrasound (HIFU) line whose primary function is treating tumors. The ultrasound waves are focused directly on the offending tissue and essentially breaks down the tumor.
• While HIFU has been the primary bread winner the past few years, a new acquisition in March paves the way for the company to expand its diagnostic line of products. The system that was purchased is called the Fluorescent In Situ Hybridization or (FISH). The acquisition is part of the company’s strategy to transform itself into an advanced in-vitro diagnostic (IVD) business. The specialized technology allows physicians to spot prenatal disorders as well as cancer occurrences in adults.
• While the main product line sold to physicians is capital intensive and sales of this magnitude can take time to complete, CMED enjoys a predictable revenue flow from the reagents or consumable inputs needed to run many of its diagnostic tests. This reagent business helps smooth out the peaks and valleys in between the less predictable sales of large equipment. As the company is successful in placing more and more diagnostic products, its base of consumable reagents will create a stronger recurring revenue source.
• Earlier this month, CMED issued a press release stating that the Korean version of the FDA had approved the HIFU system for treatment of liver cancer, pancreatic cancer and uterine fibroids. This is a positive first step towards the broader global footprint the company is aiming for. Expanding into Korea, Japan and eventually Europe and the US will cause investors to view the stock as a better global expansion play instead of pushing it higher or lower in sync with the China market. The company has partnered with France’s EDAP to sell the HIFU system in Europe and Russia pending approvals.

No position

I Didn't Realize US Comptroller Resigned

This is the #1 story on CBSMarketwatch.com today - I missed the fact Mr. Walker resigned. I've listened to him over the years and found him to be refreshing, realistic, blunt, and honest. Obviously, there is little room for a man like him in Washington DC, and I can only begin to imagine the frustration he must feel walking into work every day and running his head into the wall, watching politicians continue to promise the world to Americans to buy votes, and sending our grandchildren and great grandchildren into a death spiral of debt. He is like the one parent, surrounded by hundreds of 3 year old kids who act like they listen but once the parent turns his back for even 15 seconds, go on misbehaving.

Personally, I cannot wait to see what he is going to say now that he does not have to walk a fine line of appeasing the feelings of drunken spenders and will be in a self funded foundation, where he can really speak his mind (and he has already been saying things that I am sure peeved off many in that town!)

• The resignation of America's unheeded and under-funded chief accountant and watchdog, along with the billion-dollar bullhorn he's been given, are the ultimate sell signals for America's stock investors.
• David Walker, comptroller general of the General Accountability Office (GAO) has since 1998 been the objectively informed and outspoken critic of America's balance sheet. He has criticized supporting Iraq's dysfunctional government, pork barrel spending by Congress, unrealistic "universal health care plans" we can ill-afford or support, the escalating risks of huge deficits, fiscal vulnerability to hostile foreign governments, and a lack of will to reform our government.
• Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.
• That money will attack what the foundation considers "the most substantial economic, fiscal and other sustainability challenges of our current age" -- including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time. (BRAVO!)
• "I have been around a very long time, and I have never seen so many simultaneous challenges that I would describe as undeniable, unsustainable and virtually untouchable politically," Peterson said in a prepared statement.

Here is an example of the fiscal ills we are facing, put into simple Powerpoint that even the most simplistic Congress Person should understand. Not that they want to be bothered with facts. I do urge our foreign debt buyers to also read this report - or perhaps they are. See how the dollar is acting.

Soybeans, Wheat Continue to Romp

I keep saying crops today are where crude oil was in 2004; it is jumping madly, people are asking why, where, how? And how high could it go? We continue to see unprecedented moves, and a reader told me that on Friday even CNBC started plugging Powershares DB Agriculture Fund (DBA) - as usual 6-9 months late! But while I do expect a pullback somewhere along the way (and probably it will be quite a hectic one considering all the hedge fund money piling into the area), I think any pullback will be a buying opportunity as we are headed for some major food supply issues that the world is not prepared for. As I've written in the past expect some countries to begin restricting exports; in effect hording. Which takes even more supply off the market. Yet another one apparently began today.

• European wheat prices jumped more than 2 percent in early trade on Monday after worries over supply propelled U.S. high-protein spring wheat to a fresh record and lifted all wheat contracts in their wake.
• U.S. spring wheat on the Minneapolis Grain Exchange surged above $20 per bushel on Monday, extending recent gains and setting a record high for any U.S. wheat contract.
• Chicago soybean futures and all contract months for European rapeseed also hit record peaks, with Chinese demand prompting active follow-up buying in the case of soybeans.
• Agricultural commodity markets were continuing to benefit from speculative buying by funds wary of some asset classes.
• On the world stage, traders were watching Kazakhstan's plan to curb grain exports by imposing a customs tariff from March and reported drought in China's wheat belt.
• "The Minneapolis price broke through that significant level and Chicago prices are chasing the move," said Kenji Kobayashi, grains analyst at Kanetsu Asset Management. "Wheat is at an unprecedented level, but further gains are expected as long as fears over shortages in spring wheat are there. The strength in Minneapolis will keep others buoyant."
• U.S. wheat stocks are projected to fall to their lowest levels in 60 years by the end of the 2007/08 marketing year on May 31, after shortfalls in several world wheat regions in 2007 steered export demand to the United States.
• China's Xinhua news agency said some provinces in the north, the country's wheat basket, were suffering from drought. But analysts say it seems unlikely China will be a net wheat importer in the near future given ample stocks. Still, the areas hit by drought included China's top soy-producing province of Heilongjiang, fuelling concerns over increased soy demand from China.
• China, the world's top soy buyer, has been buying U.S. and South American soybeans as well as vegetable oils to meet its food needs, traders said. China is experiencing its highest inflation in 11 years, largely driven by higher food costs. Despite inflation, China needs to keep importing, even at record high prices, rather than risk shortages, analysts said.

Long Powershares DB Agriculture Fund in fund and personal account

Greenspan Gives us his Weekly Update

In his continuing stomping on Bernanke's ground (bad form to constantly point attention to yourself after leaving the job), Greenspan gives us his weekly update. Remember, Greenspan is actually an advocate of my stagflation thesis and "World of Shortage" thesis [Dec 17: Greenspan Jumping on my Stagflation Thesis] and his comments on crude oil (while one man's thoughts) are quite interesting. I have to give him credit on this call because most of the US economists including those at the Fed have believed that as the US slows, inflation will simply go away, as if the world revolves around the USA. Again, it's a very inward looking and dangerous view that is outdated. Once they realize this, and they have very little control over booming commodities (short of worldwide recession) I assume the panic begins when people realize just how little power they have over the inflation genie. But until then, we drink the Kool Aid.

• U.S. economic growth has stalled and recovery may take longer than usual, former U.S. Federal Reserve chairman Alan Greenspan said on Monday.
• "Growing globalisation of trade and the economy would facilitate the absorption of shocks in the U.S.," he said.
• Greenspan also said a boom in oil prices, which hit a record of $101.32 on Wednesday, will "go on forever".

One day politicians will realize that helping to support the alternative energy industries is not pandering to "greenies", and something that will be mission critical. Maybe at crude $150.

Can crude go to $75-$80 again? Surely. $50? I doubt ever again.

Silver Wheaton (SLW) Ok Results but Some Massive Expansion Opportunities

As I've stated in the past, I am not really concerned with quarter to quarter earnings with Silver Wheaton (SLW) - I am looking at it simply as a proxy for silver. Earnings are out this morning and are "fine", but the future expansion is quite astounding. Again, this continues my theme of finding companies with VISIBILITY in VERY uncertain times; companies with pricing power, large backlogs, great macro trends behind them, etc. Doesn't mean the stock price goes up, but while people have been chasing the bottom in home builders, retailers, and financials for half a year (and constantly losing), I just don't see the point when there are a handful of much more "easy" stories out there.

• Silver Wheaton Corp. (NYSE:SLW - News) is pleased to announce record annual 2007 net earnings of US$92 million (US$0.41 per share) and record operating cash flows of US$119 million (US$0.54 per share). Fourth quarter net earnings and operating cash flows were US$25 million (US$0.11 per share) and US$34 million (US$0.15 per share), respectively.
• With 2007 investments in silver purchase contracts (Penasquito and Stratoni) totalling US$558 million, annual silver sales are expected to almost double to 25 million ounces by 2010 without any further capital expenditures. This growth was financed by way of operating cash flows and a US$500 million debt facility.
• The Company has entered into five long-term silver contracts with Goldcorp (Luismin mines in Mexico and Penasquito project in Mexico), Lundin Mining (Zinkgruvan mine in Sweden), Glencore (Yauliyacu mine in Peru) and Hellas Gold (Stratoni mine in Greece), whereby Silver Wheaton acquires silver production from the counterparties at a price of $3.90 per ounce, subject to an inflationary adjustment. [Please note current price of silver is in the $18s!]
• The Company expects, based upon its current contracts, to have annual silver sales of approximately 15 million ounces in 2008, increasing to 19 million ounces in 2009 and 25 million ounces in 2010. Silver Wheaton is actively pursuing further growth opportunities.

Long Silver Wheaton in fund; no personal position

More Details Emerging on Visa (V) IPO

More news out this morning on the very eagerly (at least from this corner) VISA (V) IPO; an issue we've been talking about for many months. This is going to be quite the enormous issue, so like I've said in the past, it won't provide the real magnificent upside that Mastercard (MA) did simply because there was no established bar (via publicly traded competitor) when Mastercard began trading.

• Visa said Monday it could raise almost $19 billion from an initial public offering, which would easily become the largest IPO in U.S. history.
• San Francisco-based Visa Inc. said in a Securities and Exchange Commission filing it will offer 406 million shares at $37 to $42 per share. There will be an option for its underwriters to buy an extra 40.6 million shares to cover any excess demand.
• The Visa IPO, even at midpoint price, would surpass the $10.6 billion AT&T Wireless raised in 2000. It would be almost as big as the two largest past deals combined -- AT&T's offering and Kraft Foods' $8.7 billion offer in 2001.
• Mastercard raised $2.39 billion in its IPO nearly two years ago. Shares of Mastercard have risen fivefold since going public and are now trading at more than $203 each.

Long Mastercard in fund; no personal position

Hedge Fund Computers Not as Smart as HAL

More and more sweet justice emerges by the day. As we've written in the past, about 70% of trading nowadays is done by computers because, frankly, anything a human can do, a computer can do better, right? Well apparently not all the time (you see computers are still programmed by those lousy humans); I suppose these computers have not reached the level of HAL.

We're in an era where "quant investing" or essentially mathematicians and statisticians of PhD caliber create programs to find any tiny discrepancy even if for seconds, and try to trade these dislocations thousands of times a day. It works great. Until it doesn't. See, models are back tested on historical data to find the discrepancies aka opportunities. The problem is historical data doesn't contain things like the biggest credit bubble of all time. Bummer.

And in one of the biggest trademarks of the Street; the more popular something gets, the less it works as more people chase the exact same trend. And with what I am sure are thousands of "me too" quant funds chasing the early hedge fund winners with similar models, the "black box" investing system seems to be collapsing under the stress of a market that doesn't go in 1 direction for more than 4 hours at a time. Pardon me while I wipe away a tear. But don't you worry, as we all know, a hedge fund manager can simply wave this away as a once in a lifetime issue, raise a new round of billions and go his merry way, finding ways to make large sums in "safe" strategies that only implode in unprecedented (i.e. historic) times... which seem to happen every 6-8 years.

We've know about Goldman Sachs Global Alpha Fund having an absolutely terrible time of things since the credit issues came to light last summer, but it appears some others in the brotherhood are also faltering. Suddenly I don't feel so bad being down 5% since Jan 1 - I'm smashing the smart guy's computers by 10% ;) It's all relative baby...

• Welcome to superstar hedge fund manager Cliff Asness' winter of discontent. Asness' AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street's most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.
• Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion. (27.5% drop - ouch)
  
• The steep losses have dealt a major blow to Asness, a University of Chicago-trained mathematician whose investing prowess catapulted him into the ranks of the super-rich, and his firm. Founded a decade ago with fellow Goldman Sachs alumni, AQR now faces the daunting prospect of employee defections, falling management fees, and credit problems.
• AQR, based in Greenwich, Conn., has long been one of the most prominent hedge funds to use complex mathematical formulas to spot - and profit from - temporary inefficiencies in stock prices. Before launching AQR, Asness and his co-founders developed the computer models that helped Goldman Sachs' Global Alpha fund return 140 percent in 1996, its first year, and regularly book handsome double-digit returns before finally collapsing last year. (it appears most of these hyper return strategies work great, until they collapse all at once)
• The strategy that Asness used is known as quantitative trading, or "black box trading" given its reliance on computers to execute trades. Over the years, AQR's founders built a money management franchise with $36 billion in assets, $11 billion of which was invested in hedge funds.
• For AQR's management, the payoff from quantitative investing was exceptional. Institutional Investor magazine regularly named Asness one of the highest-paid hedge fund managers. In 2002 and 2003, he reportedly pocketed $37 million and $50 million, respectively.
• Quantitative funds have been devastated by the market volatility that began last summer. At one point in July, the AQR Absolute Return fund booked a 13 percent loss. While it recouped about half of that loss later in the month, the fund's once-resilient mathematical models were no match in the face of a global credit crunch, the severity of which few predicted. (that's because computers don't have brains, hence they cannot predict things out more than a few seconds)
  
• Worse for AQR, the firm could now see its star employees head for the exits. That's because of a peculiarity of hedge fund management called the "high-water mark," in which a fund manager must recoup the amount of prior losses before earning the lucrative 20 percent and higher performance fees. AQR's rank-and-file traders and analysts now have little incentive to stick around - unless, of course, the fund's owners guarantee them compensation from a cut of their fees.
• A fund spokesman declined comment. To be sure, AQR's non-hedge assets, which are the bulk of the firm's assets, are ahead of their primary return targets for the year. (well, I am glad to hear that - wouldn't want to see any poor soul trade down to a starter mansion/yacht in CT)

Bookkeeping: Weekly Changes to Fund Positions Week 29

Week 29 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 28.3% (vs 20.7% last week)
50 long bias: 57.8% (vs 62.4% last week)
6 short bias: 13.9% (vs 16.9% last week)

56 positions (vs 59 last week)
Additions: Fluor (FLR)
Removals: Suntech Power (STP), Blue Coat Systems (BCSI), Riverbed Technology (RVBD), Diamond Hill Investment Group (DHIL)

Top 10 positions = 28.8% of fund (vs 32.1% last week)
30 of the 56 positions are at least 1% of the fund's overall holdings (53.6%)

Major changes and weekly thoughts
As mentioned in this week's fund performance it was a tale of 2 weeks, pre Ambac bailout report/rumor/lovefest, and post. Ironically I was actually doing far better relative to the market averages this week before the news, but as I've kept repeating you cannot be comfortable as a bear or a bull in this market. All the King's Horses and all the King's Men, will try to put Humpty Dumpty together again - and each time we hear the hoofs galloping through the Forest, the market mounts a rally. So as I've been doing the past few weeks (and I believe many institutions have been doing as seen my blips up late on Fridays), I've sold off Ultrashorts (as institutions are covering shorts) because we all fear the heavy hand of the government messing with our portfolios. So my short exposure above is not very reflective of the week; in fact going into Friday I was in the lower 20%s exposure with cash around 20%. Early in the afternoon I took some off the table (as I noted I would earlier that day in the blog) due to the "intervention at any moment" scenario and once things spiked I took another large allocation off, and put it into cash. So I'd characterize it as two separate 3-3.5% transfers; the 2nd one being forced by what could be a giddy period reminiscent of previous periods in which no solution really came but a lot of happy talk created conditions for rallies. So net net I am back down to mid teens exposure on the short side.

Other than that it was truly just another week of quicksand - no real movement, we went from the high end of our recent range and were steam rolling to the low end towards end of week, until 3:30 PM Friday. It is hard to assess the future because we'll have to see how much fuel the bond insurer rally has. Continuing to seek a move back to S&P 500 level of 1400-1410 to develop any real near term bullish thesis.

We have a lot of economic reports this week, and I expect investors to react as normal - churning through the bad news to find any sliver of good news to explain to us how this economy will be rip roaring in 6 months; we are just too near sighted to see the shreds of good news within the bad. Or that the government solutions will fix the array of problems. And each time people buy into that line of thinking we get these small rallies, and each time people say "what the heck are we drinking?" (answer: Kool Aid), we get these small sell offs. And we continue onto a path to nowhere fast. But as always it's entertaining to watch the pundits clucking.

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

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

1. Tuesday, I cut back some fertilizer exposure just to lock in some very nice gains over the few weeks. At this point I've cut these names as far back as I feel comfortable with, so if the stocks continue upward I won't be cutting anymore.
2. Wednesday, nothing of substance in terms of transactions
3. Thursday, Research in Motion (RIMM) reported a stronger than expected subscriber growth metric, and the stock ramped up 10%, so I sold most of my position, and set a limit order to buy these shares back (if they fall) lower.
   
4. After yet another quarter of beating estimates and raising guidance, and seeing the stock not react, I exited Blue Coat Systems (BCSI) and it's cousin in arms Riverbed Technology (RVBD), two long held positions. One day these stocks will reflect fundamentals, but after quite a few months of not being rewarded for performance, I've decided to move on for now.
5. I expanded fund exposure to the infrastructure group, by adding to fund holding Foster Wheeler (FWLT), and restarted a new position in Fluor (FLR).
6. After Suntech Power's (STP) surprisingly poor results and more importantly a much more clouded outlook for year 2008, I closed this long held position. At this point while I expect a "speculative" rally in the group, I am concerned for what could be coming to this group over the next few quarters, but we'll see soon if it's a company specific issue or industry issue.
7. Friday, I closed a long held position in asset manager Diamond Hill Investment Group (DHIL).
8. Early in the afternoon I lightened up my short exposure, then after the market spike in the last 30 minutes, I did another layer of lightening up in case the market has a more sustained run off the bond insurer bailout... err "market based private solution".

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

Earnings of Interest Mon-Tue

Almost done with this earnings season for the market as a whole... but quite hot and heavy week for fund holdings; major information overload coming Tuesday

**Monday

LDK Solar (LDK) - fund holding and one of the top 2 biggest losers since fund inception; already warned on revenue for next quarter due to China storm; but should still hit earnings. This name continues to befuddle me - as an arms merchant to an industry growing like a weed I'd assumed it would be doing better and better insulated than the PV panel makers. So far, so wrong. I have this down to a 0.8% position (well I took it down to 1.0% position and the market took care of the rest to push it down to 0.8%). As with all solar stocks, the potential to move +/- 30% depending on how happy daytrading speculators are with the results.

Nordstrom (JWN) - held this ever briefly in the fund and somehow made a profit. Like to keep an eye on this one to reflect the higher end consumer.

Silver Wheaton (SLW) - fund holding which is supposed to be going "up" when silver goes off to the races...

**Tuesday

BioMarin Pharmaceutical (BMRN) - a few readers have pointed out this biotech name, so I'll start keeping an eye out

Homex (HMX) - Mexican home builder we held briefly this fall; has been building a base for a year, and showing some nice relative strength of late.

Foster Wheeler (FWLT) - former #1 holding in the fund and still my favorite infrastructure stock; recently pushed this back up to 3% of fund which is the opposite of what I normally do into earnings (which is reduce exposure). This strategy is something I did only in 1 other sector (fertilizer) so we'll see how it works out.

Frontier Oil (FTO) - chart is still in trouble but this former holding, is the one refiner who was able to put out a very nice quarter last time around despite tremendous head winds. Just hard to get behind these guys at crude $100, unless gasoline starts selling for $3.75 a gallon.

Home Depot (HD) - this stock should be singing with that "shortage of homes" we're going to be experiencing by the end of 2008 (ahem)

KBR (KBR) - another infrastructure stock which took OFF late last week - I am underexposed to this name and will probably try to add a bit Monday morning if the stock does not blast off on bond bailout Kool Aid rally.

Macys (M) - see Nordstrom; they've already laid the axe down on people....

Perini (PCR) - a NON global infrastructure name and former holding; expectations are so low perhaps it will lead to some surprise

Quicksilver Resources (KWK), Range Resources (RRC) - maybe I can get an explanation on why natural gas is so sexy again :)

Target (TGT) - important retail tell for mass market

66 Stocks Returning 8%+ Last Week

Below is this past week's list of winners... as always

1. Market capitalization of $2B+
2. Average daily volume 100K+
3. Stock price $10+

This week, I used +8% as the cut off. Foreign ADRs continue to dominate as the US continues to slow, and emerging markets continue to be a place people flee (along with commodities). And as I mentioned late in the week, for the first time in a long time, I am noticing relative strength in the global infrastructure group - we can see their appearance prominently in this week's list. Many report earnings this week, and it has seemed strange that commodities that rely on foreign market strength and/or energy exposure are doing well but the engineering firms have not participated in that bull run.... perhaps it is catch up time.

Green are fund holdings; blue are previously owned or discussed stocks.

Symbol	Company Name	% Price1 Week
CPS	ChoicePoint Inc	41.5
PCLN	Priceline.Com Ord Shs	24.5
HMY	Harmony Gold Mining ADR	21.9
NTES	Netease.com Inc	18.4
ACH	Aluminum Corporation of China ADR	17.8
PWR	Quanta Services Inc	16.4
BAK	Braskem ADR	16.2
MTL	Mechel ADR Rep 3 Ord Shs	15.9
HANS	Hansen Natural Corp	15.6
SID	Sid Nacional ADR Repstg One Ord Shs	15.4
HBI	Hanesbrands Inc	14.8
ITRI	Itron Inc	14.5
ANR	Alpha Natural Resources Inc	14.3
LYG	Lloyds TSB Depository Receipt	13.9
AUY	Yamana Gold Inc	13.9
OIS	Oil States International Inc	13.8
ING	Ing Groep Rep 1 Ord Shs Sponsored ADR	13.7
PCU	Southern Copper Corp	13.7
LIHR	Lihir Gold Sponsored ADR	13.7
RIMM	RESEARCH IN MOTION LIMITED	13.0
IVN	Ivanhoe Mines Ord Shs	12.8
GFI	Gold Fields ADR Reptg 1 Ord Shs	12.4
TEX	Terex Corp	12.4
HOC	Holly Corp	12.2
BCS	Barclays ADR	11.9
OCR	Omnicare Ord Shs	11.9
GG	GOLDCORP INC	11.8
WLT	Walter Industry Ord Shs	11.4
AMKR	Amkor Technology Inc	11.4
MT	ArcelorMittal ADR	11.3
SHPGY	Shire ADR	11.3
CGV	CGG Veritas ADR	11.0
STLD	Steel Dynamics Inc	11.0
RIO	Companhia Vale Do Rio Docea ADR	10.6
CENX	Century Aluminum Co	10.5
NSR	NeuStar Inc	10.5
KBR	KBR Inc	10.2
WDC	Western Digital Corp	9.9
HLF	Herbalife Ltd	9.9
XEC	Cimarex Energy Co	9.7
HPQ	Hewlett-Packard Co	9.6
NMR	Nomura Holdings ADR Reptg One Ord Shs	9.5
TS	Tenaris ADR	9.4
ICLR	ICON Plc Depository Receipt	9.4
TX	Ternium SA	9.3
CPN	Calpine Ord Shs When Issued	9.0
CF	CF Industries Holdings Inc	8.9
HLTH	HLTH Corp	8.9
SDA	Sadia ADR Rep 3 Pref Shs	8.8
CEO	CNOOC ADR representing 100 Class H Shares	8.7
FLR	Fluor Corp	8.7
BUCY	Bucyrus International Inc	8.7
TJX	TJX Companies Inc	8.6
QLGC	QLogic Corp	8.6
BSC	Bear Stearns Ord Shs	8.5
TCK	Teck Cominco Ord Shs Class B	8.3
SGR	Shaw Group Inc	8.3
AXA	Axa ADR	8.2
TWC	Time Warner Cable Inc	8.2
VCP	Votorantim Celul Depository Receipt	8.2
LECO	Lincoln Electric Holdings Inc	8.2
ITU	Banco Itau Holding Financeira ADR	8.1
FWLT	Foster Wheeler Ord Shs	8.1
SBS	Companhia de Saneamento Basico	8.1
DHI	D.R. Horton Inc	8.1
MEOH	METHANEX CORPORATION	8.1

Credit Crunch Spreading to Student Loans

As we constantly talk about this credit crunch is like a big, intricate web... many offshoots in thousands of directions. So while the Street will clap like happy seals at any bond insurer bailout, the reality of a system lacking transparency, full of (now obvious) useless ratings, and probably most important lacking confidence, continues on in the "real world" (outside of the Kool Aid party that is the equity market). Here is an article for MSN about the potential impacts on the student loan market, and frankly it is the same story we see in the mortgage market. A drying up of liquidity. Now the one great thing the government did, is apparently pull $20 Billion worth of subsidies for student aid... that pays for about 2 months of war, but hey we all have our "important" priorities. Or 13% of a "stimulus package" to get everyone back into the malls. I mean, what does a country competing with a hungry world full of aspiring engineers, doctors, and scientists need to focus on. Certainly not keeping universities affordable for the middle class. Well I am sure, come hell or highwater, we can keep churning out lawyers - Washington DC is full of politicians toting that background (and America has 8 of every 10 lawyers on the face of the Earth) ... priorities! Much like healthcare, I am unclear just how much longer tuition rates can continue at "double" to "triple" the wage gains before something simply breaks. Already we have a country full of 22 year olds saddled with $10K, $20K, $30K worth of debt just to get a basic bachelors - a tough way to begin adult life.

• College students heading off to campus in the fall will face a radically different student loan situation than they did just a year ago.

• The credit crunch that rattled mortgage lenders has spread to the education lending market, with dramatic results. If the situation doesn't ease in coming months, student lending experts say, borrowers can expect (a) Higher loan costs (b) Fewer lenders, which could mean tens of thousands of college students scrambling at the last minute to find money (c) Tougher standards that could prevent some students borrowing at all.

• "It's a very different situation from last year," when lenders were falling over each other to compete for students' business, said Kevin Walker, the president and CEO of SimpleTuition.com, a student loan site. "And it's probably not clear to the consumer that this problem is looming."

• Like mortgage lenders, student loan companies were criticized in recent years for loose standards that saddled many students with massive debts. Although student lenders didn't rush into the subprime market that eventually backfired with mortgages, they lavished loans on borrowers with little concern about their ability to repay.
• The biggest student lender, Sallie Mae, reported a massive $1.6 billion loss last quarter, thanks in part to spiking default rates, and plans to set aside an additional $700 million to cover bad loans this year. Although the U.S. government guarantees lenders will be reimbursed for federal student loans, the bulk of Sallie Mae's losses were from private student loans, which aren't guaranteed.
• As investors become increasingly spooked about the credit crunch and the rising risks that loans will go bad, they're avoiding buying bundles of loans, known as asset-backed securities, that are a major source of funding for some student lenders. This aversion applies even to federal student loans despite the government guarantee. Several recent auctions of federal student loan debt have failed, meaning that investors who hold the loans couldn't find any buyers. Without this critical source of funds, some lenders can't make loans. (I have to say I am surprised that federally guaranteed debt offerings are failing; but it shows the abrupt shift from greed to fear)

• Deborah Fox, who advises families on college funding strategies, predicts rates may climb as much as a percentage point as lenders struggle with the securities markets. "Variable rates that should be coming down in a low-interest-rate environment will be moving in the opposite direction," said Fox, of Fox College Funding, "which will put further pressure on the American consumer who is attempting to keep their head above water in what appears to be a recessionary environment."

• Not all lenders get their money from investment markets. Sallie Mae, for example, will tap a recently arranged $31 billion line of credit extended by Bank of America and JPMorgan Chase. But even lenders that don't rely on the asset-backed-securities market are paying more for the money because of the credit crunch, Kantrowitz said. Lenders will pass those costs along, he said, in higher fees and fewer discounts.
• Congress trimmed lenders' profits last year by reducing their federal subsidies by about $20 billion. That, combined with higher costs of funds, has persuaded some lenders to stop making certain federal loans or to concentrate on the private loan market. (Unlike federal loans, private loan rates aren't fixed and can range up to 19%. These loans grew in a single decade from less than 5% of the student loan market to more than 20%.)

• Another significant change has to do with credit scores. Federal student loan programs typically don't use credit information, but most private lenders in the past have required a minimum FICO credit score of 675, Walker said. (The traditional start of the subprime market, by contrast, is 620 on the 300-to-850 FICO scale.) "Now they're tightening up lending criteria so that instead of 675, 695 will be the minimum," Walker said.

Thankfully none of this will matter once that stimulus check hits the mailbox, because it will get us back into the malls, and clear all these minor problems out of the way. Whew! I was worried there for a minute that this was actually a problem....

Commodity Prices Over the Last Year

Bespoke Investment Blog has an interesting chart showing the performance of some major commodity groups over the last year. Take a look at the chart below and try to tell me, Mr Chairman, inflation is running at 3-4%. Obviously our friend, wheat, has shown a ridiculous jump (thanks to corn overplanting the year before). As I've written recently, soybeans are starting to come on ...[Powershares DB Agriculture Fund Hits $40 for First Time - Soybeans Now a Shortage] Now, if my theory plays out, soybeans and wheat will get a transfer of acreage in the coming season and we'll have shortages of other things... corn had a quiet year at "only" 23% - with even more dollars thrown its way in the latest budget to produce even more ethanol perhaps we'll see it have another huge surge next year.



Here is what analysts predict will be happening next year; I'd love to see what they were predicting a year ago - somehow I doubt anyone predicted 100% gain in wheat, or 72% in soybeans. Again, at some point this must stop, and the rate of increase can *not* continue, but I still expect a solid trend up as both Fed induced speculators move in and plainly, supply and demand of this world is stressed on world crops. We'll check back in a year to see how the analysts did ;)



Long Powershares DB Agriculture Fund in fund and personal account

Greentech Media: Solar Sector Headed for a Shakeout

I've made my case for the difficulties in investing in the solar sector the next few years until the "great shakeout" [The Long Term in Solar]. In fact, for the fund, my 2 biggest money losers thus far are in fact solar stocks, so sometimes I should listen to my own advice better. :) While I do believe speculators will be back in these stocks once the market stabilizes and we'll see some tremendous shorter term moves, from what level is the open question. I do believe many investors have been looking at the "very long term", in which solar is obviously a viable alternative, and missing the real potential problems in the "near to middle term". I also believe many investors simply miss the sheer number of non public panel makers out in Asia; people newer to the sector think the 10 or so publicly traded solar makers are the majority of the industry... unfortunately, for competitive reasons there are simply too many players in what is still a limited end market.... many many private companies.

Further, as many of the market forces buffet the sector, the open question is will each incremental dollar of revenue bring less profit, especially for the vast majority who are tied to polysilicon. An interesting conundrum and again, as I keep repeating, I found the solar sector much easier to invest in about a year ago (and I assume it will be much easier in about 3-4 years after the necessary shakeout), but between now and then I expect continued extreme volatility and some great trading opportunities *if* one can time things properly - always a difficult thing to do. Much like the internet, or as I've drawn in comparison in the past, the global fiber buildout, I think there will be a boom/bust/echo boom play out in this sector. We are just now at some stage between the initial boom and coming bust. And those companies who survive this stage will have a much bigger playing field with far fewer competitors; so eventually it will be quite an investment with a "lot less" worries. But this will take years... not months, not quarters, to fully play out. I expect a lot of blood and as I've written before (at much higher prices) I expect a few companies that are speculator's darlings over the past 6 months to be on the pink sheets or completely out of business within a few years.

Greentech Media has an article out about the sector

• It's been a rough-and-tumble ride for many public solar companies lately. And the solar industry had best prepare itself for further hardships, according to a panel of Wall Street experts at Greentech Media's Solar Market Outlook conference in New York on Tuesday.
• "There is going to be shakeout in the market," said Jesse Pichel, a senior research analyst at Piper Jaffray, who predicts that a module oversupply will drive prices down.
• According to Pichel, the winners will be the companies with the lowest cost per watt. Right now, the low-cost leaders are First Solar and "a couple of folks in China," he said.
• Pichel also pointed to silicon manufacturers as possible future winners. Even as silicon suppliers rush to add new production capacity, he said some solar companies will be forced to lower their guidance in the middle of the year because there just won't be enough of the precious stuff to go around as companies continue to make more panels.
• And that will keep margins pinched, even if the solar industry hits grid parity, the point when solar is competitive with conventional electricity, he said. "Margins for polysilicon vendors will be 50 percent less," he predicted.
• Stephen O'Rourke, a managing director at Deutsche Bank Securities, expanded on the idea. In his view, a larger supply of silicon at the end of next year will lead to "a flood of polysilicon-based modules" hitting the market. That flood, in turn, will lower prices precipitously, squeezing margins and challenging balance sheets, he said.
• O'Rourke forecast an industry shakeout -- starting with crystalline-silicon-based panels and spreading to thin films -- that could last two or three years. (agree 100%)
• So solar companies need to start jockeying for survival starting now, he said.
• "All the companies out there need to think very, very carefully about how they will position themselves for a shakeout to take advantage of the real opportunity, which is not going to hit for another five or six years," O'Rourke said.
• To be safe, crystalline-silicon-based solar-panel manufacturers need to lower costs until they are able to profitably sell panels for $2 per watt, said panel moderator Travis Bradford, president of the Prometheus Institute and a Greentech Media partner. Thin-film manufacturers need to reach profits with $1.50-per-watt prices, he added.
• If they don't, companies could find themselves trapped with low margins and unable to raise money to expand and reinvest, Bradford said.
• "We've seen over the last couple years a lot of big promises from solar companies that have not delivered," he said "We have seen a lot of polysilicon startups from companies that have zero experience and zero financing in the field. And quite frankly, we have seen a lot of smoke and mirrors regarding public-company polysilicon supply. And it's pretty distressing."