Financial Turmoil Raises Worries of Deeper Recession

It is funny to watch the masses turn to your view, over time. Last fall during the September/October "Fed will save us" rally I was typing almost daily that I had no idea why the market was rallying into the face of the coming financial crisis & recession. No investment bank economist even dared say recession until December 2007, and even then most pundits began the "2nd half 2008 recovery theme" all over the media. I shook my head through it all. Still do. I could STILL be wrong about a deeper, and more severe consumer led (regional) recession (first since early 80s) I see coming BUT some other minds are now jumping to my long held theory - joining Grantham, Soros, Robertson, Roubini, Schiff, TraderMark ;) (what a group!) [Feb 18: Jeremy Grantham has Some Sobering Words for "2nd Half Recovery: Crowd]

Now I must say, this is what the market SO difficult. Me, and my crowd above, could be dead right but it doesn't mean the herd on Wall Street will take the market down - as long as the HERD believes in the "2nd half recovery" and/or their constant commentary of "everything will be fine in 6 months" (a line they have been using since early August 2007) we will continue to get these Kool Aid rallies. And that is why investing is so difficult - you have to predict the herd... which is unfortunately (in the near and middle term) more important than reality of the longer term. So even if you are correct on the 2nd half being a dud, it does not matter as long as the herd believes it. And this is why we get such abrupt changes in the market direction - we deny deny deny... and then when something so huge hits that one can no longer deny we change 180 degrees on a dime, and panic sell. And keep repeating the pattern. Guessing when the mood changes from denial to reality is impossible. And it happens literally overnight.

Anyhow, in this article I was bemused to see the Greenspan comments. 4-6 weeks ago he had a 50/50 chance on the US even entering a recession - now he says "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II."

See this is the way of Wall Street - until the bad stuff hits them square in the jaw, they deny deny deny. Everything is about hope. Because hope breeds more transactions and in the end it's all about a used car salesmen (see all those mortgage backed securities dealers) with MBAs selling stuff. It is hard to sell stuff when you bring reality to the table - so you bring hope... poor Alan doesn't even work on Wall Street but even he has been infected with the hope trade. Now, what I *can* see happening is this scenario - the "double dip recession" - the current recession (regional), and then the government stimulus plan bringing us back to positive GDP in 2nd half 2008 where every market pundit in the world will say I TOLD YOU SO! And then we move back to our normal programming of recession in very late 2008 and into early 2009. But again, I already called for another stimulus plan coming the minute the last one was announced, within a year... so they will continue to spend money to keep the business cycle from happening. So depending when THAT stimulus plan is sent to us, I will hold off on making any longer term predictions past Q3 2008. Maybe they will send us $400B in the next stimulus plan... I mean all it takes is printing money. That's not inflationary by the way ... and now that the Federal Reserve has put the world on alert its going to fight inflation, you better sell your gold. ;)

But don't worry folks, the unemployment report (per our government) says things are fine - heck below 5% - I have no idea why people in their 40s and 50s need to move back home with their parents in unprecedented levels (let me assume their parents grew up during the Depression and have their home completely paid off - unlike their overconsuming kids who spend 110% of their income each and every day because they "deserve" it.)

• It's been almost an article of faith: Any recession this year will be mild and brief. But now the stunning meltdown of a top Wall Street investment bank and stubbornly persistent financial market turbulence has called that into question, raising fears that severe problems in housing and the nation's bedrock financial system could cripple the economy and wallop many millions of Americans. (no the first article of faith is there will be NO RECESSION, this is just a financial issue that will solve itself with a few write - offs; only in the past 2 months have we moved to a "mild and brief" recession and "everything will be fine in 6 months". But the word FAITH is accurate - instead of using logic, if you use hopeful wishing, people in NYC hope they can get their desired result)
• No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II. (He sounds like he is stealing direct from George Soros)
• Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.
• A growing number of private economists already have a downturn figured into their forecasts. They are generally calling for a mild recession that will end this summer when the economic stimulus checks going to 130 million households start getting spent. But the severe credit crisis that erupted last August -- and claimed its biggest victim this past weekend with the forced sale of Bear Stearns Co. -- is raising doubts about those mild forecasts.
• More turbulence is expected in coming weeks because there remains a great deal of uncertainty about how many more victims the credit crisis will claim. (I believe the next wave of damage will be the hedge funds - this volatility we've seen the past few weeks is the type that will knock out over levered funds left and right; we've seen a few go out lately like Carlyle Group and Peloton Partners; even Goldman's flagship Alpha fund is having a terrible time of it - if the smartest guys in the room struggle, a lot of "me too" hedge funds must be getting smashed - especially as the commodity trade they piled into blew up on them last week - they are nothing if not momentum chasing locusts. But don't worry folks, and please don't shed any tears - these failed hedge fund managers will get a new round of money and they can start anew in 2009. Because they are just that smart - after all this was a once in history event - just like the last bubble, and the one before that, and the one before that - could never ever happen again. Until 2013)
• "We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."
• David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period. (Agree!)
• The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.
• By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output.
• While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed. (Bingo again guys - I see a lot of people have been reading the blog hah)
• Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.

All these variables make it hard to predict the future economy - as I said, with all the King's Horses, and Men passing future stimulus plans and buying up mortgages direct, we could have a very different outcome than I state now. After all, when the tax payer takes all the losses (or the taxpayers grandchildren I should say) we can keep kicking the can down the road....forever? Or at least until foreign governments stop buying our Treasuries. But maybe we can keep doing this for another full decade. Or at least until the next crisis in the middle 2012-2013 level where we will blame the policies of today for that unraveling. And issue more paper currency to bail us out of that crisis.

Notice a pattern folks? As Ron Paul says... we refuse to take our medicine. So the inevitable day when the medicine must be taken, I hope we are not giving those drugs to a cadaver. Each iteration of the disease takes even larger amounts of drugs. Eventually the level of needed "treatment" will kill the patient. But let's keep kicking that can down the road. And trust me, all this will be forgotten in Q3 2008 when the GDP bumps due to the rebate checks... because ignorance of long term issues is the way to play - just keep kicking the can and keep creating paper money to solve all our problems.

A Historic 9 Days for the Federal Reserve

I've kept writing since a week ago Tuesday, these are some of the most incredible moves we have seen by the Federal Reserve. Even though we've discussed them a week ago Tuesday [Mar 11: Fed Rides to the Rescue], last Friday [Mar 14: Bear Stearns Getting Secured Financing from JP Morgan and NY Fed], Sunday evening [Mar 16: More Fed Actions!], and even Friday when the Fed put a cherry on top [Mar 20: What the Banks Want the Banks Get - Fed Expanding Junk It Will Take In] - it is worth putting them all in one story and for those newer to the market realize the historic level of "free market" interference that is happening. While Wall Street equity traders cheer (as they get their tax payer backstop), a US citizen must ask what is the Federal Reserve finally seeing that is scaring them into such historical action? Probably the same things the Roubini's of the world have been warning [Scary Stat of the Day: Roubini Calling for $1 Trillion-$3 Trillion in Losses] .... that should scare people, but instead it emboldens them to take more risk. This is the true meaning of "moral hazard".

Moral Hazard? Will this change Wall Street's ways? hahah - you made me laugh. Not in this compensation system in America where in CEO roulette - heads you win, tails you still win. Especially not in the financial system where heads you win, tails you win, and if it lands on its side the taxpayer pays the bill! [Wall Street Culture Not Likely to Change] And the Federal Reserve is helping it all along - such nice people. See, this is the irony in it all, there is no way for these people to lose. None. Never. The banking system is the US. It cannot be allowed to falter - it is now intertwined to such a degree (and levered!) nothing like the early 90s S&L bailout (when 1000+ S&Ls failed) could be allowed to happen. To do so, risks global collapse. So keep taking risk, keep rewarding yourselves with tons of bonuses and pay outs, and then when a few go under the underlings/peons will lose their jobs and 401ks, but the taxpayer will make sure the system keeps on ticking? And don't forget those retention bonuses to keep those excellent risk managers in their CEO/CFO/CIO posts. Excellent.

• And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won't have that much of an impact on how Wall Street conducts business.
• In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game.
• Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn't appear to have learned much from. Krosby noted the go-go Internet days -- when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don't put a lot of money into a venture that isn't on fairly solid ground -- but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.

The biggest risk now is if these moves truly don't put a backstop under the situation - I've been saying for a while now the implicit trust that the Federal Reserve can fix everything is really all that buffets this market from a much larger fall. I have no idea if the Federal Reserve is big enough and can print enough or it's actions are enough to support a multi trillion global shadow banking system. But they are trying and the actions truly are unprecedented in scope. For now they seem to have restored the feeling that everything will be ok. But the story is not over yet - we'll see how things continue to play out.

• The Federal Reserve has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy. The central bank acted with speed the White House and Congress only could envy.
• The Fed is largely free from many constraints that bog down other policymakers. Also, it is the only U.S. institution with the authority and ability to create money out of thin air.
• For now, the steps orchestrated by Chairman Ben Bernanke, in the first critical test of his leadership since succeeding Alan Greenspan in early 2006, are earning praise from the Bush administration, Congress and presidential contenders Barack Obama, Hillary Rodham Clinton and John McCain. (of course they are, bailout nation - we do NOT care who pays the bills, the grandchildren and their grandchildren can worry about it - all we care about is political polls in the here and now)
• But the Fed's moves are raising questions about whether its regulatory powers, established in the early 20th century, need overhauling and whether it took on some responsibilities that Congress and the administration should have shouldered.
• "I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."
• Congress created the Fed in 1913 to prevent financial panics such as runs on banks and set it up as an independent entity. Its powers grew in 1933 and 1935. Although the Fed is subject to congressional oversight, its decisions do not have to be ratified by the president or Congress. Fed officials are not paid with money appropriated by Congress.
• The system includes 12 Reserve Banks in major cities. These banks have their own boards of directors, two-thirds of whom are elected by commercial banks in the region and one-third by the Fed board in Washington.
• In a remarkable week, the Fed: (1) engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan. (2) offered emergency loans to other securities dealers under terms normally reserved for regulated banks. (3) slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September. (and you forgot about the late Thursday actions of increasing the type of junk they will now allow the financial institutions to offload into the Fed balance sheet; and don't forget last week's $200 Billion action)

An interesting "opinion" (or fact?) piece on CBSMarketwatch.com

• In a financial crisis, the Federal Reserve has an obligation to become the lender of last resort, making cash available for banks that need it right away to prevent a systemwide meltdown. But for this crisis, the Fed has become the lender of first resort to a whole new group of financial institutions that are relying on the central bank to boost their profits.
• Instead of lending only to firms that cannot find money elsewhere, the Fed apparently is lending to firms that can get the money elsewhere, yet at a higher cost than borrowing from the Fed. I say "apparently" because almost everything about the Fed's new primary dealer-lending facility is secret.
• The New York Federal Reserve Bank, which runs the program, would not comment about who is borrowing or under what conditions they are borrowing. The only information that was from the Fed came Thursday in the weekly report on reserve balances, showing that the 20 primary dealers borrowed $28.8 billion on Wednesday and about $19 billion on Monday and Tuesday.
• What executives have said, however, indicates that these firms are violating the spirit, if not the letter of the law. A spokesman for Goldman Sachs for instance, told MarketWatch's Alistair Barr that the firm has borrowed from the Fed and intends to do so again "if doing so makes sense from an economic and funding-diversification point of view." He said that the Fed was a good "alternative." In other words, the Fed is just another source of money for Goldman, and not the only one. Because the Fed's only charging 2.5% interest, it's a very "attractive" source of money
• The Federal Reserve Act, the legal authority that makes the Fed a more honorable institution than the Mafia, states clearly that the central bank may lend money to companies that are not "depository institutions" (in other words, that are not commercial banks) only if that firm proves to the Fed that it is "unable to secure adequate credit accommodations from other banking institutions" and only "in unusual and exigent circumstances." On Sunday, the Fed board voted unanimously to declare these to be "unusual and exigent circumstances."
• It's a judgment call by the New York Fed as to whether these firms can find credit elsewhere. In the middle of the worst liquidity crisis since the Great Depression, the New York Fed is understandably bending over backwards to supply credit now and ask questions later.
• Being the lender of first resort could make the Fed's goal of stabilizing financial markets harder to achieve, because the Fed could be crowding out private-sector lending. How can anyone compete with the central bank? Any firm that doesn't have access to the Fed's cheap money is at a serious disadvantage.

Another article: after reading this it looks like this man is going to be the next Fed Chief .... he is doing the dirty work behind the scenes and already he appears to be the best friend of NYC banks so who better to fill their pockets to the brim in the future?

Bank of England, Federal Reserve Deny Mortgage Security Buyout Plan

Where there is smoke there is fire. Don't believe it is NOT being talked about.

I said last summer/early fall of last year, this will be the eventual end game - direct purchases of home mortgages (the Federal Reserve currently can't do it by law) but by some arm of the government.... it sounded ludicrous then. I mean back in August everyone was assuring us this was 1x writeoffs - the correction in financials was the "kitchen sink quarter" and to "buy, buy, buy!". "Subprime is contained". But as the credit morass spreads, the depth of the web of interconnected dominoes is revealed, and the desperation by public officials, both elected and non-elected, in a presidential year increases, I thought this would be the likely "end of the cycle". In the past 14-21 days it is starting to pop up as a "solution" from the mouths of many others. As always, I'm early....

Once again, let me say when (ahem)/if this happens, the stock market will probably put on a 15-20% move instantly as we then move to socialize all losses from the risk takers to the tax payers. Wall Street will win again because the financial system can now take any risk they want, as they cannot be allowed to fail.

• LONDON/WASHINGTON (Reuters) - The Federal Reserve and Bank of England denied a report on Saturday that they were in talks over possibly using public funds to make mass purchases of mortgage-backed securities to ease the global credit crisis.

• However, the Bank of England said it was considering a number of other, unspecified options to address the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

• The Financial Times, without citing sources, said central banks on both sides of the Atlantic were in talks about the feasibility of buying up mortgage-backed securities -- key financial instruments which have plunged in value in recent months, wreaking havoc on banks' balance sheets and shares. "Central banks, including the Bank of England, have been looking at ways to ease the strain," a BoE spokesman said. "The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."

• The Financial Times had said the talks between central banks were at an early stage and part of a broader exchange on how to restore stability to financial markets. It said the BoE appeared to be most enthusiastic to explore the idea; that the Federal Reserve was open to the idea in principle, "but only as a last resort," and that the European Central Bank was less keen. (did you ever imagine the day when the US was more socialistic than greater Europe? Desperate times call for desperate measures - but this free market capitalism baloney is being exposed for what it is - on the upside it is great, but once regulation, massive risk taking, and huge transfers of wealth play out - the common folk will be asked to pay the bill)

Former Treasury Secretary Robert Rubin says it's time to use public tax dollars to bail out the banks from their lightly regulated, risk loving actions. Of course it would help Citigroup which he is closely associated with; and anyone running Citigroup obviously is unbiased (not to mention did a great job managing risk in the past 5 years)

• Former Treasury Secretary Robert Rubin called Friday for quick government action to tackle the rising level of U.S. home foreclosures and he indicated that taxpayer money would have to be used.
• "There is a strong need for urgent action," Rubin, who is chairman of Citigroup's executive committee, said. "I would be very, very seriously considering the possibility of using public funds in one form or another." The Federal Housing Administration should be involved in any stepped-up government effort to help homeowners facing the loss of their houses, Rubin said during an interview on Bloomberg Television's "Political Capital with Al Hunt."
• He praised the Federal Reserve for the steps it has taken to help the economy and to ease strains in the financial markets. "The Fed has done a very good job," he said. "The Treasury, working with the Fed, did the right thing conceptually in rescuing Bear Stearns."
• Rubin said that securities companies should be subject to the same regulation as banks now that it has become clear that they would get the same government support. (yes that would be nice - I mean now they get funds from the tax payer, yet none of the same regulation as the direct lending institutions - talk about a perfect world for the investment banks)

Alert: Commodities are Dead

.... or so you'd believe if you listened to the financial news media this weekend. Wow, I have never seen such an about face based on 2-3 days of trading action. No wait. I have seen such about faces - every other month. It is simply amazing to watch these people abandon this trade in such force; many of whom were touting it up to.... last week.

I still cannot get over the defense of the dollar due to the Fed (a) "only" cutting 75 basis points instead of 100 basis points and (b) putting more language about inflation into it's statement. So the fact the Fed took a massive slash to interest rates (75) instead of a historic cut (100) indicates they are now defenders of the dollar and not inflating the currency into a hand basket? Got it. And now that they put words into their statement saying they are watching inflation (similar words to what they had all last spring, and summer) now means they are at the ready to fight inflation? By what means? Raising interest rates? Hold on why I laugh over that. So the theory is the Fed is now suddenly going to fight inflation or will in 3-6 months, correct? So they will be raising rates to offset global inflation in the teeth of a US recession. Ok, I get it now. But this is the "thinking".

Now the dollar has other reasons to rise - namely one I have been posing which is Western Europe is posed for a slowdown (along with Japan), so the dollar could rally not on the "upcoming strength and inflation fighting by the Fed" but on a RELATIVE basis to other countries which will be entering recessions (or at least slowdowns). That theory at least I can understand. I call it the 'race to the bottom' theory - i.e. who is in the worst economic shape and hence should have an even weaker currency than the other. But a 2-3 day countertrend move, or even 2-3 week countertrend move does not make a sea change - despite the claims to the contrary. And once again, if European banks need to cut rates and inject liquidity it simply creates more paper money circling the world, which is still positive for commodities... but since we only think in "dollar" terms, that's the focus. Nothing goes straight down - but I expect to the dollar to continue to be weak over decade(s) (?) until we begin addressing the structural deficits in this country. But that doesn't mean it cannot rally for 3 months at a time. And keep in mind, we will have another fiscal emergency in about 2012-2013 time frame? Why? Because we are recreating conditions for it by following the exact same policy that got us here in 2001-2002. So we'll once again be bailing out something and flooding the system with liquidity in half a decade. Those who do not learn from history....

Now a much darker view for the downturn in commodities? Worldwide serious recession, combined with deflation. That is still an outlier view and not something I am ready to get behind - but if we reach that stage your stock investments or the price of gold will be the last thing you'll have to worry about. But that's another "theory" I am starting to see inklings of...

I don't know where commodities will be in a week or two, but I've been touting my "World of Shortages" theme and have my theories on where they will be in 3 year, 5 years, 10 years - this could be thought along the lines of Malthusian economics

Malthusian catastrophe, sometimes known as a Malthusian check, Malthusian crisis, Malthusian dilemma, Malthusian disaster, Malthusian trap, Malthusian controls or Malthusian limit is a return to subsistence-level conditions as a result of agricultural (or, in later formulations, economic) production being eventually outstripped by growth in population.

This is a long, long, long term view. And it relies on world population trends, along with the thirst for many of the world's poor (which is still the vast majority of this globe) to enter the bottom of middle class.

In February 2008, the world's population is believed to have reached over 6.60 billion.^[1][2] In line with population projections, this figure continues to grow at rates that were unprecedented before the 20th century, although the rate of increase has almost halved since its peak, which was reached in 1963, of 2.2 percent per year. The world's population, on its current growth trajectory, is expected to reach nearly 9 billion by the year 2050.

So we have to feed another 2.5 billion or so within 40 years. (2.5 Billion would be equivalent to a new China, and a new India born in the next 40 years). And even if you think those numbers are baloney (myself, I think limitations on water supply will be restricting growth perhaps by famine or wars), if even 300 million people a decade move from "3rd world" to "2nd world/1st world" you have to feed (and provide energy) for a "poor man's United States" population every decade. (why do I say poor man? Well no one can consume like the good ole American - but even if they consume like the good ole Swede or South Korean, it's going to be a unheralded strain - if these people want to consume like Americans we can just forget any chance of planetary survival - thankfully there are only 300M of us). That's without any new population entering the world. Granted, Wall Street's view of long term is "next week", but without significant technological breakthroughs we have some major issues. We are well on the way to cleaning out our seas of foodstuffs. So more and more reliant on land foodstuffs. Or perhaps some sort of medical plague will wipe out a few hundred million (or more) as Mother Nature accomplished 700 years ago as a way to cull the human herd.

Now, did the hedge funds go overboard? You bet. Are we done going down? No idea, most likely not because everything overshoots. But a solid 15-20%+ correction in a long term uptrend is reasonable. Granted we already have 10%+ in 3 days - hence how horrific the fall has felt. People have been piling in these trades as "weak dollar" plays; I've been pursuing them as "World of Shortages" plays, with the weak dollar as an added bonus. Further, taking into consideration potential worldwide slowdown (even the best Asian economies slowing by 4-6% GDP points) I have been avoiding for the most part oil, and base metals such as copper. Those should be the most economically sensitive. I do have iron ore for a specific reason - fixed negotiated prices (+65%) that last a year (I love future visibility). But right now in this homogeneous hedge fund view where oil = corn = dairy = gold = copper = wheat = copper = palladium, any nuance is lost. I've been focusing on agriculture as my #1 long term bull market. People will eat no matter the economic outcome on the globe; and the fortunes of many in the developing world will still be on an upward slope as those in developed world suffer (remember where all the cash in the world is going to = petrodollars and countries with huge trade inflows). But right now a bushel of corn might as well be a barrel of oil to the unregulated pools of money running the world's investing. And when they move like a horde of locusts you get burnt in the short run.

Thinking back to last week, I have had very little oil exposure because frankly the stocks were not confirming the great strength in crude oil pricing. I had about a 2.5% precious metal stake. I did have a large agricultural stake but always will for the foreseeable future because that to me is the true commodity trade. I have begun some mining exposure in the past few weeks on weakness, mostly with iron ore exposure. I have had for a long time had coal exposure because I don't think the energy crisis is going to change anytime soon and relative to crude, coal is a steal. Speaking of... I've mostly avoided steel despite it's great strength. So that's how I entered the weak, and I simply added (mostly) to the agriculture exposure because even though I have a large exposure it is far below what it's been in the past as I've been waiting for a pullback. I've also doubled the precious metal exposure to about 5%. And with the pullback in some of the iron ore names, I've added there as well. Coal I've already had a large stake.

So again, would a 20% pullback signal the end of days for commodities. If you listen to the financial media this weekend, yes, and everything is heading back to 2002 levels. But then again these were the same folks who missed the whole housing bubble, missed the credit implosion, denied recession as even a possibility until December 2007/January 2008, and missed the first 80% of the move up in commodities (most jumped on the bandwagon right around February 08). So I have about as much confidence in the pundits accuracy as I do in Standard & Poors (who is out Friday warning about investment banks - GEE THANKS)

Can I be wrong? Always. But running independent to Wall Street herd usually works out very good in the long run, even if it provides pain at times in the near term, when the herd turns against you. Maybe another week or two of weakness for commodities in my book but nothing the US is doing is showing me they care one iota about the dollar or inflation. And with a slowdown in other world economies, and potential for 75% of world GDP (W. Europe, US, Japan) I see a lot of money creation by central banks still to come as we no longer allow the business cycle to work in this world...

Bookkeeping: 'Rising Tide' Performance Week 33

Week 33 performance of the mutual fund

Comments: I did not like Week 33, Sam-I-Am. I did not like it in a box, I did not like it with a fox. I did not like it in a house, I did not like it with a mouse. I did not like Green Eggs and Ham, I did not like Week 33, Sam-I-Am.

What more can I say? Thank god it was not a 5 day week, the way it went? 33 used to be my favorite numbers since that was my ACT score. No longer! I refute you, week 33. Sam-I-Am. I'll give the market credit, it pulled the same stunt on me in weeks 23 (fund lost 4.4%, trailed market by 3.5%) and 24 (fund lost 10%, trailed market by 5%) at the end of January when everything I was not in ramped, and everything I was in tanked, providing a double whammy. You can see it in my performance chart where the fund NAV (orange line) took a nose dive in mid-late January 08. So I gave up 8.5% of outperformance in those 2 weeks alone; now the market is so 'efficient' it was able to take all that away from me in 4 days. How's that for brevity - she did not take long in putting me in my place. While this was not the worst week of fund performance on an absolute basis, it was far and away the worst relative to the markets.

An easy explanation for this week's results - everything I own was pounded; I was on the wrong side of almost every trade. Simple enough. Sadly, I warned of this in last week's summary - each time I really begin to pull away from my index measures (which I try to beat by 15% a year), I promptly get nailed shortly thereafter. Like clockwork - November, January, now March. I wrote

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.

Definitely frustrating on one level, but short of a wholesale change in the portfolio from what has been working 90% of the time to "the worst of breed sectors" financials, homebuilders, and retailers at exactly the correct moment - it is simply unavoidable. Shockingly, I entered the week with nice short exposure, nice cash cushion and a much decreased commodity exposure than I had say 3-4 weeks ago. Yet still these type of results. But this week was the historic type of commodity correction in terms of how quickly and how fierce it was. I keep using the word historic and unprecedented - these are simply volatile times and so much capital flows from 1 area to the next; when these hedge fund computers change direction it's 60 mph on a dime.

With that said, a lot of air was taken out of these holdings this week which is a good thing; and a lot of people who just joined the party in the past month and bought high have been burned and probably won't be returning anytime soon... also good in my book. Obviously we don't know how much further this correction will continue but with the severity and intensity we've seen; hopefully a good portion. I am not taking too much stock in the selloff here - simply put the hedge fund community has created massive imbalances everywhere they go, when they take their ball and go home, it leaves a huge vacuum (and prices go into free fall since there is little support) which affects prices in the near term - but I don't see any changes to fundamentals in coal, fertilizer, crops, etc so I am sticking to my guns with these names even if it brings more short term volatility. As I said in November 07 and January 08, these purchases in the thick of the selloffs are what generate the best returns as you go forward a month+, even if they just add to your short term misery/poor performance. If I think Mosaic is a $120 stock I should be happy to get it at $100, and thrilled at $90. So again, we will take these lumps but we knew it was coming at some point - just not all in such a compressed period, but these are the markets nowadays - time is simply compressed. Big rallies last hours, before turning into huge selloffs, before turning into large rallies.

I wish I could give you some forecast on this market but there is little to no sense on a day to day basis. Things change 180 degrees from day to day - or hourly. We appear to be nearing that resistance of S&P 1330 again and if it breaks we go to S&P 1360 but I believed that Wednesday as well, and we promptly lost 300 points on the Dow within a few hours. So we'll take it day by day in this market that continues to have no rhyme or reason.

Rising Tide Growth Fund lost 5.4% this week, losing money both in absolute terms and even more severely in relative terms (vs indexes) as the S&P500 gained 3.2% and the Ruseell 1000 gained 2.9%. Essentially, we are back to week 26 levels of outperformance and gave back (hopefully temporarily) 6 weeks of gains versus the indexes in these 4 days. But we still hold that goal of 15% yearly outperformance by the skin of our teeth. Tough to give back all those nice gains in 1 week, but this is the will of the market - we'll continue to plod forward in a very tough environment.

Price of Rising Tide Growth: $10.587
Lifetime Performance to date (vs Aug 3, 2007): +5.87%

Comparable S&P 500: 1,329.51 (-9.26%)
Comparable Russell 1000: 722.52 (-9.25%)

Fund return vs S&P 500: +15.13%
Fund return vs Russell 1000: +15.12%

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

What the Banks Want; the Banks Get - Fed Expanding Junk It Will Take In

The past 9 days have truly been historic - no one can now say the Federal Reserve is not Wall Street's... err... umm... friend. (I was going to use a different term). On top of all the other things, word is now out that even lower quality paper will now be accepted by the Fed... and Wall Street is loving they are getting their way - Merrill, Morgan, Lehman - up 10% across the board... truly a new era the Federal Reserve has embarked upon in the past week and a half.

The Federal Reserve is starting to look like the junkyard in Sanford & Son - but are we really surprised? Anything for NYC Bankers. (I can only imagine what the folks at Bear Stearns must be thinking to see their brothers waited on hand and foot)

• The Federal Reserve's first Term Securities Lending Facility (TSLF), to be held March 27, will be worth $75 billion and will expand on the types of collateral accepted, the New York Fed said on Thursday.
• The expansion in the array of collaterals can further help primary dealers, TSLF's targeted borrowers, to repair balance sheets that have been slammed by mortgage-backed securities that soured during the housing slump.
• In the debut TSLF auction, the Fed can now accept so called Schedule 2 collateral rather than the more narrow list of Schedule 1 collateral. Schedule 2 collateral includes agency collateralized mortgage obligations and triple-A rated commercial mortgage-backed securities, as well as previously announced private-label triple-A residential mortgage-backed securities, the New York Fed said. (triple A, wink wink - as in Ambak is triple A)

My favorite quote came from the Bloomberg story on same subject

The changes came after ``extensive consultation with market participants,'' the New York Fed said in a statement today.

Translation: Whatever they ask for, they get.

So up to now I have been pooh poohing the "Don't Fight the Fed" mantra but it's getting to the point that whatever the bankers want, the Fed will give. So as I stated yesterday, we might be nearing that stage with financials that we face with homebuilders - the news flow will continue poorly for months on end - the names will remain volatile with large swings up and down until everything is absorbed - then they will trade sideways for a long while.

I really need to get my own Federal Reserve - it is like having your own personal fairy godmother - they are here to make all our wishes come true. Now we only have 1 wish left to go - stop making us take the junk back on our balance sheet every 90 days and just buy it outright. Every other wish has been granted.

Up 400, Down 300, Up 200

That's just the last 3 days of trading....

This is starting to get very old...

...bipolar market. No rhyme. No reason. Just volatility.

Apple (AAPL) Mac sales up 60% in February

I haven't talked about Apple (AAPL) in a while. When last we left Apple, hand wringing over iPod sales this or iPhones sales that, led to a tremendous selloff. I was commenting how everyone is missing the forest for the trees - the real story of these products is the halo effect of bringing customers to the bread and butter of the company: the Mac. But then again I was shouting into a stiff wind and the herd ran me over. They had no use for that logic. But I still like this company as the de facto consumer entertainment convergence play; although I needed to sell some today to layer into the demolished commodity space.

Why still like Apple when the consumer is dying is one of my themes? Well, not every consumer - especially the "snobbish" Apple consumer ;) The upper 10-15% will still be fine... and for the other % of society? Well the last things people will give up are video games (see Gamestop's latest results), fashionable gadgets, and $200 jeans for teenagers. It would take a full out depression for teenagers to stop buying those jeans - I still contend American parents would rather give their kids money for expensive clothes than buy something for themselves - so they will cut that last. As customers retrench, spending on restaurants goes down but things that help us cocoon or still have brand 'cache' will hold up the best. And Apple is increasingly turning into an international story.... So it's not all blight out there - even from this corner of the blogosphere. Macs seem to be booming...

• The report shows growth in Mac unit sales up 60 percent from 2007 and growth in dollar terms up 66 percent. That’s considerably higher than Pacific Crest’s estimate of 10 percent, according to the same report.
• AppleInsider’s chart of the NPD data is pasted below the fold. It shows Apple’s share of the U.S. PC market growing from 9 percent in Feb. 2007 to 14 percent in Feb. 2008. In dollar terms, NPD has Apple capturing a full 25 percent of the U.S. computer market last month.
• Meanwhile, Piper Jaffray’s Gene Munster analyzed NPD’s February report on the iPod line and projected sales between 9.7 and 10.5 million units for the March quarter. The midpoint of those two figures would equal a 4 percent drop from 2007, considerably lower than the 2 percent gain on 10.8 million units that is the Street’s consensus.

Frankly, a 14% market share (if accurate) would blow away all my assumptions - I was hoping for something like that by end of 2009. (in dollar term, 25% is even more impressive) But again, people seem fixated on these periphery products - like the Walkman for Sony which created a buzz and cache (in the 80s folks, I know Sony is not cool now), iPod revolutionized Apple BUT to focus on iPod now as a growth driver is misguided. It will be a nice steady cash cow and keep driving people to another cash cow, the iTunes website. Meanwhile, the growth in the Macs is extraordinary if these numbers hold. And again, this is without the enterprise market which is the last castle for Apple to storm. Some of the recent updates to the iPhone are designed to help Trojan Horse into the enterprise.... if that conversion from PCs to Apples ever takes hold, it's going to be a massive upside.

But I've been saying that for a long time, I said it in good times (for the stock), I say it in bad times (for the stock) - the story remains the same, but in the near term the herd has it's own ideas and drives the stock where it wants to go (namely into purgatory of late). I still think Apple is one of the few true growth stories in tech, and at current valuation is extremely compelling. But until a lot of technical resistance overhead in the low to mid $140s is taken care of, the stock will remain range bound. But... I think this will be a very good performer in 2nd half 2008, all things being relative (i.e. stock market not imploding another 20%).

Long Apple in fund; no personal position

Citigroup Warns: The "Great Unwind" Has Begun

Interesting story on CBSMarketwatch.com - sort of parallels my commentary from day 1, about staying away from the anything directly tied to the US for quite a long period of time. It is sort of funny to watch the Street catch up to thesis' 6-12 months later. Now this is just starting to become a popular thing on Wall Street - once it becomes a drumbeat it will probably be time to reverse the trade and in fact go long the subprime US. After all we are just recreating the same conditions of low rates, and easy money that got us into this mess in the first place.

I can only imagine all the research reports on how to take advantage of global famine that should be out by end of 2008 or early 2009 ;)

• The Great Unwind has begun, Citigroup Inc. strategists warned on Wednesday. As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said.
• That means favoring public-equity markets over hedge funds, private-equity and real estate, while leaning toward emerging market countries and away from developed nations like the U.S., the bank's global equity strategy team advised
• Within equity markets, the financial-services should be avoided because it's still over-leveraged, while other companies have stronger balance sheets, the strategists said.
• "Steady growth, low inflation and rock-bottom interest rates encouraged economic and financial participants across the world economy to gear up over the past few years," Robert Buckland and his colleagues on Citi's global strategy team wrote in a note to clients. "Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position."
• "Leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less."
• During the last credit crisis in 1998, European banks were leveraged 26 to 1. In the early part of this decade, leverage grew to 32 to 1. Now the sector is geared 40 to 1 on average, according to Citi's European bank research team. (that's scary) "The banks have a long way to go," the strategists said. "We would continue to avoid the sector while they are de-leveraging."
• However, even though some companies may not have much debt themselves, they may be exposed to over-leveraged customers or highly leveraged investors, Citigroup warned. Automakers, home builders and electronics retailers benefited as customers borrowed money cheaply in recent years to buy cars, houses and flat-screen TVs. That attractive financing is now being withdrawn.
• "We are now confronted by a broad bloodbath in the credit markets," Citigroup said. " The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors."
• Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. "The U.S. shows up as the world's greatest consumer of external capital," Citi noted. So it "has the most to lose as this capital becomes less freely available."

Now, as always, in oversold conditions - the items written as bearish in this article are the things doing best right now, while the things that should be bought are doing the worst. But as always, in time, this too shall pass. As long as we have the faintest hope for a "2nd half recovery" we'll continue to see these rallies. And then when it's apparent it's not happening... we'll talk about early 2009...then mid 2009 and so on and so forth - the most favorite words on Wall Street right now "everything will be fine in 6 months".

Responses to Comments

I received a lot of comments last night after the close so I'll just respond to them all in 1 post here.

First, let me preface this by saying, these are simply my opinions and I am wrong 49%-51% of the time. There are many thousands of factors affecting the market at any one point, most of which we never will know about, see, touch, or hear about.

JeffreyC: Mark: I think this market acts like a manic-depressive. One minute suicidal, next minute euphoric, next minute despondent, next minute on cloud nine. But remember, these are all "PROFESSIONALS" running the show, at trading desks, running hedge funds, managing billion dollar portfolios... so we little folk have NOTHING at all to worry about.

Answer: Humans are humans. Herds are herds. Computer algorithms are programmed by humans. Etc. Fear and Greed never leave people no matter what level of degree they have. I call this the bipolar market and it has been for a long time. With the advent of computer trading dominating the markets (70% of all trades), and the first bear market since they truly took, I think it simply adds to the volatility. Then throw human fear and greed on top of it, and it's a heck of a brew. And stop ripping on professionals, thats my goal one day! :)

T-Rader: that same market pundit, it its who i think it is told people to keep their money at bear just last week. http://www.businessandmedia.org/articles/2008/20080317110946.aspx

I don't have a problem with anyone being wrong; god knows I screw up a lot - just like the best baseball hitters fail 70% of the time, the best investors fail 40% of the time. What gets me is the change in assessment literally by the hour. Now, one needs to be flexible always. In a market like *this* one needs to be even more flexible. But to pound the table on something (ag) at 52 week high than a week later when it falls 20% to be bearish is annoying. I still remember in August he was pounding on Foster Wheeler when it was at its lowest point, than when it rebounded 30% after the market rebounded he was on the bandwagon. Par for the course.

Guy 24 hours later and I am back to whistling my tune and that is: market participants are not counting on a prolonged downtrend ala Spring, 2002 or 1974. The market is oversold and sentiment is bearish and the Fed continues to throw money at the situation and the market is SUPPOSE to go up - it did everytime this trifecta of events happened from 1982 to 2007 (except 2002). I don't know which way the wind will blow tomorrow, but I do know this: ever since there was a break of weekly support on the SP500 (2 weeks ago) and the NAS (4 weeks ago) there has been increasing chance of a continued sell off. As I don't boast or make predictions, my interpretation has been to reduce exposure and wait for confirmation as oppose to speculate on a bottom. I speculated 6 weeks ago and lost that battle!!

Guy, my contention is this is the first consumer led recession since the 70s/early 80s. People are "used to" corporate led recessions (if you even want to call them that) of 90-91 and 01-02. Those were narrow, shallow - mostly due to Federal government (bailouts in 90-91) and Federal Reserve (kicking can down the road with easy money). Further they were again led by corporate weakness. This is the exact opposite. Further, I believe we are in a secular change where the US begins degrading as a world power. Not due to its people but due to it's policies - massive entitlements that we cannot pay, lack of good primary education, lack of energy policy with any foresight, global wage competition, overpriced living costs in housing (just imagine how much easier life would be if we could devote 30-35% of our salary to a roof over head instead of many people 45-50%), lack of savings, huge debt load, living past our means both as individuals and a country, lack of retirement savings, jobs that don't pay many in this country at a level to offset the high (relative to world) cost of living. Etc. Many of these things could be cited 2-3 years ago or heck 6-7 years ago... but it was masked by easy credit and housing boom, and before that tech bubble. And it's cumulative - it adds up over the years. Eventually the bill must be paid. And we do not have a leadership that looks past any 1 election cycle so you cannot make plans for 20-30 years out if all you care about is 4-6 years. Doesn't mean we are doomed but just because a country was the power for the past 60 years, doesn't mean it will enjoy the same status in the future - we assume the past will just continue the same and without work we will be end all, and be all. There is a lot of global competition now, with many hungry governments, many which are forward looking (see what Dubai is doing, not to mention China), with many hungry people. So this is a whole new world, and while Wall Street will be fine I worry about Main Street. That said, I am worried and have been for a long time for all corporate profits levered to the US consumer. As corporate profits plunge as "2nd half recovery" goes away, so will stock prices. When housing becomes a smaller % of expenses after a needed correction (through lower prices that the government is trying to fight) than maybe things can return to somewhat normal.

shaxmatist
Feeling your pain buddy. This commodity selloff came out of nowhere. Didnt we just have a major rate cut yesterday? And the market dumps hard assets?

I am not really surprised, except on gold and silver to be honest. I would not say it came out of nowhere - these are VERY crowded trades and as I've been saying for a while now, there is a lot of hot money in these trades as people fled equities and a lot of "new money" to boot. After reading a lot of items last night I think the best proposal was simply put we might have a lot of deleveraging going on after Bear and Carlyle Group - so many of our hedge funds appear to be levered 20:1 to 30:1 and hence so much fake buying power has been created over the years - once those calls come in, and funds must cut back you see some exaggerated selling. They can't sell their stupid mortgage backed securities so they sell this stuff. And once the herd all tries to exit the room through the same doorway, you get this type of action. Welcome to the world where hedge funds dominate the volume. Remember, commodities markets are TINY compared to equities. The long term has not changed, just the current. With the dollar reversing (another VERY CROWDED trade - to bet against the dollar) - it causes all the other trades to unwind.

T-Rader
what did you expect? i don't know if you realize this but today is Wednesday and not Tuesday. and i think Charlie V is on vacation

it seems everybody and their mom got really bullish all of a sudden. how do i know this, even you were bullish. everybody bullish = bearish. it seems to pay to have a contrarian approach in this market.

That teaches me to be bullish even one day of the past 90. p.s. It is Charlie G, not Charlie V - I don't recommend getting those Italian guys peeved at you ;)

Michael
What worries me about this current market is the amount of cash that has been pumped into it. I'm starting to wonder that even if you pick the right area (agg for example) it's going to get hammered with everything else as the money supply eventually gets cut back. Problem is that I think staying in cash right now is just as bad b/c of the real 10%+ inflation. Looks like I should've done the irresponsible thing and spent 80% of my income on a house 2 years ago. Grr!

Michael, 3 good points. #1 moral hazard is thrown out the window in this era. Just wait until the speculators err... home owners get bailed out in the end. We are not done with the bailouts. #2 The Federal Reserve is doing everything in their power to get that cash out from under your mattress or savings account. First, you get no return in savings account and real return (adjusted for inflation) is negative. Second, inflation off the chart so they want you to move into risky assets since they are making cash trash. #3 Money supply won't be cut back from the powers that be - the open question is how badly does leverage get cut back - but that's more a crisis of confidence. Not a money supply issue - everyone appears to be levered 30:1 to 20:1 and since its almost all unregulated, our "shadow banking" system poses major systematic risk. The minions have evolved to a higher form while our regulators are still stuck in the 1980s.

carotid
Do you think this is the beginning of the downtrend in commodities, oil and gold? Are you concerned about so called deflation? Your portfolio is heavily weighted on commodities right now. I am concerned about my DBA exposure which broke support today.

By the way, thank you for all the great posts on your blog.

Carotid - I'll take my heavy commodity exposure as a compliment. Where would one of rather have been the past few months? Financials? Consumer related? Retail? Etc. It's been the place to win so I am happy I had exposure there.

re: DBA - someone asked about that 2 days ago - I will give you the same answer - it's about time frame. If you have a few day time frame you are at risk. The long term has not changed one bit. Just the level of speculative buying power has.

re: is this the end of the commodities? Hardly. I am a big proponent of a 'World of Shortages' - macro long term themes. On top of that is worldwide inflation helped along by central banks. Neither has changed - only the level of speculative fervor has. Stock prices (and commodities) go up or down for many factors - it can go up or down 25% in a week. Doesn't change my long term view. A much needed correction is happening, and one that I have been calling for. Again, the gold/silver has surprised me as to the degree of correction but the rest has not surprised me. It just shows you how much leverage is in the system and how much unregulated pools of money are running things. I wrote about this in [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!] - frankly they are locusts - they come in, feed, ravage, pillage and ruin any market. Orderly markets act disjointed - ask the wheat traders who have been living in a new reality the past 6-8 weeks - many are blown out of the system since risk has exploded of late due all the new players with their funny money blowing into town. Now they appear to have so much buying power, with so much leverage (30:1, 20:1) I believe they have reached a size they are now able to have that effect even on the general equity markets, which are huge compared to the small commodity markets. Hence this extreme volatility when they are forced to unwind trades.

re: your portfolio is heavy on commodities.
Other than coal I did not enter this week heavy on commodities in my opinion. I had about 3% precious metals exposure, 5-6% fertilizer, 5% crops, 3% metals, etc. I am not a hedge fund nor am I a daytrader. So I am not going to completely exit positions I believe in, in the long run. Let's use Mosaic (MOS) as an example since it's my favorite position. I've had it at 6-8% weighting during times I am extremely bullish (i.e. the stock price is low) and 2-3% when I am not as bullish (i.e. everyone is jumping on board and stock price is high). Do I ever sell out? No. I am not talented enough to know the exact moment all the lemmings will jump out of a position, so I can sell at the exact top and get back in at the bottom. So I keep my core stake and then add during the selloffs and sell to the Johnny come latelies when everyone is bullish. I sold much of my position near $110, and now can buy back yesterday around $100 (in smaller scale) and today around $90 (in large scale). I am pleased with that. But aside from coal I did not have a large commodity exposure relative to where I've been in the past. Again, I've been in these trades a long time. I was a fertilizer bull a year ago for all the same reasons people are today (before the market recognized). I was a coal bull early last fall for all the same reasons people are today (before the market recognized). I am trying to find trends, be early, and I can't control the day to day speculation. I don't see any change to the long term fundamentals, so again, I weigh these positions more heavily when people flee, and I weigh them more lightly when everyone is piled in. Doesn't mean I do not get hurt on the downturns, but again as a "mutual fund" I am not going to go to 0% exposure and 90% cash - even if I was smart enough to know how to time things to that degree. Maybe a lot of people come to the blog and don't read the history and think I just piled into all these positions because hot money just found them the last 6 weeks. Not the case. This is not the first correction nor the last in the space - I said I would not be bullish until these names started falling many times in the past most recently [Mar 6: Waiting for the Leaders to Fall Before I Buy in Scale] I wrote

Now the commodity complex is obviously running the show - our leadership is fertilizer, crops, coal, natural gas, mining, and gold/silver. I'm happy to say despite some blow ups in the bottom of the portfolio, having a focus on these groups (ex-natural gas which I totally missed), is keeping us doing quite well.

But this also leads to the problem... while these are my favorite groups; they are also the most prone to getting hit hard in a downturn (since other groups have already been hit very hard). This is what happened in mid January - many of my stakes in such names were getting hit for 8-9% a day, every 3rd day. Does it mean it has to happen again? No. But I am assuming it will. And in fact I cannot get very confident about being more long until I see these groups get hit. The popular term is "the generals must be shot".... i.e. the generals are the leadership. So despite having the best fundamentals, and no legitimate reason for being sold off, they will - if this correction scenario I envision plays out - get sold off. And potentially very severely. It happened in August 07, it happened in November 07, and it happened in January 08.

So it is now coming to fruition - this is my game plan. To buy when it happened. So I am buying. Without a game plan you have nothing.

Pankaj
Mark,

Since you are a Ron Paul fan, I have one more idol that I just stumbled upon today, who we can praise for telling the truth!!

http://www.youtube.com/watch?v=qaSuL9L_G2w&eurl=http://www.nationalbubble.com/our-country-is-going-bankrupt/

Cheers...

Already have it covered. He was a good man and told the truth. Therefore he has no place in our government. He is now out of government... [Feb 25: I Didn't Realize US Comptroller Resigned] We continue to put our head in the sand and ignore reality. We are reactive, not preventative and just like the tech bubble, housing bubble, until it explodes we will not react. We only act in crisis and this continued behavior allows the rest of the world to catch up, and eventually many will pass us. Do you realize the Iraq War costs are an "off balance" sheet accounting in the budget? That's how they do it - it doesnt really count because its not part of the real budget. But we're already at $600 B - which would of gone a long way to completely solving Social Security. Oh well. Sheep elect these people - sheep get what they deserve; hell many sheep don't even vote in this country.

Bookkeeping: Morning Transactions

There are a lot of bargains being created today, but I am going to buy the names I've been waiting for a long while for corrections. Since I am low on cash I've sold down a bit of my Ultrashort exposure as well as a few of the holdings I've listed below

I mentioned yesterday I wanted to get fertilizer name Mosaic (MOS) in the upper $80s, and Potash (POT) in the mid $130s - both targets achieved today so I am adding in a serious way, cognizant they can go lower - but very happy they are now reaching my targets. (although the fund is of course taking a bit hit today)

1. Fertilizer Mosaic (MOS) to the gills in $89.00-$91.00s (my prime target was upper $80s) - now a 5.5% stake
2. Fertilizer Potash (POT) in $138s (my prime target was mid $130s) - now a 3.7% stake
3. Russian iron ore/steel/coal Mechel (MTL) added a ton today in $115s (falling to 50 day moving average) - now a 3.8% stake

These names above were my 3 top objectives to buy and I've been waiting a long time for this sort of correction.

Other additions

1. Infrastructure Foster Wheeler (FWLT) in $48s (this is a broken chart so I did not add a ton but the price now is approaching ridiculous) - now a 4.2% stake
   
2. Iron ore Cleveland Cliffs (CLF) in $106s (just a bit below its 50 day moving average) - now a 2.3% stake
   
3. Natural gas Cabot Oil & Gas (COG) in $43s - now a 1.5% stake

To raise funds, since I was almost nil at cash after buying short exposure yesterday I lightened up on some of the Ultrashorts along with selling off some relative winners (stocks that have rebounded or not related to the commodity correction)

1. Home builder DR Horton (DHI)
2. Medical Illumina (ILMN) [hate to sell it but simply needed the cash]
3. Tech Apple (AAPL)
4. Tech Research in Motion (RIMM)
5. Chinese travel Ctrip.com (CTRP)

Since I do not have the benefit of new funds coming into the mutual fund as in the "real world", once I get low on cash I need to sell something to fund another thing, hence why I sold the above batch down to raise cash.

Now the stocks I bought today could go further down in a panic, but I sold off my top 3 targets at much higher prices and now am able to buy back at prices I had been hoping for a while - this is consistent with my strategy of always keeping a core in my favorite names but trading around the positions. If they continue to fall, I'll find other things to sell to purchase more - I will need to study the chart to see where the next level of support is - I was just happy to finally see these prices after waiting weeks on end for weakness that never seem to have come. Again, my objective is never to catch the bottom or top - but buy on panic/weakness (layer in) and sell when everyone things unicorns and butterflies abound (layer out). And try to continue to catch the meat (middle) of the move. The risk in this environment of course is a much more general index erosion, but when I see my favorite names hit long awaited price points I have to get constructive.

Long all names mentioned in fund; long Mosaic, Potash, Mechel, Foster Wheeler in personal account

Back to Main Street....

While every minute of every trading day seems focused on these financial issues, there is a whole real economy out there. And this is our pickle. Once we get through with the "credit contagion" issues - we still have the (regional) recession to deal with (for new readers, by regional I mean those in rural states are living the highlife as are many associated with energy i.e. portions of Texas/Oklahoma). This is why this market is extremely frightful - we have double trouble - the credit issue on one hand that gets all the attention and then a very real potential for a powerful consumer led recession the likes of which we have not seen since the early 80s. The latter gets no attention as Wall Street is dominated by NYC types and all they care about is bailing out the financial system - thats why Fed cuts to zero would make most of them happy - no matter what the effects on the real economy. I was looking through CNNMoney.com today and it is striking to now see the stories of the real effects, I outlined long ago really beginning to hit people. [Do the Bottom 80% of Americans Stand a Chance?] But since it's a slow motion implosion it is not sexy like Bear Stearns turning into dust within 72 hours. So I believe it continues to get ignored and/or people are simply ignorant - with the salaries made on Wall Street, it creates a disconnect from Main Street.

What is striking is while the system is pumped with floodgates of paper money, and inflation is constantly pooh poohed as "moderating by 2nd half 2008" - almost all these stories have the common thread of rampant inflation busting frail budgets - keep in mind anecdotal study after study says 70% of Americans live paycheck to paycheck regardless of income strata (as we have greater incomes, our spending expands at similar pace). I am aghast at the CNBC cheerleading (paralleled by countless blogs, economists, and pundits) that the decision to cut 75 basis points instead of 100 is a clear sign the Fed now cares about the dollar and inflation. Pathetic. 75 basis point is a historic type of cut, rarely done in the past. 100 basis points was NEVER done before (don't quote me, but I believe I read that). So this move to only do 75 is "good" for the dollar and "a strike back at inflation"? Really, the logic on the street is beyond me many times. I find it laughable. Main Street is being sacrificed to the gods so that NYC can be saved. Bottom line, no matter what line of crapola people in NYC says over and over - maybe if they say it enough they will believe it and not feel as guilty.

Let's look at some headlines

Inflation is Americans' Top Economic Concern (the other 10% work in the Fed or in NYC investment houses)

• Americans are worried about the economy, and inflation tops their list of concerns. Ninety-one percent of respondents to a recent poll said they are somewhat or very concerned about the rising rate of inflation, according to a national CNN/Opinion Research Corp. poll released Tuesday. And 86% said they are worried about jobs. Of the over 1,000 American adults surveyed in the poll conducted March 14-16, 65% said they are "very concerned" about inflation, and 26% said they are "somewhat concerned."
• Through a series of recent speeches, Fed officials have made it clear that their primary concern is unemployment. Though they have stated that rising inflation is a worry, the central bankers have pledged to continue to cut rates in an attempt to prevent the economy from entering a recession and losing even more jobs. "The Fed's biggest concern right now is supporting the financial system by trying to stimulate growth," said Bullard. "The Fed is counting on the fundamentals - rising inflation should dissipate as the economy slows." (just like in the 1970s, right?)

A Slice of Pizza Gets Pricier

• Pizzeria owner Joe Vicari shakes his head as he prepares to rip open a 50-pound bag of flour for another batch of dough. "That's 37-bucks. $37. I couldn't believe it!" says Vicari.
• Since opening Mariella Pizza in mid-town Manhattan 30-years ago, Vicari, says he has never experienced such a jump in the cost of his ingredients
• "I can't even believe how much the flour [goes] up. When I see the bill I can't believe it, that's too much," says the veteran pizza maker, who emigrated from Sicily. Only four weeks ago, Vicari says, he was paying just $16-a-bag for Gold Medal brand flour, which at $37-a-bag now seems more golden than ever. (agflation, it's everywhere)
• Cremosa, the source said, is allocating flour to restaurants, refusing to allow customers to buy more than they had purchased the prior week. (allocation = rationing = shortages)
• Vicari struggles with the thought of raising the price of a slice, which he lifted to $2.50 only a few months ago due to an increase in cheese costs. But, he concedes, if flour rises a few dollars more, above $40-a-bag, he probably will pass along the higher expense to customers.
• Why? You can lay part of the blame on ethanol. Huge demand for ethanol has farmers planting more corn to produce the fuel when they could be growing wheat. "Ethanol was competing against wheat for acres in 2007," said Joe Victor, grain analyst with Allendale Inc.
• "Fifty-nine-percent of everything we raised in 2007 is leaving the U.S.," said Victor. "That's 9-10% greater than normal." As a result, Victor said, U.S. wheat supplies are at their lowest level since the end of World War II, another factor pushing prices skyward.
• The good news for U.S. consumers is that high wheat prices have led farmers to plant a large crop of winter wheat, which could temper retail prices later this year. (and then next year the shortages will be back to corn, or soybeans, or whatever they are substituting to plant wheat)
• "It's killing us, it's killing us. It's forcing me to pass it on to the consumer," said Frank Karalis co-owner of Europan Bakery Café in Manhattan. Karalis was holding a menu on which he had just crossed out every price and written in new, higher prices he plans for next week: Bagel with butter $1.30, up 20-cents; Muffins $2.25, up 25-cents; Paninis $7.20 up 25-cents.

Cash Strapped, and Driving Less

• Americans are finally driving less - thanks to rising gas prices. Seventy-two percent of respondents to a recent poll said recent price increases in gasoline have caused financial hardship for them or their households.
• Rising fuel prices have caused most Americans to cut back on their driving. Of the over 1,000 American adults surveyed in the poll conducted March 14-16, 64% said they have made some changes to their driving behavior as a result of higher gas prices, with 19% saying they have cut back on driving enough to have a major effect on their daily lives. And 5% say they have stopped driving altogether.
• Gas sales have started to sink as Americans curtail their driving. A recent Commerce Department report showed sales at gasoline stations, which have been bolstered recently by record-high fuel prices, tumbled 1%.

I won't copy it over, but if interested, here is "13 short blurbs" of typical Americans and the same concepts I have been proposing - jobs in the service economy are not paying most enough to keep up with real world costs, high inflation is eating away at living standards, people are giving up on a lot of things just to get by. This is why I find retail stocks, and their rallies to be bull traps. 2008 and 2009 are going to be very painful for the consumer. And the myth that all it takes is 5.5% mortgage rates to get the home boom reinflated is also simply fiction. Maybe for those in the 10-20% percentile in America. But not for most. Not until home prices fall meaningfully - something every government agency seems to be working in concert to help forestall or prevent. Damn thing about market forces - they are all powerful (in the end).

Bear Market Strikes Back

Quite an ugly day folks. Very.

Sad to see with all the government firepower, Federal Reserve backstops, and interventions we cannot hold any rallies. This is starting to cost real money to keep these markets at inflated levels... just flabbergasted that rallies cannot even last for 3 days anymore.

I do have 22% short exposure at this point as I applied almost every drop of cash to short exposure once we broke 1320 mid afternoon. But it did not do much to offset the damage - as we said in the past when the bears come to raid your top positions to the tune of 10-12% a day, 20% short exposure doesn't do much to offset that.

Here is some of today's carange in some of my favorite names (my future buy list) - I am now openly worried about what would happen to these stocks if we break S&P 1260. Sheesh. What is striking is the weakness in foreign stocks; that have nothing to do with the pathetic state of domestic affairs.

PBR -8.6%
GFA -8.4%
RIO -8.2% (it was not a good day to be Brazilian, SID was down 8% as well, Brazilian steel)
MTL -5.8%
MOS -11.4%
CF -11.2%
POT -10.2%
CLF -8.8%
BUCY -8.4%
DO -7.7%


Other random pieces of carnage on my watch list
BIDU -10.7%
IBN -10.2%
MON -12.1%
FCSX -11.8% (geez, sold this in the AM for +8% so a 20% intraday swing)
FCX -11.2%
SGR -9.2%
X -8.7%
STP -8.7%
VMW -8.4%
ICE -7.5%
ACI -10.0%
NOV -9.9% (can't believe how weak this one is)
BTU -9.3%
DRYS -7.0%

It's never a good day when your homebuilder stock is among your top performers... unfortunately we now approach a strange place - the individual names are beginning to get interesting but the indexes are (once again) approaching a dangerous inflection point if/when we get back to that 1260/1270 level we just came off of. But volatility remains the watchword of 2008. The day to day action, and total opposite reaction to the previous day continues unchecked. I thought this time with all the rabbits pulled out of the hat by the Fed would at least afford us a 3-4 day rally but not even that is offered .... quite wicked action.

Bookkeeping: Second Natural Gas Play - EOG Resources (EOG)

I am adding a 2nd name to my mini natural gas basket, which I started Monday with Cabot Oil & Gas (COG)... today I am beginning a small stake in my #1 target EOG Resources (EOG), which has some very impressive new expansion opportunities recently announced. [Feb 29: Natural Gas Focused Exploration & Development Companies Continue to Shine] Much like the fertilizer stocks which have been impervious to meaningful slowdown it has finally taken some hit... down to its 20 day moving average of $115. I am starting small since I think more downside to go, and am targetting $106-$108 (which is just above the 50 day moving average). There is a
"gap" in the chart around $108 which almost surely will get filled.

It appears the commodity trade is being abandoned by hot money so I'll be waiting at lower prices to scoop these guys up when/if they get to my targets. In the meantime we'll take the body blows as positions dominating the fund falter (temporarily). But we're only in day 2 of what could be a longer pullback in these hot money groups, so I'm not jumping in too aggressively yet.

I started a small stake of 0.5% of fund at $115. Looking to add significantly at lower prices.

Long both names mentioned in fund; no personal position

My Kool Aid was Defective

Well, what happened to the Federal Reserve solves everything Kool Aid I was drinking yesterday? Already we've broken back below S&P 1320. So every 75 basis point buys us a few hours of rallying, every $200 billion we throw at the problem buys us a 4% "best in 5 year rally", but we cannot hold any of these gains?

What's next? Are we going to have to start throwing $500 billion at a time? A trillion? Gosh darnit. Now I'm scared to see what they will come up with at S&P 1270 this time around. Cramer as new Fed Chief?

I'm back to buying Ultrashorts across the board again. And I'm returning this Kool Aid to Costco - so much for bulk Kool Aid drinking. I knew you could never trust a big round red "thing" with a disengenious smile. Only kids fall for that... and Wall Street MBA types.

Back to the grind - buying across all 6 Ultrashorts.... so tiring hitting this buy button after every "once in 5 year" type of rally. This is becoming a weekly occurance.

Here is my current technical game plan
1360+ Going back to Costco to buy more Kool Aid, and bathe in it daily
1320-1360 Big grey area where I am clueless on the next move
1260?1270 - 1320 Becoming despondant again, returning Kool Aid to Costco and listening to self
Below 1260?1270 Scared of what they will cook up this time to intervene in the free market and prop it up for the next 4% "best in 5 years" rally

Ever feel like you are in quicksand? We can never make any progress in this market except when the Gods from Mount Olympus show kindness to us with their cuts and interventions. Just imagine if the peons were left to fend for themselves, how much lower this market would be. But we'd actually be closer to a bottom. What a concept.

Alt A Mortgages Beginning to Break Down; Ultrashort Financial Not as Cool as it Used to Be

This market is so difficult right now trying to balance the reality of what is happening on Main Street with the current and future political interference into free markets. Some of the news out of the real economy is really scary - I had mentioned last August when "subprime" was the big issue that the mortgage issues will climb the food chain, into Alt A loans and then finally into prime. Subprime is just a convenient label and the weakest credit risks, so they would be the first to go. But not the only - as was conventional wisdom back then i.e. "those darn subprime people are the cause of all this - they never should of had a house in the first place". It is so much bigger than that - a truly stressed consumer up and down the food chain.

However... how do I balance this (correct) thesis against the potential for some arm of the government to step in by summer and literally buy up toxic mortgage paper directly? This is the conundrum and why this market is even harder than it appears. If the free markets were allowed to reign I would have 1 very clear strategy but with all the King's Horses (and Men) working to interfere it clouds things up. Here is some "reality" of just how quickly the vintages of Alt A mortgages from 2005-2007 (the worse era of reckless lending) are degrading. Keep in mind these are sequential increases, meaning one month over another - the pace is incredible - 2006 and 2007 are just horror shows. Frankly, it is degrading quicker than even I thought. (Is this anywhere in the mainstream financial press or are we too busy high fiving the fact we are going to overload Fannie and Freddie with mortgages?)

• Delinquencies on alt-A mortgages pooled into securities between 2005 and 2007 continue to rise, Standard & Poor's said in a report released Wednesday. Mortgage-backed securities are pools of mortgages combined and sold to investors. Alt-A mortgages are loans given to customers with minor credit problems or who do not have enough documentation to receive a traditional, prime loan.
• For securities rated by S&P in 2005, 11.7 percent of current outstanding balances were delinquent in February, a 6.4 percent increase from the previous month.
• About 15.9 percent of securities rated in 2006 were delinquent in February, a 9.7 percent increase from January.
• Delinquencies for securities rated in 2007 increased 14.3 percent in February to about 10.2 percent.
• S&P said seriously delinquent loans -- loans at least 90 days past due, in foreclosure or homes owned by banks -- continued to rise in February for all three vintages as well, with 2006 deals performing the worst. About 10 percent of 2006 loan volume was seriously delinquent at the end of February

Folks what this means is 2007 paper in the Alt A arena (that includes the whole year including Q4 2007 which is not even half a year old), is already delinquent to the tune of 1 in 10 mortgages! The oldest mortgages in this group are .75 years to 1.25 year old. And already a 10% failure rate. Scary. Scary. Scary.

BUT what do you do when the government will eventually be buying all this paper ? (since it is such a BARGAIN and it is only trading low due to inefficient markets not that its purely junk <---Kool Aid arguement) You my taxpayer friends will be paying for the losses, but the markets will scream higher when this day does come as their hands will be washed of this nuclear waste... tough from an investing point to bet either way. But after reading this story today, I am going to need to drink a gallon of Kool Aid to keep the faith. Hell, I might need to take a bath in it...

********

Speaking of Ultrashort Financial (SKF) I took another gander at it's weightings and it's become a bit less attractive as the underlying financial index has changed the weighting as Citigroup has imploded. Last I looked in September [Adding to my Ultrashort Financial Today] I wrote

The top 5 holdings make up 40% of the index, these names are: Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Wachovia (WB)

I don't have the exact weightings in the old post but I do remember I loved the fact Citigroup was the top dog (literally). But now? They've dropped Citigroup to only a 5% weighting. Darn.

Just so I have a historical record in the blog the top 5 now are

Bank of America 7.1%

JPMorgan 5.6%

Citigroup 5.6%

American International Group 5.0%

Wells Fargo 3.7%

It is too bad... of the top 5, Bank of America has the Countrywide (CFC) acquisition to deal with, but based on the Bear Stearns deal they can probably go to the government behind closed doors and say, look we will walk away from this deal unless tax payers guarantee all losses - you did it for Bear, we want the same deal for saving 20% of the mortgage market. Paulson will say, sounds great to me! JPMorgan just stole Bear Stearns and its losses are going to be paid by you, the taxpayer, - so they are golden. And I like Wells Fargo as an operator (except the fact it is so focused on CA). So that leaves only 2 dogs in the top 5. Bummer. And then Goldman Sachs (GS) who is running this country behind the scenes is #6, and US Bankcorp which is actually a great bank is #9. So this makes this index less attractive than it used to be, that's for sure.

Long Ultrashort Financial in fund and personal account

Bookkeeping: Expanding the Agriculture Exposure

I am making some decent sized buys today in the 2 potash stocks as both stocks are down 8-9% and falling to roughly the 50 day moving average. The chart for both look very similar. About $7-9K purchases, Mosaic around $100 and Potash around $148s. I've been waiting a while to see some weakness so perhaps this is *it* or the start of something more. Either way these names have been major holdings for the funds, especially Mosaic (MOS), that I cut back on of late, waiting for some signs of weakness so I am beginning to re-up the positions (that I sold down at higher prices). I've held Mosaic as a 6-7% stake many times in the past so I'd like to get back there, but at lower price points.

If the weakness continues (which frankly I do hope it does), I'd like to add Mosaic in the upper $80s and Potash in the mid $130s. Maybe they will get there, maybe they won't. For now Mosaic is pushed up to 3.7% stake (would like to get it to 6%+) and Potash 2.6% (would like to get it to 4%+).

I've also added some more Powershares DB Agriculture Fund (DBA) on this serious weakness the past few days. This is the other side of the coin of living with hedge fund computers who have piled into your favorite sector. Volatility shoots up, but it does create some trading opportunities around a core stake.

Long all names mentioned in fund; long all except Potash in personal account

Philippines Brace for Rice Shortage

This has been a long held thesis, and something I touched on just yesterday - the coming food crisis - well maybe crisis is too benign a term - the coming disaster? Not only do we have the "World of Shortages" scenario I've touted for a long time (too many humans entering 2nd and 1st world status/middle class vying for resources) but our central bank is exaggerating the amount of paper money chasing said commodities. While we are getting a correction the past 48 hours, the crisis, especially in food is real. But since it is happening in countries with hard to pronounce names that we only care about briefly during the Olympics it does not matter to Americans. The strains are showing up everywhere if you look hard enough for the news. But the crisis is building week by week, month by month - as I keep saying - it will hit the mainstream press sometime in 2009. The next step will be countries hoarding their food and restricting exports - we already saw that in wheat [Feb 25: Soybeans, Wheat Continue to Romp]- it will spread through the crop chain. And this macro theme of mine is why I shrug off almost any attack on the fertilizer stocks (but I do realize the stocks could get hit by over antsy speculators who only chase price momentum) ... but it's not a change in fundamentals. Thankfully we continue to come up with innovative solutions to the coming global food crisis, such as putting corn into cars.

• The Philippine government, one of the world's biggest rice importers, assured a jittery public Wednesday that it was taking steps to secure enough supplies amid surging prices and tight stocks worldwide.
• Agriculture Secretary Arthur Yap said there was no rice shortage and that President Gloria Macapagal Arroyo had approved a proposal to augment the agriculture department's budget for rice production. Yap said the government's rice reserve would last 57 days and that the National Food Authority was receiving additional supplies from the international market. The authority said it has secured 500,000 metric tons of rice from Vietnam and Thailand for delivery next month — part of 2.1 metric million tons to be imported this year.
• Rising demand from the Middle East and Africa has pushed up the price of rice in Vietnam and Thailand — the world's top exporters — to up to $500 per metric ton, a 25 percent jump from a month ago, the Agriculture Department said.
• But even those countries are struggling to keep pace with export demand and there are fears they may curb sales to damp domestic prices and protect their consumers.
• A Philippine left-wing farmers' group, the May One Labor Movement, warned that any shortage or unchecked price of the grain, the nation's staple food, may lead to riots.
• The National Food Authority has deployed "rice marshals" to catch unscrupulous traders who reportedly hoard government-subsidized rice, diverting them from state-run stores to sell them at a higher price elsewhere, said Executive Secretary Eduardo Ermita.
• The head of the National Food Authority, Jessup Navarro, has blamed dwindling rice fields for recurring shortfalls, with many farms in the country's rice-growing region of Central Luzon converted to residential subdivisions, golf courses and shopping malls.

Keep printing paper money....

Fertilizer Getting Hit via Barron's Article

Looks like much of today's fuss is about a Barron's article entitled 'Fertilizer Stocks Could Start to Wilt' I don't have a subscription but the body of the article was posted on a msg board so here is the text - excuse me while I yawn. As always, these stocks are prone to severe pullbacks because so much hot money has entered the space. It was much easier to invest in them a year ago when no one cared. Now the risks become much higher as any line item in an earnings report that does not please the momentum lemmings will cause them to flee. So eventually a day will come when an earnings report comes out and growth is only 45% instead of the expected 46.7% and for that 1.7% "miss" the stocks will drop 35% within seconds. That is the world of stock investing nowadays. But I don't think we are near that point yet. However, as more people jump on the bandwagon I will be a lot more defensive around earnings reports - there used to be almost no risk in holding these stocks through earnings as analysts estimates were shockingly wrong, but as with all high growth secular stories eventually the analysts overcompensate and create unreachable targets. When those targets are "missed", even if they represent massive growth, the herd panics.

But the specific reasoning below is not anything I'd lose a wink of sleep over - but there is a reason I focus on potash specifically (which I've outlined ad nauseum in the blog), even though the whole group has ramped together... but this piece has pushed both Mosaic (MOS) and Potash (POT) to their 50 day moving averages. I'd still like to see even more weakness to add more, although I added a small dash of Mosaic (can't help myself). I am awaiting lower prices (somewhat impatiently) as I outlined a few weeks ago [Thoughts on Fertilizer] - again the fund will suffer in price in the near term since we already have some good exposure to these hard hit commodity areas but these continue to be among my favorite bull secular markets so these coming purchases will be the basis for the next round of outperformance in my opinion. But for now, I am hoping for 10-20% type of corrections even from here, as the momentum chasers and hedge fund computers abandon ship.

By NAUREEN S. MALIK

THE RISING GLOBAL DEMAND for corn, wheat, soybeans and other cash crops is providing a boon for shares of fertilizer companies such as Potash Corp. of Saskatchewan and Mosaic. Over the past year, shares of Potash Corp., the world's largest fertilizer company, have tripled and shares of its rival Mosaic have risen almost threefold, thanks to soaring prices of crop nutrients such as potash, phosphates and nitrogen.

Farmers are absorbing rising fertilizer prices to produce higher yielding, better quality crops. These agricultural commodities are fetching hefty profits due to global demand for food, feedstock and biofuels such as ethanol. Demand for grains from the expanding middle classes in places like India and China are expected to double and triple earnings this year at Potash Corp. and Mosaic, respectively. But challenges loom ahead for these much-loved stocks due to global economic uncertainty.

This could cause speculators investing in Potash Corp., Mosaic and agricultural commodities, to bank profits. A commodity correction could curb farmers' profits and pressure fertilizer prices. "There are a lot of speculators in [agricultural] commodities and there's not a lot of ways to speculate [in related stocks]," says John Buckingham, the chief investment officer of Al Frank Asset Management. With this eager money concentrating on a few equities, the "Monsanto, Mosaic, Potash Corp. names got bid up dramatically." Shareholder turnover in both companies has at least doubled since the end of 2007.

The market now values Potash Corp., the No. 1 producer of potash and a leader in making phosphates and nitrogen, and Mosaic, the leading producer of phosphates and second-largest provider of potash, each at roughly $50 billion. Potash Corp. was valued at just $13 billion when Barron's wrote positively about the company 17 months ago. (See Barron' s, "On Fertile Ground," Nov. 6, 2006.)

Potash, phosphate and nitrogen are the three crop nutrients coveted by farmers to improve crop yield. Nitrogen, found naturally in the earth's atmosphere and soil, is a nutrient needed for basic growth; potash -- a form of potassium carbonate left behind after sea water evaporates -- boosts quality; and phosphates improve the plant size, says Goldman Sachs analyst Edlain Rodriguez.

The price-to-book value on both stocks has risen to more than eight times versus their historical averages of three to four times book. The Standard & Poor's 500 stock index is trading at 2.4 times -- in line with its five-year average. Frank Holmes, chief executive officer of U.S. Global Investors, recently pared back stakes in Mosaic and Potash Corp.. He uses fundamentals to pick stocks and quantitative metrics to sell. (See Electronic Q&A, "The Picks of a Natural Resources Whiz," March 17, 2008.) "When they spike exponentially over 60-day periods, then we sell 10% or 20% or even 30% of the position," he says.

Agriculture has been a relatively safe haven in the current market climate. Citi Investment Research analyst Brian Yu is bullish on both companies, but he says the biggest uncertainty threatening the industry is not whether the U.S. is in a recession but "if the slowdown in the U.S. were to go to global markets."

Of the basic fertilizer varieties, potash has the strongest industry fundamentals and prices have catapulted in some markets to over $500 a metric ton. China, currently in negotiations for 2008 supply, is paying $250 per metric ton and is playing hardball about any price increases. Still, China is self-sufficient in phosphate and nitrogen while its inventories for potash are running low. Potash Corp. Chief Executive Officer William Doyle says, "I think the prices are sustainable and I actually think they are going to be going up," quite possibly by over $100 per metric ton with the Chinese negotiations.

The top five potash producers control 65% of the capacity and there is a five-to-seven-year lead time to bring new tons to the market. Two-thirds of Potash Corp.'s revenues come from potash and the remaining from phosphates and nitrogen. It has 22% of the global potash market and has the ability to control supply with 75% of the extra tonnage out there. The company is restarting two potash mines to increase its volume from 11 million metric tons to 15.7 million by 2012 and has investments in potash producers in Jordan, Israel and China. Citi's Yu expects Potash Corp. to generate $203 of Ebitda (earnings before interest, taxes, depreciation and amortization) per tons versus $96 at the end of 2007 and $69 in 2006.

Mosaic is the second-largest potash producer with 13% of global capacity while phosphates make up the lion's share of its business. There is a four-year lead time to build out new phosphate capacity. Looking at the potash market, "last year was a volume story and I think this year is going to be more of a pricing story," says Goldman's Rodriguez. He notes both companies have a competitive advantage in the industry as low-cost producers with strong management teams, but that their fortunes are tied to commodity prices.

Commodity speculators are "one reason prices have gotten as high as they have, and you wonder how long people are going to keep feeding them," says Jack Scoville, vice president of brokerage firm Price Futures Group. The weak dollar is supporting foreign demand for cheaper U.S. crops. Scoville expects a correction due to macroeconomic concerns and the potential for "a significant increase in supply" of wheat, soybeans and maybe even corn due to favorable weather conditions, he adds. (Ed. note: if this guy can predict weather global patterns I will glady ask him for the Lotto numbers as well) Last year, U.S., Australian and European supplies were hurt by droughts and hot weather, he notes. Wheat prices have gone from $3.50 to $4 a bushel two years ago to $12, with a brief spike to $25 in Minnesota a few weeks ago, Scoville says. Soybeans have doubled to $12 and corn prices have tripled to more than $5 a bushel.

Weakness would likely begin with easily produced nitrogen, which Potash Corp. produces. Increased production by lower-cost producers of "commodity chemicals" will squeeze margins at North American and European companies, says Theresa Gusman, a portfolio manager of DWS Global Commodities Stock Fund.

Although bullish about growth at Potash Corp. and Mosaic, J.P. Morgan Securities analyst David Silver says the speculative interest in their stocks "may peak toward the end of April or early May which would coincide with the spring planting season." That means that these stocks, rather than continuing to blossom, could wilt on the vine.

Long Mosaic, Potash in fund; long Mosaic in personal account

Bookkeeping: Selling Down 3 Names into Strength

I am selling $5K stakes in 3 names: homebuilder DR Horton (DHI), Mastercard (MA) on the Visa (V) excitement, and drug company Schering-Plough (SGP).

I find it ironic that the same TV pundit who told us about a month ago to not own Mastercard because the Visa IPO will suck all the wind out of the sector was on the tube yesterday saying buy Mastercard. Near a 52 week high of course. He shall remain nameless.

I am watching S&P 1320 level. It will be important to hold this for this rally to 1360 to continue. For now I am raising some cash and hoping the market takes down some of my favorite global growth names down to lower levels so I can add at better price points, while they chase the "new leadership" stocks...

Long all names but Visa in fund; long none in personal account

Looks Like It's Going to be a Rough Week

It is striking how the market trades in patterns. I remember being very frustrated in late January when the market was rebounding off that dramatic selloff, but nothing I was holding was rebounding - it was all concentrated in the worst off sectors - financials, homebuilders, retailers; while the real strength was being hammered daily. I wrote a long piece [Feb 1: Is it Time to Adjust Strategy?] and frankly after re-reading it, I feel exactly the same today. But the fund had some rough weeks in that time frame (lagging the indexes severely) while the market jumped - so it appears we might be going through a similar patch here - my favorite groups get hit, the worst sectors rebound and everyone calling for a "rotation" into new leadership. Last time around that "rotation" lasted for a whopping 2 weeks, and then the "new leadership" went on to get absolutely pummeled. Eventually there will be a rotation but I still believe far too early. But judging from what is selling off and what has relative strength, it looks like we are going to have some similar performance to those rough weeks in latter January. Some excerpts of what I wrote in that post:

One must be constantly flexible, and staying married to any one viewpoint is, in my estimation, a way to lose money. The question is, with the flurry of changes over the past week and a half, is it time to change focus in the fund? This is something I have been thinking about a lot the last few days.

On the economic front my predictions have been just about dead on since August. Everything is playing out as I envisioned, and in fact even more accelerated than I thought. I saw a weakening US economy, distress in financial system, and a reactive Federal government on all levels. Things have moved even faster than I predicted - back when the first discount rate cuts came in August I said inflation concerns will be thrown out the window as the cockroaches came to the surface - so ignore all pundits who tell you the Fed cares about inflation - we are going to 3% by Spring 2008. It's already happened.

Now we are at an inflexion point, much like in mid August after the Fed began their rate cutting actions. It is very easy for popular pundits to now say "don't find the Fed" - and to buy the early cycle names especially retail and financials.. These were the same guys who said it in August (and they were right for 8 weeks after the market went on a Kool Aid rally). But they were wrong when they said it in October. (November was a 10% correction). They were wrong in December on the next cut. (January 10%+ correction at its lowest). And anyone in retail, financials, homebuilders lost far more than 10%. Many names were down 40-60%.

I referenced earlier this is a very similar time to August after the first emergency cuts. Why? Because we began to drink Kool Aid in large swigs. The conventional wisdom at the time was the Fed will save us and almost no one was talking about recession - this was a financial issue and the Fed could fix the banks and things will continue as normal. Not one investment bank was talking about recession. Very few bloggers were. That all changed within 3 months. As for the markets - they raged upward on "trust" in the Fed... the same investors who now berate Ben everyday for being behind the curve.

I had a lot less readers in August but do you know how I was positioned? Very similar to how I am now. And the fund suffered - I was losing money daily on the Ultrashorts... because banks were "saved" by the Fed. This was before even the first foreign capital infusion. I kept saying this is just the beginning and whatever disclosures the banks were making (they were calling these kitchen sink quarters) was nothing. We had a whole house of sinks to go through. And we have seen this was true. But PERCEPTION IS REALITY. And PERCEPTION at the time was, "the banks will be FINE once we get over this rough patch" and "recession? laughable". So the market ramped for 2 months into mid October.

Where are we now? Well I find the same viewpoints now everywhere. The Fed will save us. I am looking at what is rallying and I have to ask an open question. With a flailing employment situation ... and folks, we won't see the truth of the employment situation until the summer in the "government numbers"... how do you justify a bullish move into retailers, homebuilders, and financials?

We have 2 risks (a) systematic financial risk and (b) recession risk. What has made this market scary to me is having both risks at once is not something I can recall - nothing in 98 or 01-03 was similar. Perhaps 1990 was the same, but that was before my time in the market. If this were simply a recession story I could "game that" a bit easier. But both at once? Much harder to game. Now with that said, we are beginning to work through the systematic financial risk... i.e. the bond insurers won't go out of business and bring down the system. But we still have other new financial risks that people are now glossing over in their drive to run up the financials. Those have been discussed at nauseum here - mortgage risks in Alt A, prime. Car loans. Student loans. Credit card borrowing. I still believe almost none of this is discounted in the market. But all people care about now is that we don't have a global collapse due to bond insurers and that's good enough for a hell of a financial rally. But that doesn't mean we don't have many more shoes to come. Shoes I don't think are being discounted at this time.

So am I changing strategy? Nope, not until I see financials ramp hard on their next round of write offs and capital infusions.. I do think the "perception is reality" trade will push me into financials, and homebuilders as the year goes on (I've already written about this). Retailers scare me in this environment where the US consumer is falling behind inflation on a daily basis, but "perception is reality" so they can go up to. Again I need to stress - Main Street is not Wall Street. When 5700 people lose jobs, the stock goes up. But I don't think much of what I've written above (which can of course all be incorrect) is priced anywhere in this market.

*****
Since that post a lot *has* changed - the Federal Reserve is now essentially a backstop for financials; Lehman Brothers and Goldman Sachs already tapped the discount window last night - etc. But the underlying problem (housing prices continue to fall, and more people walk away each week) has not changed. And the recession (regional) still looms. So from time to time, we are going to have this "sector rotation" and people will ask "is the commodity boom over?" "should I be jumping back with 2 feet into the early cycle plays?" Well certain financial media pundits told you to do that about 7 weeks ago, and if you followed that advice you had your head handed to you on a platter. I still think it is way too early but I do expect this "rotation" talk (and action) in stocks to happen in cycles over the coming months. At some point they will be correct, but I don't think yet. That doesn't mean the stocks won't rally for a few hours/days/or weeks. But with a longer term horizon in the mutual fund positions, I don't make wholesale changes to ride a trend that might last 7 trading sessions.

Bookkeeping: Closing FCStone Group (FCSX) After a Short Rental

I am closing my small position in FCStone Group (FCSX) after a very very short stay in the portfolio [Mar 10: Beginning Starter Stake in FCStone Group]. This stock was absolutely destroyed in the panic Monday [Mar 17: FCStone Group Already Getting Smacked - I Barely Knew You], down 50% at one point, before rallying 45% yesterday. Frankly, the thesis on the name has not changed but I cannot stand for that sort of risk - I did not realize just rumors could drop something like this down 50% and I don't want to carry that risk on the books even if it means giving up profits. Not worth it to me, in this enviroment which is still fragile - stocks that move up/down 40-50% in a day are just not my cup of tea, and that's now how FCSX usually trades.

I am selling my 1% stake in the name @ $33.65, and booking a $1600 loss; compared to how bad the situation was Monday I'll be very thankful to escape with such minor damage. Thankfully I had been patient on waiting for an entry point or my loss would of been much more substantial. Again, this does not mean the stock is going down or cannot rally 50% higher from here. Logic would dictate there is some great value here but when logic gets thrown out the door, it doesn't help the portfolio one bit. I'll revisit in 6 months or so when things calm down.

No position

Fannie Mae (FNM), Freddie Mac (FRE) Layered with MORE Risk

This could be the most inaccurate headline I've seen in a long time 'Government Gives Plan to Help Fannie, Freddie' - funny, I see it exact the opposite. Two overleveraged companies, and the government is giving them more rope to potentially hang themselves - but not to worry because federal tax dollars are at the ready when/if these fall off the cliff. How quickly things change, eh? Just a week ago Barron's was talking about the potential to be the next government bailout [March 10: Barron's Cover Story: Is Fannie Mae (FNM) the Next Government Bailout?] Now, we want to increase their leverage - which is exactly what is taking down institutions like Carlyle Group, Bear Stearns, et al. Again, I cannot make these things up - but this is the desperation to get the mortgage market going by any means necessary.

• The government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion of financing for home loans.
• The initiative, which will require Fannie and Freddie to raise substantial funds, is part of a broader government strategy to ease a credit crisis that has made it difficult for consumers and businesses to borrow, and spread fear throughout global financial markets.
• The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, said the mandatory cash cushion for Fannie and Freddie -- now nearly $20 billion for the two -- will be reduced by a third under the new plan. The freed-up money will go toward buying mortgages of struggling homeowners, enabling them to refinance into more affordable loans.
• The capital requirement for each company will be reduced from the current 30 percent to 20 percent, and further reductions will be considered in the future. Fannie and Freddie will raise additional capital through special sales of stock or cuts in dividends.
• It was the third step the government has taken in recent weeks to allow Washington-based Fannie and McLean, Va.-based Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.
• The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

I don't even know where to start... this is right up there with corn ethanol subsidies. Again, these are implicity backed by your tax dollars so if things devolve you know who will be on the hook for the bailout - but talk about tempting fate.

No position

Bookkeeping: Both Precious Metals Stocks Drop to 50 Day Moving Average, so Adding More

Well that was quick. Yesterday I mentioned I was increasing exposure to the 2 precious metal stocks [Bookkeeping: Adding to Precious Metals], as they fell to their 20 day moving averages

I am taking this opportunity to add a good amount of exposure to both Kinross Gold (KGC) and Silver Wheaton (SLW) - both charts are identical - stocks in solid moves up which have pulled back to a first level of support (20 day moving average). Both risk falling further to 50 day moving average where I would buy more.

Now, according to plan they both have quickly shed more value and dropped right near their 50 day moving averages, so I am adding another layer to both positions. So far it's been a textbook pullback - can they fall further? Certainly, as the hedge fund invasion into commodities has caused massive volatility, but the underlying trends have not changed and short of a new era of dollar strength, and equity market resurgance these should rebound well on the next market selloff.

I've added to Kinross Gold in the $23.30s, and Silver Wheaton in the $17.00s; the former is now a 3.0% position and the latter 2.8%.

Long both names in fund and personal account

A Box of Chocolates Every Tuesday

Remember last Tuesday? The so called best day in the markets in 5 years? [Yowsers!] Already an antique! I've come up with a new strategy - be long Tuesdays, and short every other day - should make me a billionaire within the year.

While it's a fool games to try to predict short term stock market movements on a consistent basis, it doesn't mean it's still not fun. I mentioned this morning [Short Term Bullish?], it might be time to bring out the barrels of Kool Aid since everyone in the media and other blogs was starting to sound like me. Makes the contrarian in me jump out of my skin.

Later today [Not Selling... (Yet?)] I asked if this was the time to sell since last Tueday/Wednesday you wanted to get out of dodge as quick as possible ... but I thought/think this time is different.

We have a bit of resistance at S&P 1320, but the Fed and PPT will take care of that. No problem. Maybe we'll have to worry a bit at S&P 1360. Ahh... having the Fed protect my stock account is... priceless! (Speaking of which VISA IPO imminent). Whatever I do... whatever choice I make... Ben is on my side. Feeling like 1999 all over again.

Sprinkled in between that tongue in cheek is some reality. S&P 1320 was a key level, and we blasted right through that as if it didn't exist. So as I wrote, I'll probably be a Kool Aid toting Bull until S&P 1350s... does it mean I'll be selling this short exposure? Nah, only have about 11-12% and I can't count on being so fortuitous as I was today. Sometimes you get lucky in timing.

And ironically, I am trailing the market - these days the market indexes explode (last Tuesday and this Tuesday) it is just hard to keep up with the indexes unless you are completely unhedged.

So we'll see what the rest of the week brings but this bulletproof attitude I spoke about this morning has seemed to seep into the market. We'll see how how the S&P handles a serious technical level (50 day moving average) if/when we get there. But I'm still not selling down long exposure (I'd normally be layering out after this sort of move) since my hunch is we keep rolling... after all, we have the government on our side now! And helicopters, fire trucks, and jumbo jets filled to the gills with Kool Aid. Excellent :) Life is good.

Bookkeeping: Adding to Precious Metals

Sort of ironic in another day of currency debasement the gold and silver stocks are down. I am taking this opportunity to add a good amount of exposure to both Kinross Gold (KGC) and Silver Wheaton (SLW) - both charts are identical - stocks in solid moves up which have pulled back to a first level of support (20 day moving average). Both risk falling further to 50 day moving average where I would buy more.

We'll get another 50-75 basis point cut in a month and a half. Or a government bailout - either of which add a flood of US pesos to the system.

Kinross Gold is now up to a 2.6% stake (bought today just under $25), and Silver Wheaton 2.2% of the fund (bought today in $17.90s)- the largest stake I've had in both names. The risk to these positions is the dollar starts to rally on (a) faith in the US system or (b) Europe cutting rates in concert with Fed to prop up global financial system but the latter will just put more fiat money into the system so it's not as much of a concern as point a. Even at $1000 gold, these miners are printing money. Due to the heavy speculation by hedge funds certainly we could see a pullback to mid $900s or so, but the trend remains in place.... Currency debasement.

So today while the Ultrashort exposure and commodities suffer, the long exposure benefits. When the next shoe does fall (although the shoe will be saved by the Fed of course), equities will fall some and then commodities and Ultrashorts will be working. Always trying to have something working, and biding time. Once we get through this whole credit mess we can start to focus on the earnings implosion coming in 2nd half for most companies who rely on the strapped US consumer. We've been so focused on the financials that we forget little things like that. :) All in good time. Bailouts first.

Long both names in fund; long Kinross Gold in personal account

Larry Fink from Blackrock (BLK) Getting More Bullish

I've mentioned my great respect for Larry Fink, the CEO of Blackrock (BLK) in the past on this blog. One of the few CEOs in this country worth the ridiculous sums of money they pay most of these people to babysit the executive suite for multi millions in return. As I was looking through some of the investment banking news today, I came across this blurb on how he is becoming more bullish. Always worth listening, among the host of used car salesmen with MBAs, to one of the legitimate bright minds on Wall Street.

p.s. notice where Mr Fink is traveling... since day 1 in this blog, I've been talking about investing in companies whose customers are becoming more rich by the day through petrol dollars or trade surplus - instead of those getting poorer by the day such as subprime USA.

• Larry Fink, the mastermind of mega-investment firm BlackRock (BLK), readily concedes that he built his career by being bearish. But right now, while he stops short of calling a market bottom, he is sounding a whole lot more bullish. In recent days, Fink has been traveling around the world—China, Saudi Arabia, Dubai, and elsewhere.
• But Fink, whose firm controls over $1 trillion in assets, has big-money investors to confer with as he plots his strategy for what he acknowledges are scary days on Wall Street. What he is telling major clients is that once stability returns to the markets, all the cash that's on hold will set off a massive rally. So act now.
• Back in the fall I said markets cannot hit bottom until there is a capitulation or people begin selling. We're at a point where people are capitulating and selling. But these are frightening times. Every day you read about the impairment of one hedge fund or leveraged lender; about stresses with banks and security firms over their balance sheets. So the question is: How low does the market go until it finds a bottom? It's hard for me to tell you the bottom is here, but I'm telling all our clients worldwide that for long-term investing, the credit markets represent great values.
• The problems the Fed and our government are facing is that lowering interest rates has actually aggravated the credit markets they're trying to fix. We are experiencing a liquidity problem. But what the Fed did today was very different than any other action it's taken. It is proposing to offer Treasuries in return for other types of collateral to security firms. This is very important and is a strong statement by the government that it wants to fix this liquidity problem. They're saying that in exchange for Treasuries, they'll take in mortgages. So they are trying to reduce the balance-sheet stresses at banks and security firms over their mortgage holdings. In fact, some of the major catastrophes or bankruptcies or failures we've seen in the last few weeks involve entities that held prime mortgages.
• Everyone is still fixated on subprime. Subprime was yesterday's problem. I don't want to say it's not still a problem. But the bigger problem today is in other asset categories—prime mortgages, leveraged loans, and other forms of leverage. I think we're going to see next week, with first-quarter earnings from Goldman Sachs (GS), Lehman Brothers (LEH), and Bear Stearns (BSC), that if they show any impairment—and I'm not saying they will or they won't—their impairment isn't going to be in subprime. It's going to be in bank loans. It's going to be in commercial real estate. It might even be in prime mortgages. (Bingo! I keep saying subprime was just the sympton, not the disease)
• I am very bullish on some components of our economy. I think we are in a recession, but I believe our exports will probably make this recession less severe than it otherwise would have been. But getting back to the world, we are seeing a slowdown in the Asian economies, a tremendous slowdown in Korea and in Japan. We're seeing a slowdown from maybe 12% GDP [growth] in China to 8%. In the Middle East, we are still seeing a huge boom in infrastructure. However, the one contagion that we are starting to see in China and certainly in the Gulf region is an untenably high inflation. My worry is that inflationary pressures from the Gulf and China, combined with low interest rates the Fed has put in place, could create higher inflation in the U.S.
• If the global economies do slow down, commodity prices should slow down, too. [The runup] in commodity prices is because so much of our markets are being driven by hedge funds, and most hedge fund managers are momentum traders. So they're buying long positions in commodities because the momentum is for higher prices. I don't believe the economic activity we're seeing in the world justifies these commodity prices.

I've always liked this guy. Maybe because he agrees with me on so many subjects. ;)

One important point that I tried to put into larger font is the runaway inflation the rest of the world is starting to see - part of it is the World of Shortages and part of it is hedge fund speculation in commodities and part of it is a world awash in liquidity (paper money) chasing finite hard assets. Basic economics - huge supply (trashed currency) chasing finite assets = prices skyrocket. So as we cheer what the Fed is doing to prop up one asset (equities) keep in mind the after effects worldwide and the real pain it will cause across the globe. People in America do not realize how for most people in the developing world, what a great % of income goes to food alone. So as food costs escalate we are really going to be causing harm to hundreds of millions if not billions across the world. I haven't written about the food shortages and pricing issues for a few weeks but this "bubble" we create this time to "bail out the system" is going to affect the lower and middle class across the globe (not to mention in the USA) through commodity inflation; the one commodity they all care about is food. [Feb 26: Rising Inflation Creates Unease in the Middle East] This is not even taking into account the corn ethanol boondoggle. This is why it is so purely toxic what "they" are doing - all to bail out the NYC banking community. This has been a theme of mine for a long time, but the real painful effects will be borne out the next 1-3 years globally. So in return for saving "innovative" "lightly regulated" US bankers from themselves, we exaggerate an already awful global food supply problem. But as inward looking Americans, all that matters is our stock market goes up - the rest of the world - well it's a dog eat dog world (or "people eat dog" world the way it's going) [Jan 30: Hungry Haitians Resort to Eating Dirt] Flooding the world with paper money (and we're only in inning 4-5 of our epic flood) does have many consequences; for those paying attention we are already seeing them - the mainstream press will catch up in a year or two.

Long Blackrock in fund; no personal position

Not Selling.... (Yet?)

Last week, I made a host of purchases during weakness Monday... and then after the huge move Tuesday on the Federal Reserve new interventions (I know.. I know... it is hard to keep track of which ones, but this was the $200B one), I sold most of that stake Wednesday.

Following a similar pattern, yesterday I made a large bucket of purchases, but despite this huge move (again on a Tuesday) I am not in a rush to sell. Why? Well the market has an air of bulletproof-ness at this moment. No financial will be allowed to fail. The Fed will backstop any bad assets. And we are flooding the market with liquidity. So people can feel invincible now. No matter what they do, the powers that be will help us push assets higher. Nice eh?

As I wrote in the blog, I debated buying Goldman Sachs (GS) yesterday at $145 but didn't have the nerve. It was that damn free market thinking that got me again - the ridiculous use of logic of the way "things used to work". With 1 competitor destroyed, and the Federal Reserve backstopping all bad assets Goldman Sachs is probably worth $300. And yet I did not buy at $145. Ugh! Today $170.

We have a bit of resistance at S&P 1320, but the Fed and PPT will take care of that. No problem. Maybe we'll have to worry a bit at S&P 1360. Ahh... having the Fed protect my stock account is... priceless! (Speaking of which VISA IPO imminent). Whatever I do... whatever choice I make... Ben is on my side. Feeling like 1999 all over again. I hope no one wakes me from this dream world where assets can only go up. I love it here... unicorns abound, and mermaids off in the distance. Nirvana.

I usually feel angst on Fed cut days because no matter what the result one never knows what how bipolar market will react. But in this current era we know its going to be something ridiculously huge as the Fed is the market's bi... female dog. What the market says to do, the Fed will do. Or the market will threaten to go down big and cause politicians to get fired. It's sort of nice. We are bulletproof. This Kool Aid is wonderful. Waiter, may I have another?

CNBC: Fed Rate Cuts are Helping Economy, Not Credit Crisis

These type of stories are what make me think that the "end game" of direct government intervention into the mortgage market, in some form, is beginning to get priced into the market. I can't wait to see Paulson's face when he is forced into this hand after denying this has any chance of happening for 3/4 of a year now. Your tax dollars - once again, hard at work.

All I know is I keep using words like "extraordinary" and "unprecedented" in this blog for the types of things we are seeing. I guess if I was a blogger in the 1930s this would be old hat, but for most of us, this is an entire new era of government interference. I can only imagine the nefarious behavior that will be borne of this in 4-5 years. We are turning into a Banana Republic and now officially have no grounds to subject other countries in this world to our condemnation when they do the same things we are about to do, to bail out their economies.

• The size of the Federal Reserve’s expected interest rate cut this afternoon may help stimulate a sluggish economy. But like the several cuts before, it is unlikely to unfreeze the credit markets, especially the mortgage one.
• And as the Fed continues to use its conventional fire-fighting equipment,there’s a growing sense that extraordinary--and somewhat controversial--measures may be needed.
• “The Fed by itself will not get us out of it," says John Irons, research director at the Economic Policy Institute. “We need to combine fiscal stimulus with monetary stimulus.” Among the ideas now emerging are a new fiscal stimulus measures, specifically targeting the mortgage market, and the possibility that a bailout of both business and consumers may be inevitable.
• It may also be no coincidence that the Fed last week took the unusual step of creating its so-called Term Securities Lending Facility, allowing it to take up to $200 billion of non-Treasury securities, including federal agency backed mortgage securities and mortgages, as collateral for up to 28 days. “It’s probably an admission that federal funds will not be enough," David Resler, chief economist at Nomura International, said at the time. Reseler considers the lending facility, the “most significant policy initiative since the credit crisis began last August.”
• But it may be as far as the Fed can go. Federal law prevents the central bank from buying mortgages outright. Congress, of course, could change that, or otherwise, empower another arm of the federal government to do that. (Bingo!)
• “The most effective way is to create some way so the federal government can force a markdown in some of these mortgages and take them on itself -- say through some sort of bank -- such that the government becomes the holder of mortgages," says Irons.
• This time, the government’s efforts are arguably ill-conceived and misplaced, say economists. The $172 billion stimulus package is likely to provide little of a boost. It contains one-off tax cuts, which typically lead to consumers saving the money, and lacks traditional measures such as an extension of jobless benefits and infrastructure spending. Most importantly, it does not address the slumping mortgage market.
• On Capitol Hill, House Financial Services Committee Chairman Barney Frank is the latest to push the idea of federal intervention and support, through some sort of loan guarantees.
• “I think it is an issue of the financial system overwhelming the rest of our U.S. economy,” Vanguard founder John Bogle told CNBC. Bogle, for one, seems to be worried about the Fed's own balance sheet and sees taxpayer money at stake. “They can't do everything,” he said.
• In a presidential election year, however, it may be more politically desirable -- as well as easier -- for the Fed than for the Congress to throw good money after bad.
• Much like the debate over the Fed’s role and the idea of moral hazard, an argument whose intensity has waned as fear of the credit crunch has heightened, hand wringing over an outright government bailout may turn into an open-hands expression of helpless inevitability. (Bingo!)
• At this point, the moral hazard issue may be solely “theoretical,” as Irons puts it, because we are “stuck” with the credit crunch and a bailout. “This is a once in a generation thing,” (no, it's not - it now happens every 6-8 years as we go into bubble/bust/kick can down the road/rinse/wash/repeat - I am so sick of hearing this once in a lifetime crapola - just like the tech stock bubble was once in a lifetime, and the coming commodity bubble will be a once in a lifetime thing, right? It's the system stupid - tails we win, heads we win - corporate America paid for by Congress)

Bailouts... coming to a theater near you this summer (or earlier)

Reader Investment Pledges mid March

Thank you readers - we are approaching $1M in total investments pledged already which is fantastic. I was not anticipating any serious interest until having at least a 1 year track record, so all these early investments are icing on the cake.

The original post on the purpose of the blog can be found here [Jan 7: Readers 'Pledges' Towards Mutual Fund Launch]

Last month's update can be found here [Feb 19: Update on Reader's Pledges 6 Weeks In]

As an aside I've lowered my total goal from $15M to $12M - I've been peeking around some smaller "no name" funds, and some have assets from $8-$10M in fact. Since break even should be do-able at $8M, once near that level I will actually start working on the nuts and bolts - unless a hedge fund swoops up my services first ;). But to think we're already 1/8th there is amazing. But you know what they say, it's the last 7/8ths that is the hardest part... (ok they don't really say that - it's the Kool Aid getting to me)

Once again thanks for the readership from all of the blog viewers - the blog growth has been fantastic, and thanks for those who have put faith to invest. Hopefully in the coming months I can win over more people with continued positive fund results. Would be nice if the markets behaved nicely for a few months - this has been a tough environment to launch a track record, I tell you.

As always, you can see how I am doing by verified independent 3rd party metric here: 'Rising Tide Growth' performance

To future investors, as always, if you change your mind and want to rescind an investment pledge and/or change (up or down) the amount, please let me know since I simply want know where I truly stand in this process. Also if you see your name below but no location, please drop me an email or comment on this blog entry of your city, state. Thanks.

Amount	Who	Where
$75,000	Self	MI
$2,500	Michael D	Oceanside, CA
$7,500	Oth	Parts Unknown
$10,000	Dean D	San Jose, CA
$2,500	Oza P	MA
$20,000	Oren L	Chicago
$10,000	Rob T	NYC
$5,000	Ryan	Seattle, WA
$7,500	Ted	Sunnyvale, CA
$2,500	Brian P	Cerritos, CA
$22,500	David B	Middlesex, NJ
$50,000	Ian	San Antonio, TX
$40,000	"LiquidWindows"	Deep in heart of TX
$5,000	Jonson	LA, CA
$5,000	Jimidean	Parts Unknown
$3,000	Brooks R	Baton Rouge, LA
$5,000	Zlatanscores	Parts Unknown
$3,000	Ben S	Portland, OR
$5,000	Sheng S	Omaha, NE
$10,000	msuberri	NJ
$5,000	David W	Houston, TX
$10,000	Ryan T	NJ
$3,000	NandaK	Nashua, NH
$2,500	WaltF	Parts Unknown (via email)
$2,500	Joe	Scranton, PA (email)
$2,500	Todd	Nashville, TN (email)
$250,000	David R	South Carolina (email)
$100,000	A.F.	Los Altos, CA (email)
$50,000	Satya	Parts Uknown (email)
$5,000	Bobby L	San Jose, CA
$200,000	Ganesh S	Bellevue, WA
$2,500	Michael A	Charleston, SC (email)
$2,500	TJP	Sterling, IL (email)
$37,500	Bob B	VanBuren, AR (email)
$10,000	Pat L	Tuscon, AZ (email)
$10,000	Art H	Auburn, CA (email)
$5,000	Dan D	Augusta, GA (email)
$5,000	Jeffrey H	Greensboro, NC (email)
$994,000	Total

Short Term Bullish?

I realize sometimes reading this blog can be a downer - but frankly I believe truth and reality helps people make money more than "blind optimism" - that "cheery stuff" can be found on most financial websites or financial business TV shows. I do wish at times I can make this a more cheery place (and hope someday we can when conditions in the US change), but for most of the time since the blog started last August it has been more important to preserve capital and be defensive. But I will toss out a short term bullish bias ("Be Happy") that I am forming at this point. With 1 caveat - no surprising blind side line item from a financial company....

This is within the context of a larger bear market but... for the first time in a long time I am reading almost everywhere the ideas I have been posing for a long time. And once a view that was once scoffed at becomes conventional theory I believe it begins getting priced into the market. Again, something like the Bear Stearns debacle obviously was not priced into the market as it happened nearly overnight, but the "risks to the financial system" are now being talked about openly on TV shows, and many financial websites - whereas in the past it was Roubini, Schiff, Minyanville.com, Mish Shedlock, and that's about it. Now it's everywhere. So it is slowly but surely getting in.

Next, our leadership finally seems to get how bad it is. This Sunday's actions to extend the discount window to the investment banks AND the perceived backstop the Federal Reserve now has put on all financial assets is important. It doesn't mean they can hold off the negative deluge forever, but they are going to do their best to keep kicking the can down the road until things improve. This is what we do in America.

Another point I have been promoting for a long time is eventually the federal government will get involved in directly buying mortgages - as the financial situation devolves, and in the heart of a presidential political campaign the pressure will be immense. I believe all the free market Republicans will eventually cave to self preservation and this step will happen.... and from recent actions my "theory" from last summer is gaining more evidence by the day. At some point the market will begin pricing that in as well. Do I like it? No. Is it fair? No. But my job is not to like it or find fairness - just make money. So I am a realist if nothing else. In this culture of "it's not my fault" and "come bail me out from my mistakes" I just think this is the eventual end game. The financial leverage is just too great in the system - and as more people begin to "walk away" in 2008, more loans will become non performing.

There are myriad other reasons but they all fall under the same pattern. Denial is finally turning into acceptance. Especially at the Federal Reserve. Inflation is not a concern with these people, so money will be printed to save the financial system at all costs. And the actions since last Tuesday show how serious they now are.

Now this does not mean I expect a massive rally, nor that the underlying economic pinning is strong. But it doesn't have to be, for some meaningful rallies. In fact most of the greatest rallies in history have come within the context of a bear market. I do expect quarters, if not years of middling US growth and real inflation (that the government disavows is happening). But that does not mean the stock market cannot have periods of solid returns.

Negativity is extremely high - every other blogger now sounds like me. ;) That's contrarion. And yesterday's technical price action literally broke every rule I know. So it tells me (as Todd Harrison of Minyanville.com likes to say), nothing is more dangerous than a cornered animal. And the folks in the government are cornered - and powerful. So the concept of free markets gets thrown out at those times, and rules that work for decades suddenly become moot. Yesterday showed that to me. So for now, until the next wave of reality hits... I'll be constructive. I'd be more constructive if "they" allowed us to swoosh down and have some serious pain, and create some great buying opportunities. But it is what it is. How far or high it takes us I don't know. If the financials/retailers/homebuilders will be the "leadership" for the short run (as they were in mid January) I don't know. But I do know a lot of action we will never see or know about seems to be afoot behind the scenes. And being on the opposite side of that trade can be detrimental. Kicking the can is a national policy, so one must respect that. Unfortunately our children and grandchildren will suffer. But that's not important in terms of how the market will do in the next few weeks/months/years.

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Bookkeeping: Beginning First Natural Gas Play - Cabot Oil & Gas (COG)

I want to build a mini basket of a few natural gas companies, as I've done with fertilizer and coal. We first started noticing the relative strength across this entire sector about a month ago [Feb 11: An Interesting Development in Natural Gas], but I wanted to do more homework on the group as I have not invested in any of these names for close to 3 years. I still like coal more due to its potential to be exported BUT it appears as more coal is sent offshore this has pushed up demand for natural gas. But my main fear of the natural gas trade is slowing US economy will hurt it, and since it is not easily transportable like coal can be, it is levered far more to the domestic situation. That said, the price action in the stocks of late is hard to argue with, so I am going to begin exposure here and then watch how things develop.

Of interest are EOG Resources (EOG), Chesapeake Energy (CHK), Cimarex (XEC), Southwestern Energy (SWN), and a few others. I'll probably stick with 2-3 names and simply have a group of 5-6 on a watch list and am waiting to see which ones hit my price targets first. I do want EOG, with their recent discoveries, in the portfolio badly. Today I am beginning with Cabot Oil & Gas (COG) as it has fallen nicely to its 20 day moving average and is down 9% today. I started with a primer position of 1.2% or 250 shares right near $49. I would like to expand this position if/when the stock falls to its 50 day moving average below $46. We'll see if that happens as these stocks have shown incredible relative strength of late - staying flat in all this market turmoil.

Most of the other names have not fallen that much (ex SWN), but I want to buy the strongest charts WHEN they falter in a general market selloff. Cabot Oil & Gas is one of those names that provided an opportunity today. (could of bought for a similar price in past 2 weeks of course, but wanted to see how this group reacted in the anticipated sell off)

Long Cabot Oil & Gas in fund; no personal position

Technicals Simply not Working Today

The Plunge Protection Team appears to be working very hard today. Today, we had a triple bottom break of 1270, MULTIPLE times throughout the day and each time we rebounded off... 1260? Makes no sense. Simply put, when the index reaches the same point on the 3rd try (1270) and then falls through, the end is near and another leg down begins. I actually bet against this happening in early January and paid the price with 2 weeks of severe losses in the fund. Now, the exact same thing happened today, and the market rebounded 25 S&P points? For those of you who don't follow charts, see above to see what I mean... early January we went to 1270, last week we went to 1270, and today was the "triple bottom" that "broke" as we fell below 1270.... multiple times. Yet nothing happened -> instead we go up. I haven't seen something like this ...that I can recall. I am sure it has happened, I just don't remember when.

This triple bottom break is an exact replica of early January action and should of precipitated another leg down. Looking at an intraday chart this happened over and over today, but we were "saved" each time by massive buying once we got to 1260. I wonder by whom? Anyhow it is simply not a market where things learned over 2 decades are applying - market forces are not being allowed to play out, so frankly I give up on the guessing when things that work year after year, suddenly have no meaning.

I've been whipsawed severely today, but in light of the action I've had to reverse course yet again and I've lightened up my short exposure, since what "should" of happened, did not happen. So if we are dictated to go up by the powers that be, I will go along for the ride. Can't fight the government and win all the time I suppose. For now, I'll just shake my head in wonderment.

Bear Down, Lehman Brothers (LEH) Next?

Lehman Brothers (LEH) was very weak Friday as speculation grew that they would be the next domino - I feared for what would happen to them today but thought last night's Fed moves might give them a stay of execution. The market seems to disagree, pushing the shares down 40% today (they were down lower earlier). Pure crisis. If Lehman goes, than there are only 3 investment banks left and Merrill Lynch (MER) is not in good shape as they were one of the center pieces of the whole mess. Their new CEO, John Thain, has a ton of respect on the street so I am guessing that must be the reason the stock is not being pole axed further. I opined at the turn of the year that I could see investment banks being a good investment in the 2nd half of 2008 after all the cockroaches that at the time people were saying did not exist came to light, but will there be anyone left but Goldman Sachs (GS) at this point? Sheesh. They are going to have all the investment banking business to themselves at this rate. I keep repeating these are truly unprecedented times....



But back to Lehman...

• Lehman Brothers shares fell to a six-year low as Wall Street, leading the decline among financial stocks, as investors wondered whether the firm might be the next domino to fall in the banking meltdown.
• The drop in Lehman's shares was accompanied by options activity that showed investors were perceiving heightened risk for Lehman's stock and an increased likelihood of a decline in its value.
• Earlier Monday, CNBC learned Chief Executive Dick Fuld sought to calm Lehman employees by sending out an email telling them that the Fed's action to open its discount rate window to primary brokers has taken the liquidity issue "off the table for the entire industry." However, investors clearly were not soothed by his words. Lehman has higher exposure to mortgages and mortgage-backed accounts than Bear Stearns.
• Option traders were buying more than three-times the number of puts than calls, a sign that traders expect the value of Lehman shares to fall, according to Rebecca Engmann Darst.
• Analysts at Deutsche Bank sent an alert to their clients saying, "Lehman is not Bear." They cited Lehman's higher levels of liquidity, the support it has from its counterparties, its higher level of diversification, and the experience of Lehman's CEO as reasons for its opinion.
• But it said Lehman's exposure to commercial and residential real estate, and to a lesser degree leveraged loans, will likely burden earnings at least for the next several quarters.

Amazing what the power of rumors is doing in this market. Some powerful hedge funds who have the ears of journalists must be making some huge dollars in this era, simply by betting short and starting worst case scenario rumors. Anything to make a buck... not that they'd do anything like that (ahem).

No positions

FCStone Group (FCSX) Already Getting Smacked - I Barely Knew You

Sheesh, I just started this position in FCStone Group (FCSX) last week [Beginning Starter Stake in FCStone], and already carnage ensues - this is like 6 degrees of Kevin Bacon, except 6 degrees of financial exposure. Even if you are not a bank, if you are related within 6 degrees you are being taken out to the back of the shed and shot. Thankfully it is only a 1% type of position so the % loss is awful but in dollar terms its not horrific, but throwing money at anything even "somewhat" related to financials is simply a black hole right now... here is an article that mentions the carnage in the stocks that have "6 degrees of relation" to the main financials; there appears to be a whole brotherhood being slaughtered in concert. This is when fear overtakes any form of logic.

• MF Global (MF), the world's largest broker of exchange-listed futures and options, sought to reassure investors that it had enough funds for normal business even with its stock falling as much as 78 percent on Monday.
• "In sympathy with the Bear Stearns news, several other companies, including MF Global, have gotten hammered today," said William Lefkowitz, option strategist at brokerage firm vFinance Investments in New York. "Speculation is that clients are pulling money away from these financial companies leading to tremendous sell-offs and a lot of put buying," he added. "Investors are very fearful that there will be more problems in financial companies and that the potential for more bankruptcies exist."
• In addition to MF Global, inter-dealer broker GFI Group Inc (GFIG) was down 28 percent at $46.99 and FCStone Group Inc (FCSX) was down 34 percent at $23.65 on Nasdaq. Interactive Brokers Group Inc (IBKR) was down 20 percent at $23.72.

The logic of this makes little sense, but it is simply dangerous right now to venture in these shark infested financial waters. Any rumor can lead to a panic ... even to the "best of breed". I am simply going to sit tight at this point as the drop in the stock has dropped the weighting to 0.6% or so, but just like any of my other financials I am not adding despite these "bargain" prices because I cannot model sheer panic. Any of these stocks could be out of business in a week or up 100%. A new paradigm.

In moments like this we need some laughs so I had to sort of laugh at this comment from MF Global (MF) "we have no exposure to Joseph Lewis" - this is the guy who lost over a billion in Bear Stearns. Apparently he is now the new asbestos? It is just funny how it sounded but the most likely fear is Joseph Lewis (again this is not Buffet with $40B) is so strapped for cash he will sell any of his holding to pay off his Bear Stearns losses (maybe it was borrowed money?) - but this just shows you how any rumor can kill almost any company once confidence is lost. Amazing to watch it happen.

• Shares of MF Global plunged as much as 80% in heavy trading Monday amid worries that investors may be pulling their accounts from the brokerage firm, Bloomberg reported. The selling lightened up around midday after MF Global said it had $1.4 billion in committed, undrawn credit lines “and no exposure to subprime mortgage-backed securities or Bear Stearns investor Joe Lewis,”
• Lewis is the billionaire currency trader who has emerged as one of the big losers in the collapse of Bear’s stock. JPMorgan Chase (JPM) agreed Sunday night to buy Bear Stearns for $2 a share, or $240 million, in stock - a stunningly low price for a firm with such an august history, and one that will lock in major losses for Lewis, who was buying Bear stock last summer at $120.

I guess we all have to go check all our stocks now and make sure Joseph Lewis is not an investor!

Long FCStone Group in fund; no personal position

Bookkeeping: Layering Back in some Ultrashort Exposure

This morning's (ahem) rally, seems to have lost some steam so I have layered back into some of the Ultrashorts - I am back up to about 16% exposure there. S&P 1260 is where we sit right now, which is the level I mentioned I'd be watching closely this morning. We remain on the cusp of a breakdown...

As with the bad selloffs in the past, the fund will be taking a hit as some of my favorites are now beginning to really falter, and frankly when long positions started falling 8-12% across the board, a 15-20% short exposure doesn't help too much.... but I have a high cash position waiting to buy these positions lower if we really begin to falter. Won't ever catch the bottom (or top), but will continue to layer in as conditions weaken. This is starting to become old hat - Aug 07, Nov 07, Jan 08, March 08 - every 6-8 weeks we have a tremendous selloff :)

A lot of headline risk tomorrow with Goldman, Lehman and Fed cuts all compressed in 1 day. But technically we remain in bad shape and my first line target of the S&P if we continue this progression down is summer 2006 levels of 1220, about 3% lower than here. But individual names will suffer far more than 3%....

I'll be poking around this afternoon for some smaller buys if we continue to weaken. As I mentioned this morning, most of my buys have been smaller scale $4-$5K variety. No need to be a hero here and try to declare any bottoms or make huge scale moves. I do want to urgently increase fertilizer exposure (at lower prices) and potentially some natural gas... but still waiting for better prices.

Bookkeeping: Restarting Stakes in Malaysia and Singapore

I've been waiting a while to get back into my exposure into Signapore and Malaysia - both have been beaten with an ugly stick since I last exited the positions, so these seem like opportunite times to revisit the names for the portfolio. Notably, both are holding up relatively well today in the global selloff. Malaysia has some political risk that has risen of late so I am a bit less bullish then I was in the past, but I still like it as a commodities play, and Signapore is what the US used to be - a sterling home of finance. Even when all this mess is cleared up in the US, I expect a long period of underperformance as the US worker/consumer continues to fight a lot of global macro forces that are going to hurt his standard of living. So I continue to look for opportunities overseas.

I've held both these positions in the past, but sold out completely - and am now beginning starter $10K stakes in both iShares Signapore (EWS) and iShares Malaysia (EWM). It might sound counterintuitive to go to such "emerging markets" in times of crisis, but the malfeasance, corruption, and lack of regulation in the US is as bad or worse in my opinion. So I would not call a low (or negative) growth country that lies in its government statistics, compensates its upper 1% to a massive degree, ignores the middle and lower class, and drives government policies that hurts the masses as any different from a backwater 2nd or 3rd world country. That's simply my opinion, and why I don't see much more risk in investing in these countries than I do in the US. At least those countries have opportunistic leadership and high growth potential. Sort of like the US 40 years ago. While we are sure to get some sort of back half of the year spike in US equities, we've literally gone nowhere for this entire decade and that's in dollar terms - in gold terms or foreign currency terms we've gone down all decade. The proof is in the pudding and I see nothing in the leadership or consumerism of this country to suggest there is any change coming soon. Frankly, it saddens me but facts are facts - maybe one day we'll look into the collective mirror and demand change but the entrenched interests are simply too strong at this point. Hence, I continue to focus overseas despite the potent risks that also lie there. (nowhere is a perfectly safe environment)

I am not buying either of these country ETFs due to technical reasons - both are in terrible downtrends, but they have corrected severely and we can begin getting interested again. I closed my iShares Singapore position in mid November 07 [Bookkeeping: Closing iShares Singapore (EWS)] writing

While I like Singapore for the long run, its a finance based economy so could be open to some slowdown if we get a global/Asian slowdown. Technically the index is sitting at its 200 day moving average and is poised for a bounce back, but with other opportunities opening up, and heightened risk in Asia (in my opinion), I will use this cash in other places. While Asia markets have corrected along with US markets, the full effect of the US slowdown on their growth probably won't be recognized until 2008. So this is not a short term call, as this index is at a good support area and probably will bounce, but this is more of a long term outlook.

At the time, the ETF was still holding the 200 day moving average in the $13.80s. After a bounce into December, the index has been in free fall and now trades in the $11.70s, or a 15% correction, which is quite severe for a country index. So I am purchasing 900 shares today for a 1% fund stake.

As for Malaysia, recent elections have shifted some power away from the current leadership, so we do have some risk there.

• Malaysian stocks tumbled 9.5% after the ruling coalition Barisan Nasional, or National Front, suffered a major setback in the parliamentary election on March 8.
• The National Front won over half of the seats in parliament, but it lost its two-thirds majority for the first time in almost four decades. Prime Minister Abdullah Ahmad Badawi, of the National Front, has been sworn in and has rejected calls that he resign in the wake of the election result.
• "Insomuch as the election can be seen as a repudiation of some of the existing economic policies and structures, there are a lot of investors that would see this as a fairly interesting development," said Andrew Foster, acting chief investment officer at Matthews Asian Funds. "Quite a few investors have been frustrated with the degree of reform in Malaysia," Foster said. "Around my firm, it was hard not to see this as something that could become a positive event."
• Malaysia's main exports are electronic equipment, petroleum and liquefied natural gas, wood products, rubber and palm oil.
• Analysts at UBS said that near-term market sentiment is likely to be negative, "as uncertainty on the political landscape further exacerbates the negative effects of slower global growth on Malaysian GDP and corporate earnings."
• The Malaysian government may defer price hikes on fuel and electricity, and boost spending on social services, such as health care, education, and housing, to regain its popularity, the UBS analysts wrote in a research note.

I sold off my iShares Malaysia ETF in mid January [Bookkeeping: Closing iShares Malaysia] as the index was ramping in the face of a worldwide selloff, led by the US market freefall. With the ETF trading at $13.70 now, and $10.90s now I am able to re-enter this ETF at a 20% discount, 60 days later. Again, a substantial move for a country ETF, but part of this was the election fallout. I am taking a similar stake as the Singapore weighting, 1000 shares for a 1% holding.

Below are some blurbs from an Investors Daily piece on Malaysia in January (of course at the top!) - but again when you read it, and compare the strategic goals of this "backwards" "3rd world" country and others like it (say Brazil), you just have to really ask yourself which country is "backwards"... frankly I believe the domestic apathy & in fact arrogance in the face of rising global competition needs to end or... well we are already seeing that fallout - going hat in hand to sovereign wealth funds and/or printing money out of thin air just to keep our financial system from bankruptcy. Just imagine a leadership with forward looking goals that actually span longer than 1 election cycle. I know - a pipe dream.

• After 50 years as an independent nation, Malaysia can boast that it is the 19th-largest trading country in the world.
• It has embarked on a "national mission" of becoming a developed nation by 2020. It's taken steps to ease foreign investment guidelines, offer economic incentives and reduce the corporate tax rate to 26% in 2008. It's aiming to hold down its fiscal deficit to 3.2% of GDP to balance long-term growth with sustainability. (what a concept)
• Malaysia's real GDP is projected to grow at a rate of 6% to 6.5% this year with a 6.8% increase in nominal per capita income to $14,206, according to a report from the country's Ministry of Finance. That follows steady GDP growth of 6% in 2007 and 5.9% in 2006.
• The services sector, which accounts for 53% of GDP, grew at a rate of 9% in 2007. It's expected to pick up 8.6% this year. Manufacturing, the second-largest sector, accounts for about 30% of GDP. It's seen rising 3.8% this year, after 3.1% growth in 2007.
• The country has a low unemployment rate of 3.3%, while poverty has been reduced to 6%, according to the Ministry of Finance.

The main risks I see in these countries are the pervasive effects of inflation on the lower and middle class, but I suppose that is going to be a risk in any country at this point in the "World of Shortages" environment I envision.

Long iShares Signapore, iShares Malaysia in fund; no personal position

Bookkeeping: Morning Transactions

The S&P 500 continues to hang around the all important 1270 level even with all the forces aligned against it. Quite amazing to watch. In one respect with last night's move the Federal Reserve has now essentially put the call out they are willing to backstop all the investment bank assets; this is probably saving Lehman Brothers (LEH) from falling off a cliff as it appears the next to potentially go. Ironically, this selloff is nothing like the one in mid January due to our favorite rogue French trader, although the news flow now is a lot worse. I almost pulled the trigger on buying Goldman Sachs (GS) here in the $145 range which is the area I have been targeting but with earnings tomorrow and a potential $3 billion writedown expected I still took the conservative route.

If/when the S&P 500 breaks 1260 or so I will add more short exposure, but for now I am selling off about 8% of my 20% Ultrashort exposure - selling across all 6 names I hold due to the relative strength I am seeing. I was using 1265 as an earlier bogey but with the extreme volatility and news events I am widening that price target to a bit lower. I said many times that S&P 1270 will be defended with all the King's Horses and all the King's Men and all the firepower spent since last Tuesday with multiple historic Federal Reserve moves shows this. Once again let me stress, if we break below 1260 or so I will buy back all these positions at higher prices as this would mark a new leg down. We just don't seem to be able to put in that washout bottom with all this interference...

I am buying, again in layers of $4-$5K, and hoping for even lower prices - but I have to say this is some sort of resilience. I am focusing on companies either based overseas or with customers mostly overseas ... avoiding the US as usual. Or a focus on commodities.

1. Indian copper Sterlite Industries (SLT) @ $17.80s, down 6%
2. Indian bank ICICI Bank (IBN) @ $35.50s, down 11% (just opened a NYC branch!)
3. Indian bank HDFC Bank (HDB) @ $89.30s, down 6%
4. Fertilizer CF Industries (CF) @ $110s, down 4%
5. Fertilizer Mosiac (MOS) @ 103s, down 3%
6. Solar Trina Solar (TSL) @ $29.10s, down 5%
7. Coal Arch Coal (ACI) @ $42.70s, down 5%
8. Coal Consol Energy (CNX) @ $65.30s, down 5%
9. Brazilian oil and exploration Petrobras (PBR) @ $104.30s, down 4%
10. Brazilian homebuilder Gafisa (GFA) @ $34.30s, down 4% (this was actually a larger buy as the stock was nearing 200 day moving average)
11. Bulk shipping DryShips (DRYS) @ $56.90s, down 4%
12. Chinese drug outsourcing WuXi PharmaTech (WX) @ $22.40s, down 6% (this replaces the batch I sold post earnings last week)
13. Chinese travel Ctrip.com (CTRP) @ $49.90s, down 5%
14. Iron ore Cleveland Cliffs (CLF) @ $114.50s, down 3%
15. Russian iron/coal/steel Mechel (MTL) @ $129s, down 5%
16. Crop commodity, Powershares DB Agriculture Fund (DBA) @ $40.10s, down 3%
17. Infrastructure Foster Wheeler (FWLT) @ $55.70s, down 5%

Similar to last week, if these stocks rip higher on tomorrows .5%, .75%, 1%, 1.5%? 3%??? Fed cuts I'll be cutting back. Simply put there is so much liquidity being thrown at the system with so many Federal mandated backstops in the financial system, you have to be willing to buy some short term Kool Aid. But free markets, as we've been saying for months, in the US are truly a joke. When push comes to shove you see the hypocrisy - a country that tells other countries in finacial crisis to not interfere and let free market forces take over, takes the exact opposite tact itself.

Again, S&P 1260-1270 is a key area. Will be watching that area. I still am stunned we are not seeing any sort of real selloff with all this bad news... the belief in the power of the Fed in this country is quite amazing. I am keeping ready cash ready to apply to the short side if we ever get to reality. But in the meantime, I'll suspend disbelief and try to make some money.

Long all names except Lehman Brothers, Goldman Sachs in fund; long Mosaic, Foster Wheeler, Trina Solar, Sterlite Industries, ICICI Bank, Gafisa in personal account

More Fed Actions!

Wow, I am going to never be able to leave the computer screen as the action is hot and heavy even on weekend around here.

2 more Fed actions - an immediate cut to the discount rate of 25% and a new facility that they just came up with to dump more mortgages on the balance sheet of the Fed. How do I know they just came up with it? They haven't even had time to think of a fancy name like the TAF or TSLF... it's just the "black hole" - give us your junk. Is that the smell of desperation in the air? More serious steps, not even a week after the last round? Seriously Ben, just BUY the stuff right now, let's stop with these parlor games of "borrowing" for 28 days... why all these song and dances first? Let's just get the conclusion - the Federal Reserve will be the owner of a vast amount of mortgages ... just do it Ben.

• Federal Reserve Chairman Ben Bernanke said new steps announced by the central bank Sunday should help squeezed financial institutions get cash infusions-- a fresh effort to provide relief to a spreading credit crisis that threatens to plunge the economy into recession.
• The central bank approved a cut in its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans. (something they rushed so quickly out the door, they didn't have enough time to even properly name!)
• The new lending facility will be available to financial institutions on Monday. It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25 percent and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the loans.
• The Fed also is broadening the type of debt it will accept as collateral in the lending facility. The Fed said such loans can be collateralized by a broad range of investment-grade debt securities.
• The facility will begin on Monday -- and the maximum period for such loans will be extended to 90 days from 30 days.

Takeaway: So they are repeating what they did last Tuesday, but now extending it down to the 4 remaining investment banks. And taking a "broad range" of junk; meaning all types of junk are now going to be accepted. Especially if it has that special coveted AAA rating from Ambak and MBIA! And now instead of 28 days, we are going to 90 days at a time.

And as we all knows "extended as conditions warrant" means these are going to be outstanding for years. More risks for the taxpayers. Again, let's just cut out of the middle man here... just buy all this junk outright... we've been calling for this for months on end... this is the ultimate conclusion. Or instead of 90 days why dont you just say 1000 days? That's effectively buying it... or maybe 5000 days.

A Picture is Worth a Thousand Words: Inflation

Courtesy of Tim Iacono, courtesy of Barry Ritholtz, is this chart that shows what inflation would look like if the government had not constantly adjusted the way it measures CPI. The blue lines represent what inflation would like today if we continued using early 1980's methodology... and the red lines are what you are fed today after "1001 adjustments". I think this is what the American people feel, but how many Dow points would we lose if we started printing 14% CPI numbers? (Remember I keep saying 13-13.5% is the true inflation since our IMPORTED goods are coming in at that level, and we import almost everything) - this tells me that the way the government used to report things *was* in fact, relatively accurate. Was. Now, I am sure the early 80s methodology measurements were not perfect either, but they sure seem a lot more realistic cross referenced to what we see in real life Main Street economy. Just keep this chart in mind each time Wall Street claps (as it was going to do early Friday) at these bogus government inflation numbers.

The truth is out there - sadly it's kept from us and/or the government cannot afford to tell us the reality due to COLA (cost of living) adjustments. So we continue to tinker with the number to keep pushing it down. Again, as I said Friday, I truly hope we show negative CPI next month while crude is $125 and gold $1100, and wheat $16, etc etc. The farce will just continue to be exposed piece by piece....


(click on graph to enlarge)

March 2008 Update: Top 10 Winners and Losers

We last looked at the top 10 winners and losers for the fund mid December [Top 10 Winners and Losers so Far]. Now that it's a quarter later, time to update the list. In that time we've had a few nice weeks of rally at year end 2007, then a horrific fall in January 2008, followed by 6 weeks of range bound action and now another deterioration. So not an easy time to make money from the long side.

In the winners list, the fertilizer names and Ultrashort Financial and Real Estate remain from the last go around, but have become even bigger winners. Dropping off the winners list were Suntech Power (STP), Foster Wheeler (FWLT). 2 more Ultrashorts (Russell 2000 and China) make the list, and coal continues to be a nice exposure for the fund. Interestingly, unlike a position such as Mosaic which has been a top weighting for much of the fund history, even smaller stakes in the Ultrashort China and Mechel (which are generally 1-2% weightings) have provided some huge returns.

Top 10 Winners
Mosaic (MOS) +48.6K - fertilizer
Ultrashort Financial (SKF) +33.4K
CF Industries (CF) +31.7K - fertilizer
Ultrashort Real Estate (SRS) +22.6K
Potash (POT) +17.7K - fertilizer
Ultrashort Russell 2000 (TWM) +14.6K
Consol Energy (CNX) +13.7K - coal
Mechel (MTL) +11.0K - steel/coal/iron
Ultrashort Xinghau China 25 (FXP) +10.0K
Mastercard (MA) +8.7K credit cards

On the losers list, my new forays into the financials have only cut off my fingers; and my 2 solar darlings continue to be pure anathema, turning from bad performers into terrible performers. A former big winner for the fund, Crocs, turned into a loser despite my selling many points higher from current levels. I've also added some tech damage at the bottom of the list with my forays into South American e-commerce & Apple.

Top 10 Losers
Thornburg Mortgage (TMA) -22.9K - high end mortgages
Trina Solar (TSL) -22.2K - solar
LDK Solar (LDK) -19.8K - solar
Riverbed Technology (RVBD) -11.0K - networking
MFA Mortgage Investments (MFA) -10.8K - mortgage REIT
Crocs (CROX) -9.0K - plastic shoes
NII Holdings (NIHD) -8.1K - cell phone
Mercadolibre (MELI) -7.1K -Latin America e-commerce
Apple (AAPL) -6.9K - computers/consumer entertainment
Solarfund (SOLF) -6.6K - solar

While this is an ugly list above, I do believe quite a few names have some upside once the market regains its feet, but for now they remain relatively smallish positions. We will always have losers, but the key is the amounts in the losers list remain smaller than the the amounts in the winners list. Judging from how poorly the average stock is faring in this market, I'll be satisfied with that. We'll check back early in the summer for the next update.

Hot Off the Presses - JPMorgan Buys Bear For...

$2.

Ouch.

• The transaction will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share.

So Countrywide for $5, Bear for $2. "True value" is really being shown in our financials... yikes.

Update: Apparently Joseph Lewis' loss on his Bear Stearns trade is $2.7 billion (not confirmed) ; makes me feel a bit less bad about my stinker in Thornburg Mortgage. 99% loss for Bear since he bought in $105-$120 range and now gets $2. Cripes.

WSJ: People Want Bear Stearns Sold Before Asian Markets Open!

Poor Joseph Lewis ["Smart Money" is Buying, So Should You!] - he of billionaire status who was buying Bear Stearns at the bargain price of $105-$120 last fall - looks like he is going to get about $20/share when all is said and done. (if lucky) I heard this weekend he lost $800 million on this deal as of Friday's price, so with Bear potentially going for far less than Friday's close, I guess we can put this total at >$1 billion loss. That's gotta sting.

Anyhow, the financial world is frantically trying to get Bear Stearns sold before Asian markets open in a tizzy. Then we can clap like seals and send the US stock market up Monday as we ignore all the other potential calamities coming down the pike. Kool Aid baby!

• Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning. People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading.
• Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.
• One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets -- such as its prime brokerage business that caters to hedge funds -- Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm's exposure, said people familiar with the matter.
• Regulators, bankers and investors are concerned that the firm could plummet even further when markets open Monday. A continued exodus by parties that Bear trades with could even cause the investment bank to collapse.
• Terms likely will factor in the value of Bear's Madison Avenue headquarters, which could be valued at around $1.2 billion based on going market rates. That could make Bear's banking franchise worth roughly $1 billion -- a pittance for a firm that was regularly making $1 billion to $2 billion in net income during the middle of the decade. (so the building Bear is in, is as worth as much, or more, than the underlying business - a sad statement on the hocus pocus black box earnings potential of our investment banks)
• Bear also has been preparing for the possibility of a bankruptcy filing, with that as the likeliest scenario if an acquisition by J.P. Morgan falls apart, according to a person familiar with the situation. Such a filing might even occur before financial markets in Asia open for Monday trading.

Once again, this shows just how quickly it can all fall apart in the intricate web of unregulated finance that is our country's backbone. From denying any problems on CNBC Wednesday to effectively bankrupt Friday if not for Fed bailout - to potentially really being bankrupt Monday (or a shotgun marriage at the best)

WSJ: Debt Reckoning - U.S. Receives a Margin Call

Thanks to a reader for pointing out this article - as I always like to say, until it hits the Wall Street Journal or Barron's it is not "official" on Wall Street... even if it's plainly obvious to some of us months/quarters/or years ahead of time. What makes me ill, is I truly don't know what "ends" this... other then a lot of time and pain. As I've liked to call us... the "subprime nation".

• The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts. The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.
• Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.
• Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar and sending it below 100 yen for the first time in a dozen years. Against a trade-weighted basket of major currencies, the dollar has fallen 14.3% over the past year, according to the Federal Reserve.
• Lenders and investors are pushing up the interest rates they demand from financial institutions seen as solid just a few months ago, or demanding that they sell assets and come up with cash. Banks and Wall Street firms are so wary about each other that they're pulling back. Financial markets, anticipating that the Fed will cut rates sharply on Tuesday to try to limit the depth of a possible recession, are questioning the central bank's commitment or ability to keep inflation from accelerating. (Thankfully, the CPI report shows inflation is dead!)
  
• "Clearly, the whole world is focused on the financial crisis and the U.S. is really the epicenter of the tension," says Carlos Asilis, chief investment officer at Glovista Investments, an advisory firm based in New Jersey. "As a result, we're seeing capital flow out of the U.S."
• That is a troubling prospect for a savings-short, debt-heavy economy that relies on $2 billion a day from abroad to finance investment. It is raising the specter of the long-feared crash in the dollar that could further rattle financial markets and boost U.S. interest rates.
• But while cash continues to pour into the U.S. from abroad, this flow has been slowing. In 2007, foreigners' net acquisition of long-term bonds and stocks in the U.S. was $596 billion, down from $722 billion in 2006, according to Treasury Department data. Americans, meanwhile, are investing more of their own money abroad.
• Bob Eisenbeis, a former executive vice president of the Federal Reserve Bank of Atlanta, says the problem is more than an inability to find ready buyers for assets. "It is time to step back and recognize that the current situation isn't a liquidity issue and hasn't been for some time now," said Mr. Eisenbeis, the chief monetary economist for Cumberland Advisers. "Rather, there is uncertainty about the underlying quality of assets -- which is a solvency issue, driven by a breakdown in highly leveraged positions." (Bingo!)
• The loss of confidence is now spreading beyond the biggest banks, with their well-publicized losses on subprime and other risky assets, to regional and small banks. (wait, you told me it was the kitchen sink quarter and to buy financials last fall? Did you lie to me again?)
• This couldn't come at a worse time for U.S. homeowners. American household debt has more than doubled in a decade to $13.8 trillion at the end of 2007 from $6.4 trillion in 1999, the vast majority of it in mortgages and home equity lines, according to Fed data. But the value of U.S. householders' biggest asset -- their homes -- is now falling.
• Kenneth Rogoff, a Harvard University economist, says the current difficulty has many mothers -- the housing bubble, the subprime problem and the fact that the value of U.S. imports has long outstripped the value of exports. The current account deficit -- the broadest measure of the trade deficit -- burgeoned, and the U.S. needed to borrow ever larger amounts of cash from abroad to fund it.
• Pressures in one market spread rapidly to other, often more distant markets. "The dollar and subprime -- they're two sides of the same coin," says Princeton University economist Hyun Song Shin. Many U.S. hedge funds and financial institutions were speculating in mortgage-related securities with money that was ultimately borrowed in Japan, where interest rates have been low for years. (google "Yen carry trade" if interested)
• The resulting blow to confidence threatens to further weaken lending, borrowing, spending and investment in the U.S. economy. "Hedge fund blowups have so far been one-off situations. One worry is that we'll cross some line and there'll be a systemic wave of fund failures. It's a reason why the market is so nervous," says John Tierney, credit derivatives strategist at Deutsche Bank.
• Now, many hedge fund managers say, access to borrowed money, essential for many of their investment strategies to work, has become virtually impossible.
• Mohamed El-Erian, co-chief executive officer of Allianz SE's Pacific Investment Management Co., says the hedge-fund community is unwinding its leverage. "This will push more of them into 'survival mode,' further accentuating distressed sales and nervousness among the prime brokers," he wrote to his colleagues Thursday morning. "In such a world, the quality of the assets matters less than whether you can finance them [or] how liquid they are."

Other than that... everything is fine. Now go drink some Kool Aid.

And now you see why I have sounded like a worry wart since blog inception... the "realization" of the scope of the issue is now hitting the lemmings.

Bookkeeping: Weekly Changes to Fund Positions Week 32

Week 32 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: 18.2% (vs XX.X% last week)
55 long bias: 61.7% (vs XX.X% last week)
6 short bias: 20.1% (vs XX.X% last week)

61 positions (vs 60 last week)
Additions: FCStone Group (FCSX)
Removals: N/A

Top 10 positions = 33.4% of fund (vs XX.X% last week)
34 of the 61 positions are at least 1% of the fund's overall holdings (55.8%)

Major changes and weekly thoughts
Please note last week I was not able to update positions during the weekend, hence the "XX" designations

Summary of the past week - volatile and crazy. Summary of the future week - more of the same. With government interventions, government arranged purchases of investment banks (coming next week?), the major investment banks reporting earnings (i.e. writedowns), and people calling for Fed funds to be cut anywhere from 50 basis points to 100 basis points (now that inflation is tamed!), it will be another volatile week. Bulls will point to the 4 opportunities last week for the S&P to break through the 1270 level, which it held each time. Bears will point out each time we test those levels, we create more probability it will eventually break. Right now, the daily (hourly) news flow trumps everything. I will have to say I am shocked the market was not down 400-500 pts (on the Dow) based on the Bear Stearns news, but again I believe this goes into the long held belief that the Fed is larger than life and can solve all our problems (or mitigate them) - this inherent trust will take a lot to break, so benefit of the doubt will constantly be given that the Fed can fix the boo boos. The problem with this thinking is when/if it becomes clear the problem is larger than the Fed can fix/solve - this gives us more potential for a devastating move down at once as confidence is lost - as opposed to letting the air out a bit at a time. Confidence is not something I can "measure" or watch daily... hence it creates yet another layer of uncertainty ... to go along with the 400 other things.

I remain very cautious and am willing to give up some lagging on the upside to stay relatively hedged against a major downturn. I have more than enough gains versus the indexes built up in 32 weeks; so I can lag for a while if the market once again begins its push up to la la land. If the credit markets seize up even 1/3rd as bad as some pundits are claiming could happen, we could have a drastic drop in equity markets. On the other hand is the threat of massive government intervention. In no clear terms, these are some of the most uncertain times the financial markets have ever faced so it is not a time to take outsized risks in my opinion. In times like this, I prefer to stay in high cash positions and let things start to make some more sense. When a case could be made for a 500-1000 point move either up OR down - it's not a time to be betting the house. This sort of hourly/daily volatility is going to simply push many either to the sidelines or out of the market entirely.

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. Monday, as the market made it's first direct approach to the S&P 1270 level, I anticipated a potential bounce and bought a slew of names, effectively moving 10% of fund holdings from cash to long exposure. Post Fed actions pre-market Tuesday to begin allowing financial institutions to offload toxic mortgage debt for 28 days at a time, and ensuing 4-5% type of rally, I offloaded most of this exposure Wednesday.
2. I started a new beginner position in FCStone Group (FCSX), a commodities risk management company, after a 25% haircut - I added a bit more later in the week.
3. Wednesday, I tried to make the best of a bad situation and sold off half my Thornburg Mortgage (TMA) in the $3.10s, for a severe loss.
4. Thursday, I sold off the coal exposure I bought Monday for very slight gains - this was the main part of my Monday "trade" that did not work out well, so I wanted to get my coal exposure lower as it was >10% and the market had potential to fall further.
5. Friday, I cut the majority of my WuXi PharmaTech (WX) exposure after a large spike post earnings. I hope to buy back this exposure lower.
6. Same explanation as above for my transaction in LDK Solar (LDK)
7. I sold down some of my Powershares DB Agriculture Fund (DBA) throughout the week - while I think inflation is ramping I am a bit worried about these commodities also being sold off if we do have a more panic type of selling atmosphere.

Most of my transactions this week were simply allocation switches from cash to Ultrashorts, and vice versa as the market made massive 3% intraday moves, three times this week. I tried to lower my allocation of short exposure even further late in the day Friday pending a "Bear Stearns buyout" news premarket Monday, but those transactions don't seem to have worked in the Marketocracy.com account - so I have more short exposure going into Monday than I'd have liked. I was trying to get closer to a 15% allocation, rather than 20% since Kool Aid bulls will cheer the Bear Stearns "buyout" as great news, I am sure. And we can talk about another "bottom is in financials" moment (I believe the 17th since this mess started)

59 Stocks Returning 7%+ this Week

Despite a relatively flat market, not many outperformers this week.

Below is a list of 59 names with characteristics of

1. >$10 Stock Price
2. >100K average volume
3. >$2 billion market cap
4. 7%+ return

Similar to previous weeks of late are a lot of foreign and gold names with a few natural gas mixed in - a few solar names rebounded from dramatic losses of the past 2 months; just a hodge podge of names. A few beaten down financials also thrown in, especially in the credit business. As always, green we own, and blue we have owned in the past or discuss.

Symbol	Company Name	% Price 1 Week
NFS	Nationwide Financial Services Inc	24.3
LDK	LDK Solar Co Ltd	16.3
GME	GameStop Ord Shs Class A	14.9
NTY	NBTY Inc	14.5
JOE	St. Joe Co	12.2
STLD	Steel Dynamics Inc	11.8
APOL	Apollo Group Inc	11.4
BVN	Buenaventura ADR	10.7
AEM	Agnico-Eagle Mines Ltd	10.4
COF	Capital One Financial Ord Shs	10.4
LTD	Limited Brands Inc	10.3
REP	Repsol YPF Depository Receipt	9.9
WLL	Whiting Petroleum Corp	9.4
WFR	MEMC Electronic Materials Inc	9.4
DFS	Discover Financial Services	9.3
EDU	New Oriental Education & Technology	9.2
CEDC	Central European Distribution Corp	8.9
GDNNY	Groupe Danone ADR	8.9
CAM	Cameron International Corp	8.8
PRGO	Perrigo Co	8.6
FULT	Fulton Financial Corp	8.4
MA	MasterCard Inc	8.4
EOG	EOG Resources Inc	8.3
BX	Blackstone Group LP	8.2
CIB	BanColombia SA	8.2
NEM	Newmont Mining Ord Shs	8.2
COG	Cabot Oil & Gas Corp	8.1
YGE	Yingli Green Energy Holding Co Ltd	8.0
HES	Hess Corp	8.0
CPRT	Copart Inc	7.9
PCAR	Paccar Inc	7.9
PAAS	PAN AMERICAN SILVER CORP	7.8
IHS	Information Handling Services Inc	7.8
ADSK	Autodesk Inc	7.8
FRE	Freddie Mac Ord Shs	7.8
SNH	Senior Housing Properties Trust	7.7
ROC	Rockwood Holdings Inc	7.7
DV	DeVry Inc	7.7
X	United States Steel Corp	7.7
PSA	Public Storage Ord Shs	7.7
NHP	Nationwide Health Ord Shs	7.5
R	Ryder System Inc	7.4
CHKP	Check Point Software Technologies Ltd	7.4
BIIB	Biogen Idec Inc	7.4
KMX	Carmax Inc	7.3
DHI	D.R. Horton Inc	7.3
TOC	Thomson Ord Shs	7.3
JCG	J Crew Group Inc	7.2
UB	UnionBanCal Corp	7.2
WTI	W&T Offshore Inc	7.1
NYT	New York Times Ord Shs	7.1
HMY	Harmony Gold Mining ADR	7.1
HCP	HCP Ord Shs	7.1
LIHR	Lihir Gold Sponsored ADR	7.1
LINTA	Liberty Media Interactive	7.1
CHK	Chesapeake Energy Ord Shs	7.1
CAT	Caterpillar Ord Shs	7.1
GGB	Gerdau SA Depository Receipt	7.0
SCGLY	Societe Gen Spon Depository Receipt	7.0

WSJ: Fed Races to Rescue Bear Stearns

Some interesting Wall Street Journal articles this weekend - below is an article on the saga that is the Bear Stearns bailout. What is fascinating is what has happened to Thornburg Mortgage, Bear Stearns, and Carlyle Group could in theory happen to most financials - it is simply a run on the bank and a crisis of confidence. Frankly I don't see much different with Lehman Brothers or Merrill Lynch - it is simply the fact (at this point), the confidence level in those investment banks have not turned south to a degree it would lead to carnage.

With Paulson out today saying the government will do "what it takes", this raised the other side of the risk to shorting these names as the natural order of things is not being allowed to play out. That said, the open question is, with 5:1, 10:1, 20:1 and even 30:1 leverage in our entire shadow banking system, is this problem to big for the government? Already the Federal Reserve has used half its balance sheet to prop us up so far. Granted they have UNLIMITED balance sheet in theory as they can bring more dollars but do we risk hyperinflation to keep the financial system from its knees. Again, we've been talking about these issues for a long time... but to watch the dominoes begin to fall.... all I can say is these are unprecedented and truly fascinating times. I keep using the word "web" - this is a web of credit globally and when one falls it has implications worldwide. This is why I am not sure they can allow almost any major player to fall - because the implications will be unknown. Much like the Plunge Protection Team (in my opinion) engineered a private buyout of Countrywide Financial (CFC) as it was about to fall off the cliff into insolvency, I expect Bear Stearns to be "bought" (meaning any losses the Federal Government will take care of behind the scenes) very soon (and the market will rally of course)... but once again if a crisis of confidence truly erupts there will be more Bear Stearns - soon we will run out of banks to buy other financial institutions...

• Credit turmoil spread to the heart of the U.S. financial system as Bear Stearns Cos., an 85-year-old institution that has survived the Depression and World War II, sought and received emergency funding backed by the federal government. In an extraordinary move, the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep Bear afloat following a severe cash crunch. The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said. (effectively the worst of the worst toxic loans is now on the federal balance sheets, and you - the taxpayer - now bear the risk)
• The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank.
• Some Wall Street executives said they thought Bear was likely to be sold, in whole or piecemeal, in a matter of days, to prevent it from going under.
• Possible buyers, according to a person close to Bear, include J.P. Morgan and hedge fund Citadel Investment Group, which recently bought a big stake in online brokerage firm E*Trade Financial Corp. (Citadel is quickly turning into the next Goldman Sachs, an omnipresent financial powerhouse with its hands in everything)
• After initial relief, credit markets have taken a turn for the worse in recent weeks, breeding an every-man-for-himself attitude among Wall Street firms. With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.
• Bear's situation echoed in some ways that at British mortgage lender Northern Rock PLC, which in September became the target of the U.K.'s first bank run in more than a century, after the Bank of England stepped in with an emergency line of credit. "At Northern Rock, it was depositors running. At Bear Stearns, it was counterparties" -- the parties a financial firm trades with -- said Tim Bond, a Barclays Capital strategist.
• Word began to spread among fixed-income traders nine days ago that European banks had stopped trading with Bear. Some U.S. fixed-income and stock traders began doing the same on Monday, pulling their cash from Bear for fear it could get locked up if there was a bankruptcy. That development put firms that still wanted to do business with Bear in a tough position: If Bear did fail, they would have to explain to their clients why they ignored the rumors. On Tuesday, a major asset-management company stopped trading with Bear.
• But by Thursday afternoon, it was becoming clear within Bear that the firm couldn't withstand an accelerating retreat by worried customers -- in effect, a run on the bank. Securities firms that had been willing to accept collateral from Bear Stearns were insisting on cash instead. And the hedge funds that use Bear to borrow money and clear trades were withdrawing cash from their accounts. Around 4:30 p.m., Mr. Schwartz was convinced that Bear was facing a desperate situation.
• Some time after 6 p.m., Mr. Schwartz called James Dimon, CEO of J.P. Morgan, the second-largest U.S. bank in stock-market value. J.P. Morgan's risk officers were familiar with Bear's collateral because J.P. Morgan was the clearing agent for its trades; thus, J.P. Morgan seemed to be in good position to lend Bear money, say people familiar with Mr. Schwartz's thinking. Mr. Dimon sprang into action. He got on the phone with Steve Black, co-head of J.P. Morgan's investment bank, on vacation in the Caribbean. The group had a number of conversations with Fed representatives, concluding that something needed to be done for Bear, in part because a failure of the firm could have wide consequences
• The Fed can lend directly through its "discount window," but ordinarily only to commercial banks. A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to nonbanks only in extreme circumstances. The Fed, with two governors' seats vacant and one governor overseas and unreachable, invoked a special legal clause to approve the loan with just four governors.
• For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.
• If Bear fails and the collateral it posts is insufficient to cover the loan, the Fed will sustain a loss. Officials say there is no preset maximum amount of the loan, other than how much collateral Bear is able to provide to meet the Fed's requirements.

My favorite part of the article is this Mr Cayne blurb who was the old CEO who WSJ reported spent a lot of time "allegedly" smoking a certain substance... so he got "canned" as CEO but of course kept his Chairman gig.... and where was he during the week Bear was fighting off rumors all week? Here is where he was... classic!

Mr. Cayne dialed in from Detroit, where he was playing in a bridge tournament, say people familiar with the matter.

So in the end who is going to end up a big winner here, especially if another of the "big 5" go out of business? You guessed it - the company with men in every major financial post in America - Goldman Sachs.