Bookkeeping: 'Rising Tide' Performance Week 31

Week 31 performance of the mutual fund

Comments: It was another wild and wooly (sp?) week in the market. As we've been discussing the market has been range bound, and my prediction was when we did break out of this range it would be downward, which did happen this week - twice. But for the 3rd week in a row I got Gasparinoed


Gasparinoed /verb/ - to be positioned perfectly anticipating a market selloff due to technical conditions, only to be blindsided by a TV pundit passing "well founded facts" to millions of viewers which ultimately do not come true, and immediately destroying all your short positions to the tune of 5-8% across the board.


Not only did I take a hit 2 weeks ago Friday when the market was about to break down, and Charlie came to the rescue @ 3:30 PM, driving the market up 1.8% in 30 minutes, but he did last week and again this week Tuesday; just as the market broke technical resistance (S&P 1320) that I've been waiting a month to happen. So once again my positions turned against me, and I lost money, but this time at least the effects were short lived. But it still lost some performance.


Of greater note, the saga of Thornburg Mortgage (TMA) killed performance this week, subtracting roughly 3% (when combined with the smaller loss in MFA Mortgage) from fund performance. So first I was Gasparinoed and then I was Thornburged. Thankfully, I did not get Croxed, or I might not even of made it to the keyboard by the end of the week. Either way I felt I was allocated quite smartly if not for the CNBC pundit interference, for the rest of the week. As for being Thornburged - well it is going to happen at some point - but you never expect 90% drop in a week. At this point I am considering that position a lottery ticket as it is so close to $0 as it is, and hopefully some soul will see it worth a buyout - I mean even Countrywide, with a far poorer book, could find a greater fool to buy it out.

With that said, I am going to ask the government for a bailout on my Thornburg Mortgage position; I mean everyone's doing it nowadays so why not me? What's that? I'm not a multi billion bank who showers its CEO with multi millions of compensation to drive the stock into the ground - therefore I don't deserve the entire government riding to my resuce? Ok, I see how it is.


So from a big picture view of the market, we have been broken down but we seem to be moving toward a direct Fed bailout into the mortgage business which raises the risk of short exposure exploding in our face at any moment. The drumbeat grows louder by the hour. S&P 500 level 1270 remains a key level, and we'll watch how the market reacts when we get there. Friday, however financials and peers did seem to outperform by a large degree so these stocks could potentially be washed out for now. There are so many cross currents happening in this group it is hard to know what to expect - without the threat of government interventions the ultimate direction would be very easy to model; but right now anything can happen.


Anyhow, if you exclude this "mortgage related stock" 3% drag the fund did very well this week - but unlike our financial institutions I cannot hide this loss in off balance sheet accounting so I'm stuck with it. Rising Tide Growth Fund lost 3.15% this week, trailing the indexes we track by approximately 0.3% - the S&P 500 was down 2.8% this week and the Russell 1000 was down 2.9% this week.

Price of Rising Tide Growth: $10.984
Lifetime Performance to date (vs Aug 3, 2007): +9.84%

Comparable S&P 500: 1,293.37 (-11.73%)
Comparable Russell 1000: 705.37 (-11.41%)

Fund return vs S&P 500: +21.57%
Fund return vs Russell 1000: +21.25%

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

Here We Go: PIMCO's Bill Gross Says Fed Should Buy Mortgages

It's all be pointing to this direction for a long time... now prominent people are calling for it. For those who don't know, Bill Gross is basically the Warren Buffet of bonds. He is now calling for the Federal Reserve to buy mortgages outright. (full video interview if you follow the link) This was the direction I think we ultimately head as all the King's Horses (and Uncle Ben) put Humpty Dumpty back together again; but it might be a lot sooner than I anticipated. When/if this happens - I expect the stock market to rally quite severely. This is why at any moment it's a risk to hold these Ultrashorts because if it's announced premarket as the Fed loves to do, one will get crushed immediately.

• The Federal Reserve needs to take a more active role in stemming the housing crisis, possibly by exchanging Treasury notes for mortgage notes, Pimco Bonds Chief Information Officer Bill Gross said on CNBC.
• Gross said the Fed's move to increase the allocation for its Term Auction Facility will help the markets, but it needs to be more aggressive to help rally the real estate market. "I think the increased TAF facility this morning will help, but in effect it's sort of a small step for a Fed chairman," Gross said. "What really needs to be done is for the Fed to come in and to lower long-term mortgage rates."
• Gross suggested the Fed can do so by exchanging Treasury securities for mortgage securities. He compared the idea to something called Operation Twist in the 1960s, where the Fed sold Treasurys and bought mortgages.
• The TAF move, he said, "doesn't really provide a floor for mortgage prices and a ceiling for mortgage yields, which is incumbent I think in order to stop the slide of home prices. I mean We still have 30-year Fannie Mae conventional mortgage at 5 3/4 which means 6 1/4, and 7 percent-plus for jumbos. (I didn't know it was the Fed's job to put a stop in the slide of home prices - I didn't see that in their charter? Could someone point that out to me, if you have that handy in front of you?) Egad.
• "The housing market cannot be supported with those types of yields. The Fed needs in effect to buy the mortgage market and not to basically lend on it."

Free market capitalism baby.... works until it doesn't. And then the bailouts begin.

On a related note, I was glad to hear someone is going to become rich from the Thornburg Mortgage (TMA) explosion (it is certainly not going to be me) - like a good vulture, he is passing along the site of a car accident which should not of happened, and stealing the jewelry off the fingers of the mortally injured. Wow, I thought their book of business was just a terrible disaster - so awful that all their banks need to call in their loans immediately; imagine that, the smartest bond manager in America wants to soak up this paper hand over fist. This is simply frustrating to watch this train wreck happen as it's all caused by impatient and frightened banks. Especially when they've let technically bankrupt home builders off the hook for quarters on end.

• The manager of the world's biggest bond fund said on Friday he had bought hundreds of millions of dollars of Thornburg Mortgage Inc's (TMA) debt in the last few days.
• Bill Gross, chief investment officer of Pacific Investment Management Company, or PIMCO, said on CNBC television he has been buying "high-quality" rated Thornburg paper with yields in the "9, 10, 11 percent range." Gross manages the $120 billion PIMCO Total Return Fund.
• "Ultimately, we expect the paper that we're buying to ... provide close to double-digit-type returns," Gross said.

Wonderful. Just fantastic.

Long Thornburg Mortgage in fund; no personal position

Bookkeeping: Starting 2 Mining Positions Emphasizing Iron Ore

I am beginning two mining positions, based on strength in metals, specifically iron ore. I've been patiently awaiting pullbacks in both names - one has hit my initial target and the other has not fully, so I am weighting these differently.

First, I am adding a full position here in CVRD (RIO), the Brazilian conglomerate.... we have seen great price increases in iron ore of late [CVRD Secures 65% Increase in Iron Ore Pricing], and I like the stability of iron because prices are on contract as opposed to spot pricing as with most metals. But CVRD is one of 3 global giants in mining, and the other 2 are engaged in a takeover battle, so this is the clean and easy choice. Technically, the stock has fallen from a recent high of $37.50 to its 50 day moving average just over $33; about a 11% correction. So I've bought a 700 share position here in the $33.40s for a 2.1% exposure for the fund. This won't be a lightning shot type of position, but should be a nice slow and steady stock that I can cut back on when it runs and add as it falls, during a sustained long term trend.

Second, I am adding Cleveland Cliffs (CLF) which is an American iron ore company with some coal exposure - I am shocked this company has not been bought out by now to be blunt. Since the stock has not fully fallen to any key support I only have done a starter position of 50 shares or 0.5% type of position in the $112s range. I was hoping to see $109 which is the 50 day moving average but that's just 2-3% away so I suppose I am being a bit picky; it is down from near $128 so a 12.5% correction. The reasoning is identical to CVRD, but the action in this stock is much more trader friendly in terms of volatile action. But this also makes it more prone to profit taking, hence why I did not build a larger position yet. I'd love to buy a large stake in the mid to upper $90s if possible.

In my 'World of Shortages' scenario the assets these companies own will only become more valuable over time. That said, they are heavily reliant on China to continue it's outsized building and use of steel especially - but at least with CVRD's case they mine many metals so this gives me broad exposure to other commodities as well.

Long both positions in fund; long neither in personal account

Might See that 1270 Today, After All

First whiffs of panic in the air. Ironically the stuff that was pole axed yesterday is holding up well today (financials and commercial real estate). So I am not deriving much benefit from my Ultrashorts there. These sectors just might be "sold out" - i.e. anyone who is going to sell is pretty much out at this point. We saw the same pattern in mid January when everything was selling off yet financials, homebuilders, and retailers were showing relative strength. This development makes things tricky because unlike yesterday my Ultrashort exposure is not providing very much value, in those 2 names at least (Real Estate, Financial). So it's a much rougher day than yesterday when those instruments were up 8-9%. We went through the exact same conundrum in mid January when I could find nothing in the Ultrashorts to offset the damage in the long side.... this is the problem with only being able to buy ETFs on the short side. Sometimes you need a hammer and all you have is a screwdriver. Similar situation forming it appears.

Seeing the strength we have today in those 2 groups (relatively) and assuming they are close to washed out, I will be cutting them back this afternoon with a pretty serious haircut, especially as we break below S&P 1280, on our way to S&P 1270. I do expect the Plunge Protection team to be hitting the "buy" button hard and fast and defend that level at all costs.... so we could get a vicious bounce once we get there. Either way I will be curious what they have up their sleeve Monday in premarket with futures.

By end of the session I'll probably be selling half or more of my exposure to both these positions ...

Long Ultrashort Financial, Real Estate in fund and personal account

Bookkeeping: Coal Finally Correcting - Continuining to Build Up Positions

I added Massey Energy (MEE) this morning, so now with the other 3 coal focused name in the fund finally seeing good signs of weakness I am adding new $4-$5K type of layers into the others

1. Peabody Energy (BTU) - in $52s, worst shape technically, now below the 50 day and breaking down to 200 day moving average
2. Consol Energy (CNX) - in $74s, right near 50 day moving average
3. Arch Coal (ACI) - in $47s, right near 50 day moving average

I certainly don't expect this to be their bottoms, but will continue to expand my basket of coal names as they fall. Aside from fertilizer this will be my 2nd biggest "commodity" weighting, as the macro trends continue to favor this sector. I do expect to take a 10%+ type of exposure as we continue to break down, and the stocks continue to (hopefully) falter to lower prices.

Speaking of, fertilizers are showing their first signs of weakness in a long while- other than a small purchase in CF Industries (CF) I am awaiting the other names to fall to their 50 day moving averages before making the first purchases. Again, in time like this when my major weighting suffer the fund performance will take a near term hit, but these are the positions that constantly make us good money when the market rebounds.

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

Bookkeeping: Restarting Position in Mexican Homebuilder Homex Development (HXM)

I am going to give Homex (HXM) another chance in the portfolio after it's recent impressive earnings [Feb 27: Homex with a Very Nice Earnings Report]. I had held this earlier in the portfolio but had a measly 2% gain... this is not really a fast mover type of stock although it has had a huge run of late. As I wrote in February

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.

Well, now I have the makings of a pullback as the stock is down 12% from recent highs of mid $64s range, down to $56s and approaching the support level of the 200 day moving average. Since the market is so weak, I don't want to overcommit capital, so I am only buying 200 shares for a starter position of 1% of the fund. The stock could easily break this key support level on a market sell off which would put it immediately in negative shape on its chart. With stocks like this, which are generally slow movers, it is more important to be prudent than in fast moving stocks which you can generally make up poorer entries with some trading along the way.

This stock has always been hard for me to value since it has no peer to compare to, but with $4+ EPS in 2008 it is trading at a reasonable 14x forward earnings, and should continue to grow in the 15-20%+ level for the next few years.

I've also added a bit to it's Brazilian brother, Gafisa (GFA) today in the $37 range. I continue to look for opportunities away from the United Debtors of America.

Long Homex, Gafisa in fund; no personal positions

Plan for the Rest of the Day

For those who have been around a few weeks, you know I've been selling off my Ultrashort ETFs each Friday afraid of government interventions and or bailout rumors or whatever. I'm actually going to change that policy this weekend (which will probably lead a historic Federal government bailout solution with my luck), but with the markets breaking down and the S&P heading for a retest of January lows I want to keep all my insurance.

In fact, I bought back in the past 30 minutes, 75% of the short exposure I sold off first thing this morning into the selloff, since the market rallied for no good reason other than "Fed cut hopes", and I was able to buy back positions I had just sold 1 hour earlier for a 6-8% discount. I continue to be amazed we rally on "hopes for Fed cuts"....the same Fed cuts destroying our dollar, creating huge bubbles, and not helping much of anything except buoy hope in equity investors. But people are trained to cheer Fed cuts no matter what, so their instinct is to buy. We were also extremely oversold, so this (ahem) rally, basically let people remount shorts at more attractive levels in my opinion. Short of falling very hard this afternoon (to S&P 1270), I just don't see myself letting go of much of this insurance.

Frankly, I am trying to think of the long run and how we get out of this mess, and I don't see any real solution outside of a Federal bailout of the mortgage business where they literally take the loans onto taxpayer's books. Why the Fed is not pressing for full and total disclosure of the "black box" financials is beyond me - we lack transparency even though people claim we are the most transparent system in the world - not in financials. So either the Fed is asleep at the wheel, because without transparency no one is going to trust each other (I wrote this last August, so it's not a new theme), or the Fed knows what is on the books and doesn't want it exposed. Either way it is bad. The fact our country allowed and in fact encourages financials to have off balance sheet accounting is truly astounding considering this is how Enron hid their problems from the world. There is so little regulation in the industry that greases the world's engine, it amazes me. And instead of coming down on hard on the banks to open up their black boxes, we continue with these iterations of kicking the can down the road.

I am only awaiting the next credit acronym I've never heard of to pop up. Also we now seem to be on the first edge of municipalities running into trouble - I thought this would happen in later 2008 as tax revenues from housing began decreasing (but cities/state refuse to cut budgets or benefits for state workers) but due to the credit freeze up, we are seeing the first wave of issues there as well. Again, it's a huge interconnected web and as the tide goes out, we are seeing a lot of the "ugly" below. How corporations are forced to cut back on jobs but governments continue to hire (with huge long term entitlements to boot) is beyond me...

Last, where exactly is all the insider buying by bank executives since they are such a great value? I've been asking that for months each time a pundit tells me the "great value" in financials. Why does no one from the inside who knows what is going on seem willing to buy their own stock? That tells me everything I need to know. While these financials will have oversold rallies, we seem set to see some bankruptices down the road, if we continue down the same path we are at now with the total freezing of certain credit markets. The inability to offload "junk" to their "loyal customers" is really a huge problem.

So while the equity guys cheer the same Fed cuts (don't they ever learn) - we have some truly dangerous situations being created - I have no point of historical reference to look at so trying to game the outcome is impossible. The problem is no one has any historical reference for what is happening now. All I see is kicking the can down the road. And at times while we kick - the equity markets rally. But this feels suspiciously like early January to me... a lot of lemmings gathering near the cliff edge.

So equity markets will remain at constant risk until something (I'm not sure what) changes. Without housing prices stabilizing, it's all up in the air right now... and from what I am reading foreign governments can only own so much of our financial institutions so I am not sure where we go to raise more capital once we reach the limits. Very few here have that type of money....except the Fed.

Until then, I have popcorn in hand and await the epic battle of the "Invisible Hand" versus market realities we will see at S&P 1270. Should be a doozy.

EDIT: Just read Bush is supposed to address the nation on economy at 2 PM. Might screw up my plan - i.e. free mortgages on us! You just never know ;)

Ciena (CIEN) Continues to Execute

Ciena (CIEN) was briefly the fund's top position in the fall, and made us some solid profits. However, I sold it out of the portfolio a few months ago off [Jan 8: Closing Ciena], and right now the networking stocks simply are not a place to be... even companies executing are continuously sold off due to fears of "future" slowdowns. Perception is reality; so as perception is things must slow in the future the stocks continue to be weak, no matter what reality they provide every quarter. Some of the valuations in the sector are ridiculous but in a bear market, value means nothing... they can stay at ridiculous valuations for as long as the market wants. When the money flow returns to this sector, so will I. But I still keep up to date on the best names.... Ciena has earnings up and is up a nice 11% as a result. Even with today's huge gain, the stock is exactly at the same price I sold out of it nearly 60 days ago.

• Communications equipment maker Ciena Corp (CIEN.O: Quote, Profile, Research) posted a higher-than-expected rise in quarterly profit on Friday and gave an outlook above market expectations, saying strong demand for faster networks helped it avoid being hurt by a weaker economy.
• The stock is down 48 percent from 2007 highs on worries about increasing competition from bigger rivals, many of which have merged over the past few years.
• Ciena, which sells optical switches and other products that support Internet protocol (IP) networks, said it was optimistic about its outlook. The company forecast full-year revenue growth of up to 27 percent, better than the average analyst forecast of 22 percent growth according to Reuters Estimates.
• "While we are mindful of the macro economic environment, indications from our customers to date suggest no change in the fundamental drivers of Ciena's business: the demand for increasing network capacity and the transition to ethernet/IP-based network infrastructures," Ciena Chief Executive Gary Smith said in a statement.
• Ciena said its fiscal first-quarter revenue rose 38 percent to $227.4 million. Analysts, on average, had forecast revenue of $225.7 million for the quarter, which ended Jan. 31, according to Reuters Estimates.
• Quarterly net profit rose to $28.8 million, or 28 cents a share, from $11.1 million, or 12 cents a share, in the same quarter a year earlier. Adjusted earnings rose to 47 cents from 22 cents, far exceeding the average analyst forecast of 39 cents, according to Reuters Estimates.

No position

Bookkeeping: Picking Through Some Rubble

I think the overall market is still on the path downward, and I am not buying stocks that have held up (among my favorites) as I've stated in the past week, as they have potential to fall hard.

I am picking among some of the rubble, making some purchases in my layer in, layer out strategy. These are generally about $5K buys, and as (if) they go lower I want to build up later positions...

1. Indian bank HDFC Bank (HDB) - down 14% in 6 sessions; chart is in bad shape though
2. Indian bank ICICI Bank (ICIC) - down 20% in 6 sessions; chart is in bad shape
3. Chinese travel agency Ctrip.com (CTRP) - down 15% in 6 sessions after earnings spike where I sold off most of my remaining position
4. Coal producer Massey Energy (MEE) - continue to sell this off in parts on lifts, and buy back when it falls back, trying to make some small trading gains in this awful market
5. Medical company Illumina (ILMN) - down 12% in 7 sessions; been waiting for this one to fall for a long time; it's fallen to its 50 day moving average in upper $60s; I'd love to see it in the lower $60s to load the boat

I am trying to find places to apply cash; my favorite sectors still continue to fail to break down - again, as stated yesterday the "generals" will be the last to fall. So I remain patient waiting on a full blown panic before they will sell off.

Long all names in fund; long none in personal account

Morning Thoughts

Good morning... nothing surprising this morning other than the faulty government report which is understating job losses, is at least negative for 2 months ago. January numbers were revised lower from previous levels, as were December 07 numbers. (this is yet another reason to ignore these numbers, as they are not only wrong, they are then revised substantially). More worrisome is the unemployment rate FELL to 4.8%. This signals more and more Americans have just given up the ghost on finding a job and dropped out of the job market altogether. Further, if you believe the numbers to be accurate the government created 38K jobs which means the private sector lost > 100K. Again, this is a highly flawed report so using any numbers is relatively fruitless in my opinion, but the trend is clear for anyone who does not have their head in a bucket of Kool Aid.

The Fed came out this AM and 12 minutes before the report (not they are trying to manipulate the market) announced (a) they are increasing their TAF auctions from $30B an auction to $50B and (b) instead of holding them "until needed" they are now firmly saying at least 6 more months. They are also expanding WHAT they will take, which means our Federal government is on the path to holding subprime mortgages - but since they have the printing press they can do whatever they want. Last some vague language about working with other central banks aka begging them to cut rates so we don't look like the only idiot in the globe.

Due to market sentiment being so poor it would not be surprising to see some attempts at rallies which we already appear to be having. Again it is a process, and people will find any glimmer of silver lining (more rate cuts - woo hoo!) to continue to buffet the market. But hopefully as each data point comes out more people move from denial to acceptance stage. But now the people calling for "everything to be fine in 6 months" are losing more credibility by the minute.

I am selling some of my short exposure into this morning's sell off, but not that much. Now, the next wave of Fed cut chatter, federal government bailout chatter, and the like will be used by bulls to try to move the market up. After any rally we will continue to see the same themes, dollar erosion, more Fed cuts, commodities rally, etc.

We remain in bear market, and simply turn your thinking upside down from the past 5 years... instead of buy on dips, you sell on rallies. Turn the charts upside down if you are a chart reader and just pretend it's a bull market and react accordingly.

I did add back my Powershares DB Agriculture Fund (DBA) exposure that I sold off earlier in the week in mid $42s, when I said I'd be interested buying back in mid $40s. It is just around $40 this morning. I continue to use this as my "safety" fund and inflation buster; not to mention the underlying macro themes are the strongest out there in any sector.

I also am liking the relative strength in technology of late - while I don't expect it to last too long it might work in the near term, much like the relative strength we saw in financials, retailers et al in late January.

I'll be poking around for some other buys, but the key level now is S&P 1270. We are still destined to test it and if it holds or not, determines a lot. I expect the "invisible hand" to work all the magic it has to make sure we hold, at least the first time through.

Be careful of the Kool Aid...

Long Powershares DB Agriculture Fund in fund and personal account