Bookkeeping: 'Rising Tide' Performance Week 34

Week 34 performance of the mutual fund

Comments: Overall a relative boring week in the market, which frankly I think we all cherish at this point in contrast to the tremendous volatility since Jan 1. And even more so after the nutty 4 day week last week of down 200, up 400, down 300, up 250. Not a lot of news events, or economic events - just the constant drumbeat of everything will be ok in 6 months, but I've been hearing that since August 2007. Eventually they're going to nail that call says the blind squirrel. Next week should be a lot more interesting as everyone clenches their jaws for the first 4 days, waiting to react to an inaccurate employment report next Friday... from which people can decide if there will be a recovery in 2nd half 2008 or if the world is ending. Either way, they will surely overreact, and I'll point out the utter nonsense that this number is due to Birth/Death adjustment, which I plan to do 12 times a year until people get it. [Jan 27: Monthly Jobs Report and Birth/Death Model] 80% of our jobs, by the way, are now created by the Birth/Death adjustment... sad.

As of Tuesday, I mentioned I was utterly confused by the action, specifically last week, and as they say "when in doubt, get out". Since I'm not going to 100% cash, I decided to quickly build to a 25%+ cash position and closed the week north of 27%. Until I see a clear trend, I want to be cautious and even things I like are now potential victims of hedge fund liquidations. Hence I pulled back on everything across the board. So we are again in the stage where nothing is really safe on the long side. And you can't really feel safe on the short side because that's not safe due to government interventions. So in summary - safety is gone. So I'm trying to be as 'hedged' as my self imposed rules allow and we watch day by day, week by week whom is more powerful - the government powers or the free market. Unbelievable it's come to this - I remember when stock picking was the basis of markets - but that only works on the way up I guess....

Since fundamentals are out the door in this "new era" that leaves us with technicals.... on Tuesday the S&P500 reached out to its 50 day moving average (a key support/resistance line for those who follow technical trading), and at that moment I said we're at a critical juncture [Mar 25: Back to Important Inflection Point for S&P 500]. I was open to the possibility of a move either way, up through that resistance and onward and upward to a land of Kool Aid and unicorns. Or back down. I was positioned however more towards the latter since deep in my heart of hearts my free market soul still believes ("they" haven't completely crushed my free market spirit yet).... also this was the 8th attempt at a new higher high (instead of making lower highs) since early October 2007. But within 48 hours we were confirmed.... this was the 8th failure.

Below are 2 charts - the first shows you how we looked Tuesday at the inflection point. The second shows you how we look now. We're back in no man's land of S&P 1260/1270 to 1355 or so. In a "non Plunge Protection Team aka Invisible Hand" scenario, I'd have full confidence we would be headed back to 1260/1270 and in fact break down below it as we were "supposed to" (by all rules I've learned the past decade+) a week ago Monday. In our current era I have confidence in nothing. So we'll take it day by day.

(i) Tuesday chart - bulls cheering, hopeful, happy, telling us to buy those early cycle names, commodities are dead



(ii) Friday - not so much.



As for the fund, I really did not do that much - Tuesday and more so Wednesday as it appeared a failure was likely I began building up the slew of Ultrashorts back to >20% stake. And kept raising cash and reducing risk. I've cut back on the actual commodities exposure quite a bit but of course still hold the 2nd derivatives (i.e. coal stocks, fertilizer stocks). After all I need to hold something to be considered a long biased fund... but it was a quiet week overall.

Last week was a very poor one for the fund, and this week was very good. Since neither week, in my opinion, represents reality of the fund holdings but more a reflection of large scale sector moves by hedge funds this week vs last - I am going to simply average the 2 weeks together and by that measure the fund was up for the 2 week period, with extreme volatility.

The S&P 500 lost 1.1% this week, and the Russel 2000 lost 0.9%. Rising Tide Growth Fund gained 6.0% this week, offsetting last week's 5.4% loss, to net out at 0.6% gain over the 2 week period. Again, I don't consider either last week's loss or this week's gain to be representative of the fund's holdings - simply outsized volatility caused by hedge funds racing in and out of sectors like scalded chimps (thanks Macke). I do go home this weekend in far better mood than last week since I feel like I did my virtual investors some justice this week ;)

Price of Rising Tide Growth: $11.227
Lifetime Performance to date (vs Aug 3, 2007): +12.27%

Comparable S&P 500: 1,315.22 (-10.24%)
Comparable Russell 1000: 716.15 (-10.05%)

Fund return vs S&P 500: +22.51%
Fund return vs Russell 1000: +22.32%

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

Founder of Long Term Capital Failing Again

I have to say, when I read these type of stories (and it's not the first, not even the first this past month), I get inherently frustrated. I want to ask the type of people who entrust these people with their money, why do you go back to the same well over and over when there are other people (maybe writing a blog) who actually manage well? I know whenever a hedge fund blows up it says "well it's a Black Swan" - a once in a lifetime situation that caused it... just like the Asian currency crisis in late 90s, just like the tech bubble 4 years later, just like the real estate bubble 5 years later, just like (insert crisis here, they keep repeating every 4-5 years) - and each time the hedge fund manager says, well those are conditions we didn't model, we promise it won't happen again. Investors lap it up, give them money, and they blow up again down the road. Is having a "background" at the "right investment firm" all that is really needed to raise $500M or a few billion at a hedge fund? I openly wonder this because of the purpose of my blog... it is mind boggling to me. So easy to raise billions when you have the right access, but so difficult to raise money if all you are is a good investor... fascinating.

For those who were not around, Long Term Capital Management was a hedge fund that was a lot like Bear Stearns - it was so large, that it had its tentacles in so many pieces of the global financial world that it was not allowed to fail - so the Federal Reserve of NYC managed a bailout (sound familiar?) ... details here if interested.

• Ten years after overseeing a hedge-fund collapse that buckled the world's financial markets, John Meriwether again is scrambling to stem losses and keep investors from jumping ship.
• Mr. Meriwether is best known as a founder of Long-Term Capital Management, which in 1998 lost $4 billion. That helped foster a global financial crisis and triggered both a Wall Street-led bailout and congressional hearings on the dangers of hedge funds, the freewheeling pools for wealthy investors and institutions that often trade heavily and rely on borrowed money to bolster returns. (now remember, back in "those days" $4 billion was serious money - nowadays we write that off on a weekly basis and laugh it off, we are immune to numbers "that small")
• Now, Mr. Meriwether's biggest fund, a bond portfolio, has plunged 28% this year; another, broader market fund is down 6%. Both had subpar performances last year.
• Some investors in the funds are seeking to get their money out. Mr. Meriwether and his colleagues at JWM Partners LLC -- which he launched in 1999 with LTCM alumni -- are trying to reassure investors in the two funds that they have slashed risk and will use their experience to survive this market crisis, preserving about $1.4 billion in assets.
• Mr. Meriwether, a 60-year-old former vice chairman of Salomon Brothers, has seen three decades of market zigzags, recessions and credit contractions. Yet he can't corral the risks of today's markets and is trying to play it safe, even though he believes he should be buying securities.
• His funds' losing positions have included mortgage securities backed by Fannie Mae and Freddie Mac, trades tied to municipal bonds and triple-A-rated commercial-mortgage-backed securities, according to the letter. Those bets have eaten into his returns this year, particularly as hedge fund Peloton Partners LLP and Carlyle Capital Corp. unloaded many of the same securities as they spiraled toward demise.
• His LTCM hedge fund, located in Greenwich, Conn., included Nobel Prize winners and math whizzes, but it was undone in 1998 by massive "leverage," or borrowing -- up to $50 for every dollar invested -- which amplified losses when the markets turned on him. (sound familiar? 40:1, 30:1, 20:1?)
  

Do you see the pattern of the systematic greed that is Wall Street? Take outsize risk, fight regulation, ride the train for a few years, build generational wealth through huge fees - then move on to next step.... blow up, get burnt, talk about how you "learned your lesson", Congressional hearings, someone is sacrificed to the gods (goes to jail), some regulation is introduced, everyone claps, then as things quiet down 2 years later, begin to lobby to unwind regulation, began levering again, take more risk, create a new round of transfer of wealth (generational wealth), rinse, wash, repeat - the game is the same, only the name of the crisis is different (except this current version is the worst ever in its reach) - thats why I keep saying we will have another crisis from today's slashing of fed rates, creating easy money, another bubble, which will end badly circa 2013... so the savers in this country get trashed (low interest), the common man gets trashed (rampant inflation through easy money) but there are some winners of course - and you can guess who. And then in 2013 we'll hear the same tired excuses of "this is a Black Swan event, once in a lifetime" and we "promise" it won't happen again - please don't regulate us, we mean it this time. If I'm still writing this blog at that bursting of the next bubble, begging for investment, while these fat cats get billions handed to them (again), just shoot me. But I digress, back to the shrewd Mr. Meriweather who because he was a VP at Salomon obviously knows how to run money (into the ground)....

• Mr. Meriwether's recent troubles partly stem from borrowing. His bond fund had $14.90 in borrowed money for every $1 in equity at the end of February, according to the March 18 letter. Although far lower than at LTCM, the fund's risk level, which includes leverage, was still too much for this year's volatile environment, he and his fund managers have acknowledged in conversations with investors.
• Mr. Meriwether marketed his bond fund as a lower-risk version of LTCM's core strategy, of identifying the next financial crisis and profiting from it by buying securities its managers consider underpriced. Investors were told that the firm would aim to keep borrowings below 15-to-1 even during less-volatile times. Mr. Meriwether and his colleagues promised to behave more conservatively, rebuilding their reputations with consistent returns. His bond fund hasn't had a money-losing year. (Editor note - see these are how these things work, devise a strategy - all the herd of hedge funds copy - they are all on the same side of the trade - and then when things turn "once in a lifetime" it blows them up across the board)
• JWM's Relative Value bond fund, launched in December 1999, has lost 28% this year through last week after notching a 5.6% return in 2007, according to people familiar with the fund. The recent losses further weigh on the fund's average annualized return since inception of about 7% through February 2008. The Lehman Brothers U.S. Aggregate Index, a measure of investment-grade bond performance, has returned an annualized 6.5% during that period. (this is the hilarious thing - "sharp" investors pay these hedgie managers 2% annually plus 20% of profits to return 0.5% over what they could get by buying an index fund - what a scam. Yes there are the few bright minds out there who deserve that, or more - they return true value but when you have 6000-7000 hedge funds its a bunch of "me too" - just like the mutual fund industry, except more sexy because its "secretive")
• Moreover, Mr. Meriwether's five-year-old macro fund, JWM Global Macro, which invests in broad trends through currencies, commodities, stocks and bonds, was down 6% through February after falling 5.6% in 2007. The fund has gained about 5.7% per year, on average, since it began trading in 2003. That record means the macro fund, too, trails its peers, which have gained twice as much a year, on average, during the same period. (probably 2/3rd of the readers of this blog have beaten that return - so apparently we can all be hedge fund managers - although they will claim "we reduce risk much better than peon individuals" - yes, they reduce risk until they blow up into shards)
  
• Meanwhile, there is a big disadvantage to reducing how much money they borrow. Lower leverage cuts into the fund's chances of climbing back from losses. And it is a steep climb before JWM can start collecting its 20% performance fee again, in addition to the 2% of assets that the managers collect.

I would like to run a hedge fund someday too. Somehow, I think I can do better than these guys. And I won't need to lever 20:1 to do it. What a circus out there. And these are the people driving wheat up 25% 1 week and down 20% the next. Thanks locusts....

WSJ: Buyers' Revenge: Trash the House After Foreclosure

Absolutely no redeeming investment thesis from this article, but interesting nonetheless... I wonder what it says for our society. Or if people simply feel duped or bitter. What struck me is the huge % of properties left in this condition; if it were 10% I'd say it's relative isolated but 1 in 2 houses? Yikes.

• The stucco subdivisions of Las Vegas are caught up in the nation's foreclosure crisis. These days, bankers and mortgage companies often find that by the time they get the keys back, embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc.
• Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have "substantial" damage.
• The most practical way to ensure the houses are returned in decent shape, lenders and their agents say, is to pay homeowners hundreds or even thousands of dollars to put their anger in escrow and leave quietly. A ransom? A bribe? "Yeah, somewhat,"
• In Las Vegas, 1.9% of homes in the Las Vegas area were in the foreclosure process in January, almost triple the rate of a year earlier. Each day, auctioneers offer 150 to 200 properties for sale in the small lobby of the Nevada Legal News -- a high-speed inventory of dreams forfeited. About 95% of the auctioned properties, however, go unsold and revert to banks eager to get the properties off their books. Some owners just walk away peacefully. But agents say a significant number take what they can carry and take revenge on the rest.
• "I'm one of the thousands of people in town in foreclosure so I'd like to get as much as possible for the items," said one recent Las Vegas online ad offering a double wall oven, dishwasher and built-in microwave, all of which, in most cases, legally belong to the bank.
• "When you're losing your dream, and you're paying all this money to it...and you're hoping that it's going to go up, and you're going to make 100 grand like everybody else did, and it doesn't happen -- you know, people get upset," says Joe Kraemer, a broker with Century 21 Advantage Gold who deals in foreclosed homes.
• The original owner bought the house new in 2003 for $131,000. A year ago, Mr. Carver says, it could have fetched a quarter of a million. (sounds like madness now, eh?) The house sold for $170,000 in November, ferret scat included.
• One example house... Light switches, outlet covers and thermostats were smashed. There was what looked to be crowbar damage along the staircase. A large pool of paint had hardened on the living-room carpet. It appeared that someone had dripped motor oil in a trail that wound its way through every carpeted room. The appliances were gone, as were most light fixtures. A cabinet door had been removed and left soaking in a full tub of water. Not a wall was left without a hole the diameter of a closet rod, including the pink child's room once carefully decorated with a floral wallpaper stripe. It's damage that Mr. Carver described as "a vengeance-type thing."
• The former owners, who couldn't be located, paid $261,892 for the house when it was new in March 2006, borrowing $209,513 in their first mortgage, according to public records. Now it's listed for $149,000 -- as is.
• The owner, a 43-year-old man with two children who spoke on the condition that his name not be used, says he bought the property in 1993 for $140,000. Three years ago, he says he had the house appraised for $440,000 and took out a $207,000 home-equity loan to pay off credit-card bills and buy his wife a new van. His initial payments were an affordable $1,800 a month. (these are the people who the pundits miss when they think the damage is limited to "subprime people" who bought in 2005-2006-2007 - remember some people were serial refinancers - refinancing every year, drawing on that house ATM to live life, or redo the kitchen, or the new pool, or the SUV) He fell behind, however, after he went through a divorce and his landscaping business faltered, just as his interest rate was rising. The man worked out a payment plan with the bank and borrowed heavily from his father, but, including penalties, his monthly payments rose to $4,000, he says.

Now multiply this by thousands, and in some states like CA and FL and OH by hundreds of thousands - and let's discuss the recovery coming in 6 months. Even though most homes that *will* be in foreclosure have not even reached that stage yet.... KB Home (KBH) is not seeing it...

• Jeffrey Mezger, KB Home's president and chief executive, said a growing supply of unsold new and existing homes on the market, tight mortgage lending and industrywide discounting drove down sale prices and compressed margins during the quarter.
• "Until prices stabilize and consumer confidence returns, we believe inventory levels will remain significantly out of balance with demand," Mezger said in a statement. "We do not anticipate meaningful improvement in these conditions in the near term, as it is likely to take some time for the market to absorb the current excess housing supply and for consumer confidence to improve."

But anything to prop up the market... keep the mantra going... in 6 months, everything will be fine. Let's chant it together... 2nd half recovery.

Bookkeeping: Cutting Back on Powershares DB Agriculture (DBA) - Focus on Fertilizer for Now

Despite no change to my long term view on the crops I am cutting back on my Powershares DB Agriculture Fund (DBA) position to a 0.5% fund holding as the chart appears to be going sour (breaking down below the 50 day moving average). I am cutting back here in the mid $37s. I am still concerned about more deleveraging by hedge funds, especially if the credit market continues to struggle and banks want to repatriate their money - and the hedgies seem to have really had an even larger effect than I assumed on these commodities. [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!] So at this moment the hedge funds overpower the underlying fundamental crop supply/demand situation - this will reverse in time I am very confidant but I don't want to stand in front of a herd of panicked hedge funds if this scenario plays out. As with everything of late - better safe than sorry; cash is not trash. There is a reason I call these hedgies locusts - they come into an area en masse, feed, ruin it, and then move on... so we'll let this ETF settle and then revisit at either a lower price or on a breakout. I'll be focusing instead on the fertilizers for the near term as Mosaic (MOS) reports next week.

With that said, no change to my long term view and I look forward to next week's crop report - my expectation is the exact reverse of what happened last year when farmers piled into corn due to the ethanol boondoggle. With the ridiculous rise in wheat, I expect a huge upswing in wheat plantings and ... *drumroll* a shortage in corn. Which will drive it up next fall/winter ;) And so the World of Shortages continues - until farmland devoted to growing crops (along with large yield increases) starts happening, it is simply robbing Peter to pay Paul. Take from 1 crop, another will derive a shortage next year. And so we'll continue... as too many humans want to eat like a Westerner, and we keep putting food into our cars (not just here in the US, but worldwide).

Still very wary of this market as a whole...

Long Mosaic, Powershares DB Agriculture Fund in fund; long Mosaic in personal account

This Day in Food Crisis - Rising Rice Prices Spark Concern Across Asia

I believe this is now the 4th article this week alone on this subject - SOS. SOS. Again, my focus keeps turning to the social strife angle - as this article highlights. We just talked about the Philippines last week [Mar 19: Philippines Brace for Rice Shortage] Food shortage is very different from energy shortage - many of the world's poor don't use any central power source... food? Well that's sort of necessary. I feel like we are whistling past the graveyard - much like the equity market is doing... our "World of Shortages" theme only grows...

And once again, watch for agflation to lead to "food protectionism" - Cambodia is the latest to restrict exports - following China, following some of the former USSR satellites that I cannot spell correctly... etc.

• Philippine activists warn about possible riots. Aid agencies across Asia worry how they will feed the hungry. Governments dig deeper every day to fund subsidies. A sharp rise in the price of rice is hitting consumer pocketbooks and raising fears of public turmoil in the many parts of Asia where rice is a staple.
• Part of a surge in global food costs, rice prices on world markets have jumped 50 percent in the past two months and at least doubled since 2004. Experts blame rising fuel and fertilizer expenses as well as crops curtailed by disease, pests and climate change. There are concerns prices could rise a further 40 percent in coming months.
• The higher prices have already sparked protests in the Philippines, where a government official has asked the public to save leftover rice and communist rebels have vowed to take advantage of the situation to stir up public unrest.
• In Cambodia, Prime Minister Hun Sen ordered a ban on rice exports Wednesday to curb rising prices at home. Vietnamese exporters and farmers are stockpiling rice in expectation of further price increases.
• Prestoline Suyat of the May One Labor Movement, a left-wing workers group, warned that "hunger and poverty may eventually lead to riots."
• The neediest are hit hardest. Rodolfo de Lima, a 42-year-old parking lot attendant in Manila, said "my family will go hungry" if prices continue to rise. "If your family misses a meal, you really don't know what you can do, but I won't do anything bad," said de Lima, whose right foot was amputated after he was shot during a 1985 gang war.
• "There are people who are hotheaded," he said. "When people get trapped, I can't say what they will do."
• The U.S. Department of Agriculture forecasts global rice stocks for 2007-08 at 72 million tons, the lowest since 1983-84 and about half of the peak in 2000-01.
• Jack Dunford, head of a consortium in Thailand helping more than 140,000 refugees from military-ruled Myanmar, said soaring rice prices and a slumping U.S. dollar are forcing cuts in already meager food aid. "This rice price is just killing us," he said. "This is a very vulnerable group of people under threat."
• Rice prices have almost doubled in Bangladesh in just a year, sparking resentment but no unrest yet. Repeated floods and a severe cyclone last year have cut production, forcing the government to increase imports.
• Farmers there say they are not benefiting from the higher prices. "The rice price has gone up 50 percent over the past three months, but I'm not making any more money because I have to pay double for fertilizer, insecticides and labor costs," said Nguyen Thi Thu, 46, a farmer in Ha Tay province, just outside Hanoi. (My advice is to form a powerful lobby, and buy the lawmakers influence with political contributions - it works wonders here!)
• Things are so tight that Agriculture Secretary Arthur Yap has asked people not to throw away leftover rice and urged fast-food restaurants, which normally give customers a cup of rice with meals, to offer a half-cup option to cut waste.
• Philippine farmers say the country, which has become the world's largest importer of rice after being an exporter in the early 1970s, has shot itself in the foot by developing some former rice paddies for housing and golf courses and planting more lucrative crops on others. (I keep saying, if I could invest in farmland across the world I would - it's going to be a very valuable commodity in the coming decades)
  

Stories like this sort of makes our farm subsidies look even more outrageous - I wonder if the farmers who are traveling to Washington to show lawmakers "a dose of in-your-face reality" [Mar 27: WSJ: Farm Lobby Beats Back Assault on Farm Subsidies] would like to trade their reality with the reality of an average human in one of these countries that they have never heard of... somehow I think not.

Hedge Fund Buys into Thornburg Mortgage (TMA)

I am almost tempted to add to the tiny position into Thornburg Mortgage (TMA) on this news... but I'd rather see signs of recovery and buy up at $4 rather than $1.50. But all things considered this is relatively (relatively being the key word i.e. relative to bankruptcy) encouraging. The terms are quite horrific (dilution is enormous) but again, the alternative is being out of business. And if it makes it through this crater, and gets back on it's feet this could be a very interesting stock for later in 2008 or 2009.

• In a last-ditch effort Thornburg Mortgage seems to have figured out a plan to raise cash and avoid bankruptcy.
• Shares of Thornburg Mortgage (nyse: TMA - news - people ) jumped 36.4%, or 46 cents, to $1.73, at the close on Tuesday, after the company said it will commence a private placement of up to $1.4 billion of seven-year senior subordinated secured notes with an interest rate of 18.0%, which could be knocked down to 12.0% if the company is able to buy in most of its preferred stock at a fifth of its face value.
• In the new issue, distressed securities specialist MatlinPatterson Global Opportunities Partners will pick up $450 million worth of the notes, which will be secured by Thornburg's mortgage-backed securities inventory.
• Tuesday's announcement comes in the wake Thornburg's announcement Monday night that it had amended its bylaws to allow an investor to acquire up to $300 million worth of stock in conjunction with the company's offering of $1 billion of convertible debt.
• Although Tuesday's deal keeps the Santa Fe-based firm out of bankruptcy, it comes with a high cost. For one, Thornburg is selling the purchaser of the notes warrants that will allow them to buy 48% of the company for a penny per share.
• The dilution of stock makes the current shareholders' equity worth nearly nothing, Bose George, an analyst at Keefe, Bruyette & Woods, told the Associated Press, though he added there were no real alternatives. "If the deal doesn't go through, lenders will liquidate the company, so shareholders presumably would end up with nothing," he said.
• They may end up with nearly nothing anyway. The agreement with creditors, under which Thornburg was required to raise capital in the bond market, has what seem to be onerous terms. Thornburg can get out of that seven-year pact early by issuing even more warrants, which would leave the current shareholders with just 10% of the company.
• Shares in Thornburg, whose problems stem from a distaste among investors for mortgage-related assets, traded as high as $28.40 last year. The company specialized in jumbo mortgages, those too large to be securitized by the government-sponsored Fannie Mae and Freddie Mac. As a result of the subprime mortgage crisis, Thornburg's portfolio of adjustable-rate jumbo mortgages lost value, and lenders issued margin calls that it was unable to meet.

Long Thornburg Mortgage in fund; no personal position

Ignore Government Reports on Spending; Listen to JCPenney (JCP) or DSW (DSW)

One theme I like to harp on is ignore these government reports as much as possible - the herd on Wall Street reacts as if they are accurate, but most are highly flawed. Instead listen to the companies themselves. JCPenney (JCP) is out this morning with exactly the reason I don't believe the "stocks are cheap on 2008 earnings" arguement.

• Mid-tier department store operator JC Penney Co Inc (NYSE:JCP - News) on Friday slashed its first-quarter earnings forecast, saying sales through the Easter holiday were below expectations and noting that consumer confidence is at a multi-year low.
• "J.C. Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets," Myron "Mike" Ullman, chairman and chief executive officer, said in a statement.
• The retailer now expects first-quarter earnings of approximately 50 cents per share, compared with its previous view of 75 to 80 cents per share.
• J.C. Penney Co. said weakening consumer confidence has hurt its results as well as lower-than-expected sales through Easter.

Surely I can put any number out there for 2008 "estimate" and say stocks are cheap; but these numbers are wrong for almost everything tied to the US economy. I touched on the latest Wall Street sales job re: retailers during one of the "early cycle" boomlets last month [Feb 26: Kool Aid Bulls Twist Inflation Into Being a "Good Thing"]

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

So each time Tiffany's (TIF) reports a better than expected number (whose flagship NYC store derives a ton of sales from foreigners thanks to our cheap US peso), or Costco (COST) ramps due to people fleeing to bulk, I keep focusing on these heart and soul middle America stores like JCPenney (JCP) or Kohls (KSS) - companies that are actually good retailers but who are being overwhelmed my macro economic events. Aside from restaurants [Sep 19: Tough Times Ahead? Restaurants], I find the retailers to simply be one of the biggest targets to avoid [Nov 7: Are Department Stores Signaling a Recession in 2008] unless you're a very short term trader who buys them in their extreme dips, and flips them on the "early cycle rally" which is destined to fail within a week or two. Unlike the companies I focus on these groups have no pricing power, and no visibility - exactly the type of things we want in an investment. More and more companies are simply pulling guidance now, such as DSW (DSW) - Fast Money stole my line here last night but if women are not buying shoes you know economic issues are serious...

• Shares of shoe retailer DSW Inc. tumbled Thursday after the company reported lower quarterly sales and earnings and issued a bleak forecast. DSW, which operates more than 200 stores and supplies footwear to hundreds of more locations, said earlier its fourth-quarter profit slid nearly 94 percent.
• The company also declined to issue specific full-year earnings guidance, saying only its profit for the first six months of the year will be "significantly below" the 68 cents per share it earned in the comparable year-ago period.
• The analyst is also concerned that the retailer plans to sell more "deeply valued" merchandise, potentially driving down margins at the same time it faces higher costs from vendors, due to rising material and production costs.

Both these sectors are being hit with the same issues - squeezed on the input side by inflation (although the government reports deny it's an issue), and then squeezed on the output side by the struggling consumer. This leads to compression of margins... which leads to compression of profits... which leads to compression in stock prices. Maybe a lot of this is already reflected in the stock prices [Jan 15: Will There be Anywhere Left to Shop in 2010?], but I am still of belief other than the deep discounters, bulk warehouses, and a few select teen retailers the outlook remains bleak and is not going to improve in the next few quarters, no matter what the "everything will be fine in 6 months" crowd keeps insisting. The "pooring" of the Middle Class continues in America - real wages not keeping up with real inflation, combined with loss of house ATM. $600 rebate checks is not going to change this dynamic; although the financial pundit folks in NYC still live in their ivory tower and don't realize this.

I've been debating adding this Ultrashort Consumer Services (SCC) for months on end, but since it is top weighted with the companies that should benefit most from the pooring of America (Walmart/McDonalds), I've been reluctant to pull the trigger. Since last fall I've been bemoaning the opportunity to short individual names such as Coach (COH) [Oct 9: Our Old Friend Coach] or frankly almost any restaurant stock from much higher levels when the denial pattern of any slowdown was still ripe in the air - being stuck solely with Ultrashort ETFs is a major roadblock. But with that said, with the new socialist era of financial backstopping I've been thinking maybe some of that financial short exposure should be moved to this consumer area (and I'm limited to this ETF) - after all the government won't backstop consumers - they are not integral to the economy or have major lobbyist groups like NYC banks....

No positions

WSJ: Farm Lobby Beats Back Assault on Subsidies

Stories like this showcase the sheer lunacy of our political system - you don't know whether to laugh or cry at the inaneness. A sensible system would have some levers in place - i.e. when crop prices hit so and so level, we know times are tight and the subsidies would hit; but when crop prices rise above so and so level, they go away. But that would be common sense which we have no place for in legislation. And don't forget our tariffs on foreign sugar ethanol - can't have any of that seeping into the system.

If most of this money went to the every man small farmer, that would be one thing but all the pieces I have read on the subject show that 90% of the benefits accrue to ...whom else... the corporate (largest 10%) farmer. Cramerica - for the corporation, by the corporation - bought and paid for.

• With grain prices soaring, farm income at record highs and the federal budget deficit widening, the subsidies and handouts given to American farmers would seem vulnerable to a serious pruning. But it appears that farmers, at least so far, have succeeded in stopping the strongest effort in years to shrink the government safety net that doles out billions of dollars to them each year.
• "At some point, you have to step back and ask, 'Does this make sense for the American taxpayer?'" says Rep. Ron Kind. The Democrat from Wisconsin sponsored a measure that would have slashed about $10 billion over five years in subsidies -- and saw it get crushed on the House floor.
• U.S. farm income, buoyed by demand for grain from rising middle classes around the globe and the biofuels industry, is projected to reach a record $92.3 billion this year. Still, farmers are expected to collect $13 billion in federal subsidies this year, according to the U.S. Agriculture Department, including payments for commodities, land conservation and emergency assistance.
• A little more than a year ago, the stars appeared to be aligned for significant changes to the complex piece of legislation known as the farm bill, which allots billions of dollars to farmers and landowners to help stabilize grain prices, make products more competitive abroad and provide a plentiful food supply. President Bush wanted to cut subsidies. California Rep. Nancy Pelosi, who had backed a high-profile effort to reshape the system in 2002, had become House Speaker. And a broad coalition of advocacy groups was assembling to press lawmakers.
• But.....As Congress tries to finish writing the new farm bill, the final tab is likely to be larger than the 2002 bill, which totaled more than $260 billion.
• Influential interest groups -- which had toyed with supporting changes -- cut deals to get their own piece of the action. Lawmakers who supported an overhaul peeled off as the debate moved into the election year. Historical alliances between rural and urban lawmakers proved difficult to untie. (and there in a nutshell is our "system" where almost nothing is ever accomplished, unless it serves those who cut the deal)
• The agribusiness industry plowed more than $80 million into lobbying last year, according to the nonprofit Center for Responsive Politics, which tracks spending on lobbying. Much of that was focused on the farm bill. "We got rolled," says Rep. Paul Ryan, a Wisconsin Republican who worked closely with Rep. Kind. "The agriculture community circled the wagons."
• Farmers and their allies in Congress say a victory is all to the good because the bill, which is typically renewed every five years, is designed to provide farmers with a safety net through cycles of boom and bust. The heady times of the 1970s, when crop prices soared as the Soviet Union gobbled up American grain, devolved into the farm crisis of the 1980s, leaving farmers buried in debt.
• As first conceived in the 1930s, the bill was designed to be a temporary boost to farm income. (no spending bill is ever temporary once passed!) It has since evolved into a thicket of hard-to-cut programs, providing payments and special loans to farmers to counteract swings in commodity prices and ensure market stability, as well as income. Subsidies flow to growers of corn, wheat and cotton, among other commodities. The legislation has also become a vehicle for funding food stamps, land conservation and school lunches, to name a few things, attracting supporters whose constituents have little or nothing to do with farms. (this is how you get a bill to become so popular almost no one wants to vote it down - it affects people that have nothing to do with farming - genius!)
  
• That has helped create a powerful alliance that makes the farm bill difficult to challenge. The bloc helps ensure all programs in the legislation live on, when they might be vulnerable if considered separately. The 2002 farm bill tab was one of the most expensive ever, with a yearly payout that roughly totaled what the federal government appropriates annually for the Education Department.
• Today, farmers make up less than 1% of the U.S. population, and agriculture production is dominated by large, industrial farms that have annual sales of $1 million or more. In 2006, average farm household income was $77,654, or about 17% more than average U.S. household income, according to the Department of Agriculture. Average farm household income is expected to be about $90,000 this year. Current law allows subsidies to farmers with annual adjusted gross income of as much as $2.5 million.
• "If you're providing benefits to the wealthiest Americans, that's not a safety net," said Chuck Connor, deputy agriculture secretary and the Bush administration's lead farm-bill negotiator. "We felt that was fundamentally wrong."
• Mr. Bush would later rue signing the 2002 bill, which hampered efforts to reach a deal in long-running global trade talks launched in Doha, Qatar, in the wake of the 9/11 attacks. In those still ongoing negotiations, poor countries -- whose economies are often dominated by agriculture -- are complaining U.S. subsidies give American farmers unfair advantages in the global marketplace
• In January 2007.....the goal was to target more benefits at farmers who work the land and need financial assistance, while weaning benefits away from the well-to-do. Recent recipients include 92-year-old David Rockefeller Sr., heir to oil-baron John D. Rockefeller. He received $554,000 in subsidies from 1995 to 2005 for farm operations and land conservation in New York.
• At the same time, disparate advocacy groups came together and began pressing for change. The loose-knit alliance included the National Black Farmers Association, which felt the subsidy system had ignored black farmers; the faith-based Bread for the World; and Taxpayers for Common Sense, a group advocating fiscal responsibility. "We decided to put on a game," says Washington lobbyist Rick Swartz, who organized the alliance. Some groups argued that farm subsidies hurt poor, unsubsidized farmers in the developing world. Others argued the programs can't be justified with the federal budget deficit as large as it is. Still others blamed the commodities subsidized in the farm bill for contributing to obesity, diabetes and heart disease.
• The farm lobby already was fighting back. Led by the American Farm Bureau Federation, with more than six million members nationwide, the pro-subsidy force includes trade associations representing farmers of corn, wheat, cotton, soybeans, sugar, rice and peanuts. Many of these groups have their own lobbyists and entire teams devoted to farm-bill strategy.
• Through the spring of 2007, roughly 3,000 Farm Bureau members came to Washington to lobby lawmakers as part of a well-organized "fly in." The farmers found receptive ears on the House and Senate agriculture committees that write the farm bill.
• Soon after the Bush proposal was unveiled, Mr. Peterson, chairman of the House Agriculture Committee, vowed "to make sure that we protect the safety net." His committee proposed to lower the income limit on payments to $1 million from $2.5 million, and to $500,000 for beneficiaries who don't earn at least two-thirds of their income from farming. He agreed to additional changes, including one that would bar farmers from collecting multiple payments by setting up affiliate corporate entities.
• As it became clearer the farm lobby wasn't going to be stopped, groups that had considered pushing for change focused on getting a piece of the pie. One such group is the United Fresh Produce Association, which, along with other fruit and vegetable groups, is likely to win specialty-crop producers up to $2.2 billion in aid for the first time.
• Mr. Bush has vowed to veto both bills, a threat that gives him leverage in negotiations to wring concessions on reform. At the same time, Mr. Bush is dangling the prospect of $10 billion in new spending, in return for congressional support for more aggressive changes. As an inducement, the White House has suggested it could raise its proposed income cap to $500,000 from $200,000.
• But farmers are standing fast. A group of Farm Bureau members from Iowa traveled to Washington earlier this month to give lawmakers "a dose of in-your-face reality," says a spokeswoman.

I don't remember learning this in Social Studies when the teacher finished with "And that children, is how a bill gets passed." So, much like the subsidies given to oil companies during their boom (don't need to windfall tax them, just don't give them subsidies!), the only way to get some of that tax money waste offset is to invest in the companies benefiting from our lawmakers largess...i.e. fertilizers.

For the Medicare version of "How a Bill Gets Passed" check out this 60 Minutes piece.

Canpotex Potash Contracts Secured with India @ $625

Canpotex [in English that means Mosaic (MOS), Potash (POT), and Agrium (AGU)] has secured a contract with India with identical pricing as the Russians [Mar 26: Russia-India Deal Boosts Potash Price Forecasts] with a 30% volume increase as the cherry on top. The last frontier is China, and as I stated I'll be thrilled with even a $500 price point with the volume China will bring to the table.

Frankly, the numbers being tossed around astound me and surpassed all my earlier expectations. I can't tell you where these stocks will be tomorrow, or 2 weeks, or 2 months - but I look at this Mosaic 2009 EPS forecast of $7.40 and I still think its blatantly short of reality. With this type of pricing we should be talking $9.00+ and tag that with a 20-25 P/E ratio and you have yourself a double in 12-18 months. Even after the huge gains in this name since last spring. Hopefully they remain independent until late 2009. ;)

Serious upside to the other 2 names as well, but since I overweight Mosaic as my horse of choice this is the one I am mentioning. Just a flabbergasting secular bull market here with plenty of governments desperate for the product due to agflation. The perfect storm just continues - sometimes easy to forget the big picture when CNBC crams the "Commodities are dead" headline down your throat every hour on the hour (i.e. last week). I'll continue to be a buyer of these names on each dip, recognizing the fund takes a hit that week in performance but cognizant of the long term benefits. So far it's worked like a charm.

Now we await China...

• The Mosaic Company (NYSE: MOS - News) announced today that Canpotex Limited, the export association of Saskatchewan potash producers, has reached an agreement to supply 1.3 million metric tonnes of potash to its key Indian customers at $625 per metric tonne CFR. This represents a volume increase of 350,000 metric tonnes and a price increase of $355 per metric tonne from the prior year contract. Shipments will occur during the period between May 2008 and March 2009.
• "In this period of unprecedented demand, we are very pleased to have concluded these negotiations and this purchase demonstrates the importance of a timely settlement to ensure supply of potash for the upcoming planting season. India continues to be an important partner of Canpotex and we highly value our relationship with these strategic customers," stated Jim Prokopanko, Mosaic's President and Chief Executive Officer.

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

The Great Google (GOOG) Debate

It is always so fun to watch analysts clash with each other; especially over a fan favorite such as Google (GOOG). I've had a stake in this name since day 1 in the fund, but it's never been a large stake (usually 1% or less of the fund holdings). I've had an open question since last August how Google would react in its first full blown recession. [Aug 30: Google Can't Get Any Traction - is this Why?] Of course at that time no one said we were going into a recession. I mean even now we have a lot of holdouts ;) after all everything will be fine "in 6 months"; unemployment is low and will rebound "in 6 months"; inflation almost nil and any inflation that there is will be gone "in 6 months", and the housing market will be back "in 6 months". Folks I just can't wait until we reach 6 months from now - nirvana! But let's assume nirvana is not going to happen despite CNBC's assurances. It would seem reasonable to a rational person that in a recessionary environment that consumers buy less.... and hence click on ads to buy things less... and hence corporations pay less for ads... and hence Google would suffer. Of course we are not in a rational world, but just saying...

The stock has been in bad shape, and unlike Apple (AAPL) which I am constructive on, Google I still see no rush to get back in. Remember, despite all its prowess it is still levered to the domestic subprime economy - certainly far more than Apple (of course both could fall under the banner of consumer related). Even mighty Google appears to be getting dragged down by its heavy US exposure - shows you just how bad things are (err in theory, but not per pundits). We are seeing a slowdown in click thru's on their ads but if it's more macro economic or more change in efficiencies of ads is up for debate. But in a way, we don't really need to know "why" - we just have to respect the stock action - which is putrid. One could pick at bottoms here and expose themselves to further downside and/or months of sideway action or wait for a true turn up (missing the first part of the move). In a general sense (always exceptions) I prefer the latter scenario. What I see with this data is uncertainty - and the one thing Wall Street hates more than bad news is uncertainty (this entire credit contagion is the best example of this). So at this point I am just sitting on my small stake and waiting it out... but in the long run I still like the Google - near monopolies are generally positive for an investors wallet over time...

Analyst Spat

• New data confirming slowing growth in Google Inc.'s paid clicks renewed debate Thursday on Wall Street over whether the Internet search company's revenue can quickly adjust to changes it made in how it generates clicks.
• Citing data that comScore Inc. released after the market closed on Wednesday, analysts said growth in Google's click-through rate has nearly ground to a halt.
• The click-through rate grew 3 percent in February compared to a year earlier, and January saw no increase compared to January 2007. Several months earlier, the rate was growing 25 percent to 40 percent compared to a year earlier. The new data is in line with click-through declines Google reported last quarter.
• Google, which gets paid when users click on a sponsored ad that comes up as the result of a Google search, has reported steadily rising per-click revenue. The Mountain View-based company said in January that the drop in click-through rates is a result of its efforts to boost the usefulness of each click to its advertisers' sales performance. For instance, the company decreased the space around a word that would result in a click, so more clicks would be intentional.
• Analysts disagree on how long it will take Google's per-click revenue to adjust to any increased value per click it has created.
• Rob Sanderson, an analyst with American Technology Research, said per-click revenue will rise immediately if advertisers see more value in each click, because they'll pay more for them at auction. "It's not clicks that advertisers are really buying, it's what those clicks get them, which is sales conversions," said Sanderson.
• "The counter point is that Google is out there saying, 'We are trying to make our clicks more worthwhile.' They want to actually deliver relevant hot leads to their customers because that's what their customers want," Gillis said
• Piper Jaffray analyst Gene Munster predicted Google will fall short of Wall Street expectations in the current quarter because of the click-through rate. Lehman Brothers analyst Doug Anmuth cut his 2008 profit estimate for Google and reduced his price target to $580 per share from $644, citing the click-through rates.
• He also said advertisers may be trimming their budgets -- and not responding to the changes Google has made.
• Some analysts remain puzzled over whether it is the economy that is actually driving down Google's paid clicks as a result of advertisers scaling back on their spending, or if it has to do with the company's own efforts to fix problems with fraudulent and inaccurate clicks.
• Fraudulent clicks come from advertisers clicking on the ads of their competitors in order to jack up their rates. Inaccurate clicks occur when users link to an ad that does not correspond with what they are looking for. Google has been trying to eliminate both of these, which may lead to fewer ads for the company but could also allow it to charge more money for higher quality results.
• Jeffrey Lindsay, an analyst for Sanford Bernstein, says that while advertising spending is certainly feeling the impact of the economy at the same time as Google is trying to address its own problems, it is hard to tell which of the two factors will ultimately sway the company's revenue.

Long Apple, Google in fund; no personal positions

Lehman Brothers (LEH) Looking Sick Again

The stock action in investment bank Lehman Brothers (LEH) continues to fascinate me. If you recall a week ago Monday, this firm appeared headed off the same cliff as Bear Stearns (BSC) [Mar 17: Bear Down, Lehman Brothers Next?], but their earnings report Tuesday AM (along with Goldman Sachs') combined with the opening of the discount window direct to these firms a week ago Sunday night, seemed to soothe the savages at the gate. Lehman rallied 50% off its abyss low. But the action since has been in a word... troubling. I obviously have no information and we'll never know what is going on behind the scenes but it's all starting to smell very familiar. The same rumors, the same denials, the same pack action that doomed Bear. What would be troubling if this repeated itself is the Federal Reserve literally has availed its balance sheet to the investment banks - so if we have a "run on the bank" with that backstop; well it would be a scary situation because it would imply not much is safe. And we'd have lost our 4th and 5th largest investment banks - leaving only the big 3. Remember, it's all about confidence for the banks - perception is reality (which I love to say) is never more true than in this sector, full of its hocus pocus black box, mark to model, mark to mythology, off balance sheet accounting and lack of transparency.

Very interesting drama playing out - I wonder if Hank is one the phone lining up the next "suitor". Oh to be a fly on that wall... if this price breaks down below $35, I assume the Bat Signal will be sent out to the skies of Gotham city and Uncle Hank will break out his Utility Belt flush with printed greenbacks and blackbook of friendly risk free bailout partners.



I remain perplexed that the market is not treating Merrill Lynch (MER) with the same doubts. Very strange as they are part of the core of the problem along with Citigroup (C). At this point (and looking at the charts) it appears only Goldman Sachs (GS) [not only full backing of government but has people placed throughout the system] and Morgan Stanley (MS) appear (cough) safe. By safe, I mean we won't wake up to the possibility of Bear II.

• Shares of Lehman Brothers (NYSE:LEH - News) fell by nearly 10 percent in early New York trading on Thursday on rumors that the fourth largest U.S. investment bank could see a run on the bank similar to what happened to Bear Stearns (NYSE:BSC - News), traders said.
• Declines in Lehman's shares on Thursday are "all being tied to fears of Bear Stearns," said Robert Bolton, head trader for Mendon Capital Advisors in Rochester, New York. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like."
• Kerrie Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."
• The U.K.'s Times reported on March 19 that the U.S. Securities and Exchange Commission (SEC) was probing whether hedge funds and other market players deliberately circulated false rumors about Lehman Brothers to push the company's shares lower. (once again highlighting the special preference these banks get - I see a lot of companies complain about this over the years, but their complaints are ignored - but my gosh, when its a NYC bank time to get the SEC here pronto! Now it matters! And of course traders in these banks, trying to make unfair profits, NEVER pass along rumors so that THEY can benefit right? Funny when the shoe is on the other foot....)
• In addition, large bearish bets on Lehman in options markets contributed to selling pressure, some traders said.

After the market closes tonight, we'll find out how the $75 Billion "give us your tired, your poor, your junky mortgage" Federal Reserve auction went. Somehow I get the feeling every last dime will be handed out in our nanny state banking system.

Bookkeeping: Cutting LDK Solar (LDK) and Trina Solar (TSL) on 3 Day Rally

The solar sector has been moribund for months... I've mentioned in the past it will simply take some match to light the fire and these stocks can explode in huge fashion in a very short time. The past 3 days have been very good and today's earning report from Solarfun Power (SOLF) is helping to keep the party going. I am going to sell into this rally and will look to re-up at lower prices. If this were a bull market I'd treat it differently as these stocks can move 50% in 2 weeks when the mood is right, but in a bear market I assume today's gold is tomorrow's trash. Further, many of these stocks are approaching some resistance levels. With that said, when speculation reaches a fever pitch in solar technicals mean nothing. But I am taking a conservative appraoch and selling into these gains.

I am selling much of my Trina Solar (TSL) around $33, and much of my LDK Solar (LDK) north of $29. There still remains a lot of headwinds in this sector but again, speculators don't care about fundamentals - as long as momentum is there, they drive these stocks. I do believe they should enjoy a better 2nd half of 2008 as any candidate will look like a tree hugger compared to the current holder of the White House.

Specific to the Solarfun Power earnings - they did beat estimates by $0.01 but it took $20M more revenue than analysts expected to earn that 1 extra penny - highlighting continued margin pressures. In a situation like that, you need more revenue simply to stay in the same place in earnings - which is the affliction across much of the industry right now. On the positive side Average Selling Prices (ASPs) remain strong; it's simply the cost side that provides the angst. Polysilicon issues remain as a dark cloud over most of the sector, not just now but for the foreseeable future - which makes it hard to be as bullish as I was say 12 months ago on the group. But again, when people get happy in this sector they cannot be bothered with details like that ;) I mean, they are having fun! Solarfun!

That said as I've been saying lately the stocks for the first time in a long time reflect some "value", as they've been beaten to pulp for months on end.

• Solarfun Power Holdings Co Ltd (SOLF), which makes photovoltaic cells and modules that convert sunlight into electricity, reported fourth-quarter results above expectations on increased shipments and selling price, sending its shares up 11 percent.
• For the fourth quarter, the company reported net income of $9.1 million, or 19 cents a basic American depository share. The one analyst who covered the company's earnings had forecast a profit of 18 cents a share, before special items, according to Reuters Estimates.
• Net revenue for the quarter was $135.4 million. Three analysts on average were expecting revenue of $115.3 million.
• Average selling price rose more than 5 percent sequentially to $3.85 per watt.
• The company said it was affected by winter in China in February and continues to be affected by the relatively tight supply and increasing costs of polysilicon, a key raw material used in making solar cells. Solarfun expects these factors to pressure gross margins for the first quarter of 2008
• It expects volumes in first quarter to be at least 35 MW, and average selling prices to remain strong and relatively constant.

Polysilicon appears to remain an issue for the rest of 2008.... but MW shipments really will be taking off - again the same quandry - a lot more revenue but at decreasing profitability as polysilicon eats away at the cost structure. Spot polysilicon surprised us last quarter at $400/kg - yesterday I read a piece where it was up to $475/kg. Ouch. I thought last year at this time, we'd see flat lining or even decreases in polysilicon pricing but that was before an army of panel makers was created in China, creating too much demand.... eventually we will have a glut of polysilicon but eventually keeps getting pushed out a few quarters.

• Solarfun Power Holdings Co. said Thursday it expects improving shipments and strong pricing through the first quarter, but noted that high polysilicon costs will pressure profit margins throughout the year.
• The Chinese solar-power company expects to ship at least 35 megawatts worth of solar products in the first quarter. It noted, however, that severe winter weather in China hindered operations last month and that it "continues to be affected by the relatively tight supply and increasing costs of polysilicon."
• Spot prices for polysilicon have been escalating, Solarfun said, and it expects those trends to continue throughout the year. The company forecast lower gross margins for the first quarter and full year as a result. Chief Executive Harold Hoskens called 2008 "a mix of opportunities and challenges."

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

UN Report: Asia Faces Jump in Food Costs

This is the 3rd story this week alone I've posted on this subject - still not on the radar of anyone but blog readers I guess (but it did hit Yahoo Finance at least). I've been talking about since this last summer - but it still does not appear to making a dent into public conscience. As an investor it's important because frankly it is a major headwind for emerging market investing - Americans spend less than 10% of their budget on food, but many in these sexy new emerging markets spend >50% of their income on food. Some of the thesis in emerging market investing is dependent on the newly formed middle class consuming like a Westerner - but this is going to put a crimp in things. However, some governments who have the huge trade surpluses (i.e. China) are subsidizing the cost - but the bill to do so is increasing by the week. So aside from being a social disaster, it is going to become a major strain on much of the world's newly minted middle class. Their lower class? Don't even want to think about it...

But this is just another step towards the acrimony that will grow not only within countries but between countries as priorities on how to use limited resources are debated. See the Indian Finance Minister's quote below. And just imagine the "mood on the street" in these countries - the inability to feed your family leads to desperate measures. If you think it's bad now, give it half a decade. "Food protectionism" will be a growing issue.

• Asia faces a sharp rise in food costs, due partly to surging demand for crops used in biofuels, and governments should do more to shield the region's poor from economic shocks, a U.N. commission said Thursday.
• Economic growth in the region will slow as the U.S. credit crisis hurts demand for exports, but a robust expansion in China and India should help Asia avoid a major slump, the U.N. Economic and Social Commission for Asia and the Pacific said in a report.
• "Rapidly rising food prices will be the key challenge in the coming year," Shuvojit Banerjee, an economist for the commission, said at a Beijing news conference. "With the march towards biofuels apparently unstoppable, the region has to prepare for sustained inflation through higher food prices."
• In China, food costs in February were up 23.3 percent from the same month last year, driven by a 63.4 percent jump in the price of pork and a 46 percent rise for vegetables. China has banned use of food crops for fuel and has imposed curbs on grain exports to increase domestic supplies and cool inflation.
• Across the region, price rises are driven in part by surging demand for food crops to make biofuels, such as sugarcane used for ethanol, the commission said. "We do view biofuels as quite a worry for food production in the region," Banerjee said.
• On Wednesday, Indian Finance Minister P. Chidambaram said the use of food crops for biofuels is hurting the poor and called it "a sign of lopsided priorities of certain countries." "It is outrageous and it must be condemned," he said in a lecture in Singapore.
• The U.N. report said rising food costs hurt the poor much more than higher oil prices because they spend a much bigger share of their incomes to feed their families. In the Philippines, for example, 50 percent of consumer spending is for food versus 7 percent for energy.
• "We find persistent poverty and widening economic inequalities due to the neglect of agriculture," Banerjee said. "Improving agricultural productivity would have a profound impact on poverty."

Bookkeeping: Adding to Huron Consulting (HURN) on Earnings Warning

Remember when you were a kid in the doctors office and there were those issues of Highlights Magazine? Remember Goofus and Gallant? Well Huron Consulting (HURN) is Goofus. I've bought a paired trade of Huron Consulting and FTI Consulting (FCN) last year as a play on the coming restructurings in corporate America. [Nov 27: 2 New Recession Plays] FTI Consulting had the higher valuation but for a reason - it executes - it is Gallant. [Feb 28: FTI Consulting Continues to Prove to Be Best of Breed] Huron? Since I've owned it, it's warned twice.

Thankfully, I am not HolderMark but TraderMark, and by trading around this position I've lived to see another day. My original purchases in this name were in the $60s, but as the chart shows after a brief fling with glory it's been mostly downside. The last batch I bought near $50 in late February I've already released into the fire and was sitting this morning with a 0.10% position. So with today's warning, and stock down 30% I am buying back some exposure. Revenue was guided down but not by a huge amount; however earnings guidance really degraded.

Now, normally companies that execute this poorly (you cannot put a price on reliable management) I simply abandon ship but I do believe in this thesis, and there are limited ways to play it. But Goofus and Gallant show why stock investing is so tricky - Huron is the "value" play, much cheaper (even before today's destruction) while its peer FTI is "expensive" and gets more so every month. So do you pay up for quality and consistency? Or take the "value". A quandry but many times, it pays off to pay up... and this is yet another example. Now again, since I am willing to trade around positions I can live with the situation, especially since I've been relative fortunate in my timing with this name, but for a traditional buy and hold investors this holding is an unmitigated disaster despite its "cheap value" relative to peer.

Today, I've increased my exposure in Huron Consulting (HURN) from 0.1% to 1.7% of fund, in the $40-$41 range. Frankly the chart is so busted I have no support anywhere - these are lows not seen for 2 years. So I simply let the market do its thing the first 20-25 minutes and then began scaling in - certainly the stock can go lower and without any clear chart support I did not buy a larger stake. But at these prices the valuations are low, even if they miss next quarter again (which appears to be their operating model). Hopefully 2009 will be the year for them to benefit for the original reason I bought these 2 names....

• Huron Consulting Group Inc., which provides financial and operational advice to businesses, on Thursday reduced its first-quarter guidance, citing continued weakness in its financial consulting segment.
• For the quarter ending March 31, the company anticipates earnings between 50 cents and 57 cents per share, compared with previously issued guidance of 66 cents to 70 cents per share. Analysts polled by Thomson Financial, on average, expect earnings of 67 cents per share.
• Huron estimates revenue before reimbursable expenses to be in a range of $138 million to $140 million. The company originally forecast first-quarter revenue between $142 million and $147 million. Analysts, on average, estimate revenue of about $145 million.
• "While we are disappointed in the results of our financial consulting segment in the first quarter, we remain optimistic that this segment will regain momentum," said Gary E. Holdren, chairman and chief executive, in a release. "The continuing turmoil in the financial markets should translate into an increasing level of investigations and litigation over the next 12 to 18 months."
• Huron said its outlook for the year still includes double-digit organic revenue growth.

Long Huron Consulting in fund and personal account

US Government's Humanitarian Relief Agency Cutting Back

Another in a series of articles about the real impact of agflation and the coming (arrived?) food crisis globally- the dollar amounts in this article are a pittance compared to how much a few warships, or jets cost but remember, war first - food second. (Entire budget here is $1.2 Billion) This is from earlier this month and I missed it...

Lennon: All We are Saying... is Give Food a Chance....

Now, I do wonder when does the government begin helping poor Americans? Oh yes that's right - thats an entitlement (darn food stamps, only for lazy people) and a Democratic initiative - so there is no way we can pass that because the Democrats would get credit it. Not a problem. More Humvees please!

• The U.S. government's humanitarian relief agency will significantly scale back emergency food aid to some of the world's poorest countries this year because of soaring global food prices, and the U.S. Agency for International Development is drafting plans to reduce the number of recipient nations, the amount of food provided to them, or both, officials at the agency said.
• USAID officials said that a 41 percent surge in prices for wheat, corn, rice and other cereals over the past six months (remember inflation even included food and energy is somehow only 4% by OFFICIAL government statistics) has generated a $120 million budget shortfall that will force the agency to reduce emergency operations. That deficit is projected to rise to $200 million by year's end.
• "We're in the process now of going country by country and analyzing the commodity price increase on each country," said Jeff Borns, director of USAID's Food for Peace, the organization's food aid arm. "Then we're going to have to prioritize."
• The reductions, international relief agencies say, will seriously complicate already strained efforts to combat global hunger, particularly in Africa, Central Asia and Latin America. Poor countries in those regions are struggling to cope with record food price surges, which have made it difficult for aid groups to sustain their operations in some countries.
• The U.N. program is confronting similar price pressures. It announced this month that it was facing a $505 million shortfall due to soaring food and fuel costs, and would cut distribution if it did not receive new funds.
• Meanwhile, need is increasing. Afghanistan, for instance, recently put in an emergency request for $77 million to cope with skyrocketing prices that have put key staples out of reach for more and more Afghans.
• "Look at what's happened to wheat prices alone -- they shot up 25 percent in one day last week," said Josette Sheeran, executive director of the World Food Program. "This is really the first emergency we've faced without a drought, war, natural disaster. We will have to cut the amount of people being served or the amount of food being served if we do not get more funds."
• Groups that work with USAID, several of which have been informed of the shortfall over the past two weeks, are alarmed. Emergency aid is earmarked only for countries in desperate need as a result of natural disasters, civil strife or other humanitarian crises. Although the United States has proportionally provided less of the world's food aid in recent years, it still provides about half the global total in efforts to relieve hunger among more than 800 million people.
• Frank Orzechowski, an adviser for Catholic Relief Services, said his organization has calculated that U.S. food aid would drop from 2.6 million tons last year to about 2.2 million this year. "That is going to be a pretty big hit for the people who can afford it the least," he said.
• The biggest concern is that there are going to be more people being pushed into food insecurity in poor countries because they don't have the purchasing power to cover higher costs, and we will be less rather than more prepared to cope with that. Higher commodity prices is not a situation that the U.S. is to blame for, but we are going to need to see it step up now and decide to make a greater contribution anyway."

More liquidity injections please, Ben. We need them - hedge fund managers need the cash infusions, after all we can't have deleveraging from 30:1 level to 20:1 - please send more paper money into the system so hedge fund managers can feed their families. We're now hearing the first signs of anguish in the financial community - bankers wives forced to cut back on spending $50K on window valences. The horror - hell hath no fury like an apartment decorated for under $300K - I don't know how they will be able to show their face at the next cocktail party. Please cut to help these poor wives out. More... more... more. Print. Print. Print. Inflation is only 4% in one government agency while 41% (in half a year) in another - keep the obfuscation going... the sheep remain confused and won't understand what happened for maybe 10+ years from now. Oops, I remember now - by lower rates by 75 basis points instead of 100 points and inserting some "strong language" about inflation in your last statement you ARE fighting inflation. CNBC told me that so it must be. My bad! Carry on the "fight". And please tell us how hard you are fighting it on the next liquidity injection as well, sometimes I forget in my lather....

Theme of the Day: Continue to Reduce Risk

I've gone to risk aversion mode the past 48 hours since the mindless market is acting more nutty than usual. As of this time yesterday I was up to 30% cash, as I stated I would be raising cash until a clear trend is determined, either up or down. I did not pile into short exposure although I did increase it to some degree yesterday, as we were at one of these inflection points on the S&P 500. But with today's action I had been increasing short exposure, "relatively" confidant (as much as you can be in this bipolar environment) we appear to have set another bull trap.... fund cash has dipped to around 26%, but short exposure is back up to "full insurance mode" near 22% of the portfolio (although my mix is more balanced across the 6 Ultrashort ETFs than previous eras). Combined with my cash this is the most "non long" exposure I've had. Period. But again, the cash is more of a condition of being thrown around so much by the 180 degree moves literally daily in this market where yesterday's trash is today's gold. I also threw out some of the coal exposure on today's upgrade and large moves up, because in a bipolar market coal will be seen as trash tomorrow. (or if not tomorrow within a few days) Because as we all know, coal fundamentals change every 24 hours.

With tonight's sales "miss" (not a real miss, just at the low end) in new software sales (v expectations) by Oracle (ORCL) we seem to be poised to be repeating this same pattern since October 2007, lower highs, reversals at key technical levels - pure bear market action. Draw in hope, bring in long money, trot out CNBC analysts calling the bottom (for the upteemth time), tell everyone to get back into financials, the early cycle move is here, and then crush spirits. Everything I read today said Oracle is so consistent and would soothe the market, it made me even more nervous; yet another reason to increase the short exposure as I did through the day. Now it is 4:30 PM EST and that gives the socialist Federal Reserve 16 hours to cook up a scheme to bail out the market but my working assumption is we've failed yet another time at resistance and are either going sideways or down. I really don't follow Oracle that closely but with it's consistent growth and large cap status ("safety stock") a chink in their armor should make bulls even more worried. If the large cap "safe" stodgy performers don't live up to billing, what does it say for the more flighty stocks? We'll still have pockets of good performance but it's like walking in a field of land mines in this environment....

These are the types of issues I think we continue to face throughout 2008 as earnings estimates for the full year are too high due to the Kool Aid prognosis of "2nd half recovery". So this is a creature of the Kool Aid bulls own design - their disbelief that any recession can last more than 3-4 months, will lead to constant disappointments as they keep estimates far too high - Meredith Whitney is taking the knife to financials almost every 4th week now - I'd argue most of the rest of the market has similar issues of overinflated 08 expectations. As we move into yet another earnings season (and warning season coming in the next 2 weeks) the risk remains high for those caught in those stocks. I said the same thing in January (but I got caught myself in a Kool Aid spill) - I believed the market would correct as companies began warning on future guidance - I did not expect a full bear market to happen in 15 trading sessions. But I do expect continued reduction of estimates for "2nd half 2008" as we move through mid April to mid May earning season. And then once investors "get" that businesses are having issues maybe their expectations will be lowered, and we can have another Kool Aid rally. And so we will continue... until we have enough people reach utter disgust with this market. And that's probably when we will "really" bottom. Bear markets don't really bottom when 80% of pundits are calling the bottom every other week. They end in frustration and pure capitulation. Still too much hope in the powers of the Federal Reserve and talk of 2nd half recoveries and housing bottoms everywhere. (in my humble and often incorrect opinion)

• Oracle Corp (ORCL) reported a higher quarterly profit on Wednesday, but its 16 percent rise in new software sales was at the low end of expectations, and its shares fell 8.3 percent.
• Sales of new software, which investors look to as a key indicator of the future financial performance of business software makers, rose to $1.6 billion in the quarter, from $1.4 billion a year earlier. Oracle in December had forecast third-quarter new software sales to be 15 percent to 25 percent higher than a year earlier. Wall Street analysts were expecting the company to report growth around the mid-point of that range.
• New software sales figures are a key indicator because the customers also sign maintenance contracts that cost 20 percent of the product price per year. Also, software makers get extra revenue from customers when they expand the number of workers using a computer program that they have already purchased.

Preview of new socalist era Oracle conference call
Larry Ellison, CEO: Thanks everyone for listening to that boilerplate... I wanted to move on to our future guidance. We at Oracle take pride in our business, and my numerous yachts... but it does appear other CEOs might need to sell their yachts because we are seeing the beginning signs of...
Hank: Excuse me! Excuse me! Hi everyone, this is Hank Paulson - a friend to you. Sorry for interfering - we've been doing a lot of that lately. I just wanted to let you know that was Larry was going to say was we are seeing signs of strength in the business community. Sales are fine. Everything is fine. And we're working on a stimulus program with members of Congress for Oracle customers so that sales can continue to be strong. This will only cost tax payers in the range of $10-$12 Billion, a pittance.
Larry Ellison: wha...whe...huh...?
Hank: And I also would like to take this moment to announce the Federal Reserve of San Francisco stands ready to lend money at a 2.5% rate to any institutional investor who wishes to invest in Oracle stock. Or any stock for that matter. And no, before you ask, this offer is not open to individual investors (laughing loudly) Individuals? Hah. Cmon now.
Analyst: Larry...err... Hank... or Larry - whichever... could you talk about your new software sales coming in at the low end of your range - what do you see in the next quarter
Hank: Please now. No questions of that nature. I am here to assure you housing is 4% of GDP, the dollar is strong, exports are booming, and Oracle software is an export. So therefore, it is strong. I can't simplify it anymore than that. p.s. what bank do you work for? Do you need help? Here is my cell number, give me a call. We're good with that right Ben?
Ben: (deep sigh) Yes Hank.
George: This is so cool! So this is how a business is run! I remember, because whenever I screwed up, Daddy came and bailed me out. Now we can do this with everyone. So where do we get the money? I mean who is like my Daddy?
Hank: Mr President, that is something you don't really need to worry about. I do believe the NCAA champion LSU Tigers are visiting in 10 minutes - why don't you go get ready for that?
George: Fun!!!
Hank: This now concludes this call. Right Larry?
Larry: ummm, yeah ok.
Hank: Thanks, I need to go call Goldman Sachs and tell them our next moves. Oops, that was off the record ok everyone? Now I see why this system works so great for Putin...

**************** END OF TRANSMISSION

Does this look familiar yet? It should - we seem to be setting up for the 7th "lower high" since early October highs.... another 2% or so down and we're confirmed... someone get Uncle Ben and Hank on the phone - time for more socialism.

Apple (AAPL) Now at Inflection Point

Coming off its solid win in the 1st round of the Fund My Mutual Fund Stock Invitational Apple (AAPL) has put on a 12% move in the past 4 days. We discussed this stock late last week [Mar 20: Apple Mac Sales Up 60% in February] In that post I wrote:

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.

Well now we are at that all important mid 140s, as the 200 day moving average beckons - just a tad under $145. A move above this level (maybe off Oracle report tonight) and in a bull market I'd be buying hand over fist. In *this* market I'll have to assess a bit closer but it's definitely a nice move and Apple is looking like the old champ it has been the past few years. With quarter end approaching I am not sure if this is just the institutions running up the stock price or the long awaited beginning of a rebound. We shall know soon enough.

Long Apple in fund; no personal position

Bookkeeping: Closing MFA Mortgage Investments (MFA)

As I stated earlier this week, I have portfolio creep - too many names, as I like to stay in the 50-55 range in long positions. So I am letting go of another small stake today; in MFA Mortgage Investments (MFA). This one has not been in the portfolio long and was my misguided attempt to play the "financial rebound" through mortgage REITs; and have some zig when the market zags against my commodity/global plays. Well all it's done is zag zag zag down, to the tune of a loss of 1/3rd of the position - nearly $10K. It didn't take very long to make my top 10 list of losers [Top 10 Winners and Losers] That stinks, but it happens eventually when you hold this many positions. All my purchases were in the $10s in early to mid February, and I am exiting my last batch here at $6.77. We've had our now predictable"early cycle" rebound where financials/retailers/etc that fell for weeks on end rebounded 30-40% in a week, so low $7s appears as high as MFA is going to go for now. I am cutting the loss and will revisit at a later date.

I still like the thesis behind this group *BUT* if (when?) we go through another phase of financial turmoil I could see this name being sold down further - much like FCStone Group (FCX) - once the confidence is lost, no matter what the fundamentals - entire groups of stocks are sold off en masse. This stock lost 50% within days once the confidence was lost... so with some rebound here, I am going to exit stage right and like FCX revisit down the road once the credit markets are more orderly and the risk of your stock going down 50% in a few hours based on a rumor is not an issue to wake up to every morning.

No position

I'm on Meredith Whitney's Side

Meredith Whitney is an Oppenheimer & Co banking analyst who has not drunk the Kool Aid. [Feb 22: Kool Aid Drinkers in Financials Unhappy with Today's Reality Checks] She has been nailing these financials each and every time the jocks on Wall Street jump onto the "bottom is in" (for the 18th time) bandwagon. If not for the unprecedented Federal Reserve actions, she would already be even that much more correct than she has been. Only the full backing of the tax payer is helping to prop up the system in my opinion. But she is out today with more downgrades, and slashes to earnings and warns she is not done for 2008. Don't mess with Meredith. (and yes there are those out there calling for the bottom is in - but it all depends on how truly socialist our Federal Reserve and government plans to be - something we cannot model - so until then - we have to go with our semi capitalist assumptions)

• Oppenheimer & Co. on Wednesday forecast Citigroup Inc. (C) could write down another $13.1 billion in the first quarter and post a loss more than twice as deep as Wall Street's outlook.
• Oppenheimer also cut its first-quarter estimates for the other large-cap banks by an average of 84%, and put itself in the camp of analysts who believe the credit crisis plaguing financial companies is far from over.
• "We are confident this will not be our last reduction in 2008," Oppenheimer analyst Meredith Whitney wrote in a research note. "Rather as key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."
• In addition to $13.1 billion in write-downs for Citigroup, Whitney predicts $ 4.3 billion in write-downs for Bank of America Corp. (BAC), $2.8 billion for JPMorgan and $1.5 billion for Wachovia Corp. (WB).
• Last week, Punk Ziegel analyst Richard Bove said the Federal Reserve's action to provide a liquidity backstop for the banks marked an end to the crisis and a "once in a generation opportunity to buy bank stocks."
• Whitney is perhaps the most prominent voice on the other side of the divide, having gained extra weight from her contrarian - and correct - call five months ago that Citigroup would have to cut its dividend.
• Miller on Monday cut his estimates for 21 banks, saying that despite the recent rally in bank stocks, the problems in the credit markets have intensified. He believes that the Fed's actions "should help at the margin, but credit losses will have to run through the system, putting tremendous pressure on capital levels and earnings."

How we exit the globe's worst credit contagion without any serious bankruptcies is simply a Kool Aid fantasy. But one we keep getting fed. (or is it Fed?) So while we are assured to our face, the FDIC is quietly hiring staff for the coming bankruptcies. I mean, even the Federal Reserve (i.e. you) can't bail out all of them. And one of them, Citigroup (C) is so big, the Federal Reserve and Treasury won't be able to find a buyer for them - so how they handle that coming drama will be so very interesting. Somehow, I believe all our pocketbooks will be part of the "solution".

• The Federal Deposit Insurance Corp plans to hire as many as 138 new workers to address the potential for rising bank failures, the Wall Street Journal said in its March 26 edition.
• An agency spokesman said the FDIC plans to boost the number of workers in its Division of Resolutions & Receiverships to as many as 380 from the current 223, the newspaper said. (over a 50% increase folks...)
• Only five U.S. banks have failed since 2004, including two this year. Analysts have predicted the failure rate will grow as losses from soured mortgages and other loans mount, and as regulators crack down on lenders that take too much risk.
• More than 2,000 banks nationwide failed in the decade ending in 1992, encompassing the heart of the savings-and-loan crisis. (but this is a new era of socialized losses.... taxpayer funded and Uncle Ben/Hank/George approved!)

Position: Frightened by Citigroup's prospects

WSJ: Stocks Tarnished by Lost Decade

This is something I've touched about in the past on the blog - how anyone investing in general indexes since Jan 1, 2000 is underwater. One thing I definitely agree with Jim Cramer on is there "is always a bull market" somewhere, so you can always make money on something, but it takes a lot of hard work, thinking, and interest in the markets. For the great many who live normal lives and investing is simply something they do through most large cap mutual funds (many of which are simply S&P 500 clones disguised to rake in large fees) in their regular accounts or 401ks, it's been a tough decade. And that's not adjusted for inflation in which real returns are clearly negative. Last, that's in dollar terms; the story has been a disaster for foreign investors who have had to put up with the dollar decimation to boot (on top of inflation adjusted real returns). So while the stock market does well over "long periods" of times, I'd consider a decade to be a serious amount of time - and this has been a bad decade. Unless you had the stomach (following huge losses in 2001/2002) or simply had good timing to start following the stock market in 2003, there has simply been no easy way to make money using traditional indexes. And NASDAQ investors? Still down in a big way.

This is why the Pollyanish "everything will be fine" in the long run attitude about the US continues to worry me. Stocks were not necessarily overpriced a decade ago - but we created a bubble - and the aftershocks of said bubble still reverberate all these years later. And without that bubble (spike) in 99/00 where have we gone? If stock prices are a reflection of the underlying health of the economy (through corporations)? And going forward what are the catalysts to get out of this funk? That's the bigger question for me at this point - almost everything in the US is based on a financial or consumerism model. And the financials are now going through a NASDAQ type correction that frankly, I believe will be very similar to the tech bubble - yes there will be large spikes off of oversold bottoms but risk aversion should stick around at least for another 2-4 years and almost all these financials goosed earnings by taking outsized risks and then leveraging to a massive degree. That era is now gone (until a new round of suckers is born in 5-6 years), and some parts of their revenue stream will disappear. [Mar 20: Citigroup Warns: the "Great Unwind" Has Begun] So those that assume that "after the correction" financials will just go right back to where they were in 2005-2006, I'd point to a very similar situation as the tech stocks earlier in the decade - unsustained valuations caused by irrational behavior and easy credit; and the stocks are still nowhere near where they "were". While we are going back to the easy credit era (one new bubble solves an old seems to be the logic), the risk aversion will take quite a while to work through. So that leaves consumerism as the remaining driver. I guess we can continue spending individually again until we go blue in the face - but again, access to credit is not going to be quite so easy so even people who want to do this will have a harder time AND I belive the lessons learned (the hard way) by many individuals will chastise them into perhaps saving "a little" go forward.

And then the wildcard is inflation - just how bad will it get and how sustained over the next 3-10 years? If it remains elevated (which I believe it will), then you have a permanent dent in consumer buying culture and by proxy our consumerism culture. So what is the next great driver? It appears green energy but frankly a few European countries/Japan have a huge lead time on us. Our top leadership, in some circles, is still denying Global Warming at this stage so how do you become a leader in green energy under that backdrop? So as I try to weigh things in the "long run" I am trying to think what will be the next driver of the US "service" economy to jump start the economy and the markets for a sustained period of time (5-10 years). All I can think of (aside from commodities that we do have) is some unknown technological break throughs in clean energy or simply a return to the home flipping game (creating fake paper wealth) in 3-4 years. So I wonder if the stock market performance the past decade has really signaled a lot of the economic power lost slowly but surely by "the masses" - which most US focused companies do cater to (as the wealth becomes concentrated in multi nationals and the top 2%). But hopefully something surprises me in the future; but until then I continue to focus overseas where the real future growth appears to be. I continue to go that route because when I think of macro economic trends and rank countries who will benefit from what I believe is happening globally, it is hard to place the US even in the top 5 anymore. I am mulling if we have another lost decade coming in front of us - don't think it can happen? Japan has been in bear market since 1989. We are NOT Japan, but we do have some of the same bubbles/mistakes (easy money, low interest rates, housing bubble, etc). While we used to allow creative destruction in the past 3-6 months we've seemed to have shifted to a more socialistic model where losses are socialized... sort of what we criticized Japan for doing. And our structural deficits will eat our entire GDP by 2030? Not exactly a path for prosperity.... people will need to pay higher taxes and/or take on more of their own costs for "needed things" - leaving less money for consumerism. Again, all paths seem to lead to the same direction ... unfortunately.

Ironic.

• Over the past 200 years, the stock market's steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.
• The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.
• The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year.
• Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn't held up for stocks bought in the late 1990s or 2000.
• Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.
• Stocks also underperformed other investments during the 1930s and the 1970s. During both of those periods, stocks would rally strongly, only to fade.
• But Yale economist Robert Shiller, who predicted the market trouble in his 2000 book "Irrational Exuberance," warns that the market still hasn't shaken off its excesses. He and some other analysts think the latest volatility is a symptom of more trouble to come. "I have to say that this isn't a great time to be in the stock market," says Prof. Shiller. "The housing crisis that we are going through is going to put a damper on the economy that is longer than a recession. I don't see the stock troubles ending as quickly as many people are imagining."
• "When you have extraordinary returns, as we did from 1982 through 1999, then usually the next 10 years aren't very good," says Prof. Sylla. His research suggests that exceptional booms steal gains from the future. When the booms end, returns become subpar, so that average returns over the longer term fall back to the 7% norm. Economists call this "reversion to the mean," the idea that exceptional performance can't last forever. (keep in mind the 7% normal, in a highly inflationary environment that our Federal Reserve has helped bestowed upon us means much less than in a low inflation environment)
• In recent years, investors have been putting far less money into U.S. stocks than they did during the stock-investing boom. In 2000, at the height of that boom, Americans added $260 billion to U.S.-stock mutual funds, according to the Investment Company Institute, a trade group. Last year, investors took more money out of those funds than they put in -- a net outflow of $46.4 billion.
• A big problem for the market right now is what analysts call stock fundamentals. Strong corporate-profit gains and low inflation have supported stocks since 2002, but they are becoming harder to sustain. In a typical year, Prof. Sylla says, corporate profits run at about 5% or 6% of total economic output, after tax. In 2006, that number was 9%, a record. Historically, this number tends to revert to the mean, suggesting that profits now could weaken. "Profits may fall to 3% or 4%" of economic output, Prof. Sylla says.
• Spending by ordinary people could have an effect on those profits. Consumer borrowing and spending kept the economy afloat after the stock bubble popped in 2000. Emboldened by high home values, people borrowed at levels rarely seen, pushing down the national savings rate to zero.
• A consumer pullback would hold back economic growth and corporate profits, putting a damper on U.S. stock gains and giving investors an incentive to continue putting money into commodities or stocks in Brazil, Russia, India and China. Baby boomers concerned about retirement income could look for safer investments with guaranteed returns, such as Treasury bonds and bond-like products offered by mutual-fund companies.
• "We have to accept that this is no longer a nation of 4% real economic growth. This is a mature nation that no longer has a strong manufacturing base," says Steve Leuthold, chairman of Leuthold Weeden Research in Minneapolis. (Bingo)
• "The S&P 500 never got back down to its long-term trend line" after the 1990s, says Jeremy Grantham of Boston money-management firm Grantham, Mayo, Van Otterloo & Co. Mr. Grantham, who has long warned of a prolonged period of subpar stock performance, says exceptionally low interest rates temporarily propped up the indexes. (Bingo, as I keep saying, easy credit will inflate all assets - but once again 8% stock return in a 9% inflationary environment means you lose - you just don't realize it)
• There are reasons to hope that things won't be as ugly this time as they were either in the 1970s or in the 1990s in Japan, which went into a prolonged slump after bubbles in its housing and stock markets. For one thing, although inflation has been running above 4% this year, it remains well below the double-digit rates of the 1970s. That's made it easier for the Fed to stimulate the economy without worrying about sparking runaway inflation. (lies, lies, and more lies: 4%? No, it's 13% - 4% is if you believe the government statistics)

Annual Spring Warning on Entitlement Programs Falls on Deaf Ears

I talk about the structural government imbalances on almost a weekly basis - not directly, but as part and parcel with the world view that we are simply a subprime nation and the effect on our dollar. While the dollar has gotten a lot of attention the past year, the truth is it's been in a swoon for many years. Frankly, anyone who tries to raise a fuss is quietly ignored to the point they feel like they are running into the wall. [Feb 25: I Didn't Realize US Comptroller Resigned] Who will finally stand up and try to do something? My guess - no one will get anything done until its a crisis condition - which means we can kick the can down the road for maybe another decade. And then when it's a crisis we will pay 15x the cost it would cost now to be preventative. But that's the American way - if it's Katrina, if it's bridges, if it's Medicare, if it's mortgage regulation, if it's (fill in the blank) - this is how we do it. Ignore warnings and only address when its an imminent threat.

Quite a sad statement - I only point this out because yesterday was the annual report which was promptly ignored. And we will continue to borrow ourselves into more debt as these entitlement programs suck up more and more of the annual budget. Politicians who appear to only care about their own term have a timeline of 4-6 years - any issue in this country that would create unpopular consequences (higher taxes, reduced benefits) will be ignored as long as it can be pushed out past their 4-6 year term. This seems to be our leadership situation. And why both parties are just a disaster; our presidential election system is based on who said what 9 years ago, or who has better stage presence, or who has more charm, or who has the correct religion, or who is "likable" instead of asking people the hard questions and potential solutions - solutions that will not be to the liking of their electorate.

Some articles of note ....
Washington Post: Spring Forecast? It's Always Gloomy

• The rites of spring have returned to the capital. The daffodils are blooming. The Easter eggs are rolling. The perch are running. And members of the Bush Cabinet are warning about entitlement calamity.
• "Rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," a distressed Treasury Secretary Hank Paulson announced at a news conference yesterday afternoon.
• Still not alarmed? "This will trigger -- and I want to emphasize again, as Secretary Leavitt has said -- this will trigger a Medicare funding warning," contributed Labor Secretary Elaine Chao.
• The quartet made it a four-alarm fire, yet even the participants acknowledged that their agitation had become a bit ceremonial. One day each spring, administration officials release the latest annual reports on Social Security and Medicare and warn that the programs will go bust without urgent government intervention. The administration officials, along with their counterparts in Congress, then spend the rest of the year achieving nothing to fix the problem. (Now that is a perfect summary!)
• In spring 2007, they announced that the Medicare trust fund would run out in 2019 and Social Security in 2041. Yesterday, they announced that the Medicare trust fund would run out in 2019 and Social Security in 2041.
• It's a bit of an exaggeration to say nothing happens with Medicare. Actually, it gets worse. The projected solvency of Medicare has shrunk by six years during President Bush's tenure. Bush's prescription drug benefit has added another $915 billion in costs to the Medicare program -- although Leavitt cheerfully pointed out yesterday that the hole Bush created is "about $117 billion less than we felt it would be last summer."
• Though Democrats dispute the urgency and magnitude of Social Security's problems, there can be no doubt about Medicare's woes; its payouts are forecast to exceed tax revenue starting this year.

NYTimes: Outlook Remains Bleak for 2 Programs

• The Bush administration issued a grim report on Tuesday on the financial outlook for Medicare and Social Security, but said the condition of the programs had not significantly deteriorated since last spring.
• The report may put pressure on the presidential candidates to say what they would do to rein in health costs and to shore up the programs, which serve more than 50 million people. The candidates have largely avoided these questions, but the next president will not be able to escape them.
• The Democratic presidential candidates have set forth proposals to provide health insurance for all Americans, but have said less about how they would finance the costs of Medicare, for people who are 65 and older or disabled. Efforts to squeeze even modest savings from that program typically provoke a frenzy of lobbying on Capitol Hill.
• But the report, prepared by government actuaries and economists, said these projections were unrealistic because they assumed that Medicare payments to doctors would be cut by more than 10 percent in July and by an additional 5 percent in January 2009 and in each of the next seven years, for a cumulative reduction of about 40 percent. (holy smoke, those are some laughable assumptions) In fact, Congress usually intervenes to block such cuts and, in recent years, has approved small increases for doctors, thus increasing the costs of Part B and beneficiaries’ premiums.

Forbes: Cry Medicare

• While the U.S. Federal Reserve is rushing to bandage up the housing crisis, the trustees of Medicare and Social Security ponder a much bigger and perennially ignored problem: the looming deficits facing government entitlement programs.
• Without sweeping reform--an unlikely prospect in an election year--the next president will see similar numbers in 2009. But by then Medicare will be only one year away from cannibalizing its trust fund.
• Critics of the system suggest the situation is even more untenable. The trust funds for the entitlement programs consist of special-issue bonds from the U.S. Treasury. And when the Treasury has a financial obligation it’s the taxpayers that foot the bill.
• Today, Medicare, Medicaid and Social Security consume under 10% of the gross domestic product. But if these trend lines don’t change by 2030, the year that a child born today will finish college, then the cost of the entitlements and interest payments on debt would consume the entire federal budget. (think about that... it's only 20 years from now - in most of our lifetimes)
• 80 million people will soon be getting old enough to claim benefits. Either the cost of the entitlement shrinks, or the government--and therefore taxpayer--needs to foot the bill.

Our 3 main candidates responses? A lot of hemming and hawing. The typical rhetoric. And even if they do have plans they have to deal with a Congress that is so polarized, they refuse to work with each other UNLESS its a common shared goal of getting re-elected (i.e. send money to people to "stimulate" them to re-elect them). Just sad.

We'll check back in 365 days when I type the same message.

Goldman Sachs Upgrades Coal Sector; Exports to Boom per FBR

A pretty smart time to make this move, as the coal names have pulled back substantially...

• Goldman Sachs raised its rating on the U.S. coal sector to "neutral" from "cautious" and upgraded two companies to "buy," citing in part a strong steel market that uses coal.
• "Given that valuation has retracted, we feel that now is a good time to take profits on our cautious coverage view and upgrade to neutral," Goldman said about the sector in a note.
• Goldman raised Alpha Natural Resources Inc (ANR) and Consol Energy Inc (CNX) to "buy,", and Arch Coal Inc (ACI.), International Coal Group Inc (ICO) and Massey Energy Co (MEE) to "neutral."
• Goldman raised its price target on Foundation Coal to $47 from $45. It also increased its target on Arch Coal to $44 from $35.

Interesting to see Peabody Energy (BTU) *not* mentioned; I will have to revisit Alpha Natural Resources - I have not looked at this name for quite a few years; when I used to own it it always seemed to lag the group but the chart looks excellent relative to the group.

In another note - Friedman Billings Ramsey finally is on board with what I've been touting since early in the fall - exports will be booming for coal

• U.S. net coal exports are likely to rise 300% for the 2008/2009 shipping period as U.S. miners rush to fill demands on global supplies crimped by weather problems in South Africa and China, said Friedman Billings Ramsey analyst David Khani Monday in a research note. He said visits to several coal export ports last week supported his outlook for rising export capacity.
• "While inevitably there will be transportation related congestion issues, railroad and barge companies are doing everything they can to boost capacity," Khani wrote. Many of the contracts that producers signed in December and January are committed to foreign buyers. Earlier this year, China introduced emergency measures to pump up coal inventories. South Africa's coal output has been pressured by wet weather.

I've been touting this group since September and some history can be found here [Dec 6: Coal Stocks Quietly in Bull Market] - I continue to believe its the forgotten commodity AND the trashing of the US dollar by our governmental structural imbalances plus Federal Reserve inflationary measures makes this a great export .... really many of the same macro themes as the US crops. So they sometimes get trashed by the hedge fund locusts who move in and out while chasing the sexy theme of the week (early cycle names baby!), but the fundamentals don't change - only the hedge fund computers weightings.

Easy way to play? KOL [Jan 14: New Coal ETF (KOL) Introduced from Van Eck Global]

Long Consol Energy, Massey Energy, Peabody Energy, Arch Coal in fund; no personal positions

Russia-India Deal Boosts Potash Price Forecasts

Funny to suddenly hear the commodities are dead crowd going silent? 3 days of cheerleading on CNBC and now they hid back under the desks? Hmm....

We discussed the analyst commentary a few days back on the upgrade of Potash (POT) [Potash and Monsanto Upgraded] re: the prices coming out of India. Here is a more in depth story but bottom line, visibility, visibility, visibility combined with price increases, price increases, price increases - I just cannot find a better story out there. (and I search daily). At some point the analysts who have been SO far behind the curve will push up earnings estimates to the appropriate level and the companies will "miss", but from everything I read they still seem to be well behind the curve. I will be very interested to see what prices China is forced to pay after being pushed kicking and screaming - near monopolies (potash) are cool like that. Even a $500+ price for China with the amount they need to buy would be huge...

p.s thanks to my 3 person team of fertilizer "analysts" who email me stories almost daily on the fertilizer stocks ;)

• North American potash producers are eyeing even higher prices in the hot world fertilizer market after Russian competitors signed a major deal with India last week, analysts said on Monday.
• "It's significant news for the potash market around the world," said Ashley Harris, manager of investor relations with Agrium Inc. "It definitely sets a precedent about the types of increases expected," Harris said.
• India typically negotiates yearly deals after China, the world's largest volume importer, inks its annual contract. China normally buys at a discount to prices paid by importers in other markets like Brazil and southeast Asia.
• But tight world potash supplies combined with pressures to control food inflation this year have prompted India to leapfrog ahead of China to secure annual supplies with Belarussian Potash Co, which trades for Uralkali (URKA) and Belaruskali.
• The deal was done at the going spot market price of $625 per tonne (delivered) -- more than double last year's contract price of $270 per tonne.
• Canadian producers Potash Corp (POT), Mosaic Co (MOS) and Agrium negotiate export deals to India and China jointly at values that are usually similar or higher to the Russians.
• JP Morgan analyst David Silver said he now expects potash producers to negotiate a price hike of $200 to $250 per tonne to China from his 2007 estimated price of $260 per tonne -- up from his earlier estimate of a $150-$200 per tonne increase.
• "North American potash stocks remain near record lows, and major suppliers are essentially sold out," Silver said in a research note.

Long Mosaic, Potash in fund and personal account

CVRD (RIO) Pulls Out of Xstrata Deal

I guess CVRD (RIO) has changed its official name to "Vale" but I still call it CVRD since that's what I've known it for the past few years... either way "the company" has pulled out of it's deal with Xstrata; which I like. Generally companies in these deals, especially on the acquirer side have an overhang over them so this removes that. BHP Billiton (BHP) is in the same situation now with its bid for Rio Tinto (RTP). Smaller deals would not be so hard to digest for the market. In the long run, what these companies own in their mines is incredibly valuable in my "World of Shortages" thesis. But the market capitalizations already reflect this, especially in the "Big 3".

• Brazil's Vale (RIO), the world's largest iron ore miner, said on Tuesday that talks to buy Swiss rival Xstrata had failed and that Vale would look at other potential takeover targets.
• If Vale had succeeded, the deal would have been one of the largest corporate takeovers in history. Some analysts had valued Xstrata at up to $90 billion.
• In preparation for a potential Xstrata takeover, Vale had secured an estimated $50 billion in financing from banks including Santander, HSBC, BNP Paribas, Lehman Brothers, Credit Suisse, Citigroup, Calyon and the Royal Bank of Scotland.
• The recent softening in Vale's share price since its peak in October, despite its securing a hefty 65 to 71 percent price hike from clients for iron ore in the past weeks, was the main reason that the talks failed, a source in London close to the deal said.

Long CVRD in fund; no personal position

WSJ: Wave of Foreclosures Drives Prices Lower, Lures Buyers

I really should read the Wall Street Journal front page before posting since they basically summarized my earlier thoughts on the housing numbers [Home Prices Fall 11.4%]. Now the open question is... we only have the beginning wave of foreclosures hitting the market. What happens when those who have been treading water, get kicked out in the next 3-6 months? And then what about the wave after them (vintage 2006-2007) gets kicked out in 12-15 months? This is why I think we have a lot of inventory coming online and prices still have a long way to go down... BUT again...that will be bullish (not necessarily for home owners, but for potential buyers). And get those mortgage bonds stabilized - although by then they will be owned by the government one way or the other.... (so it will be a moot point)

Keep in mind, this was off yesterday's "bullish" numbers which showed inventories coming in "below analysts expectations" but still up a whopping amount year over year. Already over 10% of all "for sale" homes are bank owned. And the bottom line is banks don't have the emotional attachment to homes and stubbornness to seek "what they deserve" in prices like a homeowner who still thinks 2006 prices are around the corner - so prices will be forced down. Just as more inventory continues to flood in...

• A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.
• The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.
• On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July. The median price dropped 8.2% from a year earlier to $195,900, the biggest drop recorded by the Realtors in the current slump.
• In some beaten-down markets, the price cuts have been stark. The Detroit Board of Realtors recently found that home sales in the city (excluding suburbs) in the first two months of this year jumped 48% from a year earlier, to 1,540. The average home price there sank 54% to about $22,000. (now you see why I am biased by my local news coverage and circumstances - it's ugly here, but this is the inner inner city - the suburbs are suffering quite starkly as well)
• Banks and others holding foreclosed property have concluded "we've got to move things" and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va. The supply is piling up fast. Overall, the total number of lender-owned homes doubled last year but sales grew only 4.4%.
• At the same time, the specialist firms that sell foreclosed homes for lenders say banks are sending them additional properties much faster than they can be sold. "They're coming in [at a rate of] two new properties for every sale," said Claudia Smith, vice president of operations for First American REO Outsourcing, which is handling roughly 8,000 foreclosed homes for lenders.
• First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks, estimates that foreclosed properties held by lenders accounted for 493,000 of all homes on the market in January, up from 231,000 a year before. Properties like these represent roughly one of nine currently listed for sale nationwide, compared with a one-in-15 ratio a year earlier.
• The overabundance of foreclosed homes in the market is likely to push down home prices in much of the country for the next several years, says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm in Cleveland. (I thought the bull market in housing starts "in 6 months"?)
• A recent Credit Suisse report projects that average home prices have another 40% to fall in the Miami metropolitan area, 36% in Phoenix, 26% in Los Angeles and 20% in Las Vegas if they are to become more in line with income levels.
• Another hurdle is that the lenders responsible for selling the homes don't own all of them. That's because many mortgages are sold to investors in the form of securities; therefore, the investors in those securities actually own the homes. The trust agreements that create securities like these require lenders to show that they are getting the best price possible for the homes. That makes it tough to cut deals with potential buyers seeking huge discounts.

Again, I'll eagerly report to you the housing boom coming "in 6 months" in the blog - as all my Wall Street friends keep insisting will happen... ;) They just never tell me which "6 months" they are referring to.

Wells Fargo (WFC) Indicates it Would Love to be Forced into a Fed Shotgun Marriage

More of the many unintended consequences of government meddling....

....so lookee here, if you buy this troubled bank we'll cover 98% of the potential losses, and give you a 10 year loan at the discount rate to cover your losses? It's basically risk free! Plus we'll throw in a building in NYC for free, and oh yeh - 14K employees. Interested? It'll cost you $300M... wait, maybe $1B after the shareholders whimper.

Of course any viable bank that did not run its business in the ground would jump at that offer - so much so that they are even offering publicly to "help". :) Again, of the major banks Wells Fargo (WFC) is one that has done a very good job of navigating this mess... and looks like the perfect suitor to pick up a tax payer sponsored bailout of say Washington Mutual (WM). I mean risk free transactions are very capitalistic - creative destruction and all. Wells Fargo has its hand out - when the next disaster strikes, I'm sure the booty will be delivered by the Fed. Once you set that precedent....

• The chief executive of Wells Fargo & Co. said Tuesday that the current environment presents opportunities and that the venerable San Francisco bank would consider doing a deal in conjunction with the Federal Reserve. "I would not be averse to a Fed-assisted transaction," Chief Executive John Stumpf said in an interview with the San Francisco Business Times newspaper
• The bailout of crumbling investment bank Bear Stearns by the Federal Reserve and the Treasury Department 11 days ago has investors wondering how far the government will go in playing matchmaker to stabilize the troubled markets.
• Wells Fargo, with its good standing after a year of widespread write-downs and a rapidly slowing economy, would likely be at the top of the list as a suitor for many banks. It's the only one of the nation's five largest banks to have maintained a AAA credit rating from Moody's Investors Service and Standard & Poor's. (should we be happy for Wells Fargo or what does this say about the other 4 top "financial institutions" in America? That light regulation thing really worked out great...)
• Still, the San Francisco newspaper reported Stumpf said he would be willing to risk that rare designation in exchange for the chance to snap up a target at a bargain price.

Such a kind offer. Too bad the other banks are in such shoddy stage or else we'd have a bunch of banks lining up to be on the Federal Reserve Christmas gift list. Quite a sad state of affairs so few are in position to take advantage of this offer due to their own troubles...

Back to Important Inflection Point on the S&P 500

Once again the transition from fear to greed is incredible in this market - a week ago Monday the financial world was on the edge of the abyss, Bear done - Lehman, Merrill looking as next two to go - the S&P made repeated attempts to break 1270 (successfully) yet did not follow any technical rules and magically held 1260 repeatedly during the day. Then the dawn of a new era.....now 6 trading sessions later we are 100 S&P points higher with the Federal Reserve backstopping the system. Just like that.

I am open to any directional move because from here on out the Kool Aid theory can be "no matter what bad news is out today, that is backwards looking, and in 6 months everything will be fine". That is a powerful arguement because it can be used forever and there is no way to dispute it. Frankly the bulls can shoot down any bad economic report for the next 2 years with this "reasoning". Time is flying - we already approach the April earnings season which means pre warnings should be coming soon. How the market reacts to those warnings will be interesting. As I've been saying we could have a "double dip" slowdown (recession, whatever) with weakness late in 2007 through "now" and then some artificial uptick due to government handouts in Q3 2008 and this can be grasped as a reason to rally. While that is suspect thinking and I think the consumer will still be weak on the other end - what the herd thinks is all that is important. As long as the herd believes everything will be fine in 6 months, stocks will go up. Even when you get to that point you are proven wrong.

Case in point, September/October 2007 market rallied tremendously off the first Fed discount cut since the financial issues were just a matter of a 1x write off and the "Fed was on our side". Did it make sense? Zilch. Did it prove true? No. But the market still rallied 1500 Dow points. So as long as the Kool Aid is running you must respect it, even if its intellectually a farce. Hence why I am open for a huge rally from here or a huge pullback. Or sideways action. Last, as I keep saying, inflation inflated EVERY asset. Including stocks. So simple liquidity thrown into the system can help to buffer this market. (at a cost to Main Street but who cares about them anyhow)

I am back to using technicals because at this point fundamentals are useless. At this point we can go either way, as has been the case at multiple points in the past - we've now rallied from an oversold condition right back to the 50 day moving average (from below). We continue to make a series of lower highs dating back to October 2007. We are now at another one. So it's an important inflection point where we either break through (and get bullish) or fall back and keep repeating the same pattern we've been in for months.

A lot of individual stocks I own are in the same exact condition. I am treating both the indexes and the stocks the same way. Assuming a failure here. And prepared to reverse course if we do not have a failure.

For individual stocks that means to lighten up as we approach their individual resistance, but be willing to buy (higher) if this resistance is broken and we move upward.

For the indexes that means to buy short exposure as we approach this resistance (as we are now), but willing to sell it off if the resistance is broken and we move upward. Same pattern I've been utilizing since October save for 1 week in January when it cost me to not stay in that disciplined approach. Eventually this pattern will fail (we'll make a new high) and I'll have to reverse course... but so far it's been relatively predictable. I'll be looking for action north of S&P 1390-1395+ for that to be confirmed for me.

Home Prices Fall 11.4% in January

I have to say that is quite a shocking number - after median prices held up as sellers were very stubborn throughout 2007, failing to recognize reality and waiting for the "bounce" back to 2006 prices, it appears we are finally getting some capitulation. Remember, "they" told us this could never happen [Jan 24: They Said It Could Never Happen. Ever. They Lied.]

While many will hand wring over this number, it is a bullish development to me. As I've outlined before [What Should Median Home Prices be Today?], home prices need to fall for the free mark.... err.. for our socialist market to react. We've seen the homebuilders slash prices already - it was the homeowners who were still living in denial world. But as more and more supply hits the market (especially forced supply through foreclosures and walkaways), competition will increase and prices will drop. Which will eventually spur new owners into the market.

So the process is now beginning in earnest (bullish) - now we just need to find some people in America who could actually put 10% down on a home (bearish) and the lenders have to want to lend to them. With our savings rate so pathetically low as a nation, I just don't know how many people who don't ALREADY have a home have 10% down sitting in the bank account (on a $200K house thats $20K). The other alternative is a return to pushing 1% down, 3% down, and 5% down loans, but I don't know how many lenders will risk that in an era where home prices are falling. If you put 3% down and the home price drops 8% the homeowner is underwater immediately and a future "walkaway" candidate.

So we remain between a rock and a hard place despite what the pundits tell you. When the "rebound" comes its not going to be a straight shot up - it's going to be a long sideways. But as houses become cheaper, more people can actually afford them (a foreign concept eh?) and more people will have enough to put a solid down payment on the home (another concept lost in the excesses of the past half decade). Now if we could only get our socialist government to back off and allow this to happen, just imagine the long term positives.

• A widely watched index of U.S. home prices fell 11.4 percent in January, its steepest drop since data for the indicator was first collected in 1987. The decline reported Tuesday in the Standard & Poor's/Case-Shiller index means prices have been growing more slowly or dropping for 19 consecutive months. The index tracks the prices of single-family homes in 10 major metropolitan areas in the U.S.
• The broader 20-city composite index also fell, dropping 10.7 percent in January from a year ago. That makes it the first time both indexes dropped by double-digit percentages.
• "Home prices continue to fall, decelerate and reach record lows across the nation," said David Blitzer, index committee chairman at S&P. "No markets seem to be completely immune from the housing crisis."
• Blitzer said all 20 cities S&P tracks have seen dropping prices for five consecutive months, when compared to the prior month. What's more, the declines are growing in severity, with 13 of the 20 cities reporting their biggest single monthly decline in January.
• Washington, D.C., and Minneapolis both slipped into negative double-digit territory for the first time in January, recording 10.9 percent and 10 percent drops compared to last year.
• The worst performing markets are Las Vegas and Miami, which both reported 19.3 percent drops.
• Other cities that showed double-digit percentage losses were Phoenix (18.2), San Diego (16.7) Los Angeles (16.5), Detroit (15.1), Tampa (15) and San Francisco (13.2).

Meanwhile, while the upper 1% on Wall Street continues to clap like seals cheering on their Kool Aid "2nd half recovery" in the US consumer; said consumer in bottom 80% is living a whole different life on Main Street. Systematic destroyal of the lower middle class (and moving up to middle middle class through inflation) will finally become a realization to those upper 0.5% living in $1.6 million apartments in NYC (average salary of $1.4M for investment bank managing director). But then they can push out the "6 months everything will be fine" to "1st half 2009". While blowing kisses to Uncle Ben because inflation really doesn't sting too much in the $1M+ bracket.

• Consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects deepened worries that the economy has fallen into recession. The Conference Board, a business-backed research group, said Tuesday that its Consumer Confidence Index plunged to 64.5 in March from a revised 76.4 in February. The March reading was far below the 73.0 expected by analysts surveyed by Thomson/IFR.

But don't you worry traders - it's time to buy retail stocks because the consumer will be back in force in the malls with their $600 checks come summer. So buy buy buy. That's what the playbook says, and the playbook knows all.

Zhongpin (HOGS) Earnings

Zhonpin (HOGS), my smallest company by far in the fund has earnings out today and the report is very solid, with good guidance. That said, it hasn't matter as the stock has been decimated despite today's 8% increase. On the plus side it is nice to see an AP report on earnings - usually one has to dig into SEC filings to find anything out about this company. This is yet another case where fundamentals mean nothing as hedge funds ping pong between chasing commodities or "early cycle" plays and ignore companies with good fundamentals or who do nothing but execute. Reminds me of the Blue Coat Systems (BCSI) saga or some of the solar stocks of late. If the hedge funds don't have you as a buy in their playbook - you can report good earnings all day and night - your stock will be trashed. For someone who tries to focus on fundamentals, it's a very difficult game right now; you get your 1-2 day pop and then the stock resumes trading in purgatory.

• China-based meat processor Zhongpin Inc. said Tuesday it swung to a profit in its fourth quarter due to higher pork prices that led to a big revenue boost in the company's largest division.
• For the quarter ended Dec. 31, the company reported net income of $5 million, or 17 cents per share, compared to a loss of $1.5 million, or 7 cents per share in the year-ago quarter. Excluding a non-cash compensation charge, the company said it earned 19 cents per share.
• Sales more than doubled to $100.6 million from $47.7 million in the fourth quarter of 2006.
• The company said its sales and revenue were helped by market expansion and a rise in the price of pork products in China.
• For the year, profit jumped to $18.5 million,or 80 cents per share, from $4.1 million, or 20 cents per share in the prior year. Revenue more than doubled to $291.4 million from $143.8 million in 2006.
• Zhongpin Inc. said Tuesday it expects 2008 profit to rise at least 62 percent.
• For 2008, the company estimated earnings between $30 million and $33 million, or $1 to $1.10 per share. In 2007, the company earned $18.5 million, or 80 cents per share.
• Zhongpin predicted revenue of $490 million to $520 million.

So 100% trailing growth, and 60%+ forward growth, all for a 10 PE ratio. And they say the market is rational.

Long Zhongpin in fund and personal account

Bookkeeping: Reducing Commodities

Frankly, I am utterly confused by this market - first time in a long time I can say that. With all the behind the scenes socialism and hedge fund liquidation not much of the action makes sense to me the past 2 weeks - technicals are not working correctly - when indexes break down, they hold up - when the dollar increases 1%, commodities drop 20%. No sense. What stunk 3 days ago is now worshiped; and vice versa. If there is a 5% rally from here I have no idea which group the hedge funds will flock to - will it be commodities? tech? financials? retail? or something else? Or does it matter, because they will rotate from 1 to another within the span of 48 hours.

Today of course, as predictable as it is, when last week's junk is this week's treasure the "commodities are back" trade has arrived. This is simply not an environment I thrive in as no trend lasts for more than a few days/or hours. So I am cutting back and raising more cash until I can see any sort of trend. I still have NO CHANGE to my long term belief in commodities, especially agriculture, but until some pattern emerges that lasts more than the blink of an eye I am going to simply reduce exposure to everything. I try to invest on FUNDAMENTALS and use TECHNICALS for timing entries/exits to some degree. Right now FUNDAMENTALS mean NOTHING; and only quick in and out trading works for ANY SECTOR. So this is not an environment for me to thrive, so I am going to ratchet back for the time being. I feel like a person in a cave without a flashlight right now so the best thing to do is to raise cash and reduce exposure everywhere - even in positions I favor the most on fundamentals.

Today I took off some

1. Kinross Gold (KGC)
2. Silver Wheaton (SLW)
3. Mosaic (MOS)
4. Potash (POT)
5. Powershares DB Agriculture Fund (DBA)
6. Foster Wheeler (FWLT)
7. Mechel (MTL)
8. Arch Coal (ACI)
9. Peabody Energy (BTU)

At this point, with (in my opinion) no rhyme or reason, I'd rather miss part of a move up and have more safety. This is the strangest market I've ever encountered and the level of strangeness since the Invisible Hand went from invisible to visible has increased by a degree of 10. Until fundamentals are rewarded once again, I'm going to pull back on risk to some degree - and try to remain hedged. Right now it "feels" like hedge fund liquidations make more difference in a stock price than any sort of fundamentals. I don't believe in a "2nd half recovery" (although I am open to a double dip recession based on rebate checks) so it is hard for me to buy financials or retailers up 30% from their bottom last week, and the stocks I do believe in are sold off every time the dollar drop 0.0004%. So I don't have an easy path right now on the long side. If I see some better technical action in the stocks I like the best I will reapply some exposure...

Maybe my mood will change and some great awakening will awash over me (or my Magic 8 Ball will show me the way) in a few hours/days but for now I am simply perplexed and that's not a way you want to invest. Just being honest; I don't have the answers all the time - only 99.7% of the time. ;) We are now in the other 0.3% of the time.

I've moved cash up to 21.5% at this point.

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

This Day in Agriculture

A few items today (1) raised guidance from Monsanto (MON) on the heels of yesterday's analyst upgrade (2) impact of central plains flooding on the corn crop (3) more stories of world shortages of food. Now if the hedge funds are done with their speculative locust behavior I'd be happy to raise my stakes in agriculture much higher.... again, the fundamentals are quite clearly those of a massive secular bull. Why fertilizer stocks sell off when wheat drops is beyond me, but that's the lame logic we have in these "high level analysis" of Wall Street. Instead they run into "early cycle" retailers because that's what the "playbook" says to do. Even in a US consumer recession. That's the herd at it's best.

Once again, one benefit of an investor of agriculture is problematic weather - bad weather = higher prices = better for investor. Not so good for worldwide consumer of said food. But since I am a heartless American socialist... err I mean free market capitalist because that's what we are in the USA, I can only focus on making money and have to ignore the plight of hundreds of millions/billions...

Monsanto substantial increase in guidance

• Agricultural products company Monsanto Co. on Tuesday raised its 2008 earnings per share guidance and predicted its second-quarter profit will rise above Wall Street analysts.
• The company said it now expects second-quarter earnings per share of $1.98, including a gain of 23 cents per share for a settlement of claims related to a subsidiary's emergence from bankruptcy. Excluding that gain, the company expects earnings of $1.75 per share.
• Analysts polled by Thomson Financial expect earnings per share of $1.34.
• The company said its seeds and traits business will contribute more than expected to profit due to brand share growth and increased volume in the soybean business.
• Monsanto added its Roundup and other herbicide businesses have also performed well in the quarter with demand exceeding supply.
• For the year, Monsanto now expects earnings per share between $3.38 and $3.48, including the gain of 23 cents per share. Excluding that gain, the company expects earnings between $3.15 and $3.25.
• The company previously expected earnings in the range of $2.70 to $2.80 per share. Analysts anticipate earnings of $2.87 per share.

I have previously held off on holding Monsanto in the fund due to valuation but with such large increases in future guidance it suddenly gets much cheaper. Will have to rethink. The fear with Monsanto is its dependence on corn but we see they have some benefit from soybeans as well... also, as for corn we might be headed for a shortage there this year - my thesis (I'm not a farmer but thinking like an economist) is the huge year in wheat will drive a lot of acreage to shift from corn to wheat this spring leading to.... shortages of corn NEXT year... despite the ethanol boondoggle.... and the weather is not helping.

Wheat, Corn, Soybeans Advance on Supply Risk (mind you this supply risk did not suddently disappear last week and then reappear - it simply speculation moving these commodities and stocks up/down 20% for no good fundamental reason - gold I can understand - but not these agricultural products but again to Wall Street corn = oil = wheat = coffee = gold = copper = soybeans = iron ore = all just a fun plaything for hedge funds levered 30:1)

• Wheat, corn and soybeans rose for a second day on speculation demand for grains in food and fuel will outstrip supply as poor weather cuts U.S. crop yields. Corn and soybeans may keep rising because output is lagging behind demand, said Morgan Stanley, the second-largest U.S. securities firm.
• ``U.S. production in the near term is inadequate to meet growing ethanol and export demand,'' Morgan Stanley analysts led by New York-based Hussein Allidina, said in a report e-mailed today. The fundamentals are ``very constructive,'' he said.
• The price decline last week resulted from a strengthening dollar and reduced inflation expectations, ``rather than a change in the underlying supply and demand fundamentals,'' said Morgan Stanley's Allidina.
• Rising prices of food commodities have fueled inflation from the U.S. to China and India. China has increased imports of raw materials and boosted stockpiles to cool prices. South Korea and India announced the removal or reduction of tariffs on some food commodities in the past week to keep inflation in check.
• Wheat jumped the most in more than a week yesterday on speculation dry weather in the western U.S. Great Plains will reduce yields. Soybeans climbed the most in almost nine months, and corn rose, on speculation flooding and rain in U.S. growing areas may delay planting, eroding potential yields.

Will La Nina further penalize the US growing season? (already off to a shaky start, but these guys cannot forecast a week out so I take any long term assessments with many grains of salt)

• U.S. farmers in the Midwest and Plains risk drought this summer while those in much of the eastern half of the U.S. could face flooding similar to what has battered the nation this week, government forecasters said on Thursday.
• There is an "enhanced risk" of drought going into spring and even summer for the Corn Belt, largely because of a fading La Nina, said Doug Lecomte, a meteorologist for the National Oceanic and Atmospheric Administration's Climate Prediction Center.
• But he added: "The first thing is to worry about getting rid of the wetness" that is "is unprecedented for this time of year."
• Forecasters said a major concern this spring is the threat of flooding across much of the country as a result of record rainfall and melting snow packs, which are causing rivers and streams to overflow.

It's easy to talk about this stuff academically from NYC or heck Michigan, but what is it like from a local perspective?

• As flooding continues to torment southern Missouri, weather watchers in Kansas City are not just worried about what is happening today. They are worried about what could happen tomorrow. Here.
• “The next couple of months,” said meteorologist Mark O’Malley of the National Weather Service in Pleasant Hill, “could really be problematic.” Why?
• Soils, even here, are saturated. Ponds are full. Streams are running strong, sometimes too strong. Add it all up, and even average rainfall totals for the next several months could spell disaster.
• “We’re on the edge of what could become a major problem,” said Gary Lezak, meteorologist at KSHB. “No doubt about it, there’s a very, very high likelihood of above-average precipitation. “We got wet in October, and it hasn’t stopped yet.”
• “With our heavy clay soils, if we get in there and work them when they’re wet, they just become clods,” he said. “They ball up. That destroys the structure of the soil, and it can present problems for the rest of the growing season. “Whether you’re doing 300 acres of corn or six tomato plants in your backyard, it’s the same thing. You destroy that structure, and the roots don’t go deep into the soil. If you don’t get a good root system, you don’t get a good plant.”

Or maybe here

• Flooding has some Arkansas farmers worried that they may have no wheat to harvest later this spring. Some are concerned about having enough time to plant their other crops, after the waters recede and the fields dry out.
• Stephen Wyatt, who farms near Rosie in Independence County, said all 800 acres of the soft red winter wheat he planted in the fall are underwater from the White River overflow. Some of the 6- to 8-inch tall plants are submerged in more than 10 feet of water, Wyatt said.
• “The million-dollar question is: How long can wheat survive underwater ?” The answer depends on several factors, he said. Cooler water and running water are probably less damaging, and the smaller the plants are, the more likely they are to survive, Kelley said. The longer the water is on the wheat, the more likely damage is, he said. Some plants may be able to live for as long as three to seven days.
• Arkansas farmers have planted an estimated 870, 000 acres of winter wheat, according to the U. S. Department of Agriculture. That would be 6 percent more than the 820, 000 acres planted in 2006.
• “I’ve heard that people haven’t seen it this bad in 80 years,” Vangilder said.
• Soybean agronomist Jeremy Ross said flooding and heavy rains are hampering farmers who want to get out in their fields and prepare them for planting. “If they’re behind on getting their corn planted, it’s going to push the soybeans back, too. It’s kind of a domino effect,” Ross said.

Last, in our weekly review of the coming global food crisis that no one pays attention to in the US. The social unrest will grow as foodstuffs continue to increase by the week/month/quarter. Trust me, this is China's greatest fear...

• If you're seeing your grocery bill go up, you're not alone. From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.
• The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.
• But food protests now crop up even in Italy. And while the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan.
• "It's not likely that prices will go back to as low as we're used to," said Abdolreza Abbassian, economist and secretary of the Intergovernmental Group for Grains for the U.N. Food and Agriculture Organization. "Currently if you're in Haiti, unless the government is subsidizing consumers, consumers have no choice but to cut consumption. It's a very brutal scenario, but that's what it is."
• No one knows that better than Eugene Thermilon, 30, a Haitian day laborer who can no longer afford pasta to feed his wife and four children since the price nearly doubled to $0.57 a bag. Their only meal on a recent day was two cans of corn grits. "Their stomachs were not even full," Thermilon said, walking toward his pink concrete house on the precipice of a garbage-filled ravine. By noon the next day, he still had nothing to feed them for dinner. Their hunger has had a ripple effect. Haitian food vendor Fabiola Duran Estime, 31, has lost so many customers like Thermilon that she had to pull her daughter, Fyva, out of kindergarten because she can't afford the $20 monthly tuition. (Haiti seems to be extremely hard hit as a very poor nation - Jan 30: Hungry Haitians Resort to Eating Dirt)
• However, consumers still face at least 10 years of more expensive food, according to preliminary FAO projections.
• What's rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4 percent in the U.S. last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture.
• As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls
• For many, it's a disaster. The U.N.'s World Food Program says it's facing a $500 million shortfall in funding this year to feed 89 million needy people. On Monday, it appealed to donor countries to step up contributions, saying its efforts otherwise have to be scaled back.
• In Egypt, where bread is up 35 percent and cooking oil 26 percent, the government recently proposed ending food subsidies and replacing them with cash payouts to the needy. But the plan was put on hold after it sparked public uproar.
• In China, the price hikes are both a burden and a boon. Per capita meat consumption has increased 150 percent since 1980, so Zhou Jian decided six months ago to switch from selling auto parts to pork. The price of pork has jumped 58 percent in the past year, yet every morning housewives and domestics still crowd his Shanghai shop, and more customers order choice cuts. (Americans, this is your new global competition for resources ... like food) And it's not just pork. Beef is becoming a weekly indulgence.
• "The Chinese middle class is starting to change the traditional thought process of beef as a luxury," said Kevin Timberlake, who manages the U.S.-based Western Cattle Company feedlot in China's Inner Mongolia.
• At the same time, increased cost of food staples in China threatens to wreak havoc. (again class warfare - the poor struggle with basics while the emerging middle class are becoming richer by the day, and driving prices up across the food chain - fascinating from an economics standpoint)
• Chinese Premier Wen Jiabao says fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1 percent in January, the highest in 11 years, led by an 18.2 percent jump in food prices.
• The oil spike has also turned up the pressure for countries to switch to biofuels, which the FAO says will drive up the cost of corn, sugar and soybeans "for many more years to come."
• In Japan, the ethanol boom is hitting the country in mayonnaise and miso, two important culinary ingredients, as biofuels production pushes up the price of cooking oil and soybeans.
• Food costs worldwide spiked 23 percent from 2006 to 2007, according to the FAO. Grains went up 42 percent, oils 50 percent and dairy 80 percent.
• Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum. (sounds familiar!) In recent weeks, rising food prices sparked riots in the West African nations of Burkina Faso, where mobs torched buildings, and Cameroon, where at least four people died.
• But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries. Partly because of the cost of imported wheat, Peru's military has begun eating bread made from potato flour, a native crop. (and that's the key to it all)
• "We need a response on a large scale, either the regional or international level," said Brian Halweil of the environmental research organization Worldwatch Institute. "All countries are tied enough to the world food markets that this is a global crisis." (Here is one solution - let's give the largest corporate farmers in America subsidies to make corn into ethanol... yes, bright idea!)
• Days after the riots, Pascaline Ouedraogo wandered the market in the capital, Ouagadougou, looking to buy meat and vegetables. She said a good meal cost 1,000 francs (about $2.35) not long ago. Now she needs twice that.
• Irene Belem, a 25-year-old with twins, struggles to buy milk, which has gone up 57 percent in recent weeks. "We knew we were poor before," she said, "but now it's worse than poverty."

Keep inflating Ben - the world's poor salute you. At least you are making multi millionaires on Wall Street happy. That's the important thing. When do we start the drumbeat for 50 basis points next meeting? Do I hear another 75? More liquidity injections? I mean we are well over half a trillion - can we double it? More paper money is needed Ben.

As for the federal government - I will continue to say, while everyone thinks Iraq is the biggest disaster of this administration - when we look back in 25 years I wonder if it will be the corn ethanol push.... which has more of an effect on the global population? Anyhow the beat goes on... ignored... as I keep saying, maybe we'll start seeing some of this in the mainstream press by late 2008 or early 2009. Maybe mass starvation will wake people up. I wonder if any of the multi millionaires will donate to the food programs - after writing the thank you letter to Uncle Ben and Uncle Hank. I know, I know - I am such a socialist by these rants but guess what - so is our federal government now. So we're all socialists now together.

Long Powershares DB Agriculture Fund in fund and personal account

Bookkeeping: Exiting KHD Humbolt Wedag (KHD)

I am closing my very small (100 shares remaining) position in Hong Kong infrastructure play KHD Humbolt Wedag (KHD). The stock is up around 13% today, reversing some very bad action of late; this allows me to exit with a very minor loss - about $800. I've never made this a large position and frankly it's valuation has puzzled me - it could simply be a case of a stock no one knows about or cares about, but when its not standing in place it's falling.... despite some very good fundamentals. [Dec 1: New Position in KHD Humbolt Wedag (KHD)]

I've added quite a few new names to the portfolio the past week, and I'm starting to get "portfolio creep" (too many names), so this was a logical name to go due to the small exposure and poor technical action. Again, I am completely perplexed by the stock action in light of the fundamentals, but I've noticed most of my small cap stocks have suffered no matter what the fundmentals are as people flee to the relative safety of large cap (multinationals especially). When the "real" rally begins in the stock market, I do expect small caps to rally hard since they've been beaten so hard, but I don't have any clear indication yet that this is the "real" rally - but even today I am seeing some great action in small cap stocks on my watch lists that have been beaten to a pulp, regardless of industry or prospects. I still like this company, especially since it gives me exposure to Eastern European growth. I'd just like the market to like it half as much as me.

No position

WSJ: New Limits to Growth Revive Malthusian Fears

(click to enlarge)

Thanks to a reader for pointing this WSJ article out - I actually spoke of this exact subject Saturday in depth [Alert: Commodities are Dead] (tongue in cheek of course), and I've been writing about a "World of Shortages" thesis since the beginning of the blog; nice to see it on the front page of the Wall Street Journal. Because as you all know by now, nothing exists in NYC investment world until it hits the front page of Barron's or Wall Street Journal. Now of course this weekend's Barrons calling the bottom in financials is getting all the interest, because that is based on "hope" :) and we love hope on Wall Street. Luckily this blog is based on despair so I'll focus on this article instead (hah). Nothing "new" in this article but it's a nice summary of many of my thoughts.

My World of Shortages theme has in fact been an investing thesis of mine for a few years and will be for many years (decades) going forward. (although in the "long long run" I do expect technical innovation in many fields to help offset some of the shortages). Too many humans want to live like Americans... or at least like Brazilians or Italians (no one can quite consume like an American). And now more and more people have the means or are on the path to doing so within the next 3-10 years. I wrote last year in the blog, that it was the first year where more humans on this Earth resided in urban environments instead of rural. That trend should only continue slowly but surely. Unfortunately, even at current population levels, unless we continue having the same % of people living in morbidly poor conditions, the Earth will struggle to handle things. Human prosperity is ironically, not a good thing for Earth's natural resources. So we will compete, as peoples and nations for these resources - I still think water one day will be what oil is today. If you don't believe traditional wars will break out over these resource acquisitions (which is what most wars are in our history are based on - acquisition of property or resources) - then "economic" wars might be more up your alley. Essentially countries will be at odds with each other over these resources, and on a more granual level, the individual people of the US of A will be 'fighting' (economically) with people in many other countries for said resources. And with our structrual imbalances and reliance on other country's generosity in continuously buying our debt to keep us sustained, we don't appear to be heading into this multi decade "economic" war from a place of strength. More importantly, regardless of nationality, the "lower" and "middle" class across the globe will be competing with each other (on price) for these resources. Somehow I believe the upper crust in each country will somehow survive; I expect economic disparity to continue to grow within the vast majority of countries, continuing a trend of the past 10-15 years. And this will lead to more social strife within the countries. I believe this is already happening in the US....but its a slow erosion. When you cannot feed your family, you tend to get desperate. But I am open to (and hoping) I am completely wrong on this specific thesis.

But for our investing focus the game is to find the coming shortages, understand the powerful macro trends these shortages will generate, and get in before the herd. Eventually the masses will "discover it" (probably from a Wall Street Journal rticle), jump in with their leveraged unregulated pools of capital, drive the price up too far, cause havoc and volatility of unheard magnitude (if you only saw how boring fertilizer stocks used to trade), and corrections will happen along the way. CNBC will tout "the move" is over - and then we'll start on an new leg up a few weeks/months later. And so we should repeat for many many many years. But again, Commodities are Dead - Fox Business and CNBC told me so.

• Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth's resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel growth. Today the old fears are back.


• Although a Malthusian catastrophe is not at hand, the resource constraints foreseen by the Club of Rome are more evident today than at any time since the 1972 publication of the think tank's famous book, "The Limits of Growth." Steady increases in the prices for oil, wheat, copper and other commodities -- some of which have set record highs this month -- are signs of a lasting shift in demand as yet unmatched by rising supply.


• As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.


• The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue.


• "We're living in an era where the technologies that have empowered high living standards and 80-year life expectancies in the rich world are now for almost everybody," says economist Jeffrey Sachs, director of Columbia University's Earth Institute, which focuses on sustainable development with an emphasis on the world's poor. "What this means is that not only do we have a very large amount of economic activity right now, but we have pent-up potential for vast increases [in economic activity] as well." The world cannot sustain that level of growth, he contends, without new technologies.


• Today's dire predictions could prove just as misguided as yesteryear's. "Clearly we'll have more and more problems, as more and more [people] are going to be richer and richer, using more and more stuff," says Bjorn Lomborg, a Danish statistician who argues that the global-warming problem is overblown. "But smartness will outweigh the extra resource use." (Sure he is from Denmark where everyone is happy, and the gulf between rich and poor is tiny - I mean those darn socialist northern Europeans - always finding the silver lining. p.s. can I eat or put smartness in my car?) [Feb 18: Economic Woes Reveal a Long-Felt Unease & Denmark is the Happiest Place on Earth?]


• Some constraints might disappear with greater global cooperation. (right? like the Kyoto treaty for example where the most powerful country on the globe avoided like the plague) :) Where some countries face scarcity, others have bountiful supplies of resources. New seed varieties and better irrigation techniques could open up arid regions to cultivation that today are only suitable as hardscrabble pasture; technological breakthroughs, like cheaper desalination or efficient ways to transmit electricity from unpopulated areas rich with sunlight or wind, could brighten the outlook.


• In the past, economic forces spurred solutions. Scarcity of resource led to higher prices, and higher prices eventually led to conservation and innovation. Whale oil was a popular source of lighting in the 19th century. Prices soared in the middle of the century, and people sought other ways to fuel lamps. In 1846, Abraham Gesner began developing kerosene, a cleaner-burning alternative. By the end of the century, whale oil cost less than it did in 1831. (I do believe this will happen in the 'long run' but a long period of struggle and pain before)


• A similar pattern could unfold again. But economic forces alone may not be able to fix the problems this time around. Societies as different as the U.S. and China face stiff political resistance to boosting water prices to encourage efficient use, particularly from farmers. When resources such as water are shared across borders, establishing a pricing framework can be thorny. And in many developing nations, food-subsidy programs make it less likely that rising prices will spur change.


• "If our patterns of living, our patterns of consumption are imitated, as others are striving to do, the world probably is not viable." - Nobel laureate Joseph Stiglitz


• One danger is that governments, rather than searching for global solutions to resource constraints, will concentrate on grabbing share. (Bingo - humans are about self preservation! Keep your DNA pool alive - bottom line. Nations won't act too differently) China has been funding development in Africa, a move some U.S. officials see as a way for it to gain access to timber, oil and other resources. India, once a staunch supporter of the democracy movement in military-run Myanmar, has inked trade agreements with the natural-resource rich country. The U.S., European Union, Russia and China are all vying for the favor of natural-gas-abundant countries in politically unstable Central Asia.


• Competition for resources can get ugly. A record drought in the Southeast intensified a dispute between Alabama, Georgia and Florida over water from a federal reservoir outside Atlanta. A long-running fight over rights to the Cauvery River between the Indian states of Karnataka and Tamil Nadu led to 25 deaths in 1991.


• Nagpur in central India once was known as one of the greenest metropolises in the country. Over the past decade, Nagpur, now one of at least 40 Indian cities with more than a million people, has grown to roughly 2.5 million from 1.7 million. Local roads have turned into a mess of honking cars, motorbikes and wandering livestock under a thick soup of foul air.


• In 2005, China had 15 passenger cars for every 1,000 people, close to the 13 cars per 1,000 that Japan had in 1963. Today, Japan has 447 passenger cars per 1,000 residents, 57 million in all. If China ever reaches that point, it would have 572 million cars -- 70 million shy of the number of cars in the entire world today.


• China consumes 7.9 million barrels of oil a day. The U.S., with less than one quarter as many people, consumes 20.7 million barrels. "Demand will be going up, but it will be constrained by supply," ConocoPhillips Chief Executive Officer James Mulva has told analysts. "I don't think we are going to see the supply going over 100 million barrels a day, and the reason is: Where is all that going to come from?"


• There are no substitutes for water, no easy alternatives to simple conservation. Despite advances, desalination remains costly and energy intensive. Throughout the world, water is often priced too low. Farmers, the biggest users, pay less than others, if they pay at all.


• In California, the subsidized rates for farmers have become a contentious political issue. Chinese farmers receive water at next to no cost, accounting for 65% of all water used in the country. Parched northern China has been drawing down groundwater supplies. In Beijing, water tables have dropped hundreds of feet. In nearby Hebei province, once large Baiyangdian Lake has shrunk, and survives mainly because the government has diverted water into it from the Yellow River.


• China's farmers need water because China needs food. Production of rice, wheat and corn topped out at 441.4 million tons in 1998 and hasn't hit that level since. The farmland squeeze is forcing difficult choices. After disastrous floods in 1998, China started paying some farmers to abandon marginal farmland and plant trees. That "grain-to-green" program was intended to reverse the deforestation and erosion that exacerbated the floods. Last August, the government stopped expanding the program, citing the need for farmland and the cost.


• A growing taste for meat and other higher-protein food in the developing world is boosting demand and prices for feed grains. "There are literally hundreds of millions of people...who are making the shift to protein, and competition for food world-wide is a new reality," says William Doyle, chief executive officer of fertilizer-maker Potash Corp. of Saskatchewan.


• It takes nearly 10 pounds of grain to produce one pound of pork -- the staple meat in China -- and more than double that to produce a pound of beef, according to Vaclav Smil, a University of Manitoba geographer who studies food, energy and environment trends. The number of calories in the Chinese diet from meat and other animal products has more than doubled since 1990, according to the U.N. Food and Agriculture Organization. But China still lags Taiwan when it comes to per-capita pork consumption. Matching Taiwan would increase China's annual pork consumption by 11 billion pounds -- as much pork as Americans eat in six or seven months.


• In years past, the U.S., Europe and Japan have proven adept at adjusting to resource constraints. But history is littered with examples of societies believed to have suffered Malthusian crises: the Mayans of Central America, the Anasazi of the U.S. Southwest, and the people of Easter Island. Those societies, of course, lacked modern science and technology. Still, their inability to overcome resource challenges demonstrates the perils of blithely believing things will work out, says economist James Brander at the University of British Columbia, who has studied Easter Island.

Actually a very in depth article and one worth the full read. You can dispute it or say everything will take care of itself in the end; maybe. But it summarizes many of my views, and each time I hear this garbage about the end of commodities due to hedge funds leaving the field like the locusts they are, I have to just smirk. But if CNBC says so...

So if oil is $65, $85, $105, or $125 in 2 weeks or 2 months - the manic depressive market will react violently one way or the other - but their timeline is minutes, days, hours in most cases. If you look past the trees, the forest looks far more alarming...

Scandal Rocks Stock Invitational

Already scandal erupts on the first day of the Stock Invitational... IBM sent out Intel as a ringer to face Microsoft. The tournament committee, still reeling from its commodity exposure last week, obviously has not recovered and was asleep at the wheel.

Any fool knows Microsoft and Intel work together to form pseudo - monopolies so they'd hate to actually have to face off....

A sullen IBM is tossed back into the ring to meet it's fate vs the giant from Redmond, WA.

Blackrock (BLK) Continues to be Interesting

2 Interesting Developments today for Blackrock (BLK)

(1) The NY Federal Reserve has chosen the firm to manage the $30B portfolio of assets previously owned by Bear Stearns (double positive of prestige plus more fees)
(2) Creating a joint venture for a firm that buys distressed mortgages.

This continues to be one of the few financial firms out there that has the top notch leadership, and apparent trust of the higher powers that be in this country. I did sell some today due to the large move up of late in all things financials, but it has been an amazingly sturdy financial stock in a sea of malcontents. I did pull back a few weeks ago when even Freddie Mac and Fannie Mae paper was freezing up [Mar 4: Cutting Blackrock Exposure], but frankly we appear to be in a new era where we have a Federal Reserve willing to loan against any junk paper so perhaps one must be nimble and adjust strategy. As I said last week when I was prematurely bullsh (which of course the market fixed by selling off 300 points) there appeared to be an air of bulletproof-ness, especially in financials i.e. we can do anything now and the Fed will fix us, because we are too big to fail. So this backstop makes me have to rethink many things. Once again, everything learned for many years unfortunately must be tossed to the garbage in this new era of government supported stock market. I feel like a newbie now.

I highlighted an interesting quote in green below - while people are (once again) calling the bottom for housing off to today's "great news" (by great news we mean, terrible numbers in the housing market beat analysts expectations of horrendous numbers) - some of the smarter guys in the room believe "dramatic" growth in non performing mortgages (i.e. defaults). I'll take these guys view over the herd.... even though the herd moves stock prices.

I also believe this new firm could be direct competition for the mortgage REITs, if I am understanding it correctly, and we're seeing some weakness today in this battered group.

• Money management firm BlackRock Inc (NYSE:BLK) and hedge fund Highfields Capital Management are backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector.
• The new company, Private National Mortgage Acceptance Company, which will be known as PennyMac, plans to raise capital from private investors and will help borrowers restructure loans to avoid foreclosure.
• BlackRock and Highfields executives picked industry veteran Stanford Kurland, who spent 27 years at mortgage giant Countrywide Financial Corp (NYSE:CFC), as the new company's chairman and chief executive officer. David Spector, who used to oversee global residential mortgages at Morgan Stanley, will be the chief investment officer.
• "Over the next two to three years, we anticipate that the volume of bank-held nonperforming mortgages will grow dramatically," Highfields co-founder and Senior Managing Director Jonathon Jacobson said. "PennyMac will be extraordinarily well positioned as both a buyer and servicer of these assets," he added.
• New York-based BlackRock made the announcement on the same day it was tapped by the Federal Reserve Bank of New York to manage a roughly $30 billion portfolio of assets once owned by Bear Stearns.

Long Blackrock in fund; no personal position

UN Agency Appeals for $500M to Avoid Food Aid Cuts

I have to give credit to Cramer for jumping on the potential food disaster we have coming globally ahead of anyone on the Street - the past month he has joined the dark side (my side). Aside from myself, and a few analysts like Don Coxe [Jan 18: One Lonely Voice Agrees with Me on Food Inflation] I don't hear anyone talking about it. Oh well, it's just the bottom 20% of the globe with potential to starve. No problemo because they don't buy stocks - so we don't have to worry about them since they don't help push the story market up. Priorities after all! Conditions continue to degrade on a weekly basis. This crisis is going to be the mother of all "unintended consequences", especially if by economic theory this monetary inflation in the developed world (W. Europe/USA) serves to continue to drive commodity prices ever higher. Not to mention the corn ethanol genius.

• The World Food Programme has launched an "extraordinary emergency appeal" to governments to donate at least $500m in the next four weeks to avoid rationing food aid in response to the spiralling cost of food.
• The WFP, the United Nations agency responsible for relieving hunger, said in a letter to donor countries that if fresh money did not arrive by May 1, it might cut "the rations for those who rely on the world to stand by them during times of abject need".
• "We urge your government to be as generous as possible in helping us to close this gap - which stood at $500m on February 25 and has been growing daily," wrote Josette Sheeran, WFP executive director.
• The WFP's funding gap is now about $600m-$700m, officials said, after a 20 per cent jump in food costs in the past three weeks, the rise in the oil price to about $100 a barrel, and a surge in shipping costs. The US is the largest WFP contributor, having donated about $1.1bn last year, mostly in food shipments. The European Union, with $250m, and Canada, with $160m, are the second- and third-largest donors.
• Food prices are rising on demand from developing countries; rising population; more frequent floods and droughts caused by climate change; and the biofuel industry's appetite for grains, analysts say. The WFP provides food to about 73m people in nearly 80 countries.

73M people? In a globe approaching 6B, with a large % in abject poverty. Ouch.

Fund My Mutual Fund Stock Invitational - 1st Round

To get into the spirit of the season, let's have our own "Stock Invitational". The folks over at Fast Money have created a stock pool of 64 teams, so I am curious how this blog's reader base will pick among the selections.

The full pool can be found here.

I will put up 3 polls a day to try to get through the first round relatively quickly and leave each poll up 24 hours - whomever polls higher moves on; and we'll go all the way into the final pairing.
Today we have 3 first round matchups in the "Technology" bracket. I'll edit this post to list all 1st round winners ....

Technology Region
(1) HP v (16) Western Digitial - HP wins 76%/23% in a rout
(8) Corning v (9) Intel - in a nailbiter the 2 firms tied in regulation with 24 votes each. The commissioner had to come in during overtime and give the split decision to ... Corning.
(5) Microsoft v (12) IBM - our first cheating incident and clear NCAA violation where IBM tried to send out Intel to take on heavyweight MSFT. After an hour or so of slugging it out, the commissioner realized the issue and sent IBM in; in a surprise (but every tournament has a 12 seed beating a 5 seed, why not us?) the Apple faithful came to IBMs defense and the champion of the 1980s pushed out the perennial champion of the 1990s in the "geezer bowl" - 52 to 47%.
(4) Oracle v (13) Comcast - in a rout Oracle comes away with a 82% share win. How Comcast was able to get a 13th seed is beyond me; I assume insiders have pictures of the commissioner in an Eliot Spitzer situation! Way too generous of a seed; I was thinking something closer to 17th for this degrading business model.

(6) EMC v (11) Verizon - our second tie in 2 days; 23 votes a piece. Cmon people, stop leaving these decisions in the hands of the commissioner. Simply on the basis of the underdog status, and that crazy 6th man from the mean playgrounds of NYC named FiOS, I am going to play the Verizon card. Have to respect the groundswell of support for the lower seed.
(3) Apple v (14) RIMM - in a brutal seeding for Research in Motion (14th?), Apple wins with 2/3rd majority decision - I somehow think the easy conference RIMM came out of (Canada) must of led to this low seeding; their strength of schedule did not work out well in the RPI ratings - hence they are now unfairly RIP after this tough 1st round matchup. Apple is like Ron Paul, potentially unbeatable in online voting with their horde of fans.
(7) Cisco v (10) Dell - another strange high seeding with Dell at #10 - what is this? 2001? Cisco blows the doors off the stadium with a 90 to 10% trouncing.
(2) Google v (15) AT&T - new school v old school. Ma Bell looked her age - no contest, Google with 80%.

Health/Home
(1) Pepsi v (16) Hormel - SPAM lovers were valiant, generating 22% positive returns for Hormel, which ain't too shabby for a #16! Pepsi advances...
(8) McDonalds v (9) Disney - I thought this would be a close battle but perhaps I underestimated the waist lines of my readers ;) McDonalds beats the Mouse in a trouncing with 75% of the votes. I guess theme park visitations might be suffering in the coming year, or be filled with more foreigners than Americans!
(5) Altria v (12) Pfizer - in the battle of sickness vs health - sickness wins 65/35%; just can't beat that reoccuring revenue stream for Altria
(4) Walmart v (13) Target - Walmart wins this one easily 70/30%; how quickly things change - if this were 2005 and the house ATM was roaring Target would not only not be a 13th seed but a tournament favorite. Now in the pooring of America scenario they are a first round victim.

(6) Coca Cola v (11) Macys - the tournament's first shutout! 100% for Coca Cola - how Macy's gets an 11 seed in this economy is beyond me.
(3) P&G v (14) Bud - Toilet paper wins out over beer 70/30%, it's P&G
(7) Merck v (10) UnitedHealth - 2 companies the commissioner does not follow, Merck wins 60/40%
(2) J&J v (15) Home Depot - the Commissioner felt sorry for Home Depot and threw his vote towards it, otherwise this would be a shutout. Well in reality it was our 2nd shutout of the tournament - 100% for J&J. No one believes the 2nd half housing boom except me???

Financials
(1) Berkshire v (16) Ambac - commissioner grants a first round by to Berkshire. Ambac? Seriously now.
(8) US Bancorp v (9) Bank of America - another tie. Since this tournament is a focus on the next 12 months, and Bank of America loaded itself up with Countrywide toxic loans I am going to have to rule for Warren Buffet's US Bancorp
(5) Mastercard v (12) American Express - no contest, Mastercard with no credit risk comes in @ 86%.
(4) China Life v (13) Wells Fargo - China Life wins 60 to 40% over valiant Wells Fargo.

(6) Simon Property v (11) Lehman - Simon Property by a nose 53 - 47%
(3) Goldman Sachs v (14) Washington Mutual - commissioner bye granted to Goldman Sachs
(7) NYSE v (10) AIG - NYSE in a romp over the insurance giant - who likes insurance anyhow? 90 to 10%
(2) JPMorgan v (15) Citigroup - in a squeaker, JPMorgan with 94% of the votes. The Fed intervened to make sure it was not any closer. JPMorgan is going to be hard to beat with interventions and backstops each and every round.

Industrials
(1) United Technology v (16) Sunpower - the solar conference did not send it's best candidate to the big dance yet still garnered 41% of the votes - tournament champion First Solar would of been the better candidate! UTX wins.
(8) Valero v (9) Exxon - in a mild upset Exxon wins 59% to 41% - unless those crack spreads fall its hard for Valero to get traction
(5) Potash v (12) Boeing - the Commissioner's darkhorse to take the whole tournament if it can get past the tough matchup in the 2nd round, Potash wins with a resounding 85%. This game started 45-0 in the first half but Boeing at least put up some fight once the game was decided
(4) Freeport v (13) ADM - another tournament stud Freeport whitewashes the much hated ethanol play with a 94% win.

(6) Alcoa v (11) PG&E - in a sleepy affair Alcoa (yawn) wins with 58% of the vote
(3) Toyota v (14) General Motors - No love from the home court advantage - Toyota with 82%
(7) 3M v (10) Caterpillar - CAT with 3/4 of the votes
(2) BHP v (15) DuPont - Mining giant runs away with it @ 87%... BHP

Potash (POT) and Monsanto (MON) Upgraded

Some upgrades out this morning reversing the "agriculture is dead" thesis that was so sexy last week. A few readers have been sending me a lot of info about the fertilizer pricing negotiations so nothing is a shocker here to me, but as I've been saying for a year now - these analysts are STILL behind the curve on their estimates - the pricing power is even astounding me, and I'm a permabull on these names. [Oct 23: Analysts Still Doubting the Fertilizer Stocks] [Nov 19: Revisting "Analysts Still Doubing the Fertilizer Stocks"]

So while I'm cognizant of the hedge funds piling out of these names due to the "hey everything will be fine in 6 months and it's time to buy retail stocks" trade instead - I just cannot comprehend comparing a Kohl's to a Mosaic and picking Kohls, even at the low valuations of the retailers. Sorry, just not buying it even if those names do pop 30% in a week before selling off for a month straight as they've been doing for the past 6 months. The pricing power, visibility, and analysts still behind the curve is really no different from when I first came to this group last spring. So once the hedge funds get done liquidating their overleveraged selves, we might have lower prices, but the story will be even better...

Potash (POT)

• An RBC Capital Markets analyst upgraded shares of Potash Corp. of Saskatchewan Inc. on Monday, expecting the fertilizer company to gain from higher prices for potash.
• Both Belarusian Potash Co., a Belarus-based potash supplier, and Indian Potash Ltd. recently agreed to a contract potash price of $625 per metric ton -- up sharply from a previous price of $270 per ton. Pricing for the fertilizer has been supported by factors that include rising demand for ethanol, made from corn.
• Analyst Fai Lee upgraded the stock to "Top Pick" from "Outperform," with a price target raised to $250 from $195. That implies upside of around 73.3 percent from Thursday's $144.26 closing price
• Lee believes the recent Indian contract will set the tone for negotiations with other countries, like China. "We believe it is only a matter of time before Chinese potash prices approach global levels," Lee wrote in a client note.
• CIBC World Markets analyst Jacob Bout suspects the recent contract will cause a contract with China to settle sooner than expected and at a higher-than-expected price. "The Indian contract settling before the Chinese negotiations, unprecedented historically, is an indication of the current tight supply and demand fundamentals for potash," Bout wrote in a client note.
• Bout's new price target is $200, up from $155. He also raised his rating to "Sector Outperform" from "Sector Perform."

Monsanto (MON)

• Shares of Monsanto Co. jumped in early Monday morning trading, after a UBS analyst upgraded the seed maker to "Buy" and said a pullback in the stock price has made shares a better value.
• Monsanto's stock has slipped 25 percent from highs reached earlier this year, as investors have noticed that farmers are devoting less planting space to corn, and focusing more on soybeans and spring wheat, UBS analyst Chris L. Shaw said.
• Last year, corn prices surged on strong demand for ethanol and exports. Now, other commodities like soybeans have seen rising prices, as well. "We still see the lower corn acres impacting profits in Monsanto's seed business, but now see the risk of any weakness priced into the shares," Shaw wrote in a client note.
• Shaw upgraded the stock to "Buy" from "Neutral," and said there's still a good long-term opportunity for Monsanto's seed business, given a robust research and development pipeline.

Long Potash in fund and personal account

Bookkeeping: Some Morning Sales

As mentioned in this week's summary we headed right to that to that 50 day moving average which is around S&P500 level 1355. Ironically last week when I was "bullish" I expected a move to this level, but we had that one day slide of 300 points out of the blue, before completely reversing Thursday and this morning. So my prediction was accurate - we just sold off massively for some odd reason in between.

Either way, I am taking this time to take some profits off positions bought last week, cut back other positions, and begin expanding short exposure. Since I am not clear where the market's head is right now, I am using the most simple broad market Ultrashort Russell 2000 (TWM) as my main tool. Now that the market is in love with the financials, retailers, and homebuilders (as it seems to do like clockwork every 7-8 weeks), I will be treading a bit more carefully in those shorts until I see a return to reality.

Once again I find this market to be bipolar and very tiring - the moves are so severe and in such complete opposite directions from day to day. What works today, fails tommorrow. What works tomorrow fails 2 days later. And nothing bought on fundamentals lasts as a trend for very long. Until this behavior changes, I will continue to assume all sharp rallies will be shortly followed my sharp selloffs, and vice versa - so even the positions I have the most conviction in, I need to cut back on these spikes up, even if I find their valuations compelling. So I am cutting to some degree positions I added in panic selloffs late last week - until the market makes up its mind for more than 48 hours at a time cash seems the best options many times. These are in general $5-$7K sells - sadly of late the only way to make any money is this quick allocation trades, moving from long to cash and vice versa. I've done more of these large scale swings in and out in the past 3 weeks than the previous 3 months combined. Again the market is so disjointed right now and I prefer some sort of trends that last more than a few hours, so I am trying to move to a more neutral bias... with more cash.

1. Powershares DB Agriculture Fund (DBA) - this was a larger sale, around $12K, simply because the "commodities are trash" trade might have more downside ahead... I'll re-up once sense returns to the market and this is still the largest long position, but just want to ratchet back some exposure on this +2% move. This has nothing to do with my long term outlook - simply the fear of hedge fund computers.
2. Mosaic (MOS) in $96s/$97s (fertilizer)
3. Potash (POT) in $152s (fertilizer)
4. Baidu.com (BIDU) in mid $230s (Chinese internet)
5. Mechel (MTL) around $120 (Russien iron ore/steel/coal)
6. ICICI Bank (IBN) in $40.50s (Indian bank)
7. HDFC Bank (HDB) in $105s (Indian bank)
8. DryShips (DRYS) in $62s (dry bulk shipper)
9. Massey Energy (MEE) in $35.40s (coal)
10. Blackrock (BLK) near $220 (asset manager)
11. Cabot Oil & Gas (COG) in $47.50s (natural gas)
12. Foster Wheeler (FWLT) in $56.60s (infrastructure) - I can only assume Thursday's move down to $47 was a hedge fund liquidation it happened so quick and then reversed but I was happily buying at $48, which I am now flipping out 1 session later for a nice profit.

I will change my tune on the market to constructive, if we see a move north of S&P 1400. Until/unless then I doubt any of these moves sustainability and will trade accordingly. If I am wrong (which one day I will be as the market puts on a real move that lasts for more than a week), then I'll buy back my favorite positions at higher prices, missing the first part of the leg up, but still enjoying the vast majority of the Kool Aid. Remember, all these liquidity injections (over $1 trillion now from Europe and US) inflate EVERY asset at a level higher than they otherwise would be - including stock prices. So it's the war of Main Street vs Wall Street - inflate everything to keep the financial system greased.

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

Bookkeeping: Weekly Changes to Fund Positions Week 33

Week 33 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: 8.5% (vs 18.2% last week)
58 long bias: 84.4% (vs 61.7% last week)
6 short bias: 7.1% (vs 20.1% last week)

64 positions (vs 61 last week)
Additions: iShares Malaysia (EWM), iShares Singapore (EWS), Cabot Oil & Gas (COG), EOG Resources (EOG)
Removals: FCStone Group (FCX)

Top 10 positions = 36.2% of fund (vs 33.4% last week)
40 of the 64 positions are at least 1% of the fund's overall holdings (62.5%)

Major changes and weekly thoughts
Volatility continues to be the name of the game - multi hundred Dow days are now the norm as every sneeze, wheeze, or Federal Reserve action moves the markets violently one way or the other. It continues to be a difficult market for any but very short term oriented traders - buy and hold was dead and buried late last year and now we stomp on the grave. This was also a big reversal week, similar to the period in mid to late January where everything that was most severely punished for weeks on end, gets a huge dead cat bounce rebound, and everything that held through better than average was punished. We once again enter a period of "early cycle" rotation as the "in 6 months everything will be fine" crowd is back at it, this time with the full backing of the Federal Reserve to implicitly backstop any financial losses. This is about the 5th version of this move we've had since last summer. It is now becoming almost predictable at least in the rotation, if not the timing of this "swing in mood" and more urgent Fed actions. Each iteration brings new backstops, political pressure, and plugs to fix the leaky dam that is the credit system. Each intervention brings hope and cheer anew - and the ultimate iteration will be the direct purchase of mortgages, which is generating so much momentum the Fed and Bank of England already have to deny they are considering it. Each intervention has failed thus far. We'll see how this one goes - the herd is always "correct" in the near term and the herd has deemed this week to be the return of financials, retailers, and homebuilders. So if you were not overweight in those groups you were deemed a loser the past 4 days.

Technically, we still remain in sort of no man's land, although it is hard to trust the technicals after the very strange action on Monday when we broke support and should have broken down per every technical rule known - but magically never broke 1260. With the behind the scene interventions it is hard to really play by the old set of rules, since a new set is being created as we speak. But for what it's worth we head into resistance up there at S&P 1355 or so, and on the bottom we have S&P 1270 (apparently a false bottom per PPT rules) and/or 1260 on the bottom. So until further notice I assume we trade in this wide range but frankly we appear to not be allowed to go down past a certain point, so I guess we don't have to worry about downside anymore in this new era of government supported stock markets.



The fund had a poor week, with it's huge weighting in financials, homebuilders, and retailers (not). Basically everything that worked in the past did not work this week similar to that period in latter January 2008. If you believe in global growth stories, or commodities you were hit. If you believe in the consumer led, financial led, retail led domestic recovery you did well (if you had money left over from the carnage you endured the past 6-7 months). So it's a reversal week - the question is how long does it last. I spent the week, converting short exposure into long, and buying stuff that no one suddenly wanted, as I believe those trends did not end on a dime Sunday evening - even if the hedge fund computers believe so.

People continue to talk about the decoupling between emerging markets and developed markets, especially USA. I think the real story of decoupling later in the year will be the decoupling between US financial markets and US Main Street. I see the economy worsening but the stock market, supported by tax payer dollar backstops throughout the financial system, holding up far better. Along with the group think Kool Aid about the Q3 2008 "recovery" which will be fudged by the rebate checks. It is a sad state, but we are laying the groundwork. Socialize losses onto the backs of the common man and keep rewarding the ponzi scheme going on. NYC banks and multinationals win. Guy on the street (as long as it's not named Wall) loses. Should be an interesting dichotomy.

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. Despite all the ruckus Monday about the investment banks and the Bear Stearns $2 price, along with a triple bottom break that should of led to a severe drop off the market held against constant retests throughout the day of S&P 1260. It made no sense. But what has lately. I did make a large swath of buys in the morning, across multiple groups - that later in the week almost all took a hit since they did not include financials, homebuilders, or retail companies. Well I did buy 2 Indian banks, but since the Federal Reserve does not backstop Indian financial institutions, it doesn't count.
2. I restarted stakes in 2 emerging markets, that I held earlier in the fund, iShares Malaysia (EWM) and iShares Signapore (EWS). Both have corrected severely from where I bought them, and I want to continue to avoid the subprime nanny state US even though the hedge funds loved it this week.
3. I've been waiting for weakness in natural gas, and finally got some early this week so I began my first initial stake with Cabot Oil & Gas (COG), I added more later in the week.
4. Tuesday, we got another box of chocolates as it began to hit the Street that their precious investment banks now have our tax dollars behind them (without any of the nasty regulation the commercial banks must face to boot!), and another "best in 5 years" return in the markets (which was almost promptly all lost the next day, but almost all regained back Thursday). As the commodities began a selloff, I started rebuilding my gold/silver exposure (of course too early in retrospect but I guess I didn't realize 75 basis points cut was a "defense of the dollar"). I added more Wednesday morning as both names, Silver Wheaton (SLW) and Kinross Gold (KGC) fell to their 50 day moving averages - but it became clear by later that day, that this was more than a normal sell off and probably some hedge fund liquidations were going on behind the scenes. I now have my 5% stake in precious metals as a hedge so it's an appropriate level.
   
5. After FCStone Group (FCSX) was demolished to the tune of 50% down intraday (before some recovery) on fears Monday of anything within 6 degrees of financials being at risk (seems so long ago now doesn't it?), the stock rebounded on the "Federal Reserve will backstop any junk in the system" mantra and I chose to exit the position with a smaller loss - not liking this level of crazy volatility. I've barely held that position for a week but I did not sign up for 30-50% daily moves.
6. To raise some cash I sold down some of the strongest movers of the week: Mastercard (MA) on the VISA (V) mania, DR Horton (DHI) on the "houses will rebound in 6 months mania" (the same mania that has gripped this nation for 2 years now), and Schering-Plough (SGP) simply because it was not falling like a rock like most of the fund positions.
7. I had been waiting for some selloff in the fertilizer names and had downsized my exposure to as low as I was going to go - we finally started seeing some weakness so I began to layer in buying my 2 fertilizers with potash exposure; and said I'd buy more (in a larger layer) once the stocks hit my target levels, which they hit promptly the next morning.
8. I started my 2nd natural gas play in EOG Resources (EOG) - most of these names seem very similar to me, but EOG stood out in my "non technical" research with some exciting prospects so I was happy to get the name at some discount to where it has been; but would actually like to see a lower price to buy more.
9. Thursday morning as the commodities carnage continued, aside from the 2 fertilizer names I mentioned above, I created a large stake in a personal favorite Russian iron ore/steel/coal play Mechel (MTL) - again another name I was waiting quite a while for some sizeable pullback. Of course it could go lower, but I'd rather be buying here than when it was in the $130s or $140.
10. I also added to some iron ore, infrastructure, and natural gas, while selling off some of the stocks holding up relatively well to raise some cash.
11. I debated what to do with my hedge exposure on the short side - I am a bit confused as to where to place my bets when the downside happens. This was a week where most of the short exposure worked against me as well, since financials, real estate, and the like was a "happy place" to be again. I still believe we will have some more downside in the future in these groups but the risk now is being run over by the happy herd.
    

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

66 Stocks Returning 8%+ this Week

This week was the return of the titans, especially financial. Essentially the names that have been blown to bits for weeks on end made their (dead cat?) bounces this week. Unless you are in the category of buying stocks as they implode and trying to catch knives, it was hard to be involved in most of the big movers this week. So what has been winning most of the past 6-7 weeks was this week's losers, and vice versa - as the Federal Reserve rides in on its white knight yet again. The 2 government "backstopped" GSEs obviously had a week for the ages - but when some of your major financial institutions are falling or rising 30-50% a week I don't know how healthy that is, or what it says about our financial system - the "bedrock of stability".

Criteria used:

1. Market capitalization >$2B
2. Stock price >$10
3. Average volume >100K
4. Returning at least 10%

We own those in green; those in blue we've discussed or owned in the past

Symbol	Company Name	% Price 1 Week
FRE	Freddie Mac Ord Shs	53.0
FNM	Fannie Mae Ord Shs	49.3
JPM	JP Morgan Chase Ord Shs	20.6
MS	Morgan Stanley Ord Shs	19.4
HRB	H&R Block Inc	19.2
OSG	Overseas Shipholding Group Inc	17.4
KEX	Kirby Corp	17.1
DRI	Darden Restaurants Inc	16.7
PHM	Pulte Homes Ord Shs	15.8
GHL	Greenhill & Co Inc	14.1
CTX	Centex Corp	13.9
TOL	Toll Brothers Inc	13.6
JOE	St. Joe Co	13.6
TCO	Taubman Cntr Ord Shs	13.4
GGP	General Growth Properties Inc	12.9
WB	Wachovia Corp Ord Shs	12.8
BAC	Bank of America Ord Shs	12.7
WDR	Waddell & Reed Financial, Inc	12.6
NYB	New York Community Bancorp Inc	12.4
ADS	Alliance Data Systems Corp	12.3
FNF	Fidelity National Financial Inc	12.1
FAF	First American Corp	11.9
AN	Autonation Inc	11.7
PLD	ProLogis Ord Shs	11.6
NLY	Annaly Mortgage Ord Shs	11.3
AMB	AMB Property Ord Shs	11.3
MAC	Macerich Ord Shs	10.9
LEN	Lennar Ord Shs Class A	10.9
BLK	Blackrock Inc	10.5
WFC	Wells Fargo & Company Ord Shs	10.4
MBI	MBIA Ord Shs	10.4
NKE	Nike Ord Shs Class B	10.2
NHP	Nationwide Health Ord Shs	10.1
LRY	Liberty Property Trust	10.1
CSX	CSX Corp	10.0
KIM	Kimco Realty Ord Shs	10.0
BBT	BB&T Corp	9.8
SHLD	Sears Holdings Corp	9.8
HCBK	Hudson City Bancorp Inc	9.8
KSS	Kohl's Corp	9.6
GE	General Electric Ord Shs	9.5
MDC	MDC Holdings Inc	9.5
MVL	Marvel Entertainment Inc	9.4
EQR	Equity Residential Ord Shs	9.3
REG	Regency Centers Ord Shs	9.3
KMX	Carmax Inc	9.3
HCP	HCP Ord Shs	9.2
FRT	Federal Realty Investment Trust	9.2
O	Realty Income Ord Shs	9.2
SHPGY	Shire ADR	9.1
BBBY	Bed Bath & Beyond Inc	9.1
DDR	Developers Diversified Realty	9.1
PNC	PNC Finl Service Ord Shs	9.0
TK	Teekay Corp	8.9
VMI	Valmont Industries Inc	8.9
BPOP	Popular Ord Shs	8.8
GS	Goldman Sachs Ord Shs	8.6
AVB	AvalonBay Comm Ord Shs	8.6
CMG	Chipotle Mexican Grill Ord Shs	8.6
WBC	WABCO Holdings Inc	8.3
FULT	Fulton Financial Corp	8.3
DHI	D.R. Horton Inc	8.2
FCE.A	Forest City Enterprises	8.2
FDO	Family Dollar Stores Inc	8.2
FAST	Fastenal Co	8.1
ORLY	O'Reilly Automotive Inc	8.1