Bookkeeping: 'Rising Tide' Performance Week 32

Week 32 performance of the mutual fund

Comments: I'll begin by saying this was one of the week's I have been most proud of the navigation of the fund through what has been one of the most volatile weeks I can ever remember in the market. Three separate 3% intraday moves in 1 week; simply unheard of. I hate patting myself on the back, because usually that leads to a very bad following week (the market loves to humble), but I'll take some happiness with this week's performance.

I can't even remember half of this week, because we had so much action. After a sharp sell off Monday, on the doorstep of breaking S&P 1270 and sinking into the abyss, the Fed came to the rescue (again) premarket Tuesday announcing they are 1 step away from buying mortgages directly (that's coming later this summer as they turn into America's dumping ground for toxic loans), but for now will only loan Treasuries for 28 days at a time.... until... well forever, or at least the credit markets improve. The market had its best up day in 5 years. I was very fortunate that I lightened up a very heavy short exposure by late Monday anticipating some bounce off S&P 1270, so while I took a drastic hit in my Ultrashorts Tuesday it only affected about 12% of the portfolio instead of 24% or so as I had late last week. Better to be lucky than good at times.

After some follow through Wednesday, we began selling off again on news of more credit implosions at Carlyle group and persistent rumors of Bear Stearns (BSC) issues (promptly denied by management). Thursday we started the day awfully, before staging a huge rebound based off of a mid morning call by rating agency Standard and Poors (who have been SO accurate in their ratings of mortgage based securities that we should trust their every word) assuring us the end of the tunnel is around the corner in the credit mess (not). Facts could not get in the way of a good swig of Kool Aid, and the market rallied from its early depths intraday 3% to finish in the green. Then Friday, a (cough) "great" CPI number showing inflation has been defeated dragged the indexes from a red print in premarket to a big green open. But within minutes the Bad News Bears (Stearns) news hit, and the 2nd step (I should of stated that the Countrywide purchase by Bank of America was really the 1st step) of nationalization of our financial system was on. The market promptly dropped intraday 3%. And somewhere hundreds of CNBC pundits were saying "the bottom in financials is in" "you should be buying" and "just trust us."

For the fund, results were all over the place day to day, and in fact hour by hour as these swings took the positions up, down, and all around. There was no major trend this week, but I did make a nice batch of buys on Monday (about a 10% fund allocation from cash to long positions) [Bookkeeping: Purchases Today (A Whole List)] that I sold off in the mania Wednesday (about 8 of the 10% allocation right back to cash) [Bookkeeping: Making Some Sales] so we had a nice trading gain there (thanks Ben). Just could not resist those huge moves in such a short time. Not much more you can do in this type of market. The only other key trend was some severe weakness in the coal names this week.

Despite all the huge moves intraday this week, the markets finished the week not too far from where they started (at a cost of $200 Billion of course). Both the S&P 500 and the Russell 1000 were down 0.4% this week, while Rising Tide Growth Fund gained 1.9%, so both absolute and relative (vs indexes) gains this week; can't beat that. I am now once again far exceeding my targets of beating the indexes by a yearly rate of 15%; usually when I reach this point of outperformance (in the past) the market has come in and smashed the fund the following week so I'll be vigilant about that. But I do think since last summer I have been doing far better than most general equity mutual funds (and most hedge funds but shhh... don't tell them that since their Wall St pedigrees would be offended), so I am happy with the overall results. 20 more weeks, and Year 1 will be in the books.

Price of Rising Tide Growth: $11.194
Lifetime Performance to date (vs Aug 3, 2007): +11.94%

Comparable S&P 500: 1,288.14 (-12.08%)
Comparable Russell 1000: 702.31 (-11.79%)

Fund return vs S&P 500: +24.02%
Fund return vs Russell 1000: +23.73%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $9.8 Billion as of November 07) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of January 2008.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Bookkeeping: Closing Out the Week

As I've been doing every Friday, I am lightening up on all Ultrashort exposure going into the weekend, fearing whatever scheme the government/Fed/Kool Aid economic reports might have under wraps to implode the bear case Monday premarket. Keep in mind I've been saying S&P 1270 is the key level here - that is the cliff of the abyss - and it would not go down easy - we've used up $200 billion dollars this week (Tuesday) to defend that line in the sand. We closed Monday evening at 1275 so at 1290 right now to close the week, we've gained about 15 S&P points for $200 billion. So $13.3B for every S&P point - what a bargain! Much like Pentagon hammers for $241 and toilet bowls for $4200. Your money again hard at work... =)

Next week we can look forward to some more government schemes to save the system; some more hopes for (the new sexy one) 100 basis point cut on the 18th, and if the past is any indicator frozen trading on the 17th as no one does anything until the Gods on Mount Olympus bless us with their Fed cuts. Pretty much the same song and dance since August 2007 - we just keep doing it from lower and lower price levels as more and more people move from denial to acceptance. Unfortunately, the vast majority still live on Fantasy Island (tm). "Boss, look da Helicopter! da Helicopter!" [Note: Anyone born after 1975, did not get that last piece of sarcasm]

Anyhow I've built up a 20% cash position going into the weekend, with still some Ultrashort exposure. I'd be far more aggressive short if I knew the government would stay out of free markets, but that's not our situation in America so I have to deal with reality not my own fantasy of "America, the home of free market capitalism", so I have to be conservative.

Very simple game plan going forward - on either (a) a rally back to the S&P 1320-1330 level or (b) a break below S&P 1270 restart a much larger allocation of short exposure ... and then await the next government bailout/Fed bailout/"the credit crisis is almost over" blah blah blah moment where Kool Aid will punish the short exposure as it did to people Tuesday. Getting a bit predictable at this point. But this is the long grind down - I'd much prefer a dramatic swoosh which scares people, but we refuse to allow it to happen that way - so we will struggle down week by week instead until fair values are reached. We'll begin the same song and dance Monday morning... I feel like I have a fishing rod attached to Moby Dick, fighting these Kool Aid bulls.

Last, these darn fertilizer stocks just refuse to sell off 20-25% like I want them to!

Bookkeeping: Cutting WuXi PharmaTech (WX) on Rally

Exact same strategy in this stock as LDK Solar (LDK) earlier today - 2 very oversold (unfairly in my book) stocks, who got beaten to a pulp, and now are rocketing up on news/earnings and forcing overconfident bears to cover. In fact the charts look identical; WX is up 25% in just a few sessions. While I enjoy the fundamentals of both stocks, I believe all of these type of rallies need to be sold. I don't have a major position as I wrote earlier this week but I am selling down my 0.6% stake to 0.2% stake and will look to buy more WuXi PharmaTech (WX) on the pullback (if it comes)

Long WuXi PharmaTech, LDK Solar in fund; no personal position

Ron Paul : Tough Medicine is the Treatment

Ron Paul out talking the truth. One day, these guys like Rogers and Paul will be seen less as lunatics and more like accurate and honest people. Unlike those running the country. It is too bad America appears unwilling or unready to understand what goes on... oh well, maybe another few more decades of this treatment and people will wake up.

Jim Rogers: 'Abolish the Fed'

Thanks for a reader for pointing this out

Jim Rogers is back at it, telling the truth...

• Federal Reserve Chairman Ben Bernanke should resign and the Fed should be abolished as a way to boost the falling dollar and speed up the recovery of the U.S. economy, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe Wednesday.
• Asked what he would do if he were in Bernanke's shoes, Rogers, who slammed the Fed for pouring liquidity in the system and accepting mortgage-backed securities as guarantees, said: "I would abolish the Federal Reserve and I would resign." (nice! but then who would bail out the upper 1%?)
• If this happened, "we don't have anybody printing money, we don't have inflation in the land, we don't have a collapsing U.S. dollar," he told "Squawk Box Europe."
• "No country in the world has ever succeeded by debasing its currency," he said. "That's what this man is trying to do. He's trying to debase the currency as a way to revive America. It has never worked in the long term or the medium term."

• The Fed's move to accept risky collateral is not part of the central bank's business, he added. "What is Bernanke going to do? Get in his helicopter and fly around the world and collect rents? That's absurd," Rogers said.
• "Listen, investment banks have been going bankrupt since the beginning of time. If people make mistakes -- if you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich," he said. (Amen, brother. And why the Fed won't be going out of business anytime soon)
• He said he had a short position on all investment banks and is buying agricultural commodities such as cotton, wheat, coffee and sugar and was also buying the Chinese yuan and the Japanese yen.
• Buy agriculture. Agriculture is one of the few places where you're going to make a fortune in the next years," Rogers said. (agree!)
  

Bookkeeping: Taking Profits in LDK Solar (LDK)

I am culling most of my LDK Solar (LDK) position as the stock is ramping (I assume on short covering) another 12% today, following yesterday's 20% move. [LDK Solar Up 17% on Multiple Announcements] I do believe when these solar stocks, which have beaten to a pulp, finally come back into favor we will see some huge (50%-80%) type of moves in some names, but I am not clear off what level (could be lower from here). LDK Solar has just put in a move of 40% so I am not going to look a gift horse in the mouth, even if this is part of a larger move upward. Even with this move, this stock is one of the biggest losers for the fund since inception - even after this large short term gain the stock is right back to where it was a few weeks ago.

This market is simply too fragile and I cannot get a handle on things right now - with an implicit government bailout of any financial institution, it is simply not an environment anyone has traded before, so being in uncharted water I am moving to a lot more cash as the afternoon rolls on, until some sort of trend is borne out. Longs could be crushed at any moment; as could shorts. Simply a dangerous environment once free markets are tossed aside and intervention is afoot.

I am selling 80% of my LDK Solar in the $28s, 400 of 500 shares, with the last batch in the $28s. This drops my 1% allocation to a 0.2% allocation.

Long LDK Solar in fund; no personal position

Another day of Bipolar Action

Someone asked me a question in comments about the technicals in this market, and frankly in this market news flow means more than anything else - so it is very hard to use conventional theories when the stock market rallies hard on a CPI number, and within 30 minutes crashes on Bear Stearns (BSC) news. There is no way to "game" this stuff, and hence technical analysis loses a lot of effectiveness. That said, I just sold a portion of my Ultrashort exposure on this panic selloff, that I had bought yesterday as the market rallied hard....and that same exposure I had sold Wednesday on the market rally... which was the exposure I had bought Monday on the market crashing.... this same batch of exposure (about 4% of the fund holdings, which I'm switching from cash to Ultrashort nearly daily) has risen/fell 7-10% nearly every day this week. It is nuts.

You get the picture. This is a crazy market... we now have had 3 days of 3% intraday swings THIS WEEK alone.... truly epic movements - I don't remember anything like this even in the heydays of the late 90s (up) or the (down) times of 2001-2002. We had large moves back then, but they were generally always in 1 direction week after week. What's different this time, is these huge moves happen within hours (or at most days) of each other, in totally opposite directions. This volatility will simply crush most people....

Anyhow, for now I assume we are in a new range of S&P 1270 (bottom) to S&P 1330 (top). This is lower than the previous range which was 1320 (bottom) to 1370 (top). So we are making stair steps downward in this market. Make a new low, base for a while, than move down a new low, then create a new base. So for now, we adjust to a new trading range and assume we will falter as we get to the top of that range and rally as we get to the bottom. Eventually that pattern fails and we break either up or down. But as we just saw last week with 1320 as the bottom, the more times you test that level, the more apt you are to fall through. So this is why I believe, along with all the realities of both the credit market and real Main Street economy, we will continue to break down. So my strategy is to play this pattern and "swing trade", and then just as when we broke 1320 once and for all, buy more short exposure once we break through 1270 with conviction. If we do move up (somehow, in the fact of all this historic carnage) well then you just have to forget all the realities and join the bull party, but I won't really be convinced until nearly S&P 1400.

We've rallied on so much hope (yesterday is case in point - just because S&P said they *think* we are half way through the credit writeoffs the market rallies 3% intraday) and so many Fed actions - the Fed is throwing everything it has at this market to keep it propped up. So this rallying off of hope/Fed actions can continue indefinitely until finally the realities of the enormity of the credit situation envelop the Fed. For now the market continues to cling to the belief that the Fed is bigger than market forces. So we can continue to make these rallies. But this is like an epic battlefield, and amazing action to watch... again the wildcard is the Federal government and a massive bailout of the entire mortgage business - something that I truly believe will be coming at some point later in the year. I only wish I knew then, because the "free market capitalists" in NYC will drive this market higher in a huge way once "socialism" and "nationalization" take over our financial system in full force. Irony at its highest form- a system built on extreme riches based on exploiting capitalism, praying for a government bailout. This is what it's come to.

Bear Stearns (BSC) Getting Secured Financing from JP Morgan and NY Fed

We just talked about this yesterday - despite constant reassurances in the media the past week that "everything is fine", Bear Stearns is in stage 1 of its bailout. As we discussed yesterday ["Smart Money" is Buying, So Should You], we had an analyst saying the Fed would not allow Bear to fail (free market capitalism and all, where large companies are not allowed to fail)

He said that fear makes sense, but he does not think the Federal Reserve will allow that to happen. The Fed would bail Bear Stearns out before allowing the bank to dump upward of $275 billion of tainted investments on a market that currently has little appetite for risk, he said.

Well lo and behold...

• Bear Stearns received a secured loan facility from JPMorgan Chase as part of steps it is taking to shore up the market's confidence in its operations. JPMorgan Chase will provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access capital as needed.
• In a highly unusual step, the Fed, through its discount window, will provide non-recourse, back-to-back financing to JPMorgan Chase, the commercial bank said. JPMorgan said it does not believe this transaction exposes its shareholders to any material risk.
• "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," said Alan Schwartz, president and chief executive in Bear Stearns, in a written statement. "We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
• According to Cumberland Advisors Chief Investment Officer David Kotok, the problem is bigger than Bear Stearns. "This is about the system," he said. "It is about the unfrozen mortgage-back constructed paper and how you thaw it out and get a liquid market and get it trade...This is about getting liquidity to markets which are dysfunctional and seized up."

And so the nationalization of our financial system begins in earnest...

Now remember, when *you* make bad decisions you are left on your own, or must go bankrupt. When NYC bankers made bad decisions the entire Federal government rides to their rescue. Seems like an even playing field to me.

No position

Fantastic News - Inflation Dragon Officially Slayed!

For those who have been reading the blog for longer than a month, you know my pure and utter disdain for most government reports, but the CPI (Consumer Price Index) and monthly BLS (Labor) report are my 2 favorites. [Sep 28: Barry Ritholtz on Bloomberg Finally Seeing the 'Truth' in CPI]. The CPI is "supposed" to measure inflation but I've argued it is showing about 1/3rd of the actual number for a long time now. [Dec 12: Real Inflation Showing in Reports Not called PPI/CPI] Well today's monthly report shows "no inflation" - miraculous! I can not stop chuckling myself, but on one level I love the fact this number was flat because it shows the rest of the world who hangs on to this report as gospel what a fraud it really is. That said, of course Kool Aid bulls grasp onto the number, and futures went from deeply negative to sharply higher on this "factual" report. ;) So factual that somehow energy prices dropped 0.5%. My gosh, this is so laughable - but anything to get this market up, and give Bernanke room to cut rates - remember he is telling us inflation will go away in the 2nd half of the year so he can cut to 0% if he really wanted to. Kool Aid bulls find pleasure in everything - a few weeks ago they were able to say higher inflation is good because it must mean the economy will be roaring back in the 2nd half [Feb 26: Kool Aid Bulls Twist Inflation into being a "Good Thing"] and then they can twist "low" inflation into being great as well... so it's another heads I win, tails I still win - any move by inflation can turn into a bull case.

Now, M2 (a measure of money supply in our economy) has exploded the past 8 weeks (and in theory inflation is nothing else if not a measure of money supply), and every commodity index I know of is at or near all time highs. But remember the substitution effect of this CPI report. Effectively, if you shop for steak which costs $5 a lb all your life, but due to economic hardships you have to move down to ground beef at $3 a lb, well inflation (by government measures) just fell 40% in the "meat" category. That's essentially the reasoning in this report. So as Americans get hit by the "poor effect" (opposite of wealth effect they enjoyed from their inflated houses and easy credit), our CPI report can actually potentially show falling inflation as people substitute downstream. In fact, I am hoping NEXT month we show negative inflation! That would be a hoot. I would only ask these staffers who put together this report, have to go face senior citizens on fixed income who rely on cost of living adjustments based on CPI and try to explain to them how inflation is non existent. To be a fly on that wall...

Anyhow, nevermind all that - bottom line is "inflation is contained, benign, and on the way to being slayed". And we can rally. That's all that matters. (cough) Again, my dream scenario is CPI actually falls next month! This would show the banana republic off for what it truly is.

• Led by a quirky decline in energy costs, U.S. consumer inflation moderated in February, opening the door for the Federal Reserve to keep cutting interest rates to support flagging economic growth.
• The consumer price index was flat in February, the Labor Department said Friday. Wall Street economists had expected a 0.2% increase. In addition, core prices -- which exclude volatile food and energy costs -- were also unchanged, below the 0.2% gain in retail-level inflation that economists surveyed by MarketWatch had been looking for. This was the lowest core rate since November 2006.
• Energy prices decreased 0.5% in February, the biggest drop since last August. Economists said that gasoline prices dropped at the beginning of the month when the government survey was conducted but that prices then jumped as the month progressed.
• Prices charged for medical care, always a source of higher prices because of low competition, increased a slim 0.1%.
• Transportation costs decreased 0.7% last month, with airline fares off 0.3% and prices for new cars down 0.3%.
• Electricity costs fell 0.5% in February, the biggest decline since December 2005. (???)
  

LDK Solar (LDK) Up 17% on Multiple Announcements

LDK Solar (LDK) has been a stock I have stuck with, to my detriment (1st or 2nd biggest paper loss in the fund since inception). Despite the constant attacks on it's accounting or fears it is some sort of hoax company, I've stuck with it, because (a) I like it's place as an arms merchant in the fast growing industry (b) visibility of their business and (c) end customers of high quality, especially European established players, continue to place large orders with LDK Solar - so I assume these companies have done the due diligence and would not risk their own business with a "hoax" supplier. Again, thus far I have been 100% wrong on this position and the stock has simply gone down nearly every week for months on end. Once anyone raises an accounting issue, even if false - it is like a scarlet letter - you walk around with it, and people assume guilt no matter what. So in almost every press release this company has to issue some statement defending themselves, which other companies are not forced to do.

Due to this stock action I culled the position to 1% or so of the fund. At "some point" I expect this name to be materially higher, but thus far despite constant reassurances given by the company, all this does is pop the stock up for a few hours/days and then a new selloff resumes. It appears to be a stock the bears have used as a personal playpen. Today, more news both on their sales and inventory "issues". Speaking to the larger issue of solar in general, I don't think sales (demand) is an issue anytime in the near term - it is more a cost of goods/margins/supply situation that has potential to hurt the bottom line. And potential oversupply of end panel makers. But that should not affect LDK Solar - the more customers the better. But the market lumps all solar companies together, most of the time.

• LDK Solar Co., Ltd. (NYSE: LDK - News), a leading manufacturer of multicrystalline solar wafers, announced today that based upon its current backlog of contracts, it has almost sold out 100% of its solar wafer capacity for 2008 and has sold more than 90% of its solar wafer capacity for 2009. The long-term nature of its contracts enhances LDK's visibility for its business.
• In preparation for the growth of its 2008 wafer production and as noted on its fourth quarter conference call, LDK increased its inventory to $380 million at the end of 2007. Inventory in transit represented the most significant portion of the increase, growing from 263 MT to 752 MT during the quarter as the Company purchased silicon material from around the globe.
• Approximately 8%, or $30 million, of LDK's inventory at year end was classified from an accounting perspective as non-current due to the expectation that these materials would be consumed over a period longer than one year. The materials included in the non-current category represent usable silicon materials, which, due to the current virgin polysilicon shortage can only be used and blended in smaller quantities. The Company expects that the blending ratios of the non-current inventory will significantly change, increasing consumption of the non-current inventory as LDK Solar ramps production of its own polysilicon, and as more virgin polysilicon and higher resistivity feedstock become available. The higher inventory balance is an important factor in present and future cost reduction strategies at LDK Solar.

Long LDK Solar in fund; no personal position

Bipolar Market Continues

Today's move won't get the press Tuesday's did, because Tuesday was straight up, but the intraday swing today from the low 1280s on the S&P to 1320 is 3%. Which is near the "once in 5 year move" we saw Tuesday. Truly amazing times, and the volatility is off the charts. I have never seen a time when a rumor, innuendo, or comment moves markets so quickly and severely, literally on a daily basis. For those who cannot sit at a screen and watch the movement tick by tick, it is a futile market... I am not sure if this sort of action signals greed, fear or just outright confusion. Or the vortex between denial or acceptance. Or the "Invisible Hand" making every effort to make sure the market is not allowed to go off the cliff... who really knows.

For those newer to the market, this is not the way things have been over most of the past 5 years - I remember reading statistics about 1 year ago at this time how the S&P had not fallen more than 2% in any 1 day for something close to 2 years (I don't remember the exact time frame but it was some incredible length of time). Just imagine that... now we get that sort of movement nearly every day, and certainly every week.

I am going to use this spike to add to some short exposure, and sell off some of my coal exposure - the coal stocks are rebounding nicely today but have broken some key support levels. I got my coal exposure up to a 10% or so allocation a bit too quickly, so I'll look to add back lower, or if they just continue up I still have a very large allocation to the group.

Miracles Do Happen - Both Trina Solar (TSL) and LDK Solar (LDK) Up

I had to reboot my computer as for the 5th day in the past 90 sessions it appears Trina Solar (TSL) actually trades up. Even more rare LDK Solar (LDK) is up. I believe the first day in 3 months both are up together... Trina appears to be going up on disclosure of a stake by hedge fund Citadel - which is actually one of the hedge funds worth it's salt. I'll take any excuse at this time, and savor this +8% move - even if it only lasts for a few minutes. As I've been saying of late the valuation in some of these solar names is now approaching ludicrous levels - they'e been ludicrously overvalued in the past, now ludicrously undervalued.

• In a 13G filing on Trina Solar Limited (NYSE: TSL) this morning, Ken Griffin's Citadel Investment Group disclosed a 5.4% stake (135,201,400 shares) in the company. The firm held 446,496 shares at the quarter ended 12/31/�A 13G indicates a 'passive investment'.
• Citadel Investment Group LLC is a $15 billion dollar hedge fund, founded by Kenneth Griffin in 1990. Since its founding, Citadel has grown into one of the world's largest and most successful alternative investment firms.

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

"Smart Money" is Buying, So Should You!

One of the propagandas constantly offered by the financial media is "you should buy because smart money is buying". We heard this throughout the fall in the financials as Arabs/Asians were buying stakes... just do a search for "dinosaurs" on the blog for earlier posts about how dangerous this line of thinking is to your portfolio. Even non Arabs/Asians are being blown up by the financials. Back in September 07, Joseph Lewis, a billionaire was adding to a huge stake (now nearly 10%) in Bear Stearns (BSC). The stock was trading $105-$120 or so at the time, down from a 52 week high of $160. Trumpets blaring, the financial media (and many investor managers who appears as pundits in these outlets) told us "the bottom is in", "kitchen sink quarter" and "smart money is buying" financials - so should you! (feel free to do a search for word "kitchen" on how I was bemoaning this 'advice' last fall, and said we had another 10 sinks in the house to work through)

Conclusion: Oops. Bear is down to nearly $50 today on solvency fears. Ouch. Now if you are a billionaire with a nearly 10% stake, this stinks, but you still have your 8 houses, 3 yachts and private jet. Life will go on. If you are a regular Joe investor and you listened to the hype - well you just took a bath that is going to take a long time to recover from. Now in today's era you could call your government representative and ask for a bailout of your stock losses as it's the "in thing" to do nowadays, but I digress. Once again, this dangerous drumbeat of "the bottom is in, in financials" that has been espoused for months on end by various and sundry sources is simply dangerous to people's portfolios.

Now for the good news - according to the analyst cites in this story (who is well respected), Bear will not be allowed to go bankrupt. Why? The Fed will bail it out! Awesome! Your tax dollars hard at work again. More things to rejoice. What a country!

• Whispers that the New York-based bank is in trouble dragged the company's stock to its cheapest price since just after the September 11th terrorist attacks. Punk Ziegel analyst Richard X. Bove said people are worried that Bear Stearns has a lot of investments it will not be able to sell. A distaste for risk in certain corners of the bond market has depressed the value of a slew of types of investments and drained liquidity from the market.
• Bear Stearns lends money to hedge funds, some of which are running into trouble themselves, Bove said. Some of these beleaguered hedge funds are surrendering their investments to Bear Stearns, which only piles on more paper the bank is unable to sell, he said.
• Bear Stearns' stock plummeted more than 13 percent to $53.41. The stock earlier in the session touched as low as $50.48, the cheapest trade since 2001. The shares, which neared $160 last April, are down more than 20 percent this week and down 30 percent so far this year.
• He said that fear makes sense, but he does not think the Federal Reserve will allow that to happen. The Fed would bail Bear Stearns out before allowing the bank to dump upward of $275 billion of tainted investments on a market that currently has little appetite for risk, he said.

Fantastic! I wonder if he CEO will get a bonus from this as well - I mean it's only fair - he is under a lot of stress, he deserves at least $50 million for his pain.

Scary Stat of the Day: Roubini Calling for $1 Trillion-$3 Trillion in Losses

According to Yahoo Finance/Briefing.com the market is rallying from the lows of the day on a call by S&P that subprime losses will reach about $285 Billion.

• Subprime mortgage write-downs could reach $285 billion but an end to the write-downs is now in sight for large financial institutions, Standard & Poor's said in a report on Thursday.
• "We believe that the largest players, such as Merrill Lynch & Co Inc (MER) and Citigroup Inc (C), have rigorously and conservatively valued their exposures to subprime asset-backed securities such that most of the damage should be behind them," S&P said in a statement.

Judging from how accurate the rating agencies have been in their "work" the past few years, I wonder how anyone gives anything they say any credibility but hey, Kool Aid is there so we can rally. That is a huge increase from here, but it puts a "target out there". The one thing Wall Street hates more than bad news is uncertainty. And this is the crux of our problem - no one knows how bad the credit situation will be and how much more pain is coming. Even if it were an enormous number like $600 Billion, the market would drop, price it in, and then we'd move on from there. But we don't have a figure and really won't know until it's over. Also keep in mind subprime is just the leading edge of the issue - back last year all we heard was "it's contained to subprime" - what a pack of lies (or errors) that was. THis mortgage issue is hitting people all across the credit spectrum from subprime to Alt A to prime mortgages. It only hit the weakest (subprime) first. So $285 B from subprime but how much from the larger markets of Alt A and prime? And what about auto loans? credit cards? Student loans? personal loans? That's the pickle.

Now we hear Nouriel Roubini is calling for $1 Trillion in writedowns. Last time we visited Nouriel [FT.Com: America's Economy Risks Mother of all Meltdowns] he laid out a 12 point plan for very bad things coming down the pike (also lightly reported in the USA) So do we trust a rating agency which is conflicted and hands out AAA ratings as if they are going out of style? Or one of the economists who nailed this credit contraction 10x from Sunday? You know the answer folks - when the market sees a fork in the road it will choose the path with most Kool Aid on it. Or at least a path along a river called "Denial" that flows with Kool Aid. So we get a rally, however fleeting. Grasp at any straw. Unfortunately, this sort of stock action clearly demonstrates to me once again we are still in denial which is bearish in my book. Again, the power to kick the can down the road and avoid reality in the equity market is amazing; until true realization hits I just cannot get bullish other than for a few hours at a time. I still contend we are getting to S&P 1270 and now it looks like we have a great chance to break below it. Let's hear some analysis on why Roubini has put out such a scary number...(of course its all over the UK papers because in the US our strategy is to ignore it, and it will go away) And as usual, forecasters like Roubini are early, and then the "herd" falls in line later after smirking for a few months/quarters about "outlandish" figures by "doomsday" economists.

• In "Why Washington's rescue cannot end the crisis story" (this page, February 27) I analysed the implications of aggregate financial sector losses of $1,000bn. That figure was in line with estimates by Prof Roubini and George Magnus of UBS. I concluded that even this would be manageable, if painful, for an economy as big and a government as creditworthy as that of the US. Prof Roubini objects that I have taken the downside too lightly. He now argues that financial losses might amount to $3,000bn
• Most of the losses will fall not on the financial sector but elsewhere. As Prof Roubini notes, a 10 per cent fall in house prices (relative to the peak) knocks off $2,000bn (14 per cent of gross domestic product) from household wealth. The first 10 per cent fall has already happened. What he sees as a likely 30 per cent cumulative fall would wipe out $6,000bn, 42 per cent of GDP and 10 per cent of household wealth.
• Prof Roubini also talks of a $5,600bn decline in the value of stocks and the possibility of additional trillions of dollars in losses on commercial property. Total losses might even equal annual GDP.
• Worse, the bigger the damage to the financial sector, the more credit-fuelled personal spending is going to dry up. So what might such overall losses mean for financial intermediaries. In Prof Roubini's 12 steps to meltdown, discussed here on February 20, 2008, he assumed that their losses on mortgages would be $300bn-$400bn, while losses on other assets (consumer debt, commercial real estate loans and so forth) would be another $600bn-$700bn, for a total of $1,000bn. On March 7, Goldman Sachs economists published an even higher estimate of mortgage-related losses, at $500bn, along with $656bn in other losses, for a total of $1,156bn. The mainstream has caught up. But Prof Roubini has moved on.
• In reaching its conclusion, Goldman estimated a peak-to-trough house price fall of 25 per cent. In his comments on the FT's forum, Prof Roubini suggests that, after price falls of 20 per cent from the peak, losses on mortgages could be as much as $1,000bn. With a 40 per cent fall, they could be $2,000bn. He adds another $700bn for other losses, to reach total financial sector losses of close to $3,000bn, or about 20 per cent of GDP.
• So how does Prof Roubini reach these much higher figures? The difference between him and Goldman is not so much in assumptions about the house price fall: 25 per cent for Goldman Sachs and 20-40 per cent for Prof Roubini. Both also estimate that lenders would lose half of the loan value after repossession. But Goldman believes that just 20 per cent of households in negative equity would default, while Prof Roubini believes 50 per cent might do so.
• For people with poor credit ratings and few assets, apart from their house, walking away does seem to make disturbingly good sense ("Jingle-mail rings alarm bells for lenders", Financial Times, March 7). Buyers with no equity had an option to walk. Now they are exercising it. This was demented finance. [Remember, this coincides with my view that 2008 will be the year of the "walkaway"]
• Suppose, then, that Prof Roubini were right. Losses of $2,000bn-$3,000bn would decapitalise the financial system. The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses. While the US government could afford to raise its debt by up to 20 per cent of GDP, in order to do this, that decision would have huge ramifications. We would have more than the biggest US financial crisis since the 1930s. It would be an epochal political event. [Not to sound alarmist but this is the path we seem to be headed - as I've said, if things continue to degrade down this path the Federal Reserve will literally be buying mortgages and effectively nationalizing the banking system - Tuesday's actions are 1 step away by providing "rolling 28 day loans" indefinitely]
• Yet, Goldman argues that, after allowing for loan-loss provisions, the proportion of loss-making loans advanced by the non-leveraged sector and the ability to write off losses against tax, its $1,156bn comes down to $298bn. If a similar magic could be worked on the Roubini numbers, the effective losses to the leverage sector would fall to less than $750bn - huge, but more manageable. (nothing like financial accounting magic, eh?)
• Alas, worries are understandable. There are two ways of adjusting the prices of housing to incomes: allow nominal prices to fall or raise nominal incomes. The former means mass bankruptcy and a huge fiscal bail out; the latter imposes the inflation tax. In extreme circumstances inflation must be attractive. Even if it is not the Fed's choice, it is what a reasonable outsider might fear, with obvious consequences for all asset prices.
• I suspect Prof Roubini's latest estimates are excessively pessimistic. But I am not certain this is so, given his record: just look at the vicious interaction between falling asset prices, financial stress and spending. We must pray that the Fed can clean it all up, without excessive collateral damage. Unfortunately, such prayers often go unanswered.

So it's come down to prayer. Thankfully the "2nd half recovery" is only months away. So as we in the US (including media) keep our heads in the sand for another 3 months, we just have to keep from suffocating down there until the magical nirvana begins on July 1, 2008. And remember S&P says losses are finite and heck we're over half way there! So rejoice!

Position: Can't wait for unicorns, butterflies, and singing mermaids to appear on July 1, 2008 as part of the "2nd half recovery"

Where to Even Start Today

So much bad news, so little time...

1) Carlyle Capital (a very well politically connected company by the way - think papa Bush) is having its assets seized, due to what are effectively (in layman's terms) margin calls. What's important for us to note is (a) this is happening due to lenders not wanting to extend terms (b) crisis of confidence and (c) they were leveraged 32:1. Point (c) sounds ridiculous... until you realize much of the credit market players are leveraged from 10:1 to 20:1. We had an era of easy money, and people who didn't know what risk meant, so they pressed their bets. And that is what makes this credit unwind so darn frightful... so many leverged hedge funds, private equity firms, and even financial institutions.

• Carlyle Capital Corp. said it expects creditors to seize all of the fund's remaining assets after unsuccessful negotiations to prevent its liquidation, sending its shares plunging.

• The Amsterdam-listed fund shook financial markets last week after missing margin calls from banks on its $21.7 billion portfolio of residential-mortgage-backed bonds. Carlyle's troubles have amplified fears that billions of dollars of depressed mortgage-backed securities will flood the market, reducing their value even further.

• More than $5 billion of Carlyle's securities have already been sold, but the fund tried to negotiate with the banks to prevent the liquidation of the remaining $16 billion.

• More than a year ago, the fund leveraged its $670 million equity 32 times to finance a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. It borrowed money from at least a dozen banks and firms, including Bank of America Corp., Citigroup Inc. and Merrill Lynch & Co.

• Carlyle posted the securities as collateral under repurchase agreements, so if the value of the securities fall, the lender has the right to ask for more collateral -- a margin call -- to secure the loan. If the borrower does not meet the margin call, the lender may sell the security.

2) Retail Sales (via government report) stunk. This was the report Kool Aid Bulls clung to a month ago [Feb 13: A Couple of Notes from Surfing the Web Today for You Economic Geeks] , as proof the US consumer is doing fine, thank you very much. As I said then, #1 this report does not take into account inflation so a 0.2% rise in sales is simply inflation - nothing more - in fact with inflation so rampant 0.2% means negative real sales... and #2 ex gasoline the report stunk. Well now the numbers are turning NEGATIVE... and again those numbers do not take into account inflation. So the real numbers are much more negative. So if a number prints at -0.3%, considering inflation is probably running 0.4-0.8% a month (depending on who you believe) that means it's really falling at -0.7-1.1%. Either way there is no Kool Aid spin to this number; and remember it's a government report so it will not reflect reality most of the time (but at least it is directionally correct). Just look at the charts of the retail stocks since last summer for "reality". Auto sales are falling off a cliff as I predicted early in the blog's life last summer. Folks, what matters here is we are just getting started - we have not even entered a "recession" by most NYC views, and the job market is "holding up". What happens as we move into a recession (regional mind you), and job losses start piling up. Again I say this every week - we have a levered US consumer, who used his house ATM to offset the lose of real wage the past half decade, who is now facing drops in wealth through house (and stock market), and worst - devastating inflation that the government is glossing over and in fact helping to prompt with continued Fed cuts.

• Consumers, battered by plunging home prices and a credit crunch, stayed away from the malls in February, pushing retail sales down by a larger-than-expected amount. It was another worrisome sign that the country could be falling into a recession. The Commerce Department reported Thursday that retail sales fell by 0.6 percent last month, far worse than the 0.2 percent increase that analysts had been expecting. The weakness was widespread with sales of autos, furniture and appliances all down.
• It marked the second time in the past three months that retail sales have taken a tumble. Sales had fallen by an even bigger 0.7 percent in December, the largest drop in six months, as the nation's retailers suffered through a dismal holiday shopping season. Sales posted a modest 0.4 percent gain in January. (<---haha)
• Consumer spending is closely watched because it accounts for two-thirds of total economic activity. Many economists believe that the country will suffer a mild recession in the first half of this year as the economy is unable to withstand the blows from a prolonged slump in housing, record-high energy prices and a severe credit crisis brought on by soaring mortgage defaults.

3) A number I've been watching like a hawk has been import prices [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis] - they show me our true inflation in "goods", as we import almost everything into this country - this number has been printing in the 12-13% range for months (year over year) - it continues that trend. Kool Aid bulls have been trying to blame it all on petroleum of course. And another thing I've been constantly harping on is the coming imported inflation from China, a trend that only begun in the past quarter - it is up 0.1% again (again this has been a negative number for many years).

• A third report Thursday showed that U.S. import prices rose last month by 0.2 percent after jumping an even larger 1.6 percent in January. Compared to a year ago, import prices are up a sharp 13.6 percent, reflecting the fact that petroleum prices are up 60.9 percent over the past year.

4) Oil cracks through $110, as the dollar continues to crater. I truly think people are beginning to use oil much like gold... as a store of value. The paper money our government prints hand over fist to save the banking system is simply a joke at this point. The "fundamentals" (as pointed out below) don't account for all of this rise; so I think oil is joining gold in this function (inflation hedge/store of value)

• Oil prices on Thursday hit a record high above $110 a barrel as investors fled the tumbling dollar that fell to new lows against the euro and a 12-year low versus the yen. "Oil and other commodities have an intrinsic value so that to the extent that the U.S. dollar depreciates, (oil) becomes relatively cheaper in terms of other currencies, such as the euro," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "So you get an adjustment to compensate for that effect."

• Many analysts argue that current oil prices can't be justified by the market's underlying supply and demand fundamentals. Yet evidence of weak demand amid growing supplies has not stopped oil prices from rising in the past, particularly when the dollar is falling. "Some investors are apparently viewing oil and other commodities as providing something of a hedge against U.S. dollar weakness and possibly inflation concerns as well," Moore said.

5) Speaking of gold, it hit $1000, and another of my 13 Outlier 2008 Predictions comes true

6) Last, the Republicans (folks I'm agnostic towards political parties so no hate mail - they both stink) are trying to kill our economy. Why do I say that? All I've heard for YEARS is how bad regulation is... how more regulation equals stifling of business. We've been brainwashed into this nonsense for years on end. Well now our buddy Hank Paulson says we need more regulation in the mortgage industry! Obviously these Republicans want to put a stake into the heart of the American economy - don't they listen to their own rhetoric? More regulation is awful! Let these folks self regulate themselves; I mean it's worked like a charm so far! And par for the course in this country we are once again reactive after a disaster hits, not prevenative. Because special interests have far too much money to make, when times are good. I don't see any of these NYC bankers giving back years of earnings and bonuses they made during the good times - when they took outsizes risks, in a nearly non regulated system. So now the entire government is riding to their rescue... must be a good life. But anyhow, I urge you to write your Republican congressman or senator and let him know your disgust at the White House now trying to finish off the US economy with the worst of all things ... regulation!

• Treasury Secretary Henry Paulson on Thursday issued a call for U.S. financial institutions to raise capital quickly so they can keep lending, and pledged tougher rules for the mortgage industry. "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said in a speech at the National Press Club.
• Paulson said the focus of the Presidential Working Group's work since the current bout of market turmoil began last summer was to reduce the chance of repeating past mistakes. (... and trying to prop up the stock market...)

• Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of a bid to ward off future housing crises and reassure investors. Paulson said state and local regulators need to toughen oversight of all mortgage originators. Sloppy lending practices including loans made to homeowners with no requirement of proof of income are widely blamed for a soaring tide of foreclosures, especially among so-called subprime mortgages held by people with the shakiest personal credit. (wow where was this in 2002? Oh wait, there was tons of money to be made in the entire food chain, so we can't worry about regulation in good times - sort of like the stock market in 98-00, right? We didn't need regulation then either as long as a bubble was in effect)

• "Regulations needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said. (gasp, that's not what Fox News has been telling me for years)

• He said credit rating agencies need to make sure that securitized credit issuers -- like those who issue mortgage-backed securities -- "perform robust due diligence of originators of assets that are securitized or used as collateral for structured credit products." (wow, so credit rating agencies need to actually do their homework? And a "AAA" rating should mean something? Earth breaking stuff here)

Great stuff folks. But don't you worry, Fed cuts coming next week and one thing we've learned is "Fed cuts fix everything". (Kool Aid) And don't worry about the inflation ... CPI report tomorrow will understate it by 1/3rd. And anyhow, as Ben says, inflation will go away in the 2nd half of the year like magic. Readers, I cannot wait for July 1, 2008. Apparently our entire economic system will turn on a dime - no inflation, booming growth, it's going to be nirvana.

WuXi PharmaTech (WX) - Very Good Earnings

I don't have a large position in WuXi PharmaTech (WX) (0.5% of fund) as the stock has been in total free fall, but continue to love this space of drug research outsourcing. I haven't bought any of the US companies due to valuation, nor Irish player Icon (ICLR) [Feb 21: Icon with Solid Report], but I continue to like this group as a macro theme. We do have a very nice report tonight and the analysts estimates were bested by 4 cents with revenue "in line" with estimates. They ripped the ball off the covers for 2008 revenue guidance though! So next year's current estimate of $0.67 should see some meaningful upside. This is one of my smallest companies in the portfolio and these small caps have simply been crushed in this market. Further, this company has never been cheap so I clearly bought my initial stake at far too high of a price...

• WuXi PharmaTech Inc., a Chinese pharmaceutical and biotechnology research-and-development outsourcing company, said Wednesday its profit more than tripled in the fourth quarter, on higher revenue from its lab and research manufacturing divisions.
• The company earned $12.1 million, or 17 cents per American Depository Share, compared with $4 million, or 7 cents per ADS, a year ago. Revenue jumped 62 percent to $37.1 million from $22.8 million. Analysts polled by Thomson Financial expected a profit of 13 cents per share on revenue of $36.9 million.
• Laboratory services revenue rose 33 percent to $28.8 million while research manufacturing skyrocketed to $8.3 million. The company cited an increase in the number and scope of projects. Drug developers have been increasingly outsourcing various phases of the research and development process in a move to cut costs. Part of that shift involves overseas outsourcing.
• In 2008, the company said it expects revenue between $280 million and $300 million, while analysts expect revenue of $237.1 million.

Long WuXi PharmaTech in fund; no personal position

Pilgrims Pride Cutting Chicken Output

Ironically, I just wrote about this subject in the previous post; but first mentioned it earlier in the winter - I thought it would hit cows and hogs first but it appears chickens will be the first to go. I've been writing about this group (Smithfield Foods, Tyson Foods, Pilgrims Pride and the like) since last fall, not that I am that interested in the companies themselves, but as macro economic flag bearers, especially on inflation. These politicians have helped create an epic disaster. It is playing out step by step as I forecast, but at a much quicker pace than expected. When meat producers start cutting back in the face of a spike in world meat demand, basic economics tells you where prices are going in the future. I just wrote I expect this to happen in the next 12-18 months - I was very wrong. It is already happening. Not to mention the job losses.... but the bigger picture is the food inflation that simply continues to grow. Thank you corn ethanol. Ironically this is good for the sector because less supply = higher prices = more profits. This is the dichotomy of the Wall Street economy versus Main Street economy; what is good for one hurts the other many times.

We have another CPI report this Friday I believe. The government and Fed will tell you not to worry - as the US economy slows, inflation will magically go away. The same spin since last August. The consumer continues to face massive issues and I'd contend that inflation continues to get worse.. from already high levels. Again, I don't know whether to accuse this Fed and all these NYC bankers economists as poor forecasters or simply ignorant. The herd has their head in the sand, if someone like me saw this coming a year ago and these people making massive bucks cannot figure it out.

• Pilgrim's Pride Corp (PPC), the largest U.S. chicken producer, said on Wednesday it will close a chicken processing complex and nearly half of its U.S. chicken distribution centers as it copes with soaring feed costs and an oversupply of chickens.
• The news sent Pilgrim's Pride shares, as well as those of other chicken companies, higher on the theory that less production will benefit the chicken industry. "Clearly this news is positive for the group," Pablo Zuanic, food analyst at JP Morgan, said in a research note. "We expect by the summer combined cutbacks of about 3 percent by the industry."
• "I'm not surprised given the unusually high price of grain, which is restricting the ability to sell chicken domestically," Paul Aho, an economist with the consulting firm Poultry Perspective, said of the production cuts.
• "This is one shoe dropping and we might see another shoe dropping," he said.
• Pilgrim's Pride said it will take a charge of about $35 million, or 33 cents a share after taxes, for the closures, which will eliminate about 1,100 jobs, or some 2 percent of its work force. The company is looking at potential changes at other production facilities, including possible closings, with decisions likely in 30 to 60 days, Rivers said in the interview.
• "What is happening with feed ingredient prices, escalating as much as they have over the past year and half, it is causing us to look hard at some operations where we feel we have excess product or don't have our best cost structure," he said.
• "Part of the issue is the government continues to raise the mandate on ethanol so that we will pull another billion bushels of corn out of the system to make fuel. They don't have a policy in place in the event of a crop problem," he said.
• U.S. government's policies encouraging ethanol production have angered livestock and meat producers, who blame those policies for the higher corn prices.
• Based on current commodity prices, Pilgrim's Pride estimated it would cost at least an additional $1.3 billion to feed its flocks in fiscal year 2008 than it would have cost two years ago. “We simply must find ways to pass along these higher costs,” Rivers added.
• The company said on Monday that it is also exiting the turkey business because of slim profits.

Takeaways: Rising food costs are pinching US consumer. US consumer looks for cheaper fare as substitute. Rising input costs are pinching producer. Production is cut. Which leads to higher prices down the road. Which leads to more cutting back by consumer who cannot afford these foods in same quantity - and moves to unhealthier foods to boot (cheap food is usually the least healthy). Do you see the death spiral? But don't you worry - CPI report will ignore all this (after all ex food and energy everything is swell!) and Uncle Ben promises inflation will go away in 6 months; just trust him. And more Fed cuts coming next week. Stagflation coming to a theater near you...

Position: Continued disgust

Grain Boom May Spark Rural Revival

I've said in the past if there was an easy instrument to purchase farmland, I'd like to be in it. Even more so in the former Soviet satellite nations where farmland is much cheaper than the American heartland. While I am becoming concerned that SO many people have now jumped on the agriculture bandwagon, I still like the trend for the "very long" term. But I feel much more comfortable in the early stages when very few talk about a trend. Now that it is becoming 'conventional wisdom' the volatility of all things agriculture continues to increase, and short sighted hedge funds have the potential to cause major short term havoc at some point in the future. Remember, as with all things on the Street - until Barron's or the Wall Street Journal start pumping a story it doesn't matter to the herd. [Feb 15: It Finally Matters - Wall Street Journal Print Edition Front Page: Heartland Sees Boom with Grains in Demand]. Of course the NYC suits missed 12+ months of "boom" by the time these things became apparent.

Supporting my view of a REGIONAL US recession, I found this random article from an Indianapolis newspaper.

• Jon Castongia can't keep enough farm equipment in his John Deere dealership. "I've got nothing that's not sold," he says. "Across the board, new and used, everything's popular right now." Castongia's business boom is evidence of a new golden era for farmers.
• All-time high prices for soybeans and wheat and near-record high prices for corn and other farm goods have pumped up farm incomes by 50 percent since 2006 in Indiana and other Farm Belt states.
• The value of Indiana farmland has soared from an average of $3,500 an acre to more than $4,000 in the past two years.
  
• The boom is expected to plow billions of dollars of extra income into Indiana's economy in the next few years. Big beneficiaries range from co-ops and ag suppliers to rural restaurants and retailers. (this is the multiplier effect I talk about so often; the rest of the country was enjoying it from overpriced homes and house ATMs over the past half decade; but this version in the Heartland is a genuine thing unlike the credit mirage)
  
• But consumers could have something to lose -- disposable income as they face higher costs for food staples such as flour, poultry, milk and beef, all increasing because of the rising cost of grain.
• Still, Indiana has much to gain from the grain boom because it's the nation's fifth-largest producer of corn and fourth-largest soybean grower.
  
• The higher grain prices, if they last, should firm up the state's rural property tax base, adding to the tax revenue streams of local governments and schools. At the same time, prices are so high that crop farmers don't require the heavy federal commodity subsidies they collected in the past, saving the nation's taxpayers about $6 billion a year.
• Exports of grain and other agricultural products will hit a record $79 billion this year, much of it going to the developing economies of China and India. Adding to the demand are dozens of new ethanol plants that this year will convert 25 percent of the U.S. corn crop into fuel.
• "This is one of the biggest opportunities for Indiana agriculture and U.S. agriculture for maybe a century," says Andy Miller, Indiana agriculture director.
• The boom isn't happening without some pain -- for both farmers and consumers. Though grain prices make up just a fraction of the overall cost of processed foods, they helped fuel a 5 percent inflation rate on food last year that hit everything from bread and cereal to soft drinks and cookies.
• Farmers, with more cash to spend, are facing inflated costs for many of the materials they need to farm. In the past two years, prices of nitrogen, potash and phosphate fertilizers have roughly doubled. Values of farmland last year jumped about 17 percent, the largest annual increase since 1977, according to Purdue University. And land rents have shot up as well.
• "It's all about yield now," says Allen Baird, who farms several thousand acres with a brother and two nephews in Tipton County. He marvels at how much his crops are worth. "I've never seen it in my lifetime, never seen anything like it," says Baird, who has farmed since 1964.
• Long mired at less than $2 a bushel, corn now trades at more than $5. Soybeans have jumped from less than $6 a bushel to more than $15, while wheat has spiked from under $4 to more than $10. The last time grain prices jumped across the board so dramatically was in the early 1970s when the former Soviet Union began massive grain purchases on the world market.
• Demand for grain is running so strong that the nation's wheat supply is almost gone, while soybean and corn inventories by August should hit their lowest levels since 1973-75, says Chris Hurt, a Purdue ag economist. "The cupboard is almost bare. It's too tight for comfort. It'll be until (the) 2010 crop before we can catch up and rebuild these inventories."
• The upshot: grain markets in the next two years could see "enormous volatility in prices," Hurt said, as traders react to weather scares, droughts and scarcity. Adding to the uncertainty is the low value of the dollar relative to the euro, which makes U.S. grains cheaper for foreign buyers.
• Ronnie Mohr, a Hancock County crop farmer who is a director of the 50-state farm co-op Land O'Lakes Inc., says although he reaps the benefit of high grain prices, he worries they'll cripple his main customers: hog farmers and other livestock operators who buy more than half of each year's U.S. corn harvest to feed to their animals.

Takeaways: Again, I have been focused on fertilizer and crops for the past year. I will continue to be, for many years, although we will have ebbs and flows as hedge funds come in and create havoc [The Hedge Funds are Coming! The Hedge Funds are Coming!] - all those ebbs caused by "hot money" should be bought. Corn ethanol is going to be seen one day as badly a boondoggle as the Iraq war. And look for a spike in your meat prices not only from the grain inputs but the fact that at some price point, hog and cow operators will slaughter parts of their herd because it simply is getting too expensive. Which creates more shortages. This will only exaggerate the high costs of meats. I expect this to play out within 12-18 months. But don't worry - the Fed says inflation is contained.

Long fertilizer and crops

JA Solar (JASO) With Very Nice Report

You just can't win in the solar sector right now; JA Solar (JASO), a former fund holding, reported very nice earnings this morning (without foreign exchange loss it would of been a true blowout quarter) - started the day up 12% and has given back almost all the gains. Gross margins did drop 2% which is my issue with the entire sector. Guidance looked very good. Simply said, a very tough market, where even good news is not helping most companies for long. I was bemoaning the massive overvaluation in the solar sector much of the fall and early winter, and stated I just could not find any value (and yet the stocks continued to rise on momentum). Well, the worm has turned severely - now I find a lot of value but perversely the stocks continue to falter. That is the world of 10,000 quant hedge fund computers who all chase the same strength. And also the world of human psychology - people love buying the stocks when they are racing higher in the buy high and sell to greater fool theory, but when the stocks represent actual value (meaning they are faltering) no one wants to touch them. Ironic, really.

• China-based solar cell maker JA Solar Holdings Co (JASO) reported a 47 percent rise in fourth-quarter profit as revenue tripled, helped by higher demand for solar power, and forecast 2008 revenue above market estimates, sending shares up as much as 12 percent.
• JA Solar expects 2008 revenue of $990 million to $1.10 billion. Analysts on average were expecting $779.2 million, according to Reuters Estimates.
• The company, which nearly tripled its power production capacity to 48.7 MW in the fourth quarter, said it plans to raise its annual production capacity to 500 MW from 425 MW by the end of 2008.
• "Basically JA has a higher visibility into their production ramp, as well as their gross margins due to their silicon procurement levels, which are significantly better than the industry in general," analyst John Hardy of American Technology Research said by phone.
• "It is (growth) mainly attributable to a favorable subsidy structure, the feed-in tariffs that are in place in Germany and Spain as well as feed-in tariffs beginning to take traction in Italy," said Hardy, who has a "buy" rating and a price target of $35 on the stock. Feed-in tariffs, initiated in 2004 to reach the European Union's goal of increasing renewable energy use to 20 percent by 2020, guarantee energy produced from renewable resources will be bought at three times the normal market value for 25 years.
• In the latest quarter, JA Solar's total revenue rose to $144.2 million, from $47.9 million. It posted net income of $13.5 million, or 9 cents per American Depository Share, and included a foreign exchange loss of $7.9 million. It earned $9.2 million a year ago when it was not listed.
• "They were able to get more out of their existing capacity in the quarter that resulted in 50.2 MW being shipped versus our expectation of 42," said Ries, who has a "buy" rating and a price target of $27 on the stock.

No position

Refiners Continue to Get Destroyed

Ouch! The sector is really suffering - I have been an avid investor in refiners over the years as they are usually good for a 20-40% type of gain in a 6-9 week period, 2-3x a year, but not this year. To be blunt I have been scratching my heads for months on end wondering why gasoline is not close to $4, once crude oil got over $85... I am still confused; I guess the idea is consumer demand will simply fall off a cliff if pump prices went to where they should be to reflect >$100 crude. But the margins of these refining companies simply are crushed as crude (the input) increases and they are not passing along all the cost to consumers... people are complaining about $3.30 gas but with crude nearing $110, I'd of expected $4.50 type of gas to maintain margins. Something is amiss, and late winter/early spring is usually the time to buy refiners, but the rules are being broken this year. This is a conundrum - simply put crude oil is a world commodity being driven by demand in other countries along with rampant speculation prodded by Fed flooding the world with worthless dollars (inflation) ... but the gasoline products are local to the US economy so demand is weakening as the US consumer weakens. Talk about a rock and a hard place. Another example of why investing in companies reliant to the US economy is simply a fools game at this point.

I'll put up one chart - my favorite Frontier Oil (FTO), but it represents the whole group - Valero (VLO), Tesoro (TSO), Holly Corp (HOC) - all are down 6-9% today. Today's culprits appear to be high inventories ....

• Shares of oil refining companies fell Wednesday as oil prices remained high and a government report showed a larger-than-expected rise in inventories.
• Refiners have been paying record prices for oil, but have not been able to lift the prices of finished products, like gasoline, enough to offset those costs. That's because consumers have been holding back on unneccessary travel spending amid high food and energy costs, declining home values and debt burdens. Those trends have pressured refining margins since the fall.
• The Energy Department said that gasoline supplies rose by 1.7 million barrels, well above the expected 300,000 barrel increase. Higher inventories indicate weaker demand and pricing, though inventories are likely to fall as the spring and summer travel seasons approach.

....and a downgrade in the sector.

• Caris & Co downgraded U.S. refiners, including Valero Energy Corp (VLO), saying high oil price was expected to take its toll on demand, and raised its 2008 oil price NYMEX WTI forecast to $95 a barrel from $72 a barrel.
• "With pump prices set to hit new record highs this summer on the back of record oil prices and an increased likelihood of recession, we forecast that domestic gasoline demand will contract this year," the brokerage said.
• The brokerage cut Frontier Oil Corp (FTO), Holly Corp (HOC), Sunoco Inc (SUN), and Tesoro Corp (TSO) to "below average" from "above average" and Valero Energy to "average" from "above average."

No positions

Bookkeeping: Making Some Sales

I am taking this time to take some positions back down; some of which I just added 48 hours ago [Bookkeeping: Purchases Today (A Whole List)] - the market has rallied over 4%+ since and in this trader's market I have some serious gains in a short time, so I am going to book them. As always, this is a layer in and out approach so I am selling around $5-$6K stakes. I will never catch the bottom or the top, but I caught a very nice move, and in this bipolar market whose mood changes by the hour I am going to take these gains happily, even if there is more upside ahead.

1. Mechel (MTL); bought in $123.70s Monday - selling @ $138.90s = +12.2%
   
2. Mosaic (MOS); bought in $96.10s Monday - selling @ $107.90s = +12.3%
3. CF Industries (CF); bought in $105.90s Monday - selling @ $117.70s = +11.1%
4. Potash (POT); bought in $145.30s Monday - selling @ $156.00s = +7.6%
5. Shaw Group (SGR); bought in $56.00s Monday - selling @ $60.60s = +8.3%
6. CVRD (RIO); bought in $31.70s Monday - selling @ $34.40s = +8.5%
   
7. Sohu.com (SOHU); not a recent buy but stock is approaching resistance at the 50 day moving average of $47.60s, so I am selling here.
8. Baidu.com (BIDU); I really like the action in some of the tech names lately as I've written - for the first time in a long while some of these names have been greater than 1% positions of late. I didn't buy Monday but have been buying small lots in the $240s for the past 2 weeks; with the stock breaking out today to near $280 I am taking some of that off the table. This is a gain of over 15%
   
9. Apple (AAPL); bought in $119s Monday - selling @ $127s = +6.7%
   
10. Kinross Gold (KGC); bought in $23.90s Monday - selling @ $25.60s = +7.1%
11. Powershares DB Agriculture ETF (DBA); I did not buy any Monday around $39 since I already had it as the largest positions but it is up nearly 8% since, so I am taking some off.
12. Gafisa (GFA); bought in $35.60s Monday - selling @ $38.20s = +7.3%
13. Illumina (ILMN); bought in $62.70s Monday - selling @ $66.50s = +6.0%
14. Mastercard (MA); I don't see any specific news except that US consumers are cutting back to pay for gas with their credit cards (as was my long stated bull case for Mastercard), but the stock is up as Visa (V) IPO is imminent so I am taking some off the table here @ $205.80s
15. HDFC Bank (HDB); I did not buy this Monday but had been buying last week; the stock is now approaching a key resistance of the 200 day moving average of $104, so I am selling in the $102s (went down to $93s Monday)
    

Other positions I bought Monday I have not sold because either (a) they have not bounced that much aka coal positions or (b) my overall position is too small so I don't want to cut them down even smaller aka Silver Wheaton (SLW) or Cleveland Cliffs (CLF)

I mentioned S&P 1330 level as the point of first resistance and where I'd begin to layer in a new round of Ultrashorts. (along with raising cash which is what I am doing with the above sells). We reached that level today, so I am going to begin buying more insurance against my long exposure. This is simply the type of action one must do to survive in bear markets - take the gains when offered even if the market continues higher and you miss out on some further upside. The risk is simply too high to "buy and hold" as almost all position gains get erased. What will I be doing when/if the market pulls back? Buying back all these positions I assume. It is simply the environment we have - it takes many more transactions than in a bull market when you can "buy and ride" the high quality names.

Depending on what the Fed has up it's sleeve as it adapts into a short killer, I still believe the topside is limited to S&P 1370 which is 3% higher from here by next week's meeting. To turn into a Kool Aid touting bull, I'd have to see S&P 1400+. Until proven otherwise I consider all these lifts to be suspect, so I continue to sell into them, and raise short exposure. One day, this methodology will be INCORRECT as the market will have begun a new bull market... and when that happens I will take some losses, and trail the market for that week or two. But between now and whenever "then" is, I hope to continue to outperform indexes and peers by following this pattern.

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

Bookkeeping: Taking Half Off the Table in Thornburg Mortgage (TMA)

This position has been a disaster but in the past 2 days it has become somewhat less of a disaster. With the stock up 350% (after falling 90%+!) in the past 2 sessions, I am going to take half of my position off the table, and eat a huge loss... but a bit less huge than when it traded below $1.00. Bear Stearns helped to juice the shares today with an upgrade.

• Bear Stearns upgraded "jumbo" mortgage lender Thornburg Mortgage Inc (TMA), saying mortgage market liquidity appears to have improved significantly a day after the U.S. Federal Reserve announced moves to pump liquidity into the financial system.
• Shares of the Santa Fe, New Mexico-based Thornburg, a lender whose survival is in question, more than doubled to $3.50 in morning trade on the New York Stock Exchange. The brokerage raised the stock to "peer perform" from "underperform."
• "The Federal Reserve's Term Securities Lending Facility should provide a significant benefit to Thornburg as liquidity is restored to the non-agency mortgage market," analyst David Hochstim wrote in a note to clients. "Just as price declines were compounded by a reduction in the liquidity available to finance the company's low risk assets, the Fed's willingness to lend against these securities for 28 days... appears to be dramatically improving the liquidity and valuation of these mortgage securities," Hochstim said.
• "While we don't know how much the company has sold this week, the ability to obtain financing through dealers until early April should enable the company to develop alternative sources of financing on a more orderly basis," Hochstim said.
  

I am selling 1750 of 3500 shares in the $3.10s. This reduces my exposure from 1% of the fund to 0.5%. As I stated last week, at this point Thornburg Mortgage (TMA) is a lottery ticket but since NOTHING is going out of business these days, and the mortgages they own are still quality names, there was a good chance for at least some sort of buyout. The stock price is more a reflection of confidence now, nothing to do with fundamentals, so I am going to mitigate my loss here, take half off the table, and hope for some more uptick in the stock price. If not, and it goes to $0, at least I have less exposure. Simply trying to make a bit of lemonade out of a bushel of lemons.

• Thornburg Mortgage Inc (TMA), a lender whose survival is in question, on Tuesday restated 2007 results to reflect a $676.6 million write-down for adjustable-rate mortgages, 58 percent more than it had projected just four days earlier.
• On March 7, the Santa Fe, New Mexico-based company projected a $427.8 million write-down. The lender said it increased the amount to comply with accounting rules, because it may be unable to hold the affected home loans to maturity.
• Thornburg is now reporting a fourth-quarter loss of $605.9 million, or $4.74 per share, after previously reporting a profit of 33 cents per share. The full-year net loss rose to $12.97 per share from $7.48.
• Thornburg also reported that lenders had agreed not to make further margin calls through Monday, March 10. It did not say whether the waiver had been extended. Spokeswoman Suzanne O'Leary Lopez declined further immediate comment.
• Thornburg provides loans to help people buy expensive homes. It has said it cannot meet its own lenders' demands for $610 million of cash or collateral. In a statement, Chief Executive Larry Goldstone said Thornburg is talking with lenders to address the margin calls, avoid forced asset sales at large losses, and resume its lending business.

Long Thornburg Mortgage in fund; no personal position

Yowsers!

Well yesterday's purchases are working out very well today; and the markets are screaming higher, up 3%. I believe a lot of shorts are getting squeezed, and hard. This is a case study on why to layer in and out of positions; while I was hoping for lower prices than I bought yesterday and was realistic about the chance of losing money in the short term on what I bought in yesterday's layer, you just never know what the day to day brings.

At this point I have about 12% Ultrashort exposure, and will begin (speaking of) layering in some new exposure, but slowly. Today's news is actually (potentially) a lot more effective than anything else the Fed has done - and most likely we'll see the amounts increase over time. Moral hazard or not. Even the dollar is going up; that's how positive the news is - nothing makes the dollar go up anymore. With that said, still a bear market - still a huge amount of negative issues, and we'll look for some more down movement in the near future. But for now, we can clap our hands together as we anticipate the 50 basis point cutting next week, and then we'll probably return to reality. Overall, I simply view this move as overconfidant bears getting smashed, and I doubt we are returning to an era of new buying - not with all the underlying issues. But for now we drink Kool Aid.

With the S&P 500 all the way back up to 1312, I foresee a potential move to 1330 as a first resistance level where my game plan is to be more aggressive in buying Ultrashort exposure, and if the Kool Aid is really pervasive we could get back to 1370. Once again, a bipolar market - 24 hours ago we were about to fall off the cliff, and now we are talking about retests of recent highs. The market humbles everyone eventually. Again, I was simply fortunate to have layered out of my short exposure by half going into today... while I am bearish, I expected a bounce off that S&P 1270 level, but certainly could not foresee the type of action today. But as I've been stating for months - we have to be careful of "intervention" at any moment from the short side.

Don't forget the underlying situation and the fact this is a traders market. I continue to draw down long positions in euphoria and try to buy during dread. Over time this has seemed to work, even in a generally down market we've enjoyed since last summer.

Some Interesting Facts on the Fed Injections

Some staggering amounts of money being used to support the global financial system; truly breathtaking when you step back and think about it. Just imagine what would happen if we actually used regulation instead.... (I know, its a 4 letter word)

Combine the following facts, with the European Central Bank's Half a Trillion in mid December and you are starting to talk real money here. We are now approaching a Trillion Dollars when you combine the US and Europe. They don't call him Helicopter Ben for nothing. All to bail out bad decisions by bankers drunk on fees from selling shoddy instruments. Again, never preventative, always reactive - Cramerica - by the corporation, for the corporation.

• The Fed has now offered $400 billion in short-term loans to help rescue the mortgage market, including $200 billion announced Tuesday, the $100 billion from the term auction facility loans to banks, and $100 billion announced Friday in loans to primary dealers in the bond market.
• Counting the currency swaps with the foreign central banks, the Fed has now committed more than half of its combined securities and loan portfolio of $832 billion, Crandall noted. 'The Fed won't have run completely out of ammunition after these operations, but it is reaching deeper into its balance sheet than before."
• The Fed could also simply buy agency or non-agency mortgage-backed securities under its existing authorities, but the announcement made no mention of that option. (that's next! and where will they get the money?? Do you hear those printing presses working overtime?)

MFA Mortgage (MFA) Cuts Leverage in Proactive Move

One stock that is struggling today, that should be rallying hard on this Fed news is MFA Mortgage (MFA) - it appears they are cutting back leverage in this scary market (which is a good, conservative thing to do considering how the mortgage REITs have been dismembered of late). With that said, in a normal functioning market, I'd be buying more of this position but since any company in this space could in theory be called to the carpet by random acts of fear, the use of logic is not working. Even management is indicating the same if you read between the lines; again when government backed debt instruments are flailing it is just scary - nothing is sacred. So I'll err on the side of caution and just sit this one out, even if I find this action to be very proactive. Funny how the market punishes the company for being pre-emptive. In a "normally functioning" market these shares are a complete and utter bargain. In "this market" any company could literally be $1 tomorrow if people begin to panic.

• MFA Mortgage Investments Inc. said it will sell assets to reduce its debt-to-equity levels, or leverage, amid continued stress in the financial industry.

• After the closing bell Monday, the mortgage real estate investment trust said that since Friday, it has sold about $1 billion in mortgage-backed securities, including approximately $950 million of securities backed by a government agency and $50 million of 'AAA-rated' non-agency MBS at a loss of about $15 million.

• MFA Mortgage also terminated repurchase agreements at no cost and about $525 million of associated interest rate swap agreements at a cash cost of approximately $31 million. The company said its available cash balance currently totals about $348 million, and its $19 million of unpledged agency MBS also is available to meet future margin calls.

• To date, MFA said it has satisfied all of its margin calls -- or lenders demanding their money back. "We have made this strategy adjustment because it is our view that credit conditions are tightening, rapidly and indiscriminately," the company said in a statement.

• MFA said that recent credit events impacting other leveraged public and private companies increases the probability of increased margin requirements in the future for all repurchase agreement borrowers, including MFA. In addition, the company is concerned about declining values for many financial assets including agency and 'Triple-A' rated MBS.

• The company forecast first-quarter earnings of 18 cents per share, up from 16 cents in the 2007 fourth quarter, but below analysts' consensus estimate of 24 cents per share, according to a Thomson Financial poll.

• "We have undertaken these actions to decrease potential future liquidity risks," MFA said in a statement. "We believe that while many financial institutions may face the risk of systemic margin calls, our strategy is to get ahead of the curve and reduce leverage consistent with our own discipline. We believe this strategy will reduce the uncertainty reflected in MFA's share price."

Long MFA Mortgage in fund; no personal position

Fed Rides to the Rescue

The most important news item of the day is today's progression to outright purchase of bad mortgage paper by the Fed. Today, we take 1 step closer to this ultimate outcome - now the Fed is going to allow banks to shovel off this bad paper for 28 days (loans) - while this creates great moral hazard, it is a lot healthier for the economy than simply cutting Fed funds rates to 0%. Investors are also probably very happy to see coordinated action by multiple central banks as it shows they get that it is not "contained to subprime" as a certain Fed chief of the most powerful country in the world said last year.

And yet again, the Plunge Protection Team (for about the 4th time since this tempest started last summer) has crushed shorts in pre-market. Thankfully for us, I lightened up my Ultrashort Financial (SKF) and Real Estate (SRS) positions as mentioned Friday (and I took a bit more off yesterday) as they were "relatively" outperforming Friday - only to continue their carnage yesterday. But frankly that was just good fortune. Many people would be pressing those short bets as the market looked on the cusp of breaking down, and now they suffer large losses due to an item outside of their control. That very easily could of been me as well, as I had about 13-14% of the portfolio in those 2 positions middle of last week - I do feel bad for people who continuously are getting killed by the Fed stepping in pre-market since I've been in their shoes the previous 3 times. Once again this shows, bear markets are not easy for either longs or shorts.

How long this rally will last will be interesting to me... and will it turn from short covering in the worst hit areas to geniune buying? I remain suspicious until proven otherwise... but in theory this move should help the banking system. Personally I wish the market had another really bad day so I could of bought positions I've been waiting on at lower prices. Now that opportunity appears to be gone, at least for the short run, thanks to the "Invisible Hand" (although today they were not that Invisible)

• The Federal Reserve on Tuesday ramped up efforts to provide more relief to squeezed financial institutions, a coordinated action with other central banks aimed at easing a global credit crises that threatens to push the U.S. economy into its first recession since 2001.
• The Fed said it will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks. The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the U.S. government.

• "Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

• The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers -- big Wall Street investment firms and banks that trade directly with the Fed -- with short-term loans of Treasury securities. They would pledge other securities -- including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannnie Mae and Freddie Mac -- as collateral for the loans of Treasury securities.

• The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008.

• The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit. A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust. Problems first started in the market for subprime mortgages-- those made to people with blemished credit histories. However, troubles have spread to other areas.

Long Ultrashort Financial, Ultrashort Real Estate in fund; no personal position

Barron's Cover Story: Is Fannie Mae (FNM) the Next Government Bailout?

Trying to sort through all the bad financials news today... from Countrywide Financial (CFC) FBI Investigation (as I've stated, they will find someone to put into jail for all this), to Bear Stearns (BSC) having liquidity concerns, to apparently the fears about Fannie Mae (FNM) raised from this Barron's cover story. Yep, letting the financial institutions self regulate is working fantastic! This Fannie/Freddie issue is a line item I've been raising for a long while (get your wallets out folks), but once again unless the Wall Street Journal or Barron's says something the herding sheep of Wall Street refuse to acknowledge it. So today's news apparently was a "shocker", and the stock was rewarded with a 13% loss. As I've been writing, to see such a steep drop in what is essentially a government backed institution is truly troubling...



...what I find most amusing is these 2 companies (along with Freddie Mac) are hobbling but our politicos think its wise to "stimulate" by raising the amount of loans they can take in, raise the type of loans up to $714K, and now recent proposals to allow them to offer mortgages with only 1.5% down. You'd think they politicians want to kill these 2 companies. Sort of the same foresight as the ethanol boondoggle. Well thankfully, they show great vision in all other parts of running our country (ahem)

• IT'S PERHAPS THE CRUELEST OF ironies that in the U.S. housing market's greatest hour of need, the major entity created during the Depression to bring liquidity to housing, Fannie Mae, may itself soon be in need of bailout.
• Fannie, of course, occupies a curious middle ground between the public and private sector as a result of its privatization in 1968 as a Government Sponsored Enterprise, or GSE. While owned by its shareholders, Fannie is regulated by a government agency and is able to borrow money cheaply, thanks to an implicit guarantee by Uncle Sam. It uses those funds to buy and securitize home loans -- lots of them. At year end, the company owned in its portfolio or had packaged and guaranteed some $2.8 trillion of mortgages or 23% of all U.S. residential mortgage debt outstanding.
• Of late, however, Fannie's prospects have darkened notably. The company (ticker: FNM) lost $2.6 billion last year as a surge of red ink in the final two quarters more than wiped out a nicely profitable first half. And by late last week, credit-market jitters had penetrated the once-unassailable hushed precincts of the market in Fannie debt.
• In the wake of margin calls on collateral at the investment concern Carlyle Capital, yields on guaranteed mortgage securities issued by Fannie and its GSE sibling Freddie Mac (FRE) rose to their highest level over U.S. Treasuries in 22 years. Likewise credit default swaps, measuring market concerns over the safety of Fannie corporate debt, have ballooned out to 2% of the insured amount from 0.5% just four months ago.
• But, if the truth be known, a considerable portion of Fannie's losses also came from speculative forays into higher-yielding but riskier mortgage products like subprime, Alt-A (a category between subprime and prime in credit quality) and dicey mortgages requiring monthly payments of interest only or less. For example, Fannie's $314 billion of Alt-A -- often called liar loans because borrowers provide little documentation -- accounted for 31.4% of the company's credit losses while making up just 11.9% of its $2.5 trillion single-family-home credit book. Fannie was clearly looking for love -- and market share -- in some of the wrong places.
• Likewise, Barron's has found other areas that may bode ill for Fannie's prospects. Its balance sheet is larded with soft assets and understated liabilities that would leave the company ill-equipped to weather a serious financial crisis. And spiraling mortgage defaults and falling home prices could bring a tsunami of credit losses over the next two years that will severely test Fannie's solvency.
• Should Fannie or the similarly hobbled Freddie Mac buckle, the government would no doubt bail them out and honor their debt and mortgage guarantee obligations. Fannie common and preferred shareholders would likely suffer grievously in such a scenario.
• POOLE HAS LONG BEEN skeptical -- correctly it turns out -- of Fannie and Freddie's ability to serve both God (their social mission of promoting liquidity and affordability) and Mammon (the shareholder and lush management compensation). At Fannie, a generation of Democratic Party insiders, such as James Johnson, Jamie Gorelik and Franklin Raines, made substantial fortunes in Fannie's executive suite. As Fannie Mae's top regulator, James Lockhart, pointed out in recent congressional testimony, the absence of debt-market discipline (the government guarantee makes Fannie and Freddie all but impervious to credit downgrades) makes pell-mell growth irresistible to shareholders and managers. Have a hunch, bet a bunch. (another case of heads I win, tails I still win! Seems to be rampant in our financial system)

If you want to read the specific balance sheet minutia feel free to click on the link to the article... for those of you who just care about the big picture, please prepare to send back that $600 to $1200 you are getting back from the government... they are going to need it back sooner or later ;)

No position

You Can't Make This Stuff up: MBIA Demands to Stop Being Rated!

I truly could not create a work of fiction like this. First of all, this whole rating agency game is a fiasco - let me give you the shorthand version. Basically a company who wants their financial instruments (debt) rated, goes to the bond insurers and PAYS them to rate their product. No conflict of interest, eh? So if you give good ratings you win more favor and more future business. That is step 1 of the hypocrisy. Now lately, these companies (the bond insurers) have maintained their (cough) AAA rating despite dropping 90% in stock value and going hat in hand to the market or (behind the scenes) to banks asking for infusions. They price debt at 12-14% interest rates which no AAA company would ever need to ask for.

Why is this all happening? Because without those ratings the bond insurers could not get new business - and banks, already suffering massive casualties on their balance sheet would be forced to write down even more - a position some could not handle. So the mirage of AAA ratings continues... all in wink wink style.

Now to the title of this entry... in something that is so outrageous you almost have to laugh, MBIA (MBI) has asked one of the main rating agencies to STOP RATING it. hah! "We don't like what you have to say about us, so please... stop saying anything!" or "If you don't have something nice to say about someone, didn't your momma tell you not to say anything!" Honestly, this is so amazing and speaks to the shockingly pathetic state of our financial system - the wink wink, nod nod system keeping it all going with duct tape and staples. But it is amusing if nothing else....

• In the latest salvo in a now highly public war of words, ratings agency Fitch said it will continue to rate MBIA Inc.'s subsidiaries without charge, despite the bond insurer's request that it stop.
• The increasingly confrontational dialogue was initiated on Friday when MBIA asked Fitch in a letter to stop providing some ratings on the firm. That letter, released to the public, also asked Fitch to return or destroy data MBIA had provided to Fitch.
• In response, Fitch CEO Stephen Joynt said the agency plans to keep rating the bond insurer and questioned the company's reasons for trying to end their relationship. "It seems disingenuous at best to assert in your letter to investors published yesterday, March 9, that you 'intend to work with Fitch to perform the analysis needed to rate MBIA's debt securities,' while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years," Joynt wrote.
• Most ratings agencies are paid by the companies they analyze. That's created the perception of a conflict of interest because agencies may be less inclined to come out with lower ratings because they don't want to upset the firms that pay them.
• Ratings agencies also get confidential information from companies to help them produce more accurate ratings. But when companies restrict information to some agencies, as MBIA is doing with Fitch, the system may become even more skewed.
• One way around that is to introduce rules that require equivalent disclosure. When a company provides information to one rating agency, it has to give that to all other regulated agencies too -- probably via some sort of database, Mason explained.
• MBIA's request that Fitch destroy information suggests the company is very keen to stop the agency from rating it in future, Mason said. "It's expected that this information would remain confidential, but to ask that it be destroyed is really going the extra mile to stop Fitch rating them on an unsolicited basis," Mason said. "This betrays the bias that's currently in the system," he added. "MBIA is saying that because you're not financially tied to us anymore, we really don't want you rating us."
• "This whole controversy highlights the problems that exist with the industry structure, whereby a company can silence a rating firm if that company doesn't like the rating that's being generated," Egan said.

And this folks, is your US financial system... sad to see how ugly it is once the tide rolls out. I cannot wait for the new era of Sarbanes Oxley type regulation we will be seeing... as always, instead of being preventative with smart regulation we will be overreactive and overreaching, after the implosion that hurts many. This is our way. But this type of story... well I could not even make this up... so outrageous.

Bookkeeping: Weekly Changes to Fund Positions Week 31

Week 31 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: XX.X% (vs 19.3% last week)
54 long bias: XX.X% (vs 68.3% last week)
6 short bias: XX.X% (vs 12.4% last week)

60 positions (vs 57 last week)
Additions: Homex (HXM), CVRD (RIO), Cleveland Cliffs (CLF)
Removals: N/A

Top 10 positions = XX.X% of fund (vs 33.7% last week)
XX of the 60 positions are at least 1% of the fund's overall holdings (63.1%)

Major changes and weekly thoughts
Please note I was not able to update my statistics this weekend so I don't have the normal data I usually post each week, since I am writing this after a host of new transactions Monday.

Since I am late and I don't have the data this week, I will keep this short. We've been waiting for a break, one way or the other out of this range we've had for 6 weeks. The longer the range the more powerful the move... it was only the direction that was in question but the macro situation in the economy would of pointed down. Ambac (ABK) bailout rumors could only keep this market staying up for so long... At this point we are testing January 2008 lows of S&P 500 1270 which is an area I've been pointing to as a retest area since we bounced off it 6 weeks ago. This is yet another inflection point as I like to call them - meaning, what we do here is mission critical. If we bounce successfully off this level that would be bullish, at least in the near term. But if we either (a) bounce off this level but come back to revisit it later that would be a "triple bottom" which almost never hold or (b) break right through that level, then things get very dicey. Speaking of the triple bottom this is what happened in early January - a double bottom was tested for a 3rd time, and was broken. You know what happened the next few weeks. But that is getting ahead of ourselves - we are not at that stage yet, right now we are simply on the first retest of an old low.




Once again, the flip from greed to fear in this market is astounding as in 2 weeks we've lost 100 S&P 500 points, or 7.2%. I truly believe the advent of the "computer age" with hedge fund computers doing 70% of daily trading causes things to move so much more quickly then they used to, during periods of extreme action. I also expect to hear about "forced redemptions" as (another batch of) hedge funds begin to go out of business, and selling their inventory at any price - this appears to be happening in the bond market - and we saw this sort of action in August 2007 when certain stocks imploded with vicious action.

If we do break this S&P 1270 level, where do we go next? We discussed this a month or two back but let's revisit

1. S&P 1225, or another 3.5% down (from Monday's close) which would take us back to Summer 2006 levels
2. S&P 1170, or another 7.9% down which would take us back to Fall 2005 levels
3. S&P 1140, or another 10.3% down which would take us back to Spring 2005 levels

Sound outlandish? What if I told you 3 months ago the markets would be down 20% from October 2007 levels? To me, this era is far worse than the tech bubble because while the S&P suffered at that time, the real carnage was in 1 sector of the market. Now, we do have true carnage in 1 sector as well (financials), but they are essentially the grease of the US economy. Then throw on top of that the first consumer led recession since the early 80s. Then throw on top of that inflation. Then throw on top of that a Fed who cares less about inflation. And it is just ugly from a macro view. I think the US suffers for quite a while although I expect Quarter 3 GDP to bring Kool Aid back to the market as those rebate checks get spent. The big wild card is what / when (not if) the ultimate government bailouts begin. I have to tell you the action in Fannie Mae (FNM) is simply amazing.... when pseudo government agencies are sold off like this, it truly creates fear.

For the fund, I've tried to keep as neutral of exposure as I can, considering I am a long biased fund. My game plan for now is as follows... assume there will be some bounce at the S&P 500 1270 level, and expand long exposure as we sell off. I plan to scale in, and hope to see some real weakness in my favorite names - the "generals" [Waiting for the Leaders to Fall Before I Buy in Any Scale]. Again this will hurt short term performance but it's been par for the course the past 6 months - take some hits during the teeth of the downturn as my top positions fall 8-10% a day sometimes, and then ride them up for even greater gains as panic subsides in the market. If I am wrong and 1270 does not hold, then buy back short exposure to help offset the next leg down. Again, we approach an important inflection point - one of many over the past 3 months.

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. Well, there is no other place to start than the saga that was Thornburg Mortgage (TMA) this week - it was a disaster and lost 90% this week. This was a 2% fund position that quickly disintegrated to 0.3%. Odds are better than average that the company could go bankrupt which is an amazing statement for a company which posted a profit last quarter. The herd killed this one, and the vultures are picking at the carcass.
2. Tuesday, I cut some of my commodity exposure both through crops and gold. While I think both areas are long term bull markets, the short term runs in these names has been a bit ridiculous and unsustainable so I locked in some profits by layering "out".
3. I cut back exposure in financial firm Blackrock (BLK) - simply the best house in the worst ghetto in the scariest city in the world - US financials.
4. After the market breached support Tuesday but was brought back to life YET AGAIN by the Ambak bailout rumor, I cut my DR Horton (DHI) position substantially, as the market looked poised for a fall, no matter how much CNBC tried to prop it up.
   
5. Thursday, Mercadolibre (MELI) had some great earnings and was up 9%. In this market, that's a gift so I sold half my position, anticipating a pullback.
6. Friday, after some serious selling over the past 2 sessions, I began picking among the rubble, finding some "sales" in Indian banks, Massey Energy (MEE), Chinese travel, and Illumina (ILMN)
7. I restarted a position in Mexican homebuilder Homex (HMX) - the company had great earnings, the stock punched upwards - in a bull market you buy that action. In this market, you just tap your foot and wait for the selloff - buy and hold simply dies in this market.
8. I bought another a layer of coal, but stated this would not be the ultimate bottom - simply adding layers on each drop. So here was a layer...
9. I started 2 positions in miners late Friday - a sizeable position in CVRD (RIO), and a starter stake in Cleveland Cliffs (CLF) - hoping for some more weakness to add to these positions.

This week I did a lot of allocation switches among the Ultrashorts, not mentioned above.

Wilbur Ross on Stagflation and Possible Bank Failures

I have to say it is almost funny to see how many people have jumped on the stagflation thesis I outlined last fall. Every financial TV show this weekend was trumpeting it - thanks for the update pundits! Just shows yet again, on Wall Street, people deny deny deny until the facts hit them square in the face. Ironically, of all people Greenspan had mentioned in his book the potential for stagflation [Greenspan Jumps on my Stagflation Thesis]. However, he said the Fed would need to RAISE rates to combat it - instead we lower rates - funny.

Now it is showing up everywhere [Stagflation - the New Sexy Word] [Stagflation Hits Wall Street Journal Front Page] - mostly out of the mouths of folks who denied recession not even 3 months ago, and told us once the US economy slows down inflation fears will go away. Remember, this is narcissistic thinking which I believe Americans really need to avoid. Even our "brightest lights on Wall Street" seem to have a world view where everything revolves around the US of A. Dangerous. The more years I spend watching Wall Street, the more I see it simply as "conventional wisdom" herd group think at its worst. The problem is the herd has so much money, they can gallop in the wrong direction as long as enough of them all stay together in a pack. Which is why you can be intellectually and factually correct on a thesis, but dirt poor - by the time the herd realizes the truth they will have destroyed your positions betting against them. Only when the facts overwhelm them will they change direction... otherwise, Kool Aid reigns supreme.

Anyhow, enough about Wall Street lemmings - let's listen to someone who actually makes money and runs businesses... Wilbur Ross. He seems to be on my bandwagon both in the stagflation camp (before it was sexy to be on that bandwagon), as well as commercial real estate slowdown (again, before it was sexy to be on that bandwagon), as well as more serious problems in the financial system ("it's contained")

• Billionaire investor Wilbur Ross says the current market downturn differs from previous slumps in that no American banks have yet failed this time, but he suggests that's about to change. "I think that's going to be the next wave, and coupled with problems in the commercial real estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC's "Squawk Box" in an exclusive interview.
• "I think that the big banks won't fail in the sense that they will go to zero and depositors would lose money," Ross replied. "I think the Fed and other regulators will make things happen.| I think it's the medium-sized banks, and particularly some of those that got overextended with the subprime and other kind of mortgage debt.| I think those are the ones that had the serious mismatch, making 20- and 30-year loans based on 90-day deposits."
• In the meantime, Ross said he didn't think the U.S. economy would recover any time soon.
• "I think at best we're in for stagflation," Ross said, referring to the combination of higher inflation and weak economic growth. "I think the consumer has been tapped out for quite a while and is frightened by the poverty effect of seeing the house go down.

Bookkeeping: Beginning Starter Stake in FCStone Group (FCSX)

I'll update this entry later as to why I am buying FCStone Group (FCSX) but in 2 weeks this stock has fallen from $50 to near its 200 day moving average of $38; roughly a quarter of it's value lost. I've been waiting patiently and am beginning with a 0.90% stake or about $9.6K to begin this position. This is an ancillary way to play the commodities boom.... Zachstocks.com has 2 excellent pieces here so I won't recreate the wheel - he basically outlined all the reasons I am interested [FCStone Article #1] and [FCStone Article #2]

More later.

Long FCStone Group in fund; no personal position

Bookkeeping: Purchases Today (A Whole List)

I am running behind and have not had a chance to do last week's transaction update.

Just quick thoughts... as we discussed last week "the generals" (leadership groups) need to be shot; which is now beginning - time to review the buying list we were making the past few weeks and begin purchases. Since I am still worried about further downside moves I am still buying in small scale, about $4-$5K lots but as I wrote last week, my strategy would be to layer in once the selling began, so things are playing out as I anticipated - and today is my first layer across many of my favorite groups. My plan is laid out in 'Thoughts on Fertilizer' which I wrote last week. Again, when we reach this stage that the leadership stocks get hit, I always have a very bad week in terms of fund performance but it's a necessary evil for longer term outperformance since it is impossible to call exact market bottoms. I plan to add the next layer of purchases either when stocks begin hitting lower levels of technical resistance and/or we have that "throw everything out" sort of waterfall panic selling.

This afternoon I have bought layers in

1. Russian mining/coal/steel Mechel (MTL) @ $123.70s - fallen to 20 day moving average of $125 - next target $113 or 50 day moving average
2. Gold miner Kinross Gold (KGC) @ $23.90s - fallen just below 20 day moving average of $24.20s - next target mid $22.00s which is the 50 day moving average.
3. Silver company Silver Wheaton (SLW) @ $17.20s - just about to hit its 20 day moving average of $17.00 - next target is $16.50s which is the 50 day moving average
   
4. Brazilian homebuilder Gafisa (GFA) @ $35.60s - fallen just below 50 day moving average of $36 - next target $33 or 200 day moving average
5. Fertilizer Mosaic (MOS) @ $96.10s - broken its 50 day moving average of $100. Next target is "I'll take it by ear", as the 200 day moving average is down at $65. I'll be hoping to layer in the $80s if the market pounds this one down.
   
6. Fertilizer CF Industries (CF) @ $105.90s - broken its 50 day moving average of $114. Same strategy as Mosaic.
7. Fertilizer Potash (POT) @ $145.30s - right at 50 day moving average. Same strategy as Mosaic - I would like to see more weakness here to add more.
   
8. Infrastructure Shaw Group (SGR) @ $56.00s - right at 200 day moving average.
9. Infrastructure Jacobs Engineering (JEC) @ 71.00s - this is actually a poor chart as the stock broke below its 200 day moving average of $73.30s
   
10. Iron ore Cleveland Cliffs (CLF) @ @105.90s - I just began this position Friday with a starter stake so I am doubling it with another 50 shares - the stock has broken its 50 day moving average of $109
11. Mining giant CVRD (RIO) @ $31.70s - I just began this position Friday with a pretty sizeable position when it hit its 50 day moving average of $33. It has now broken that level and 200 day moving average is in the $29.30s
12. Trina Solar (TSL) @ $29.30s - I can't give you any good technical reason to purchase this and it is at January lows. The sector is out of favor but I really liked the last earnings report and will begin expanding this position.
13. DryShips (DRYS) @ $61.10s - well this one was supposed to be a trade but it has moved so quickly I am going to be adding here. The stock broke its 200 day moving average of $70 (which is bad) but frankly this stock doesn't seem to obey technicals much. The stock went as low as the $50s in January 2008 so I'll be looking to see if I can add more there.
    
14. Chinese hog producer Zhongpin (HOGS) @ $10.30s - I don't use technicals as much for this stock as it is so thinly traded, but it broke its 200 day moving average of $11.25 and now approaches January 2008 lows.
15. Coal Consol Energy (CNX) @ $68.00s - broke its 50 day moving average of $72.40s; kind of in no man's land like Mosaic on the chart - a long way down before next support levels so I'll look for January 2008 as to where to layer in next
16. Coal Massey Energy (MEE) @ $34.30s - broke its 50 day moving average of $38.00; same comments as Consol Energy
    
17. Arch Coal (ACI) @ @44.90s - broke its 50 day moving average of $47.00; same comments as Consol Energy
18. Deep sea oil drillers Atwood Oceanics (ATW) @ $83.50s - broken below 50 day moving average and looks like a sure thing for 200 day moving average of $79.60s where I'll add more
19. Medical (gene) company Illumina (ILMN) @ $62.70s - this stock has been a tower of power, but finally is breaking down - I've been waiting quite a long time. I am not using moving average for this stock; instead there is a "gap" from early January when the stock jumped (and I sold most of my position) on settlement of patent issues. I am looking for that gap to be filled (a gap is simply when a stock opens at price materially higher than when it closed the previous day, creating a "hole" in the chart)
20. Apple (AAPL) @ $119s! For the first time in a long time I like the action in Apple; the chart is a complete disaster but it is holding up relatively well. I am still hoping to get more under $110 but this is one of the best franchises out there and all the hand wringing over iPod this or iPhone that, misses the bull market in Macs as they take over market share.
    

Again, these are not huge purchases individually, and other than Cleveland Cliffs and CVRD which I just started positions in Friday, I layered "out" (sold partial positions) at higher prices so I am buying back lower and adding exposure. This is essentially an "allocation" switch from cash to long positions. I have about $40K left of cash. While this selling is bad, it is necessary - and we still have not reached in my opinion a panic stage... when I see most of the names above down 10-12% I'll become more convinced. Must that type of selling happen? No, but it would be typical of action of past 6 months.

Overall, I am pretty much where I want to be in coal in terms of fund exposure (filled to the gills). I still would like to add materially to my fertilizer exposure but want to wait on better pricing (lower). There are other stocks, sectors faltering but right now I've added to about 20 of my 52 long positions... I am focusing on the same groups, commodities and those companies either based outside the US or are not reliant on US customers for majority of business. That will be consistent for a long while in the fund.... especially hits home as I drive by all these gas stations at $3.30 and keep reminding myself not to buy the retail Kool Aid... so many Americans live paycheck to paycheck and inflation will be gouging them. It is going to a very rough year in our "real" economy I am afraid. Again, don't believe the hype (most) stocks are "cheap" - that is based on 2008 earnings - all these models have 2nd half of 2008 BOOMING. That's complete fiction. When these 2nd half 2008 earnings get slashed and the Kool Aid is replaced by reality - we might be able to bottom.

We quickly approach S&P 500 level 1270. Again, if this level breaks, all bets are off.

Long all names mentioned in fund; long Mosaic and Trina Solar in personal account