Fund My Mutual Fund Stock Invitational - 2nd Round

After an much too long first round, filled with a lot of snoozers, and only a few upsets [full results can be found here], we should have a lot more interesting 2nd round with some barn burner matchups of heavyweights.

Now keep in mind, when you choose it's not just your favorite today but what can return the most over the next 12 months - so things that are currently out of favor could return the most by April 2009.

I'll be posting 4 matchups a day, since the first round took SO long and I don't want this to turn into May Madness!

Technology Region
(1) HP v (8) Corning - Corning was valient but lost a close battle with HP topping at 53% of the vote
(12) IBM v (4) Oracle - IBM, the George Mason, the Davidson of FMMF Stock Invitation takes down another high seed - can it take out the #1 ?? 58% of the vote
(11) Verizon v (3) Apple - Apple eats Verizon for lunch with a 95% decision
(7) Cisco v (2) Google - Google, resting on its laurels, in a landslide with 80% of vote setting up an epic Elite 8 matchup

Health/Home (all favorites won first round in the Snoozer bracket)
(1) Pepsi v (8) McDonald's - Poor Americans push McDonald's past middle class Chinese eating at KFC in Shanghai - 59 to 41%
(5) Altria v (4) Walmart - Smokes still win out with 55% of the vote; but give it a year and I think those freshman and sophmores on Walmart will showcase their talent in the heart of recession 2009. Altria advances.
(6) Coca Cola v (3) P&G - P&G with 2/3rds majority. Can't live without toilet paper.
(7) Merck v (2) J&J - J&J with 73%. Can't live without shampoo.

Financials (all favorites won first round in the Snoozer II bracket)
(1) Berkshire v (8) US Bancorp - led by their senior named Buffet a blowout, Berkshire with 87%
(5) Mastercard v (4) China Life - Mastercard wins out with 62%
(6) Simon Property v (3) Goldman Sachs - with people placed throughout the government Goldman easily wins with 87%
(7) NYSE v (2) JPMorgan - With a Fed assist JPMorgan wins with 65% of the vote

Industrials
(1) United Technology v (9) Exxon - wow Exxon with the upset - and not even close with 2/3rds majority
(5) Potash v (4) Freeport - Freeport got a very tough draw - the commissioners dark horse to win the whole thing, Potash comes through with a 78% vote count
(6) Alcoa v (3) Toyota - Alcoa squeezes it out 51 to 49% - now it can be sacrificed to the BHP gods
(10) Caterpillar v (2) BHP - BHP in a rout with 84% of the vote

Congress is Rushing to Help Home Owners!!! (Not)

I just wanted to go out to the weekend with this post... it is really quite reprehensible ... we are being fed that Congress is working furtively to help out homeowners with some version of a bailout. Notwithstanding that I hate all these bailouts, at least be intellectually honest with people.

What is really happening? The banks and the home builders are getting the lions share of the benefits. The banks I can understand... they are powerful, they have a huge lobby, they have a lot of friends and relationships in D.C. But homebuilders? That relatively small group? I wonder why they suddenly have so much power.... but then I remembered about a month or two ago, they insisted if they do not get relief (mommy I need my tax rebate), they'd be suspending contributions to the politicians coffers.... and nothing gets a politicians attention like less funding for their re-election campaign. From an article on 2/14/08

• The National Association of Home Builders, one of the top 10 corporate donors to politicians, has stopped contributing to congressional candidates after it failed to get what it wanted in recent anti-recession legislation. (I admit, i did not know they were one of the top 10 donors)
• The powerful lobby said Tuesday that it was taking the unprecedented action of halting its campaign-giving to protest Washington's failure to address "the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward." The group did not mention any specific initiatives.
• The association had unsuccessfully pressed lawmakers to adopt a provision to reduce the tax liability of home builders by allowing them to offset their past profits with future losses. (which is what they are getting now)
• Election experts said the lobby's move illustrated how closely interest groups tie their donations to the decisions they hope lawmakers will take on their behalf -- a connection that usually goes unspoken. "This demonstrates in a starker fashion than we're used to seeing how groups use political contributions to promote their positions in Congress," said Kenneth A. Gross, a campaign finance lawyer at Skadden, Arps, Slate, Meagher & Flom.
• The home builders' announcement also explodes the oft-repeated assertion by politicians that lobbyists deal with them only at arm's length. "How many members of Congress have you heard say, 'People donate to me, but it has no effect at all'?" Sloan said. "What the home builders have done is expose the underbelly of the connection between money and politics."

So what happened? It didn't even take 60 days and we already have programs being rushed through to make sure the homebuilders are suckling contentedly from the nipple that is the taxpayer's money. Awwww.... isn't that sweet? And we can even put a cute and fuzzy label on it "Foreclosure Prevention Act of 2008" that makes the peons in the country feel like Congress is hard at work to help them out. It's all so beautiful... I need to go dab my eye with a tissue. It is amazing to see how efficient Congress can be, when it is looking out for its own interests - when it comes to other things they fight and stall and get nothing passed for years. This is your country - I'd just like more people to see what really goes on behind the scenes so this is why I throw it on the blog. Cramerica... for the corporation... by the corporation.

• Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis.
• The $15 billion Foreclosure Prevention Act of 2008, expected to be debated Thursday afternoon on the Senate floor, is drawing fire from critics who say it would do little to actually prevent foreclosures. The bill contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year timeframe. That's good news for big homebuilders such as KB Home and Pulte Homes Inc., which have been saddled with massive losses over the past year.
• Other big beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley. In fact, any company now struggling after years of healthy profits that pumped up their tax bills could benefit. (shocker!)
• While Democrats and Republicans called the bill a productive bipartisan compromise, Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington, questioned whether the trade off was worthwhile for Democrats. "This is first and foremost helping the big villains in the story," he said.
• Earlier this year, the National Association of Home Builders was so dissatisfied by lawmakers' actions — notably not including the tax provision in the economic stimulus bill_ that it snapped shut its political purse. NAHB said it would stop making contributions to congressional candidates "until further notice." Since 1990, the trade group has given nearly $20 million to federal candidates, with 35 percent going to Democrats and 65 percent to Republicans, according to the Center for Responsive Politics. (that's a hell of a return on investment, $20 million over 18 years buys you $6 billion - now that's a return on capital!)
  
• The bill also contains $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance subprime mortgages — those made to borrowers with poor credit — and a $7,000 tax credit for people buying properties in foreclosure.
• It includes an additional $100 million — half of what Democrats proposed — for credit counseling to help homeowners avoid foreclosure. And the agreement permanently raises the limit for loans backed by the Federal Housing Administration to $550,000. That amount had been temporarily raised to nearly $730,000 as part of the economic stimulus bill signed by President Bush in February. (oh I missed that part... more high priced homes thrown into FHA - I was assured this was a TEMPORARY provision just a few months ago? anyhow... $100M for counseling peons, $6B for homebuilders - sound equitable)
• Homeowners facing bankruptcy, however, won't find relief in the proposal. The mortgage industry fought fiercely to spike a provision to let bankruptcy judges rewrite the terms of distressed mortgages. It won that battle; the provision was left out. (let me guess, the mortgage industry is also a top 10 donor to political campaigns....)
• The absence of bankruptcy intervention was criticized by 15 civil rights, labor and consumer groups — including the Center for Responsible Lending and the Consumer Federation of America. In a joint statement, they called lawmakers' actions "a win for the financial services industry that brought us this mess."

Wonderful.

Bookkeeping: 'Rising Tide' Performance Week 35

Week 35 performance of the mutual fund

Comments: Another bipolar week in the market, with financials/retailers/homebuilders ramping Monday - Wednesday, while commodities were trashed, followed by the exact opposite on Thursday and Friday. On Tuesday, we had our third 400 point "best in 5 years" type of rally in the past 4 weeks, but this time, unlike the past 2 I cautiously went out on a limb believing this move could have some legs as we made a new higher high [Dare I Say It? A Higher High?] This proved to be an accurate call, as the market shrugged off >400K weekly unemployment claims and a worse than expected monthly labor report later in the week. We're at an interesting point as I outlined earlier today. We've put on quite a move, a lot of charts look technically better than they have, but volume has been relatively light and we need more people at the party to take us higher. But the action has been far more constructive than any other week this year (and we're already in the 2nd quarter), so there remains some hope for an extension of a rally as opposed to all those other false bottoms that pundits assured us "no, really this is the bottom - buy buy buy!"

On the economic front, things continue to worsen. I am only awaiting the moment the first pundits begin the "1st half 2009" recovery - from their current "2nd half 2008" recovery. Just remember, everything will be fine in "6 months" - they just don't tell you which 6 months. Again, my views have not changed but as with Sep/Oct 2007 when the "accurate discounting mechanism" of the collective market completely missed the coming financial carnage, I had to hold my nose and drink Kool Aid. Just like I am doing now. I don't believe in any of the myths being told, but I realize these myths can take the market up, and if I sit on my hands, or stay insistent on being short the market, I will be correct intellectually but make my shareholders far poorer. That's not the point.... so I'll play along conceptually but just smirk intellectually at the madness of the Kool Aid. The market is pricing in a 'light, shallow, and quick recession' - I believe it will be much harsher than that, so when the market needs to price in what I believe will be coming we will have another 'adjustment period' (read: down). I truly think this is one of the biggest disconnects between Main Street and Wall Street I've seen in my years doing this... but the people who reside in both spheres do live in totally different worlds, so I can at least understand "why" the disconnect is there. But I continue to believe the ivory tower crowd in NYC is going to be surprised by the large earnings revisions downward coming in 2nd half 2008 for any domestic focused company - multinationals should be ok...

The fund had a solid week, but it was a Tale of 2 Weeks. The fund was trashed early in the week [This Week's Commodity Action is a Reversal of a Reversal], and in fact lost a lot of value Monday and then even was down Tuesday as the indexes sprinted to 3.5% gains. We did not own the type of early cycle stocks the market was falling in love with (once again) - many financials ran up 15-20% early in the week so I could only watch in mock horror. Further, I actually owned Ultrashorts against all these positions (and a large cash position) which has served me well for months, but has been awful 3 of the past 4 Tuesdays, including this one. I correctly dumped a large portion of these Ultrashorts late Tuesday but the damage was already done that day. Essentially running a 'hedged portfolio', the days the markets make magnificent moves upward, I can never hope to match those returns - you'd need to be completely or nearly completely unhedged, throwing caution to the wind at the exact right moment to fully participate in such moves. I did a lot better later in the week when individual names ramped and the markets were relatively listless.

Later in the week some moves back into commodities and a prescient call to re-enter solar stocks in a material way helped me gain back some of the lost ground versus the indexes (especially Friday), but the knockout punch of Monday/Tuesday made it impossible to catch up, especially with a 25-30% cash position for most of the week. I also went cautious on my fertilizer exposure, specifically with Mosaic (MOS), reducing it from a 6% position mid week to just above 1% going into earnings Friday - not because of fear of results, but because of fear of the lemmings reaction to results. So a quick back of envelope calculation shows by reducing my stake by 5% and missing out from $100 to $113 or so where I began getting back in the name today, I left about 0.6-0.7% of fund performance on the table. Quite a lost opportunity... but that's the opposite side of being cautious - you are going to leave some on the table. I still stick by the structure of the trade (because if it went down severely I'd be thankful) and as we enter earnings season I'll probably miss a few other opportunities like this because I'll be cutting back exposure for almost every stock going into earnings - just too much unpredictable behavior for my tastes. I prefer to be a contact hitter, producing a lot of singles, doubles with a few HRs thrown in, rather than a HR/strikeout king.

So overall, the fund made a very nice return this week, but due to the above mentioned reasons lagged the huge move up (most of it in 1 day) by the indexes. The S&P500 returned +4.2% this week, and the Russell 1000 +4.3%. Rising Tide Growth Fund gained 2.8% so a nice return on absolute basis, but we trailed the indexes this week.

Price of Rising Tide Growth: $11.538
Lifetime Performance to date (vs Aug 3, 2007): +15.38%

Comparable S&P 500: 1,370.4 (-6.47%)
Comparable Russell 1000: 747.12 (-6.16%)

Fund return vs S&P 500: +21.85%
Fund return vs Russell 1000: +21.54%

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

To the Newbie Economists Out There - A Horde of Helicopters has Moved In

I grabbed this blurb from Realmoney.com's Tony Crescenzi (link works for subscribers only) - it is M2, a measure of our money supply (the amount of paper money floating through the US) Unprecedented flooding of liquidity happening people... driving up ALL ASSETS. The costs? Inflation and (potential) weakness of the dollar although the latter could be debated as long as people think the US is on the road to recovery (which would lead to in theory a dollar rebound)

But the inflation portion is NOT a theory - it is fact.....in English what is happening is for every 5 dollars you have, the Federal Reserve is printing 1 more and throwing it into the system. So your dollars in your pocket are being devalued at a historic rate. So go spend it... QUICK... because it's becoming more worthless by the minute. Read on...

M2 increased $32.2 billion in the week ended March 24, according to data released late yesterday by the Federal Reserve. M2 has advanced $264 billion to $7.721 trillion since inflecting upward in the middle of January, a 21% annual rate.

These figures are unprecedented. The only periods close to the current period (they are not close at all, really) are September 2001 and in the fall of 1998, when the Fed cut rates following Russia's default and the Long Term Capital Management collapse.

***********************
Here is a chart (with some delay) on money supply in this country via Shadowstats.com (who I believe is very accurate on his unemployment rate and inflation data - as it shows how government numbers USED to be reported before they were adjusted to make everything look more "benign").... you can see M3 going off the chart of late



I wrote a piece on M3 (which is a broader measure of money here - What is M3 and Why Do Yuo Care?). I've been using this M3 measure since the government stopped publishing it (I wonder why) 2 years ago, but I guess even M2 is being hosed. I know it sounds dry, but I really urge everyone to learn about what is going on behind the curtain of Oz so you realize why our dollar is being destructed and inflation will ramp. This signals to me that the Federal Reserve, while putting on a calm face, is frightened stiff of deflation... which is about 100x as bad as inflation is... think 1930s.... the total reluctance of our banks to loan money (instead hoarding it to fix their balance sheets full of toxic mortgage waste) appears to be the culprit from this pulpit. So to "solve" the problem, they are just creating more... and more... and more... money until it floods the banks and they have enough to lend out. What a system...

Late Payments on Consumer Loans at 16 Year Highs

While we drink Kool Aid, and toast each other on Wall Street, just keep in mind, at some point we need to recognize Main Street - so we'll continue to keep an eye on it. Remember, aside from the subprime and Alt A mortgages, we need to worry about prime mortgages, auto loans, student loans, credit cards, consumer personal loans... etc. These are things that are going to weigh on financials for a long while and in fact accelerate as more people are foreclosed on, jobs are lost, credit cards reach their limits, 401k balances are emptied, and inflation rears its ugly head.... but remember the stock market is not the economy (in the short run). But for now... toga, toga, toga.

• More Americans have fallen behind on consumer loans than at any time in nearly 16 years, as credit problems once concentrated in mortgages spread into other forms of debt.
• In a quarterly study, the American Bankers Association said the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter from 2.44 percent in the third quarter, and from 2.23 percent a year earlier.
• The rate of delinquencies was the highest since a 2.75 percent rate in the first quarter of 1992. It provides a fresh sign the nation's economy is slowing, and may be in recession.
• "Deterioration of household credit should continue through 2008, though the rate may moderate," he added. "If it intensifies, then the current recession may prove more severe than anticipated."
• ABA Chief Economist James Chessen attributed the jump in the delinquency rate largely to auto loans.
• Late payments on "indirect" auto loans, which are made through dealerships, totaled 3.13 percent, the highest on record. Delinquencies on direct auto loans rose to 1.90 percent, a 2-1/2-year high.
• Credit and debit card delinquencies rose to 4.38 percent from the third quarter's 4.18 percent, following four straight quarterly declines.
• Housing wasn't spared. Delinquencies on home equity loans rose to a 2-1/2-year high of 2.39 percent, and on home equity lines of credit rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.
• The ABA study covers more than 300 banks that extend a majority of outstanding consumer loans. Its study covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.

I actually believe credit cards will be the last to go - since people are using them as perpetual cash machine... i.e. charge $800 this month, only have to pay back $75 to keep the game going. Everything else will go first - but it's a long term process so we can have "hope" in the meantime and cling to rebate checks and everything will be fine in 6 months. Until home prices start going back up, nothing will be fine... we need our house ATM as a nation to keep spending 110% of our paycheck. Or more, if we splurge for things such as ... well... food. I keep coming back to this tax our Fed is helping to exaggerate... the worst tax for the common folk... inflation. But we did save NYC bankers and that is the important thing...

• Patricia Norris' family is feeling the one-two punch of higher fuel and food prices. Her husband works as messenger, driving around to deliver packages. But the job is not as profitable as it once was because rising fuel prices are eating into his earnings. With money tight and food prices rising, Norris can no longer afford to buy beef and chicken on a regular basis. "Sometimes I cry," she said, when she passes items on store shelves she can no longer buy.
• Reuters reporters visited Wal-Mart stores in Romeoville, Illinois, Secaucus, New Jersey and Santa Clarita, California, on the last day of March and the first day of April to find out how shoppers are navigating the food aisles when they have payday cash in their pockets.
• Already squeezed by high gasoline prices, slumping home values, a weakening job market and the possibility that the U.S. economy is in a recession, consumers have adopted a no-nonsense approach to shopping, passing over a trip to Target or a local grocery store if they can find lower prices at Wal-Mart. (BINGO! One of my favorite predictions - Dec 26: Target Shoppers Turning into Walmart Shoppers)
• They are buying cheaper store-brand products, avoiding costly cuts of meat, consolidating trips, clipping coupons, constructing well-researched shopping lists and avoiding splurges to spend only the bare minimum. (acting responsibly? American consumers? Shocker - but what happens next year when prices go up another 15%+?)
• That has consumers like Laura Miller taking a calculated approach to shopping, much of which she does at Wal-Mart in Santa Clarita, California, a planned community on the outskirts of Los Angeles. Married with three little girls, Miller said her food costs have almost doubled to $300 every two weeks. (thankfully, CPI shows that her bill only went up 4% - I have no idea why she thinks her grocery bill doubled)
• Miller's printed shopping list, organized by item and place of purchase, shows that she does the bulk of her buying at Wal-Mart. (Do you notice the same store popping up over and over?) [Jan 19: Some Walmart Commentary]
• Increasingly, shoppers like Wikholm must wait until payday to load up on groceries and then hunker down until the next paycheck. At all three Wal-Mart stores, that trend was visible. "There's no question that people are shopping when they have money in their pocket," said Tracy Ferschweiler, the manager of the Secaucus store.
• Leslie Dach, executive vice president of corporate affairs and government relations at Wal-Mart, said the cycle of shoppers running out of money in between paychecks and then flocking to its stores on payday is "more pronounced, more visible."
• Mary Ann Doyle, a 75-year-old retired teacher browsing in the dairy aisle at the Wal-Mart in Santa Clarita, said she is now buying food in smaller quantities, like half a dozen eggs instead of a dozen, and using more coupons. "It needs to get better," she said of the economic situation. "I hope we've hit rock bottom."

Now just imagine the poor seniors on fixed income getting 3% cost of living adjustments. But don't you worry, all these problems go away "in 6 months". [Do the Bottom 80% of Americans Stand a Chance?]

I keep looking at that Walmart (WMT) chart as a surging buy as I mentioned a few months ago... the pooring of America continues... but not in NYC where they are oblivious to it, and the government "has their back", at the cost of the devaluation of all our money, right Jimmy Cayne?

Position: General sense of sadness and disgust at "2 Americas"

Familiar Crossroads

We are at a very familiar crossroads we've faced most of the past half year... I look over the earnings reports, earnings upgrades, product price increases in stocks I own for the portfolio the past few months, and I continue to love their fundamentals. They are executing. In fact many are getting "cheaper" as their fundamentals only get better. I pat myself on the back for solid stock picking. Each time the market gives us any peace and after it runs up the obligatory "early cycle plays" that the herd buys without thinking, these stocks who actually have good stories ramp up and reflect their superior underlying fundamentals (as opposed to buying Fannie Mae because the government will bail it out)....

.... but, 90% of the time the past 6 months individual stock market fundamentals are completely trumped by the market direction. I look back on my history with the fund and in the times the markets rewarded individual company fundamentals the portfolio has exploded higher. The rest of the time when "all stocks stink" or "all stocks are great" or "early cycle stocks are the way to go because thats what the playbook says" we lag. This has been the major problem with this environment - to do well 90% of the time, you have to guess the market direction; it has nothing to do with individual stock selection. And this is what makes this market the most difficult I can remember, even 2001-2002 when you knew everything would be sold off 80% of the time - at least it was consistent - almost everything stunk. And it would go in the same direction (down) month after month after month. Nowadays, we have 180 degree changes in direction literally every 3rd day. So the indexes actually hold up relatively well, while individual stocks get battered, and if you are not in a stock down 30% in the past 2 weeks (i.e. any financial, retailer) and pick the bottom perfectly, you miss out on the 25% gain that comes in the following 4 days. If you are a day early or late you miss out on half the move. So it is indiscriminate action and it works against stock picking.

So this is not a market that rewards my type of fundamental analysis or picking large macro themes. It rewards those with timeframes of hours (daytraders) who close out their positions every night. Or people with bipolar personalities and a magic crystal ball who can predict when the market will change 180 degrees based on a Ben Bernanke remark, a Federal Reserve bailout, a surprise intervention here, or a massive writeoff there.

That said, the last few days have been different and seeing many names in the portfolio finally get rewarded based on fundamentals is nice to see. But that sort of action has not lasted for more than 2 weeks since October 2007. So it continues to be tough sledding, but I continue to believe in all the concepts and themes I've been presenting. Even if the market refuses to stay with any concept for more than a week. When stocks react more to their underlying story rather than if the market is + or - 300 points each day, I believe the fund will return to a more consistent pattern of outdoing the markets by a significant degree. Like I said before that does not even require the market to go up (or down)... sideways or a gently sloping trend down is fine. But the 1200 points in 2 weeks moves up, followed by 1500 points in 2 weeks down, followed by +400 point 1 day move up, followed by -300 points 1 day move down, followed by sell all commodity stocks on Monday, followed by buy all commodity stocks on Thursday.... is not an environment that rewards any thought or analysis. It is just random swings from pure panic to greed.

So we are at another crossroad now... many charts of my favorites look very good and poised for a sustained move *IF* the market does not implode. And the problem is, some news from out of the blue could cause implosion at any moment. Or the move from denial of the economic problems to recognition. And suddenly all your nice charts with great companies with extremely promising fundamentals, mean as much as a hill of beans. So do you sell here, lock in all those recent gains or let it ride? Who knows. Which is why this market continues to be extremely difficult.

For now, I'll continue to remain bullish as long as we hold S&P 500 level 1350. If we break down below that, unfortunately we probably simply return to the random action we've experienced for months on end, when having a Magic 8 Ball is more important than stock research.

LDK Solar (LDK) Keeps Signing Deals Left and Right

LDK Solar (LDK) is putting the screws to the shorts who have put the stock in purgatory for months on end, with another series of contract announcements. Not huge wafer deals, but the timing is impeccable as solar stocks are in the midst of a good run.

• Chinese solar wafer maker LDK Solar Co. Ltd. said Friday it signed two wafer supply agreements and one polysilicon sourcing deal.
• The first wafer supply agreement is with Greek solar cell producer Silcio SA and calls for the delivery of 50 megawatts of silicon wafers over the next six years. The second is with Arise Corp. of Canada for 33 megawatts of silicon wafers. It is a "take or pay" contract, LDK Solar said, with delivery set through 2011.
• LDK Solar also secured a polysilicon sourcing agreement for 1,450 metric tons (1,599 tons) with shipments scheduled through 2011.

I took this position up to 3.5% of the fund yesterday on it's breakout [Bookkeeping: 2 Quick Transactions], and continue to believe fair value is north of $40. As long as the overall stock market continues to hold up, I will hold these shares and see if we can get to $40 before lightening up. When LDK Solar runs, it really runs...

I am taking a bit off the table in Trina Solar (TSL) as the stock is up 5% in sympathy and it's a major overweight position that just breached 6% of the fund's holdings with today's gains, so I am going to take some profits off the table...

Long both names in fund and personal account

Massey Energy (MEE) Flying on Higher Met Coal Price Projections

Massey Energy (MEE) is ramping 11% this morning on ... what else... higher prices. "World of Shortages" theme continues to play out - inflation will continue to explode in the years ahead (barring global depression). I keep saying we are in a worldwide competition for resources, but these people who continue to believe inflation will fall off a cliff in the "2nd half" just don't see it my way. We don't live in a bubble protected by our oceans on each side anymore; but our economic policy and leadership still seems to live in 1980s thinking.

• U.S. coal company Massey Energy Co (MEE) said on Friday it expects metallurgical coal prices over the next three years to be significantly higher than it previously forecast and is raising spending to take advantage of the opportunity.
• The company expects 2008 metallurgical coal prices to be as much as 17 percent higher than its previous projections and sees the prices climbing even higher in 2009 and 2010.
• It is raising its capital spending budget for the year by an additional $90 million to accelerate its expansion project, bringing total capital expenditures to around $550 million.

I'm going to take a bit off the table here, as I added quite a bit of Massey Energy in the low to mid $30s over the past month; with the stock up to $44+ it is prudent to take a bit off the table. The next time the "commodities are dead" trade comes back I can buy back... people continue to miss the forest for the trees in natural resources...

I am selling 125 (of 750) shares of Massey Energy in $44.10s; reducing exposure from 2.5% to 2.1% of fund.

Long Massey Energy in fund; no personal position

Quick Comment on Jobs Report

A few points

a) The jobs report is flawed, it massively understates unemployment - so today's "bad" number is worse than it looks [Apr 2: The Underemployment Rate is Rising]

b) There were revisions downward to January and February

c) As I said earlier this week, if not for our 2 inflated job sectors of government and healthcare - both of which are contributing to our massive federal deficit and should be cutting jobs to save us money - we'd have no job growth at all. Construction, manufacturing et al have been weak for a long time - but now the weakness is spreading to our bread and butter - professional and services.... the bedrock of our economy. So we continue to add jobs to things that will weigh down the pocketbooks of our kids, grandkids and their grandkids (bloated costly sectors)... and lose jobs in things that won't. This is what your economy has become...

d) Wages continue to flail in the face of real inflation - 3.6% year over year increases. If you believe in the government inflation reports - wages are keeping up with inflation. If you live in the real world you know they are not.

• Employers buffeted by talk of recession slashed 80,000 jobs in March, the most in five years and the third straight month of losses.
• At the same time, the national unemployment rate rose from 4.8 percent to 5.1 percent, the clearest signal yet that the economy might already be shrinking.
• "The labor market has indeed turned south," said Joel Naroff, president of Naroff Economic Advisors. "That was the one last bastion of hope to stay out of a recession. Now the question is how deep and how long will it last?"
• Job losses were widespread in March. Construction, manufacturing, retailing, financial services and various business services all racked up losses. That overwhelmed elsewhere, including in education and gainshealth care, leisure and hospitality as well as in government.
• The new employment figures were much weaker than economists were expecting. They were anticipating a drop of 50,000 payroll jobs and the unemployment rate to rise to 5 percent.
• Job cuts in both January and February turned out to be even deeper. Employers got rid of 76,000 in each month. The elimination of 80,000 jobs in March was the most since March 2003, when the labor market was still struggling to recover from the 2001 recession.
• Average hourly earnings for jobholders rose to $17.86 in March, a 0.3 percent increase from the previous month. That matched economists' forecasts. Over the past 12 months, wages grew 3.6 percent. With lofty energy and food prices, workers may feel like their paychecks are shrinking.

Economically: This is all playing out as I envision, the Main Street Economy based on services and consumerism is breaking down - it will get far worse from here despite the pundits telling you everything will be fine in 6 months. We are in the exact opposite of the multiplier effect we had for years... 1 job creates need for 4 news one. Now it's one lost job creates 4 job losses - that's how a service industry works - you lose a job and you have less need for a dog groomer, a bartender, a store clerk, a florist.

Stock wise: The action has been very good this week and all bad news can be shrugged off. This can be shrugged off in the near term. The stock market is now "predicting" everything will be fine in 6 months, and this is why there is little reaction to the news. The CONSENSUS is now this is lagging indicator and if you look forward everything will be fine. My BELIEF is the consensus is dead wrong. But I am not going to place my money against the herd. Just like they were wrong in September/October 2007 that everything will be fine in the financial world and "subprime is contained", my THESIS is they are wrong today. But just like I put my beliefs to the side to take advantage of the Kool Aid bull market in the fall, I will do the same here.

I do believe the economy is in dire shape and there is a big disconnect between Wall Street and Main Street. Just like Wall Street denied the true carnage in financials all last fall until the bleep hit the fan in November, they will continue to deny this will be anything but a short, shallow recession until something happens in the future, where the amount of evidence overwhelms them... i.e. jobs reports of 150K type of losses in the summer. But thats the long term; in the short term you have to go with the herd. The herd wants to trade on hope. Remember, this is the same herd who denied any chance of recession until December 2007. Now the same pundits who said there is no chance of recession are now admitting there could be one, but it will only be mild. Etc.

I am typing this so people newer to the market can understand why the market is cheering 80K in job losses, and revisions down in January and February (higher job losses). I, myself, am simply going by the stock charts (still ok)... at some point reality will hit the market and we have to get extremely defensive again - could be later today, in 2 weeks, or 2 months. When that time comes and the market goes from denial to acceptance we will have another major selloff. This is the battle between hope and reality (intermixed with government bailouts)

Mosaic (MOS) - Excellent Report as Expected

Mosaic (MOS), as expected, provided an excellent report. The full link is here and the fertilizer companies always write very long, detailed, transparent earnings reports (unlike say, our "financially innovative" investment banks) so it's worth the read. I've posted almost the entire reports in the past, but I'll just do a summary today since I could literally copy and paste the exact same text I've done the past 2 earnings reports, just with higher numbers. [Oct 9: More Color on Mosaic Earnings] & [Jan 9: Mosaic with Another Excellent Quarter]

• Mosaic Co. said Friday its fiscal third-quarter profits grew more than tenfold as prices charged by the phosphate and potash fertilizer maker rose dramatically. The results, which beat analysts' estimates, triggered a premarket rally that lifted the stock $4.98, or 4.8 percent, to $109.50.
• Net income for the three months ended Feb. 29 jumped to $520.8 million, or $1.17 per share, from $42.2 million, or 10 cents per share. Analysts polled by Thomson Financial expected earnings per share of 95 cents. Revenue nearly doubled to $2.15 billion from $1.28 billion.
• Mosaic averaged a diammonium phosphate price of $487 per metric ton, up $241 from the year-earlier period; its muriate of potash price climbed $77 per metric ton to $221. Total sales volumes rose about 18 percent in the quarter.
• The results easily offset "significantly higher" costs for sulfur and ammonia, two primary raw materials for phosphates, Mosaic said.

The general takeaway is the same as it's always been - the pricing power is immense, margin explosion is happening, despite rising input costs. Rising input costs have been a "worry" the past few quarters, they were a "worry" this quarter, and they will continue to be a "worry" going forward - this is the "World of Shortages" scenario I talk about weekly - EVERYTHING goes up (except our government inflation reports). The key is your output goes up in price more than your inputs - which is the case in fertilizer. So the question was not the news, but the investor reaction to the news, and it appears this report calmed the nervous minions; so I will need to pay up to get back my large position - of course it stinks to have a previous 6% weighted position go up without you, but you can't have both risk aversion and return concurrently, it's either one or the other - I chose safety and will have to pay up because of that. Not a problem, because based on the new earnings estimates for 2009, Mosaic will be north of $200 a year from now. So $90, $100, or $110 is a bit of a moot point....

Now there was one very interesting piece of news that makes me EVEN MORE bullish. Mosaic is announcing they will expand capacity for potash production by 50%! This was not something that was the consensus - everyone gave a major valuation bonus to Potash (POT) because the thought that only Potash had potential to expand capacity... but if Mosaic can do as well, it's valuation should fall much more closely in line with Potash. This is a new data point, and (to me) much more important than the earnings which was already in the price. Of course it is going to take 12 years to do, but it will start in 2009 - this only highlights how large of a moat there are around potash producers - expansion is long and costly - exactly what we want to see; high barriers to entry.

• The Mosaic Company (NYSE: MOS - News) announced today a long term potash capacity expansion plan in Saskatchewan, Canada in response to continuing robust global demand for potash.
  
• The total expansions announced, together with those announced in May 2007, are expected to increase Mosaic's annual capacity by approximately 5.1 million metric tonnes at an estimated average capital cost that is significantly lower than greenfield projects. Upon completion of these expansions, Mosaic's total annual capacity will approximate 15.5 million tonnes, maintaining Mosaic as one of the premier potash companies in the world.
• The expansions are projected to occur over the next twelve years, with the first expansion production coming on line in 2009. Some of the expansions are already underway while others are in the planning and approval stages.
• In addition to these expansions, approximately 1.3 million tonnes of annual capacity will revert to Mosaic within the next few years upon the expiration of a third party tolling agreement at Esterhazy.

Again from a stock valuation perspective I cannot emphasize enough how important this is (and 98% of people in the stock today will ignore this part of the news). The fundamental reason for Potash's premium valuation vs Mosaic has been the inherent thought that over the long run, only Potash can meaningfully increase capacity. If this is not the case, which today's data seems to confirm, then the valuation gap should narrow. Meaning (a) Potash's valuation needs to fall down to Mosaic's or (b) Mosaic's needs to rise to get closer to Potash's. I am betting on the latter... so P/E multiple expansion (which we love) should happen here.

I will be adding today to the fertilizers, and be looking to continue to add on the inevitable pullbacks we get each time the market believes that "commodities are dead"....

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

NYT: To See a Stock Market Bubble Bursting, Look at Shanghai

I haven't talked about China in a long while from an investing point of view since its been a vortex of destroyed capital. But when I read this sort of article it reminds me of all the stories I read in 2001-2002. When I was reading the exploits going on in China the past 2 years, it reminded me of 1999-early 2000. Early in the blog life I was warning multiple times about the massive bubble in China - ironically there was no way for a US investor to really take "direct" advantage of it - we've been using Ultrashort Xinhau China 25 (FXP) but that shorts US listed Chinese large caps, not Shanghai

[Aug 28: China "A" Shares Bubble]

I think the China A shares are due for a fall, they are exhibiting bubble like behavior and have been so for a long time. Having lived through NASDAQ 99-01, it sounds very similar - with the same news stories you read back then - housewives daytrading, investments being pulled out of savings and into the market, "how easy it all is", investment gurus sprouting up on the internet in China, etc. The case for China (India) remains strong for the next 10+ years, but the next 12-24 months? Hmmm.... everyone says there will be no issues with China until at least the summer Olympics in 2008. When everyone says something, that makes me nervous. Consensus and group think... wasn't that what got the quant hedge funds in trouble?

[Sep 1: The Growing Bubble in the Shanghai Index]

I just found an interesting website, that probably says it all

BubbleXchange

I wonder if the formation of such websites signals a near term top, much like the infamous "magazine cover" indicator i.e. when you start seeing "How to Retire by Owning Real Estate" in 2006 or "It's Really Different This Time - How Dot Com Companies are Changing the World" in 2001 - on the cover of Time or Newsweek.

Again, this index (mainland A shares) trade in their own twilight zone as foreign investment is nearly impossible, and most mainland Chinese are only allowed to invest in this 1 index. 1 year ago the index stood at 1700, 1 MONTH ago it stood around 4000. Now it 5200.

1 year chart is here

Did I mentioned that a large portion of the "E" (earnings) in the P/E (of >50) are from investment gains and not operations?
Now bubbles can continue for much longer than we anticipate and the same arguements people are making now could of been made 2000 points ago. (and probably were) But these things never end well. It does not mean the Chinese economy is going to go south, as an economy and a market don't necessarily go hand in hand especially in such extremes. But at some point this will be very ugly for the actual market.

Things really went crazy in October [Oct 13: Shanghai the Mystical Land of Premium Valuations]; you know when PetroChina (PTR) as one of the largest companies in the planet by market capitalization gained 50% in 5 days? [Oct 17: PetroChina 12% Away from Being Largest Company in the World] and I wondered in early November if the domestic listing of PetroChina (PTR), which gave it a ridiculous valuation of $1 trillion, marked one of those tops we'd all look back as so obvious [Nov 1: PetroChina the 1 Trillion Dollar Company? Is *this* the Top?] It's been pretty much all downhill from there.

You remember Shanghai correct? The magical land where valuations of stocks are 150-225% higher than they are in either Hong Kong or the US for stocks that trade on all 3 exchanges. See this story for a graphical representation

Well in the weekly attempt to call the top in the Chinese market, I wonder if the Chinese valuing Petrochina at double Exxon as the world's first 1 trillion dollar company *is* a near term top? ;)

At that time I had been scurrying off to invest in India which was being ignored in the love affair for all things China - that worked out pretty well [Dec 11: China v India the Past 2 Months]. By Late January the writing was on the wall, China was heading in the same place all bubbles do. [Jan 28: Nikkei, NASDAQ, Homebuilders.... China Next?]. Now the destruction in China indexes has been ignored due to the global market selloff and focus on US financials, but it's there and the bubble pricked is hitting the investor class in China hard. But maybe now the water is a bit safer to get back in... if you still have your capital. I was simply bemused by the constant refrain I heard at the time "no problem, keep investing until the Olympics at any valuation- China won't allow its markets to fall"... ironically that last phrase applies more to socialistic US than it does communist China. ;)

I do find it amazing that regardless of nationality, race, creed, sex, border... human greed and fear is universal. And tulips keep regenerating themselves at an amazing rate - but the United States has been the king of tulips the past decade...[tulip mania] And we're setting the ground work, yet again, with our easy money policies and removal of risk penalty, for the next one. See ya in 2012-13 for the next doozy!

• A year ago, investors like Guan Ling were ebullient. Chinese share prices had climbed over 500 percent in the span of two years, setting off a nationwide stock buying frenzy.
• When experts periodically warned about the possibility of a bubble, prices would dip temporarily then soar even higher, breaking records and inciting another mad dash to snap up equities.
• “The market was going wild,” says Mr. Guan, 49, who a few years ago closed his real estate company to invest in stocks full time. “Everybody was talking about how much they had earned, how much more they would invest, and which stocks had jumped 20 times, or even 30 times.”
• That was last year. The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.
• Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.
• "These days my family quarrels a lot," says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. “My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family’s savings.”
• Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government. “I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”
• Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.
• “Some of them have cried,” says Nguyen Quang Tri, 74, a retired cement company manager who was visiting a Ho Chi Minh City brokerage house this week. “I have my own equity, but most of the people here borrowed money from the bank.” (oh leverage... dear leverage... it brings down mighty hedge funds, mighty investment banks, and lowly individuals in Ho Chi Minh... give people enough noose and they are sure to hang themselves)
• Few experts say the stock plunge is a major threat to growth in the real economy here. But there are worries that a prolonged downturn could reverberate through China’s financial markets — especially since a large number of corporations had aggressively shifted money, sometimes secretly, to play the market. [I discussed this scary situation where a lot of corporate China's "profitability" was due to stock speculation not running the business in November in 'How Much of China's Earnings are from Operations']
• By some estimates, 15 to 20 percent of the profits reported last year by publicly listed companies in Shanghai that are not involved in banking or finance (which usually invest in stocks) came from stock trading gains. Companies with primary businesses like selling electricity, or even sports jackets, were moonlighting by trading stocks, hoping to bolster their earnings.
• But the big companies were following the small investor. JPMorgan estimates that 150 million people in China were invested in the Chinese stock market as of the end of last year. That may still be a small slice of China’s 1.3 billion people, but it is a huge new constituency, and it has led to the birth of both a new source of potential popular discontent and a new lifestyle: the diehard investor.
• Shopkeepers, real estate brokers, even maids and watermelon hawkers are said to have become day traders. (don't forget taxi drivers!)
• Here in Shanghai, brokerage houses with giant electronic screens started to draw huge crowds, including many retirees who were content to spend the entire day transfixed by the sight of rising prices.
• “I’m getting out of the game,” said Yuan Yuan, 23, a researcher at a fund company in Shenzhen who also invests on his own. “The game is over. Big institutions pulled out first, only leaving the small investors.” (hehehe, sounds so familiar - a complaint heard 'round the world!)
• Now, in the brokerage house corridors — corridors of pain — one can hear complaints about all the market flaws: the government doesn’t regulate the stock market and it participates in it by allowing mostly big state-owned companies to go public. (wait wait, let me get this right - when everyone is making money hand over fist, ignoring all the risks on the way up, no one complains about lack of regulation ... but when things turn bad, then people complain .... hmmm.... sounds vaguely... familiar... where have I heard that before?) There are also complaints about insider trading, stock manipulation, and big investors with government connections, pumping and dumping stocks on small investors.
• This was not the way it was supposed to end. Many investors had been betting that Beijing would not allow the stock market to crash before the Olympic Games come to Beijing in August. After the Games, the powerful rumor went, everyone would sell, leading to a steep market plunge. And if anything serious happened before the Olympics, the government would certainly do something to prop up the market. (I urge these Chinese to move to America, where the government does everything in it's power to prop up markets! I mean, whose the socialist/communist here again?)

I just find great irony in the "unprecedented steps" taken in the US to prop up asset prices... this is why I keep referring to the new socialist system. And folks, "they" are not done yet distributing losses on the taxpayers back and away from the elite. As house prices stubbornly refuse to "cooperate" with the US government (the market is bigger than the government, imagine that) - more and more steps will be taken, costing you...err your grandchildren... more money. We're more socialist than the Chinese. Enjoy!

Long Ultrashort Xinhau China 25 in fund; no personal position

Corn Jumps to $6 - Start Stocking up on Soda Pop

Monday we had the USDA Crop Report [Mar 31: USDA Crop Report]

Corn plantings indicated down 8%. Even before that report my prediction was:

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

And so it's already happening. What people miss in the wheat vs soybean v corn vs whatever debate is, we don't have enough acres period. Yields are too low despite all of Monsanto's (MON) best efforts. Corn's high prices 2 years ago led to a massive overplanting of corn, drawing down from wheat/soybeans/others. Wheat/soybean prices surged this year, because of the ethanol corn initiative. Now as wheat/soybean prices rise spectacularly, farmers turn this year to overplant those 2 - causing a shortage in corn in the coming months/year. Do you see how this is circular? And on top of all that is an ever increasing global demand picture for all things food. And the market is reacting in kind already with corn bumping to $6 just like that. Now my prediction is the USDA report (which is simply an intention to plant, not set in stone) which everyone is freaking over will actually not come to fruition as is.... as farmers see corn immediately increase in price simply to this 1 report, some portion are going to switch acres right back to corn from their earlier plans for soybeans/wheat. If they *can* since some of the prime corn growing area is either underwater or soggy as heck. [Mar 25: This Day in Agriculture]. And that move back to corn is going to cause a shortage in.... well wheat/soybeans. And so we go.

If I had access to a narrow corn ETF I'd of loaded up on that before the crop report came out because this was a very predictable situation. (they trade in London but not here in the US - go figure). But instead we are left with Powershares DB Agriculture Fund (DBA) which cuts both ways - the rise in corn is offset by falls in wheat/soybeans. But that's a short term issue. They are all going up in the long run... because you will know what will happen next year... these record high corn prices will lead to next year's USDA report showing a massive intent of corn planting ... leading to a shortage of.... well you get the picture. The agflation theme is alive and well even if hedge funds have chosen not to speculate this week in the commodities arena.

And on and on we go, the corn ethanol boondoggle helping to accelerate a whirlwind of global food supply havoc... as wheat and corn stockpiles continue to multi decade lows. Praying for no bad weather this year across the globe..... as we await the inevitable global food crisis. "World of Shortages" plays on behind the surface... growing by the day.

• Corn prices jumped to a record $6 a bushel Thursday, driven up by an expected supply shortfall that will only add to Americans' growing grocery bill and further squeeze struggling ethanol producers.
• Corn prices have shot up nearly 30 percent this year amid dwindling stockpiles and surging demand for the grain used to feed livestock and make alternative fuels including ethanol. Prices are poised to go even higher after the U.S. government this week predicted that American farmers — the world's biggest corn producers — will plant sharply less of the crop in 2008 compared to last year.
• "It's a demand-driven market and we may not be planting enough acres to supply demand, so that adds to the bullishness of corn," said Elaine Kub, a grains analyst with DTN in Omaha, Neb.
• Corn for the most actively traded May contract rose 4.25 cents to settle at $6 a bushel on the Chicago Board of Trade, after earlier rising to $6.025 a bushel — a new all-time high.
• While corn growers are reaping record profits, U.S. consumers can expect even higher grocery bills — especially for meat and pork — as livestock producers are forced to pass on higher animal feed costs and thin their herd size. (this was another prediction I laid out, these input prices are going to lead to early slaughters and a "meat" shortage down the road, causing a spike in prices there - even more so than already)
• In addition, corn and corn syrup are used in an array of products, meaning the price of everything from candy to soft drinks will eventually go up, analysts say. It's the latest dose of bad news for U.S. consumers, who are already struggling with higher food costs from record increases in the price of wheat, soybeans and other agriculture products.
• "For years, corn was cheap and fermentation processes for ethanol production came to completely dominate the biofuel industry in North America," Michael Jackson, president and chairman of Vancouver-based ethanol maker Syntec Biofuel, said this week. "Now, with corn prices well over $5 a bushel, corn ethanol economics have gone out the window." (maybe we can bail them out? Or better yet SUBSIDIZE them! Yeh! Free markets and all) Looking ahead, only the strongest ethanol producers will survive in an era of ever-rising corn prices, said Soleil Securities analyst Ian Horowitz.

The ETF I referenced above is rebounding from its hedge fund sell off, and could be poised to move back up...



... remember, every 4th day we have to suffer through "the Commodities trade is over" stigma so it will be volatile. But the fundamentals support a higher move... and if weather does not cooperate this year or something like a fungus that helps to puncture Africa and Asia's wheat crops, it will be much higher... along with leading to potential famines in many parts of the 2nd and 3rd world. So let's continue on our current policy officially code named "Cross Our Fingers" and hope not one thing goes wrong the next 6 months so people don't start dying. But I digress, as Americans we have bigger things to worry about than global famine.... i.e. our soda pop might increase another 20 cents. Tragic.

I really feel like one of those guys warning of the subprime/credit contagion in 2005-2006. Shouting into the wind while the oblivious masses continue onward... oh well - let's hope project "Cross Our Fingers" works out. Things like this [Bloomberg: Pakistan Rice Exports May Drop, Worsening Shortage] are really going to ruin this strategy and we might have to move on to the more drastic "Cross Our Toes" project.

Long Powershares DB Agriculture Fund in fund; no personal position

Bookkeeping: Closing Google (GOOG) Position

Google (GOOG) is sort of in no man's land, both in its chart and in my portfolio. It is not rallying with nearly the same vigor as some of the other tech names, and I have had it as a minor position for a while down at 0.4%. With a slow down in the economy, and potential slowdown in advertising I don't have enough confidence to really build a meaningful position here. This does not mean it cannot go up, but if I clear out some clutter in the portfolio to keep the # of names from growing too high, this is one name to go.

The valuation is pretty compelling but I'd rather add to an Apple (AAPL) rather than Google as a "tech exposure". So out Google will go. I have never had this as a large position and exit with a small loss of about $2.2K. Considering the carnage since the New Year that amount is more than ok. Thankfully I took profits along the way and did not have large exposure to the massive downturn. Google is building a nice base, from which at some point it should make a very large move off of - but it should be acting better than it is with the return to speculative stock buying. So that time for a "sustained" (not dead cat) rally could be down the road a bit.

I am closing my position in Google here in the $450s, and have held this name since Aug 6. If we can see a meaningful move up through $500, I would get more excited for the potential for a sustained move. Google is just flopping around like a fish out of water at this time... maybe telegraphing more negative news to come.

Long Apple in fund; no personal position

Bookkeeping: Oil Services Finally Picking up - Adding to National Oilwell Varco (NOV)

As I've been saying, a lot of charts are looking good for the first time in a long time. Oil Services has stunk for a while despite the record high crude prices - an interesting divergence. I've been adding exposure to old favorite Core Laboratories (CLB) slowly the past few days, and today one stock that has completely befuddled me by it's weakness is finally showing signs of a "turn": National Oilwell Varco (NOV). The valuation in this name is beyond ridiculuos. On this breakout over and above BOTH its 50 and 200 day moving averages (in 1 fell swoop) I am beginning to rebuild NOV, taking it from 0.4% of fund to 1.4%. If we break $130 on Core Laboratories I'll be adding there as well. (all you chart readers will see plainly obviously why) For NOV we want to see a break above $67.50 or so to confirm this move is true.





Previously held oil service names like Cameron International (CAM), Smith International (SII) also are ramping - we seem to have a rotation here. Since I don't want to add any more names to my already bulging portfolio I'm simply adding exposure through the 2 names I already own in the 'sector'. It's been a long time since this group acted healthy.

Somehow I still feel ilke this is April Fools and all this buying will blow up at 8:30 AM tomorrow morning but have to respect the strength in these charts... so I'll have mental stops placed on all these recent purchases and if stocks start to break down I'll go back to defensive mode very quickly.

Long Core Laboratories, National Oilwell Varco in fund; no personal positions

Today's Upgrade in the Fertilizer Stocks

Thanks to a reader who sent me one of the 2 analyst reports today. Some good info out there (including risks from rising natural gas and sulphur) but the earnings upgrades are astounding. I wrote back in October the analysts have been wrong, and continue to be wrong on their estimates [Oct 23: Analysts Still Doubting the Fertilizer Stocks]. Now, prices have even surpassed my rosy assumption, so even I've been wrong in my estimates for the future - I was thinking $9.00+ EPS for Mosaic in 2009 (current consensus $7.40). Merrill Lynch just blew me out of the water. This is why I keep saying forget basing these on analyst estimates - they are sorely lacking...

Mosaic
2009 (old) $7.65 (new) $12.00
2010 (old) $8.30 (new) $14.50

Potash
2009 (old) $9.80 (new) $14.00
2010 (old) $11.00 (new) $16.00

CF Industries
2009 (old) $13.00 (new) $18.00
2010 (old) $13.00 (old) $20.00

And with that... I think analysts have finally gotten the picture... finally.

....these numbers continue to make the frantic hang wringing over input costs that cause these stocks to continuosly sell off simply silly. Stick with fertilizer and stick with Cram.... err, umm... well stick with fertilizer... ;)

Long all names mentioned in fund; long Mosaic in personal account

Quick Comment on the Market

As I've been saying all week, this market simply appears different (to me at least) - much more healthy in the short run than in the past few months. We've had three 400 pt rallies (all on Tuesdays) in the past 4 weeks, the other 2 sold off almost immediately. This one continues to hold up, very nicely in fact and to me (and probably all the technical traders that seem to dominate trading nowadays) is the "higher high" we made with Tuesday's move. I'd normally be adding short exposure here but I am just holding off in cash instead as there appears to be a bullish undertone. If not for the headline risk we carry tomorrow morning with the Labor report, I'd actually be buying aggressively here in quite a few names. Even an "in line" number, from this perch, could set off a meaningful intermediate rally.

It does not make any sense from an economic viewpoint but the market is not the economy. (although in theory corporate profits are tied to the economy but that's a long term view, in the near term anything is possible to create a move). As long as market participants are confident in a Federal backstop, and the coming multiple rounds of homeowner bailouts (we have one ready to exit the Senate today but I believe it will be the first of multiple ones) - we can rally. This is what we did in late August 2007 - when the financial issues were labeled "subprime only" and "kitchen sink" - that was proven wrong but it did not matter - we had a massive rally on faith in the Federal Reserve.

Extremely tricky action - and all derived on where the pendulum of hope/socialistic actions versus economic degradation falls each day. If tomorrow's report is not lights out scary I still have to remain short term constructive and follow the herd into nirvana of "everything will be fine in 6 months". But was Uncle Ben's admission of potential recession yesterday a sign he saw what was already coming? (He gets the numbers early). Even more tricky of a time with a plethora of earnings reports coming out, in which each day we will go from "the world is ending" to "nothing to worry about" based on that specific day's slew of reports. What can I say, this is a market that wants to go up and begin embracing risk. But it can literally change with 1 economic report... but if tomorrow's number comes in even "ok" we have to be even more bullish for the near term. A drop below S&P 1350 would change my mind, but for now Kool Aid is my drink of choice... (subject to change at 8:30 AM tomorrow of course) I'd like to see a move above 1390 or so to confirm this (ahem) "bull".

Bookkeeping: Adding Coal Exposure

Again, the on and off nature of the commodity "bull" is almost funny at this point. Today it's back on it appears.... with some firming in the charts I'm adding to all my coal names.

Patriot Coal (PCX) is a name I do not own, but sold off (was a spin off of Peabody Energy) -up massive today on a purchase yesterday and upgrade today - I'm mumbling to myself about missing that one.

• Coal producer Patriot Coal Corp. said Wednesday it agreed to buy Magnum Coal Co. for about $559 million. Under the terms of the deal, Magnum shareholders will get about 11.9 million shares of newly issued Patriot common stock. Patriot will also assume debt estimated at $150 million. Including the debt, Patriot estimated the deal was worth $709 million.
• Magnum operates 12 mines and seven preparation plants in Central Appalachia. With the addition of Magnum, Patriot said it will be the seventh largest coal producer in the U.S.

Walter Industries (WLT), a name a reader pointed out to me which has coal, natural gas, and I kid you not - home financing, all under 1 roof is also another name who technically has one of the most beautiful charts in my entire watch list.



But I'm adding to my 4 pure play names in my "coal basket" today: Peabody Energy (BTU), Arch Coal (ACI), Consol Energy (CNX), and Massey Energy (MEE). I've posted all the charts below so you can see why they look like they are turning up from a technical standpoint. Why they sold off, outside of hedge funds deciding en masse they are no longer worthy of their investment dollars, is beyond me. Fantastic fundamentals did not change last week, and then reverse again this week.

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

Bookkeeping: 2 Quick Transactions

Totally unrelated except they are both Chinese... as I said yesterday with LDK Solar (LDK) I would add on a breakout over the 50 day moving average ($31) so I am adding here. My fair value is north of $40, and much like Trina Solar (TSL) yesterday this was a stock that I was waiting for a move into better technical condition to add to. I am increasing LDK Solar from 1.2% of the fund to 3.5% of the fund with purchases in the $32s range.

The question I normally get at this point is "why don't you buy lower if you like it??" - again time value of money and everyone has a different strategy for investing - "deep value" investors will continuously buy stocks as they fall, taking hit after hit as a "falling knife" slice their portfolio. Then once the stock rebounds they are usually making up unrealized losses, instead of gaining... Stocks that are below key technical levels can many times be there for months - going sideways (you can use that money elsewhere in the meantime). Or worst - continuing down indefinitely. Same reason I only bought a bit of Apple in the $120s and $130s and waiting to see it north of $145. Yes you pay "up", but in a healthy market, the stocks than can run and you can turnover your money much quicker, in a much safer manner. Clearly this strategy is less effective in markets that gyrate 180 degrees every 3 days; nothing is fool proof and if these stocks break back below their moving averages I'll cut back and wait for the next opportunity. I'd feel a lot more confidant in this type of purchase if not for the headline risk of the employment report or a financial company blowing up at any moment - in a pure bull market I would of gone much higher than 3%ish exposure as this would be a classical "breakout" moment we'd dream for. But market risk remains high simply due to news flow.



I am cutting back on Zhongpin (HOGS), the Chinese pork producer as it's made a nice move and now approaches double resistance as both its 50 and 200 day moving averages sit in the low $11.00s. The stock could either fall back or continue upward. But the general bet is the stock would falter here. My strategy on technical conditions like this is if/when they break above these moves averages I'll add back my position. So around $11.50 or so I'd buy back my position and the stock would be in far better shape in the near term. But I am selling here at $11.15 with the assumption of failure, and dropping Zhongpin to a 0.5% exposure.



Long both names mentioned in fund; long LDK Solar in personal account

2 Stocks I'm Sour on Warn Today

I wanted to touch on these 2 stocks since I've owned one, and avoided another despite liking the sector.

First, Garmin (GRMN) - I held this one briefly last holiday season and made some small profits but noted I was officially done with the name on a go forward basis due to it's commodity nature - commodity hardware never ends well. It was a secular growth story earlier in it's life but now we are reaching the stage where it was becoming dangerous to invest in. Back in October I wrote [Oct 31: Restarting Position in Garmin on Selloff]

Takeaway: Garmin is not my favorite name - in the end its a hardware stock whose gross margins will come under attack as it becomes commoditized (in due time). It's a matter of when with this stock.

Again, at some point the party for Garmin ends, and margins will compress so this stock should trade at some discount to growth rates - but at this level it seems the discount is too great. At least in my eyes; and especially with the holiday season approaching.

The stock was at $108 and I was able to knock a nice trade out as we had the Christmas trade on. By early January the stock was just below $70 on an analyst downgrade [Garmin in Free Fall - Why You Need to Understand the Big Picture]. I wrote

I have never held this stock in my personal account for this reason and in fact have watched with a bit of awe and wonder and how this stock is treated so "well" over the past few years - as if it is an Apple (AAPL) type. Again, hardware companies are commodities and price competition will eventually ruin margins. It was just playing Russian Roulette with this type of name, eventually the "bad day" will come. Yes, Apple is in many ways a hardware company but as I keep repeating it is has a cache, design, and style that allows it to charge premium pricing [Apple the Cultural Icon], along with new businesses (phone subscription, iTunes) that have non hardware qualities.

And I stick with that. Now Garmin (GRMN) is near $50. At some point it becomes a value play but I'll let "value" investors play with it. Not a secular growth story in my book anymore. And that's saved investors from a 50% drop with no recovery. Today, Garmin warns

• Shares of Garmin (GRMN - Cramer's Take - Stockpickr) fell hard Thursday after the company's chief financial officer said that first-quarter revenue is expected to slide from the previous quarter.
• In an interview with Reuters, Garmin CFO Kevin Rauckman said that first-quarter revenue for the navigational-device maker is expected to drop between 40% and 50% from the fiscal fourth quarter, which benefited from holiday sales.
• In the fourth quarter, Garmin said revenue doubled to $1.22 billion from the year-ago quarter, with strong holiday demand for the company's navigation devices. Based on Rauckman's comments, Garmin's first-quarter revenue would come in between $610 million and $732 million. The Thomson First Call average estimate for first-quarter revenue currently stands at $731.5 million.
• Because of slumping revenue, Rauckman told Reuters that Garmin will cut manufacturing costs in 2008 to keep pricing and margin pressures at bay.

Second, we have MEMC Electronics (WFR) - which is part of the "solar" trade. I have never owned this one, and missed out on some great upside. But it's in a very similar situation as Garmin, despite being in a totally different sector. For years, MEMC Electronics enjoyed a low profit product - then the demands of the exploding solar space pushed up the prices of its polysilicon product... talk about a "World of Shortages". The stock has skyrocketed. But the end game is coming for WFR. It is in fact, just like Garmin - we don't know when, but the insiders will know before us and the stock will react before us - the stock will "tell us" by it's price action. But why risk it? A huge glut of Chinese polysilicon will be here eventually - maybe in 18 months, maybe 24, maybe 36. I don't know. But the easy money has been made here. And when this glut hits, pricing power will disappear and if you pull up a 5 year chart on MEMC Electronics you will see where the stock used to trade when polysilicon was at "normalized" levels. So I'd actually play this for a "long term" short once the first signs of the Chinese manufacturing really turns into a groundswell. Now with that said, I think MEMC Electronics won't hit 2002-2003 levels because solar is here and a brand new market so the pool of customers for polysilicon will be much larger than it was half a decade ago... but it's a commoditized business (pricing falls, margins get squeezed) and the writing is on the wall. So you can gamble and try to squeeze out some gains in the interim, but again - why take the risk? Today's warning does not appear to be due to what I outlined above, but since I am a big solar fan, and constantly get questions about why I'm not high on WFR, I wanted it out there. But let me also be clear, I don't think there is imminent doom for MEMC Electronics either - it's going to be a long, slow process. (and in the short run, for trader types, heck with the stock hit so much it might be a decent buy for all I know)

• MEMC Electronic Materials Inc., which makes wafers for the semiconductor and solar power sectors, lowered its first-quarter revenue outlook Thursday, citing production issues.
• The company now expects first-quarter revenue of about $500 million and gross margin of about 52 percent, compared with an earlier expectation for revenue of about $560 million and gross margin of about 54.2 percent.
• Analysts polled by Thomson Financial expect revenue of $559.2 million, on average.
• MEMC said that in its first quarter it was impacted by the accelerated buildup of chemical deposits inside the new expansion unit at its facility in Pasadena, Texas. The buildups occurred several times and required several days worth of downtime each for cleaning and re-stabilizing the unit.
• MEMC also said that it had delayed maintenance from the fourth quarter on two existing units while waiting for the new unit to stabilize but had to eventually perform maintenance on one of the units. As a result of the issues, MEMC said the Pasadena facility's utilization was about 20 percent lower than in the previous quarter, and output was much lower than the company had expected.

No positions

Jobless Claims Break 400K for First Time this Cycle

As I've been saying, all this focus on preserving the financial system from implosion is taking away attention from the other major issues - the recession. I'm sorry... "the minor, shallow, and gone in 6 months slowdown". Weekly jobless claims finally breached the level that all of Wall Street's Kool Aid drinkers cannot explain away, the magical 400K level. What does that mean for tomorrow's job report? First, the weekly job claims from this week will be reflected in April's report - second, the monthly labor report is a work of fiction so it can say whatever they want it to say. [Apr 2: The Underemployment Rate is Rising]. Weekly jobless claims is a straightforward report so there cannot be much fiction writing in this one...

• The number of new people signing up for unemployment benefits last week shot up to the highest level in more than two years, fresh evidence of the damage to a national economy clobbered by housing, credit and financial crises.
• The Labor Department reported Thursday that new applications filed for unemployment insurance jumped by a seasonally adjusted 38,000 to 407,000 for the week ending March 29. The increase left claims at their highest point since Sept. 17, 2005, following the blows of the devastating Gulf Coast hurricanes.
• "This report supports the view that the jobs market is deteriorating toward recessionary conditions," said T.J. Marta, a fixed-income strategist at RBC Capital Markets
• The latest snapshot of labor activity was worse than economists had anticipated. They had predicted claims would be much lower, around 365,000.
• Still, looking at the longer-term trend there was little doubt of the pickup in unemployment filings. A year ago, new claims stood at 319,000.
• Meanwhile, the number of people continuing to collect unemployment benefits rose by a sharp 97,000 to 2.94 million for the week ending March 22, the most recent period for which that information is available. That was the highest since July 17, 2004.

Now remember, in Kool Aid world you explain away this number by blaming it on Easter or American Axle layoffs or whatever you wish. Funny how holidays never seem to ruin the numbers during economic expansions but are a wonderful excuse during downtimes. And once again folks, remember the #1 excuse that will be used for months on end from here will be "employment is a lagging indicator - everything will be fine in 6 months - you have to look ahead, not backward."

I did find it ironic that by the time Uncle Ben finally admitted we now have a "chance" for a recession yesterday on Capital Hill, something I've been calling for since day 1 of this blog - I was at the least short exposure in a long time. Sort of a fitting irony and shows just how behind the curve these people are.

So now we are in a tough spot - this market wants to go up *(it continues to shrug off bad news and hold up very well after a massive rally earlier this week), but we have a potential nuclear bomb in tomorrow's useless labor report. I also am in a pickle with Ultrashorts ... with all the King's Horses and Men standing ready to save the financials despite what I see as a growing degradation (after mortgages, comes autos, credit cards, student loans - a big cluster-mess) - Ultrashort Financial (SKF) becomes a bit less interesting [Mar 19: Ultrashort Financials Not as Cool as They Used to Be]. Socialism makes investing much tougher.

So I am going to add a new Ultrashort, focusing on the consumer - Ultrashort Consumer Services (SCC). I discussed this one last week [Mar 28: Ignore Government Reports on Spending: Listen to JCPenney (JCP) and DSW (DSW)] Now the problem with this one is twofold - #1 the top 2 components, McDonald's (MCD) and Walmart's (WMT), are actually companies I like in the "pooring of America" scenario and #2 as long as people believe a recovery is coming in 6 months the retailers can keep popping. But since the government is built to bail out corporations and ignore individuals, retailers probably won't be affected as much by socialism (other than an ill fated attempt to prop up the housing market or send us rebate checks) But I believe inflation, real wage losses, and unemployment will overwhelm socialistic government programs. And many retailers and restaurants, as I've long been sailing, will be doomed as we go to a "forced savings" program as Americans. If I could short individual names, I'd much prefer that (a whole host of restaurants and retailers pop to mind) but I am forced into this instrument since I can only use ETFs.

So this will be a hedge I'll start today, and with the other names something that I'll adjust up and down as the Kool Aid ebbs and flows, along with other 6 Ultrashorts. Trying to find the correct mix and thinking out what the government can prop up versus what they cannot, is my current struggle and using up a lot of my intellectual horsepower.

Again folks this is the market we are going to be facing for a long while in my opinion - reality of economic degradation on one side, socialism plus hope on the other. It is going to make for a very difficult market, in terms of guessing where the pendulum of hope/socialism swings each day/week/month. As hope/socialism (i.e. the taxpayer takes the risk!) rises, risk premiums fall - and vice versa. As I've been stating, all Wall Street cares about is their own hide, so the daily relentless focus on their coming financial bailouts, is all that matters (to them). So with the Fed backstop clearly in space the mood is now much better. But the Main Street story is what drives domestic profits for US corporations... and as profits wane in our "70% of GDP based on consumer spending" economy, so "should" stock prices. "Should" being the operative word; that would be in a free market system. In "this" system, anything can happen.

Long Ultrashort Consumer Services in fund; no personal position

LDK Solar (LDK) Signs 10 Year Contract for 640 MW

In the "sometimes better to be lucky than good (but preferable to be both?) camp", an hour after I buffed up the LDK Solar (LDK) position [Adding some LDK Solar as a "Hey You Forgot Me" Play] we have another 10 year contract for 640 MW. A nice prepayment to LDK Solar to boot.

Western Europe, Japan, the Middle East, now India... meanwhile the US Congress continues to subsidize oil companies and laugh off solar... we continue to fall behind the global competition by the day. At least California is trying...

Judging by the nearly 10% move after hours in this name, my "breakout" target of $31 appears in the bag.... I will be adding first thing tomorrow morning on this price action... should bode well for the entire sector...

I've added today in the $29s and taken the exposure back up to 1.2%. A move above $31, and I'll add in size.

• LDK Solar Co., Ltd. (NYSE: LDK), a leading manufacturer of multicrystalline solar wafers, today announced that it has signed a ten-year contract which is a blend of "Take or Pay" linked with market-based pricing to supply multicrystalline solar wafers to India-based Moser Baer Photo Voltaic Limited (MBPV), a subsidiary of Moser Baer India Limited (MBI).
• Under the terms of the agreement, LDK Solar will deliver 640 MW of multicrystalline solar wafers to MBPV over a ten-year period commencing in mid 2008 through 2017. MBPV will make a suitable advance payment reflecting the contract value to LDK Solar.
• "The supply agreement with Moser Baer reflects the strong interest we continue to encounter for our high quality solar wafers," stated Xiaofeng Peng, Chairman and CEO. "We are excited to extend our business into an emerging market such as India, as we continue to diversify our market coverage and grow our customer list."

I'm starting to choke on Kool Aid....

Long LDK Solar in fund and personal account

Potash Makers Already Talking $750; Up from $625

The amazing ever upward moving in the potash market just continues.... just last week we had the $625 price area breached, first with the Russians [Mar 26: Russia-India Deal Boosts Potash Price Forecasts], than the North American cartel [Mar 27: Canpotex Potash Contracts Secured with India @ $625], and now a whole week later we are already discussing the $750 range. Amazing.

Now keep in mind we cannot directly compare prices in India with China, as the Indian price includes shipping (which is roughly $125/kg in today's era) so effectively it is $500 for the product, $625 to $750, stripping out the $125 shipping in both scenarios, is still a massive increase. And this is why, once people overreact one way or the other to Mosaic's (MOS) report Friday, I'll be looking to quickly scale back in. Granted we will have more major overreaction in a few week's to Potash (POT) earnings (my god the sky is falling! input prices going up! whine! cringe! weep!), but as I've said in my piece - these input costs are being passed right along to the end customers. But you can't discuss with a panicked herd, so I am going to remain cautious until I see the Friday reaction. But the fundamentals remain... scratch that... get better by the month. Now we just have to wait to see how the herd of sheep react... and then keep on trucking on this amazing secular growth story.

• The huge price jump for potash exports to India is a sign of things to come for China and other buyers for the rest of 2008, the chief executive of Russia's Uralkali, one of the world's biggest potash producers, said on Wednesday.
• Vladislav Baumgertner told a BMO Capital Markets fertilizer conference that spot market prices quickly jumped to $750 per tonne from $625, effective June, after contracts set last week between India and Russian and Canadian producers.
• "A new price level definitely higher than $750 might be seen already in the third quarter," Baumgertner said. (are you kidding me? really... are you kidding me?)
• "In the short term, our goal is to eliminate the significant Chinese price discount relative to the spot markets and the Indian contract," Baumgertner said. (Go Vlad... go get 'em tiger)
• The head of Canadian potash producer Agrium Inc. (AGU) told Reuters he expects China will end up paying the equivalent of India's contract price of $625 per tonne (landed), which is more than double last year's Indian contract price. (that would be $500, which would be a huge win...just huge)
• "The world hasn't waited for China. The market continues to move," Doyle said. (go Bill, tell 'em)
• Potash producers said they don't expect capacity expansion to overcome demand in the foreseeable future because deposits are rare and mines require huge capital costs." (I try to tell everyone this Bill, but instead they sell off your stock and others because of whiny natural gas increases... or because US farmers will produce 8% less corn which is just an estimate anyhow.... whine whine whine.....mommy hold my stock certificate please and wipe my nose... soybeans and wheat and lions, oh my.... one day they'll understand the massive earnings leverage)
• "A potash greenfield mine is a massive undertaking, and despite the noise and attention being paid in Saskatchewan and Russia, still no significant greenfield projects have been announced anywhere in the world today," Doyle said. [Nov 16: Potash Expands Mine for $2 Billion]

Again, clearly an amazing story. And the market in it's short sightedness continues to miss the forest for the trees. Unfortunately, the way speculators light forest fires we have to walk with caution through the forest, because fast money traders whose idea of long term is "tomorrow" dominate the action and can whipsaw us to quick losses.

I already mourn my loss of fertilizer exposure... only 24 hours more... I pray I can hold out.

Here is a link to a pdf file for Potash's CEO's investor presentation today

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

Research in Motion (RIMM) Appears Excellent on First Glance

Beat/Raise/Etc for Research in Motion (RIMM). All good things - should bode well for another day as we await the jobs report Friday. I don't own a ton of RIMM but Apple (AAPL) should get some nice pin action off this report - most important is good news is being rewarded in the market and the all important forward guidance (while I believe company specific) should assuage some fears in the near term. Good news being rewarded has not necessarily been the case for much of the past few months... I continue to take swigs from the Kool Aid while the gettings good! Hopefully the conference call does not unearth some factoid on line 32a-1.2.4 that people find to be "troublesome" ;)

• BlackBerry maker Research in Motion(RIMM) delivered on sky-high expectations as the company blew past Street estimates for the fourth quarter and guided higher for the current year.
• Net income for the quarter jumped 102% to $412.5 million, or 72 cents a share, compared with net income of $187.4 million, or 33 cents a share in the same quarter last year.
• Revenue for the quarter rose 102% to $1.88 billion from $930.39 million a year ago.
• Analysts polled by Thomson Financial were expecting revenue of $1.85 billion and earnings of 70 cents a share. The revenue breakdown for the quarter was approximately 81% for handhelds, 14% for service, 3% for software and 2% for other revenue.
• Approximately 4.4 million BlackBerry subscriber accounts were added in the quarter and 2.18 million net new accounts were added.
• Revenue for the first quarter fiscal 2009 is expected to be in the range of $2.23 billion to $2.3 billion, said RIM. The company forecast earnings in the range of to 82 cents to 86 cents a share. Analysts are expecting revenue of $2 billion and EPS of 75 cents in the quarter.
• Net subscriber account additions in the first quarter are expected to be approximately 2.2 million.

Another beautiful chart... starting to see some nice ones as I said earlier...



...all I am hoping for personally is an environment where every stock does not go down together or up together (or entire sectors are seen as good or evil, when 24 hours eariler the exact opposite view was taken).... and market timing is 90% of the battle and stock picking is 10%. That's been the environment for most of the past 6 months, and it makes it very hard to outperform via stock picking. A sideways or even gentle slope down would be fine with me - winners and losers would separate. These helter skelter massive moves up and down create a terrible environment for people who follow trends for more than 3 hours... today, also as I said earlier, was the first douse of "normalcy" I can remember, probably this year. I can only hope we start getting more days like this piled in a row...

Long Research in Motion, Apple in fund; no personal position

Bookkeeping: Adding some LDK Solar (LDK) as a "Hey you Forgot Me" Play

I've increased my exposure to LDK Solar (LDK) as it is in exactly the same technical position Trina Solar (TSL) was last night.... below the 50 day moving average but in a more risk loving market, prone to be taken up with the crowd. It is "only" up 7% today ;) - so it's been forgotten in today's monster rally in the group. Now the danger is the solar rally is getting long in the tooth and some of the major tier 1 names now face serious long term resistance but these secondary plays could have some pull to them. I own these 2 names because they are "value" plays that been beaten to death. They are both dirt cheap relative to most of the sector. If we get continued good mood LDK Solar (LDK) could take off tomorrow... but we'd want to see a move over $31 to feel confidant. So I am going to begin to add some exposure to this small stake and then see how the sector reacts tomorrow. I've added today in the $29s and taken the exposure back up to 1.2%. A move above $31, and I'll add in size. (technically the correct action is to actually short LDK here as it approached $31, with a stop loss over $31.50 or so, but when animal spirits enter solar land, technicians get destroyed)

Unfortunately these 2 stocks always move towards the end of the solar sector rallies so they only partake in the last part of the move, and then fully partake in the selloffs. So as each day goes by, this sector move gets a bit long in the tooth and more risk arises for the near term - but again, both stocks are the "value" names in the sector in my opinion so even 10-20% higher would be "cheap". I also have an eye on returning to JA Solar (JASO) as well, but frankly the value proposition in Trina Solar (TSL) is simply the best in the group so I'm sticking with her for now instead of branching out.

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

The Underemployment Rate is Rising

I like this term I found in this CNNMoney.com article - "Underemployment"; I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers"). Before we get into that, as we preview this Friday's job report I want to point out 2 things in the interest of education - which most financial news media gloss over. Let me preface this by saying almost any large scale "survey" has major statistical bias, and the government reports are among the worst....

First, it is critical to understand the effect of the birth/death model [Jan 27: Monthly Jobs Report & Birth/Death Model]. Worth reading the article I linked to, but in summary the government estimates how many jobs have been created by "new" or "too small" companies to be included in the survey. Many of the "jobs created" are now coming from this "guesswork". Not real surveys of job creation by larger companies. So flaw #1. There is a handy chart in the link above that shows you how dominant the birth/death model is "job creation"

Second, the unemployment rate. Keep in mind it went DOWN last month. Why? If people give up looking for work they drop out of the labor force and by the machinations of this report unemployment rate goes down. Like magic. Because less people are looking for work. So just imagine if a few million more people give up in disgust. By our government calculation unemployment would plummet... heck we could be at 3% unemployment rate and our President can keep telling us how great the economy is! Booming! Flaw #2.

As a corollary to the "true unemployment" rate point above, I'd like to show you what the true unemployment rate would be if we had kept our measuring standards consistent from how they used to be measured in the early 90s and before. Instead of sub 5% we'd be north of 12%. Just like our inflation measures, the government has been adjusting these figures over time, hand picking what should stay in and what goes out so the numbers look better. This is unfortunately what the sheep are told, and the sheep are too busy watching Britney Spears exploits to notice. But after 10-15-20 years of this, eventually it will reach the breaking point - i.e. when the majority of people can't afford a middle class lifestyle. Give it another decade and that's when social acrimony should reach a boiling point as my "World of Shortages" (global competition for resources) really crests. At some point the masses will revolt... (I know that sounds over the top, but just as people in 3rd world countries now riot over food shortages, outrage leads to serious consequences - it is not at a critical mass but if groceries continue up 10-20% a year, and fuel/heating 10-20%, along with healthcare, along with tuition, along with insurances at what point do the majority break when they are told inflation is 3%? "just trust us")


(click to enlarge)

Third, is simply the underemployment this article from CNNMoney points out. This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

So whatever the number, Wall Street in its ivory tower will cheer or boo. And the real economy will continue along, eroding the living standards of the "great middle" year by year as more and more wealth is concentrated in the top 1%. [Dec 8: Do the Bottom 80% of Americans Stand a Chance?] But don't be fooled by any good cheer. We have long term erosion happening - a "shadow" system in labor just as we've had a "shadow" system in banking. A "service" economy is by nature, simply the transfer of the same paper money (in increasing amounts as the Federal Reserve increases money supply) trying to make everyone feel rich. Yes you get more money but inflation eats away at all those gains so you make no "real" gains. But speculative bubbles in assets (i.e. tech stocks, i.e. homes) make us forget the issue for a few years at a time. That's the bottom line of a "service" economy where in most sectors nothing is "created". It's been catching up to us the last 5 years+; again - hidden by the home asset inflation boom.

Last point, we have 2 huge beaurocracies - federal government and healthcare. To keep the government from going even more insolvent we should in theory be cutting jobs from these 2 white elephants. Healthcare costs spiral out of control and we hire more people - I believe healthcare is now 16% of GDP. But how do you cut costs without cutting jobs? Thats the other dark secret - most of our recent gains in jobs are either government or healthcare related. So how do you fix the long term problems in either? Chicken or egg? They are sapping our national wealth away by their huge excesses/costs BUT they also provide the main job growth as well. As with everything my expectation is the "kick the can down the road" theory will continue - keep growing these massive beaurocracies (create more jobs and costs now) and let another generation pay for it.

• An unemployment rate at 5% used to be called full employment. Today it's considered the sign of a recession. When the Labor Department gives its March employment report this Friday, it's important to keep in mind that the relatively low unemployment rate isn't telling the whole story about the weakness of the U.S. labor market.
• Economists surveyed by Briefing.com are forecasting a loss of 50,000 jobs from the nation's payrolls in the month. That would mark the third straight month of job declines. The unemployment rate is expected to jump to 5.0% from 4.8% in February.
• But some economists point to other readings, which show that the market is much weaker than the unemployment rate would suggest.
• For one, there has been an increasing number of people who want to work full time who are only able to find part-time jobs.
• There is also a rise in the number of those who have stopped looking for jobs because they've become discouraged by the weak market.
• Finally, there has been a decline in the number of employees working as independent contractors.
• According to the February jobs report, there were 565,000 more part-time workers who wanted full-time jobs than a year ago. That's a 21.1% jump in the number of those who are under-employed.
• In addition, a rapidly increasing number of people are being forced to take more than one job. There were 161,000 more workers in February who held more than one part-time job than there were in January. One economist said this is a further indication of how bad the market is. (thats almost 2 million more people a year, at this rate)
• Wyss said another sign of the weakened market is the steady decrease in the past year in the number of temporary employees in the business and professional services sectors. There has been a loss of more than 100,000 jobs in this category in the past 12 months. "This is a leading indicator, since these are very often the first employees cut," said Wyss.
• That's because the unemployment rate calculates only the percentage of workers who describe themselves as unemployed, divided by the number of those potential workers counted in the labor force. So under-employed people don't show up as unemployed.
• And if you look at the number of people out of work in addition to part-time workers who want full-time jobs as well as people not searching for a job at the moment, a far more alarming picture emerges. Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure stood at 8.9% in February, up from 8.1% a year ago.

But don't worry - the malls will be full with people waving their $600 rebate checks by this summer.

Bookkeeping: Adding FTI Consulting (FCN)

I still have a huge wad of cash, now that I've pulled in my short exposure and began cutting back on fertilizers... trying to find some more ideas on where to go on the long side. FTI Consulting (FCN) is pulling back today, and quickly fell to its 50 day moving average. Perhaps the "everything is ok trade" is hurting them as it was going up on (aside from execution) potential restructuring, litigation, etc increases in the future. I still think all that is coming to the domestic economy (especially consumer and financial based) - this is just a weigh station in a very long road. Remember, FTI Consulting is the Gallant to Huron Consulting's Goofus [Mar 27: Adding to Huron Consulting (HURN) on Earnings Warning]. I was buying the worst of breed last week (and added yesterday), so I am going to add to this best of breed that I cut back severely on, and begin to rebuild the position. It is still very pricey, so I am not buying a lot, but in the $63s-$64s its a lot less pricey than it was yesterday at $72. There is that gap down there around $57 so I'll wait for a pullback there to really add if/when it comes.

FTI Consulting is now a 0.9% stake up from 0.1%.

Long FTI Consulting, Huron Consulting in fund; no personal position

Feels like a Normal Market for the First Time in Ages

What a concept... some stuff goes up, some stuff goes down. Not everything in 1 sector must be sold off so everything in another sector can be raised up. Not 400 points up, or 350 points down.

Feels like the old stock market again... I could get used to this. Unfortunately, that darn jobs report sits like Humpty Dumpty on the wall... wavering in the wind...

I continue to be short term constructive - hopefully Research in Motion (RIMM) comes through for us tonight, and we can continue to drink the Kool Aid for a bit more. Economy? That's for those darn intellects... toga...toga...toga!

Long Research in Motion in fund; no personal position

Bookkeeping: I Love Fertilizer But...

... I fear speculators more.

I have noticed a few things over the years... first, analysts who are often wrong are always conservative. They protect their hide. They rarely make calls ahead of the curve. And rarely do they make calls the week of earnings. Yesterday we had a downgrade of Mosaic by Citibank a few days before earnings. Very curious and does not fit the pattern of ultra conservative analysts.

• Shares of fertilizer company Mosaic Co. fell Tuesday after a Citi Investment Research analyst said there's a chance that fiscal third-quarter profit may miss Wall Street expectations.
• Citi's Brian Yu, who expects earnings of 83 cents for the quarter, says there's a chance Mosaic's results will miss the average estimate of analysts polled by Thomson Financial. Analysts currently expect 95 cents in earnings for the quarter.
• Yu says phosphate profit will likely decline from the year-ago quarter, on seasonally lower shipments and higher ammonia and sulfur input costs.

Now, nothing is foolproof or 100% but usually when an analyst will stick out their neck like that they know "something". Now let me be clear - the long term is bright, as bright as any company in the stock universe. Let me also say I believe all input price increases will be passed on to customers.

But let me also be clear that as each quarter passes more and more people who know little about fertilizer pile into the space because it's hot and sexy. So the risk increases massively. Especially around earnings season; akin to solar in the latter part of 2007. So purely as a risk AVERSION I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings. Not because of anything to do with the fundamentals or "natural gas input pressure". But because I believe the probability exists that many people who piled into these stocks the past 3 months have a propensity to panic over any whiff of PERCEIVED (not real) bad news. So we might get a buying opportunity. This actually happened last quarter when the "selloff due to natural gas costs" lasted all of a few hours.

Further, I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings
#1 I hate earnings because people overreact, so I try to limit risk (giving up potential upside) by lowering exposure on almost any stock going into earnings
#2 The ag stocks are not acting well of late - have to respect that
#3 Mosaic is trading below 50 day moving average (could change by Friday)
#4 the above mentioned "analyst rule"

Again, aside from the stock you need to know the herd you trade with. I know the herd that has now moved into fertilizer stocks. They shoot and ask questions later. This is the same herd that decimated solar stocks to the tune of 60%+ losses in the past few months and the same herd which shot Apple (AAPL) to the tune of 40% after stellar earnings because the guidance was "not enough" despite always conservative guidance that they smash regularly. The same herd which killed Crocs; the same herd which killed Google (GOOG), the same herd... well you get the idea...

So I am going to spend the next day reducing exposure (I just began the past 15 minutes) and I'll let the smoke clear... I might miss a big move up but I need to put personal beliefs about the long term fundamentals aside and protect capital. I took a big hit in Apple, in a stock that was unfairly beaten down. But there is no fair in the stock market - just emotional reactions and lots of momentum traders who could care less about fundamentals. Again it's not the news, it's the reaction to the news - good news is already baked into this sector - see Monsanto today... fantastic results, but a sell off.

So for a temporary respite going into Mosaic's Friday earnings I am changing course and will reduce exposure. I expect tremendous numbers Friday and later in the month with Potash (POT). But I could also make a very easy case that someone will find something to complain about and say "the story is ending", and cause a sell off. So its a bipolar outcome - it could go either way. And that is gambling, not investing. Unfortunately this is the market we are in, in this era - where the long run means "next week", and shooting first and asking questions later in is the norm. Earnings season is a minefield. So I don't want to give up weeks of good returns by an overreaction by the "herd".

Just want to make that clear since I have been, am, and will continue to be one of the biggest proponent of (especially potash based) fertilizer stocks, and the agriculture trade in general. This is a very short term move to simply reduce risk to (potential) shareholders. It does not mean the stocks cannot gap up and run 25% after an incredible earnings report. But it is not worth the risk to me to give back a lot of return by being overweight going into earnings. I'd miss some return but losses are harder to make up than "lost opportunities". We'll re-assess after we see the reaction to the news Friday. But I will be back, in scale, soon enough - even if it at higher prices post earnings. A temporary respite - until then I play with such lovelies as homebuilders ;) [Apr 1: A Kool Aid Trade - Adding Homebuilder Exposure with Lennar]

Long Mosaic, Potash, Lennar, Apple, Google in fund; long Mosaic in personal account

Bookkeeping: Adding Back my Baidu.com (BIDU) I sold Yesterday and Continuing to Add Apple (AAPL)

I sold off a part of my Baidu.com (BIDU) yesterday, saying I'd buy it back on either a pullback or a breakout above $280. Well this is the breakout.

On a purely technical basis I am cutting out a layer of Baidu.com (BIDU) here as it just hit its 200 day moving average of $260, and is up near 9% for the day. My strategy is purely technical; I will buy these shares back either (a) lower - if this is a failed rally or (b) higher - around $280 - if this is the start of a new surge.

I am buying back in the mid $280s , and in scale (75 shares)... another technical breakout of a stock coming off a long base.

This takes my Baidu.com exposure from 0.6% to 2.6% of fund.

I'm seeing a lot of good technical action in quite a few charts for the first time in a long time...also adding Apple (AAPL) near $150.

Long Apple and Baidu.com in fund; long Baidu.com in personal account

Bookkeeping: Adding to Trina Solar (TSL) on Long AWaited Breakout

I've been waiting for this move for months. I am adding materially to Trina Solar as it crosses over 50 day moving average on potential for technical breakout. Trina has shown a big change in fundamentals last quarter [Mar 4: Long Suffering Trina Solar Finally Gets Some Relief] which was not recognized by the market - and Citadel (the pre-eminent hedge fund in my opinion) has taken a stake as well. I think mid $40s is only a matter of time; I was waiting for a confirmation move on the chart which we appear to be getting.

I am buying 1200 shares of Trina Solar in the mid $35s.... this is big upswing which takes the stake from 0.9% to 4.9% of fund.

We also have some nice polysilicon news for the name

• Trina Solar Ltd. said Wednesday it has entered an eight-year agreement to receive polysilicon supplies from GCL Silicon Technology Holdings Ltd. at predetermined prices. GCL will provide the Chinese solar-power company with enough polysilicon to produce about 2.6 gigawatts worth of solar modules.
• Polysilicon prices have risen sharply in recent years, as the solar industry expanded rapidly. Long-term agreements with fixed prices are seen as favorable because they limit a company's exposure to spot prices, which are much higher.
• Trina did not release financial terms of the agreement, though Chief Executive Jifan Gao called them "favorable." Gao said in a statement that the company is in a "strong position" to expand margins because of its polysilicon agreements, plans for in-house polysilicon production and other cost savings.
• Deliveries from the GCL contract will begin this month. Trina has now secured about 95 percent of its estimated polysilicon requirements for 2008.

On a fundamental basis, Trina Solar is the most undervalued stock in the space in my opinion. Finally the market seems to have waken up to this, and when these stocks do move, they can really scoot. I was scratching my head why these stocks had not moved yesterday when speculative juices were ramping...

Long Trina Solar in fund and personal account

Monsanto (MON) Hilarious Reaction to Guidance

I love these news reports - talk about misleading headlines. One week ago Monsanto preannounced to the UPSIDE and raised full year guidance to $3.15-$3.25 [Mar 25: This Day in Agriculture]. Today they repeated the exact same verbage and lo and behold news outlets are reporting the stock is down due to guidance for the full year! Hilarious! What an awful company; in the past 8 days they could not find a way to raise guidance! Sell 'em off!

• Monsanto(MON) on Wednesday reported surging fiscal second-quarter profits on the back of strong demand for its corn seed products in the U.S. and Brazil. Shares were falling 3% to $109.39, however, as the company's full-year outlook appeared a bit light.
• The agricultural giant posted net sales of $3.78 billion, a 45% jump from the $2.61 billion it reported in the second fiscal quarter last year. Net income came in at $1.13 billion, or $2.02 a diluted share, vs. $543 million, or 98 cents a diluted share, in the year-ago period. Excluding items, the company posted a profit of $1.79 a share from ongoing operations, vs. 99 cents a share a year ago. Analysts polled by Thomson Financial had expected a profit of $1.72 a share on revenue of $3.6 billion.
• "Between now and 2012, we are the only agriculture company that can point to consistent growth irrespective of commodity price swings, fluctuations in planted acres or the popularity of ethanol," he continued. "Over the next five years we're poised to set the bar higher as we deliver a game changing platform every other year, real products that create real value for the farmer and for our shareowners."
• The low end of Monsanto's full-year guidance, however, fell below Wall Street's expectations for the full year. The company sees earnings of between $3.38 a share and $3.48 a share on a reported basis and between $3.15 a share and $3.25 a share on an ongoing basis. Analysts see earnings of $3.20 a share. (once again, they repeated what they said last Tuesday - obviously a huge disappointment!)
• The Street also had tempered expectations for Monsanto's competitors in the near term. Citi analyst Brian Yu said in a note after Tuesday's bell that fertilizer maker Mosaic(MOS ) could miss fiscal third-quarter profit targets due to an Agriculture Department report that showed farmers are planting less corn. The stock was falling 1.1% to $100.35 in recent premarket action. (competitor? really now - this is such shoddy reporting...)

This is some seriously funny reporting - basically it is what happens every day on Wall Street - 90% of the time there is nothing that drives the market specifically but reporters need to grab onto something to "explain" why the markets are down X% or up X%. Same with the stocks...

I do like Monsanto (MON); just not at this valuation as I believe the upside is relatively limited. But I've been saying that for a year now and have missed a huge move.

WSJ: Americans Delay Retirement As Housing, Stocks Swoon

Actually this is a great day to post this sort of article since it points out the potential dichotomy I believe might become a permanent long term fixture between Wall Street and Main Street. The article highlights how the continues boom and bust cycles (bubbles) certain portions of society create (and since our regulation system is so poor - i.e. no regulation of mortgage brokers is a great example), along with a financially illiterate populace, along with structural budget imbalances [Mar 26: Annual Spring Warning on Entitlement Programs Fall on Deaf Ears], is creating what I foresee as the "very long term" crisis - the inability for many to retire until they literally drop over. I don't have any exciting stock picks or trading ideas here but it speaks a lot to our society - again much of our capitalism is based on the risk taking, ability to "win it big" if you "work hard" carrot - in lieu of higher taxed societies with more safety nets and "perks" ("free" universities, health care etc). I am not going into the right or wrong, as that can be debated forever, but simply the potential roadmap for our system. And as investors, as we weigh one country's prospects versus another's it's important to see the macro picture. Our American system is based on consumption and services. Many of the stresses I see only growing by the year will inhibit this consumption culture, and in fact should lead to 'forced saving' (i.e. not because one wants to, but because one has to). I believe this "forced saving' is only now beginning as its first incarnation - only to be interrupted by the next asset bubble of 2-4 years in duration... followed by another forced saving era ... until people realize they cannot spend 120% of what they bring in forever. This is why I bring articles like this to the forefront.

As each bubble passes, and wages do not keep up with life costs (or over ambitious living standards) people are forced to find "innovative" ways to keep up their spending - i.e. serial house equity withdrawals, raiding their 401ks, etc. (credit cards is a whole 'nother issue) As I've said many times, the former situation has masked the deteriorating condition of many American's personal balance sheet, while the latter is a more recent phenomena which is accelerating. I've been googling news stories on the 401k raids and there are many, here is a recent one.

• Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills -- and getting slammed with taxes and penalties in the process, according to retirement plan administrators.
• Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, plan administrators say.
• This is happening even as borrowing from 401(k) accounts remains fairly flat. Fewer still are borrowing from 401(k) plans to buy homes. By contrast, new figures from plan administrators show the number of 401(k) "hardship withdrawals" is up in early 2008 compared with the same period last year. The main reason? The need to stave off foreclosure or eviction.
• Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. "If I hadn't done that, we would have been foreclosed on last year," says Campbell, who lives in a Denver suburb.
• Such hardship withdrawals began rising last year, and in January this year, they exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23 percent on plans that Merrill Lynch administers, compared with the same period in 2007
• Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20 percent increase in hardship withdrawals to save a home. And Principal Financial says that in January, it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

Or another one. Or another one. All in the past month. And when they are not taking money out wholesale, we are helping them take out loans with 401k debit cards! [Jan 23: Let's Not Forget the Underlying Economy] So as we move away from a corporate pension system (rightly or wrongly), a faltering government system (which is only "funded for the next 40 years" due to cost of living adjustments that come nowhere near real life), and individuals constant overspending and mistakes (buy tech stocks at high, speculate on home flipping), it is causing a very real long term crisis. And the stock returns in the US are not helping anyone [Mar 28: WSJ - Stocks Tarnished by Lost Decade]. This is why asset class 'inflation' especially of the home and stock market is absolutely critical to a country of non savers. And a government of non savers. Because this is where we are headed, and keep in mind, *many* people who are currently retiring or trying to actually did have pensions for at least part of their career. What about the next group, those in their 30s and 40s who have none? If you ever read studies on what the median balance is on a person's 401k in this country you just have to shudder. And then how people will pay for health care benefits until Medicare kicks in, almost disallows retirement for many until they finish that governmental finish line to qualify - far too expensive to self insure and only 1/3rd of companies (and falling by the year) offer retirement benefits (again I'm not judging if it's right or wrong, simply stating what it is). And keep in mind the article below is happening during a "low unemployment, non recessionary" period.

And these are part of the macro thoughts on why I worry about the long term health of the consumer in this country - like it or not - or argue "why" it is happening, income distribution is skewering more to the upper %. And more and more are struggling - some of the forces are just pure globalization (nothing we can do about it) but some are self made (either through individual decisions or systematic issues in government/business/etc). Either way they point to a long term trend of people forced to save more and/or forced to work until they literally cannot. Articles like this are just the bleeding edge of what I believe will be a multi decade issue in the country - and why we'll keep treading water until the next asset inflation bubble pops up (and retailers can boom again), in which people can "feel rich" for a short time, until that bubble bursts, government steps in to ask why this happened, cast a blame game, and then offer their handouts (which is our own money handed back to us), and we keep repeating the situation. Each cycle someone is enriched - the same part of society. And so we keep repeating. Why people don't learn is beyond me, but maybe it all seems just too overwhelming and the lack of primary financial education in elementary or secondary schools is on purpose? It is beyond me why the curriculum ignores this part of "being an adult"....

• As the falling real-estate and stock markets erode their savings, many aging Americans are delaying retirement, electing labor over leisure in uncertain times.
• A three-decade veteran at International Business Machines Corp., Dick Boice had planned to sell his house, pack up and move to Arizona with his wife, Lauren, to take early retirement. But two months after the January date he set to exit the work world, Mr. Boice, who is 59 years old, is still on the job. He figures he'll stay put for another couple of years. The Boices had counted on proceeds from the house sale to boost their retirement income. After a year on the market, the roomy colonial in Blue Springs, Mo., didn't move, forcing the couple to cut the asking price by $40,000 to around $250,000. The house remains unsold. Meanwhile, Mr. Boice has watched the value of his 401(k) and individual retirement accounts fall by roughly 20% so far this year, to a combined $240,000.
• Mr. Boice has plenty of graying company at the grindstone. Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans -- with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those in the work force rose to 16.2% from 16% in the same time span -- meaning 65 and over212,000 more hands on deck. So far, the numbers for March continue to show a "sharp" increase, says Steve Hipple, a department economist.
• The double dip (homes and stocks), affecting asset owners of every age bracket, is unprecedented in recent decades. In 1987, property and market values dropped in tandem -- but nowhere near the extent to what's happening now. To document similar conditions, "you'd have to go back to the era of the [Great] Depression," says financial historian Richard Sylla of New York University's Stern School of Business.
• The giant gray wave is still an inevitability. But it has run into a breakwall. Investment advisers and retirement planners at more than a dozen firms, including Charles Schwab Corp., Edward Jones and Merrill Lynch & Co., say they are seeing large numbers of older workers put off retirement as the housing and stock-market troubles have deepened. A recent Schwab survey of 1,006 financial advisers indicated that nearly a quarter of their clients are considering working longer specifically because of the economic fallout of the past 12 months. (My note: Keep in mind people with Schwab accounts are not the "lower/middle class" so just imagine what is happening lower on the totem pole of economic strata)
• Factors other than the gloomy economic outlook may be contributing to stalled retirements, says Mr. Hipple of the Labor Department. Most retirees, of course, get Social Security benefits. But traditional corporate pension plans -- which promised specific, predictable monthly payouts -- are largely a thing of the past.
• Over the past three decades, the 401(k) plan has gradually supplanted pension plans as the main source of retirement coverage for U.S. workers in the private sector, according to the Employee Benefit Research Institute, a nonprofit group. In 1979, it says, 62% of U.S. employees participated only in a pension plan. By 2005, 63% of workers reported that they participated only in a 401(k) plan.
• Another big motivation for older workers to stay on the job: scarce health benefits for retirees. Between 1988 and 2007, the percentage of large companies offering retiree health benefits fell by half, to 33%, according to the Kaiser Family Foundation.
• The dot-com bust and stock plunge of 2000-02 also persuaded some workers to delay retirement. But back then, those suffering losses in the stock market could take comfort in home values, which were still appreciating. Not anymore. "It's a double whammy this go-around," says Kevin Waldron, a Merrill Lynch financial adviser in Bala Cynwyd, Pa.
• Many would-be retirees are angry about the conditions that they see as contributing to the economic downturn. Mr. Boice blames lax lending standards and regulations for dragging down his home value. "What really needs to happen at this point," he says, "is for those that created the subprime mess to have their hands slapped."
• However, there is a potential upside. People who earn more as they age may rely less on Social Security, easing the burden on these programs -- including Medicare -- and keeping them solvent for longer. (always an upside!)
• Still, the prospect of millions of grandparents toiling away in their golden years doesn't square with the American Dream. Some aging workers feel denied their due. "I've worked all my life," says Mr. Boice, the IBMer. "It's coming down to a point where I want to try to take life easier and do something I want to do rather than work for someone 9 to 5."

Again, no easy solutions. I don't really think a system where corporations are forced to pay for employees health care or retirement makes them competitive globally with companies in foreign lands that do not. But then it goes back to either (a) self reliance or (b) relying on the government, if not corporations. And without long term planning, financial education, and discipline (a) does not work very well, and without a much higher tax rate (b) won't work. So it's a rock and a hard place. To keep the balls juggling in the air - we need asset prices to continue to inflate - at any cost necessary (inflation). Which we've did early in this decade and we are now repeating. See... it is all connected...

Bookkeeping: Ben is Our Friend Trades

With the liquidation of the short exposure I have over $400K cash so I need to find some things to buy - these are the areas I have begun layering into... I call this the "Ben is my friend" trade. Since I don't trust Ben I am not buying favorites such as Fannie Mae (FNM) or Lehman Brothers (LEH) but I'll go with some of current holdings....

1. We've been watching Apple (AAPL) [Mar 26: Apple now at Inflection Point] and said we'd be buying over mid $140s - which we are now - so we buy. In my old days I'd be afraid of buying with Research in Motion reporting but in socialized markets there is nothing to fear but fear itself.
   
2. Infrastructure Shaw Group (SGR) - no idea why this stock has been trashed, continue to add
3. Fertilizer Mosaic (MOS) and Potash (POT) - Mosaic's chart could be a case for a short seller, but the best fundamentals out there. Maybe they will say something conservative and it's leaking out and that's why we have this weakness - or maybe its just hedge fund liquidations. Either way I see materially higher prices in a year.
4. Iron ore Cleveland Cliffs (CLF)
5. Russian steel/iron ore/coal Mechel (MTL)
6. Oil service Core Laboratories (CLB)
7. Brazilian homebuilder Gafisa (GFA)
8. Mexican homebuilder Homex (HXM) - I want every homebuilder in the world in my portfolio now - free money for everyone
   

I so believe in Ben and his powers that I believe even hated commodities could come back so I began to add back both gold and crops

1. Kinross Gold (KGC) - just a touch
   
2. Powershares DB Agriculture Fund (DBA) - just a touch, will add more north of $38.50 if we get there

Now I understand most of what I bought today was not the type of stuff that "2nd half recovery, early cycle" crowd loves - but a rising tide lifts all boats... so if we get days and days, and weeks and weeks, and months and months of socialized markets every stock should rise - even stocks in terrible sectors like fertilizer, Brazil, Russia, oil, infrastructure. I mean, why bother with those areas when you can get a financial or retailer? I only hope the market shows pity on these "laggard" groups and allows them to go up someday too. I mean in a socialist market all stocks should go up equally, no? Or is that communism?

Disclosure: I don't trust a single buy above and if the S&P 500 breaks below 1350 I will disavow every word I typed above, erase this entry, and simply put up the word's April Fool's, and go back to bashing early cycle stocks.

Disclosure: If we stay above S&P 1350 I will erase the disclosure above and invite everyone to my pool party in which the pool is full of cherry Kool Aid.

Disclosure: On Realmoney.com, Jim Cramer has called this the bottom @ 2:53 PM, his 9th such call since October 2007. You know what they say, if at first you don't succeed try, try, try, try, try, try, try,try, try again. (that's 9 tries for those counting at home). Or is it "the 9th times a charm"?

Long all names except Lehman Brothers and Fannie Mae in fund; long Mosaic in personal account

Bookkeeping: A Kool Aid Trade - Adding Homebuilder Exposure with Lennar (LEN)

I don't think real estate is coming back for a few years but it doesn't matter what I think... homebuilder charts firming up and I'm a relative strength guy - this is where money is going, so hence that is where I am going. With both Democrats and Republicans ready to socialize the home ownership market, I have to get some exposure to this area on top of my DR Horton (DHI). Surprisingly the most interesting chart is mass market name Lennar (LEN) - I preferred Ryland (RYL) or Toll Brothers (TOL), but I can add those later - after all the housing market will be booming by the 2nd half of 2008! (ok the real reason is their charts look identical to DR Horton so instead I bought more DHI, instead of adding yet another position)

I am beginning a pretty good sized stake here (I drank a lot of Kool Aid before pressing buy) with a 1.4% initial buy in Lennar around $21. We have a 'double top' formed south of $22 and if we clear that level, I'll buy more... from there we have to deal with the 200 day moving average in the $24s. Once that is cleared? $500! (cough).

Downside? There is none - the US markets are now socialized. As soon will be the housing market. (Do you notice the PPT has futures up every single morning the past 2 weeks?) Get used to it shorts!

I also added more DR Horton (DHI) here in the $16.60s-$16.70s, so together I still only have a 2.5% home builder exposure but even that much scares me when I think of fundamentals... but I have to adjust to the new socialized market where fundamentals don't matter - still working on that - unlearning decade + of equity trading is hard to do in a 4 week period. I still haven't trained myself to plug my nose and plunge into financials - that will take much more work. One step at a time....

Disclosure: the whole house of cards could come tumbling down Friday on the jobs report. Until then? Toga... Toga... Toga...

Long Lennar, DR Horton in fund; no personal position

Dare I Say It? A Higher High?

I haven't seen one of these in nearly 6 months so it looks a rare bird... but this *could* be a new high as we breach/test S&P 500 level 1360. It is still too early to tell but as a defensive (or offensive depending on how you look at it) I am tossing in a lot of my short exposure and taking my short basket down materially (sub 10% exposure). This could simply be a head fake but if we close near this level and futures are screaming up tomorrow you will get the calls for a new bull market forming blah blah.

We still need some confirmation but it could go either way from here - new bull or continued bear so I want more cash in case its new bull. Even if the bull stands on faulty ground. Somehow it all feels like an April Fools joke except my portfolios keeps going down on huge up days in the market so it's real ;)

If this is a failure, we'll know very soon. S&P 1350 is the line in the sand. It is very difficult to make any prognostication either way - but you have to respect the reaction to the news. If a $19 billion UBS writedown is treated with glee can you imagine how many points we will rally when Citigroup and Merrill Lynch do their writeoffs? As always, it is not the news but the reaction to the news that matters. As long as people believe this is truly the kitchen sink quarter (like they believed in October 2007, like they believed for a few days in late January 2008 before getting summarily dismantled) we can go up. The market looks forward - as long as it sees Kool Aid through the haze we can rally. I am getting sick of typing 'inflection point' since we seem to have one every 3rd day but this is yet another one. Until it is resolved, I'll be more in cash and less into shorts...

As I wrote in this week's review, I'll always trail the markets during reversal points since I assume the previous trend continues which is what works 95% of the time (and has been working the past 4-5 months, a series of lower highs). When the (rare) reversals do happen, then you have to reverse strategy and it will take some time to catch up... but the jury is still out at this point so I'll be trailing this week while the market makes up its mind. But there is a lot of cash on the sideline which has been waiting for someone else to "go first" so technical conditions could improve to the point many more will jump in.... we shall see.

If we do embark on a rally the areas of important are all the previous lower highs, 1385-1395, and then if that bursts should be clear sailing to 1420-1440.

Bookkeeping: Continuing to Build Huron Consulting (HURN)

Last Thursday, I took my stake up in Huron Consulting (HURN) from close to nil to a 1.7% stake, as the stock warned on earnings [Mar 27: Adding to Huron Consulting on Earnings Warning] At the time I wrote

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.

Now a few days later we seem to have shown some support above $40, and the stock is up 6% today so I am going to continue to build this stake with expectation that $38-$40 should be decent protection to the downside. The stock is now $44, and I am going to target $50-$52 as a place to begin selling off part of my position. Since most of my position was bought in the $40-$41 range that would be a nice 25% gain if achieved, and even from here it's a 15-18% type of gain. As an additional bonus this is the type of stock that should not trade in sync with the majority of the type of holdings I have. With today's purchases, I am taking Huron Consulting up to 2.6% of the fund from 1.7%.

As I wrote in my earlier piece this is far from best of breed but this sell off of 30% was way overdone in my opinion. Even if if takes a few months to breach the $50 level it will be a nice return; of course I'd prefer if it happened sooner rather than later. I am encouraged by today's behavior, but in this tricky market today's gold is yesterday's trash... but downside should be relatively limited at this point to the upper $30s/low $40s. So I like the general risk/reward over the mid to longer term from these levels.

Long Huron Consulting in fund and personal account

Bookkeeping: Taking Profits in Baidu.com (BIDU)

Some nice action in a few of the top tier tech stocks of late as we've been mentioning. I am still in bear market rally mode, but willing to change on a dime if need be. On a purely technical basis I am cutting out a layer of Baidu.com (BIDU) here as it just hit its 200 day moving average of $260, and is up near 9% for the day. My strategy is purely technical; I will buy these shares back either (a) lower - if this is a failed rally or (b) higher - around $280 - if this is the start of a new surge.

Going of "my" playbook, I am selling as the stock hits a key resistance level.... this stock has actually been a very good trading position for the fund, as I've been able to churn some good profits off of it on a very predictable trading pattern, while being out of the position during its major swoons. Today's sale reduces my exposure down to 0.6% of fund.

Long Baidu.com in fund; no personal position

Interesting Day of Earnings Tomorrow

4 Interesting names report tomorrow

Research in Motion (RIMM) - should provide either a boost to or reason to sell off tech stocks

Monsanto (MON) - already preannounced so the good news should already be priced into the stock...

Best Buy (BBY) - with the slow death of Circuit City, the only real competition in the long run will be the Walmarts and Targets and of course those are not specialized competitors. Once we get out of this consumer recession in a few years, Best Buy should be a near monopoly. But for now, we watch it for a read on the consumer - I still think electronic gadgets and the like will be the last thing to go - so it should be relatively strong like the Walmarts and bulk warehouse names. If we begin to see any material weakness in results from a company like this, I would categorize it as even more reason to be bearish on the consumer.

Carmax (KMX) - another "tell" for the health of the US consumer, obviously in the car market. As people move downstream to used cars it is more important of a tell than the new car market which I think is relatively doomed - on record last year saying this would be the worst sales year in 2 decades. (more and more consumers using 7 and 8 year loans - i.e. mini mortgages - to keep buying new cars)

We only own Research in Motion (RIMM) but it's run up so much it's not really a risk/reward I'd want to expose the fund to by layering in more exposure ahead of earnings. That doesn't mean I think it will go down (I have no idea) but I'd rather be purchasing on pullbacks.

As for the consumer tells, again in a backwards way, bulls can explain away any bad results from here on out with the Kool Aid of "that's backward looking, everything will be fine in 6 months". That's going to be the bull case in my opinion for the next 18 months. All bad news can be explained away as backwards looking... and we need to look to the future. One day that theory will be correct, but correct or not, it can be used to buffet the market indefinitely.

Next week we begin to start the actual earnings season...

.... but I still think the Friday jobs report will be the big mover, one way or the other.

Bookkeeping: Locking in Profits on iShares Singapore (EWS)

We've had a very nice rally in a very short period of time in iShares Singapore (EWS) which I just restarted 2 weeks ago [Mar 17: Restaring Stakes in Malaysia and Singapore]. I don't have a huge position but since I bought in the $11.70s and we have quickly spiked to the $13.20s, considering this is an entire country index, that is a heck of a move - so I am going to take this 13% gain and lock it in, and reduce the position to 0.1% and hope for a pullback. The chart below has an incorrect moving average, the 200 day moving average is $13.40 so we soon approach resistance.... this is purely a technical move and to lock in a very quick short term gain.

I continue to favor non US exposure and will for the foreseeable future - will look to add back to this stake on a pullback.

Long iShares Singapore in fund; no personal position

This Week's Commodity Action is a Reversal of a Reversal

The bipolar market continues its crazy action - this week, once again, commodities are out of favor, after being in favor last week, after being out of favor 2 weeks ago, after being in favor the week before. I have cut back my exposure last week on the rally in all things except fertilizer, but obviously my bets against the "early cycle, everything will be fine in 6 months" financials, and real estate is working against me this week (after working great last week, after not working the week before, after working great the week before). Again a carbon copy of 2 weeks ago, but I have a lot more cash and less exposure to everything this week. I wrote a week ago I was confused by this market but on further analysis, I'll say the market is confused, not me. When people completely change sector allocations 180 degrees on a weekly basis, that is the market being confused.

Do I really want to buy gold or silver or coal or oil even the crops here? Not really (ok maybe I'm tempted with the crops...). When a trend cannot last for more than 3-5 days it really doesn't fit my investing profile. Eventually this correction will pass and a healthy back and fill of a very long term commodity bull market will return [Alert: Commodities are Dead], but as I wrote in my weekly summary I cut back across the board in everything just for the exact reason I don't want to be standing in front of a locomotive of hedge fund locusts either (a) deleveraging or (b) changing their focus 180 degrees from commodities to financials and vice versa on a weekly basis.

Last point is the dollar - it is very oversold but what I can see the herd saying is "look the US is way ahead of the curve - our central bank responds to the whims and needs of the corporations far better than those foreign central banks who actually care about the masses and inflation. Eventually those foreign countries economies will weaken and in comparison the US is going to look great!"

I call this theory the "race to the bottom" i.e. the U.S. won't look great on it's own merits but simply our horrid situation will look relatively better once foreign (esp W Europe) economies begin to weaken. And hence our dollar can rally. And hence we can cheer. Although the bulls love to have it both ways don't they? When the dollar is weak it's GREAT! because that's great for exports. When the dollar strengthens it's GREAT! because that kills off commodities and the specter of inflation. So either way, it's GREAT! This is why in the bull case there is no way to lose - no matter what happens it can be spun as GREAT!

Anyhow technically we are right back to last week's inflection point of the 50 day moving average - if we make a move to say S&P 1360+ on good volume, I'll toss aside most of the short exposure and join everyone in believing it's GREAT!



Remember, perception is reality. As long as the crowd believes in 2nd half recovery it does NOT matter what the reality is. We saw that last September/October. Everyone said subprime is contained, this is a kitchen sink quarter, there is no slowdown coming etc etc. The market went to all time highs (ex NASDAQ). Were "they" correct? No. But it didn't matter - if you bet against the herd you lost a lot of money. Even if you were intellectually correct. This is why you cannot be dogmatic. I am very down on the US consumer and hence domestic profits through 2008. I am very worried about the earnings season coming up. But if the herd wants to take this market up, I need to erase all those thoughts and try to squeeze out some return by joining the Kool Aid party. And then trying to jump back out when the keg is empty. That's what I did in Sept-Oct 2007 and if conditions repeat, I'll attempt to do it again. But, the stocks that would rally in this line of thinking probably are not the type I own in large scale, so always a challenge. But again - we are not there yet...

But as I wrote many times, these rebate checks coming will be clung to as a reason for a consumer recovery and the market should materially rally at some point in the latter half of the year, if for nothing else liquidity avalanche of paper money will inflate every asset class, including equities (at the cost of inflation). Remember, 8% equity returns in a 10% inflation environment is not a winner for anyone, except for those who ignore inflation or who tell us its 3-4%. I think this is the path we are embarking on over the next few years.

Mercadolibre (MELI) with a 3 PM Spike

Quite an interesting intraday chart for Latin America e-commerce play Mercadolibre (MELI); I don't see definite news yet but it appears to be a withdrawal of their secondary stock offering which generally creates an overhang above a stock...



I don't have a major position in this name as it's been consolidating for a long time and this secondary has been an issue but I was poking around the news today and noticed this nice write up by Sramana Mitra, who has an excellent blog that I frankly do not have the time to get to enough. Too much information on this internet; not enough waking hours. I like the market statistics that she put into the article which I generally gloss over when I do a write up, and her commentary on how the company "grew up". I do agree with the media's lack of attention to many interesting emerging markets; rather focusing it's love for all things Chinese (I've mentioned this in my India pieces many times)

• There is a market of 500 million people--about 8.6% of the world's population--that the business media all too often neglects as it serves up story after story about China and India. That would be Latin America.
• Between 2000 and 2007, the number of Internet users in Latin America grew from 18.1 million to 122.4 million, a compounded annual growth rate of 32% compared with only 12% in North America during the same period. Chile has the highest penetration of 43.2%, with Argentina at 39.7%, Brazil at 22.4%. Average penetration across Latin America is approximately 21.5%, as compared with 71.4% for the U.S.
• Not surprisingly, Latin America is developing its own collection of Internet stars. One that has really caught my eye is MercadoLibre (nasdaq: MELI), an online marketplace that facilitates buying and selling of computers, electronics, photography equipment, household items, even cars.
• Although MercadoLibre had a rocky start, the company has started delivering stellar results, growing at over 60% and profitability is increasing steadily. The moral of this story: It takes patience to build a great company, even in Internet time. Now, I believe MercadoLibre has an opportunity to become a billion dollar enterprise in the next 10 years and be a force in Latin America's economy.
• For the year ended Dec. 31, 2007, MercadoLibre's annual revenue increased by 63.5% to $85.1 million. And MercadoLibre is also profitable: Net income for the fiscal 2007 was $9.7 million, a nice jump over the $1.1 million reported for the company's in fiscal 2006. Their 2007 diluted earnings per share of 22 cents met analyst expectations to the penny.
• MercadoLibre has now become the No. 1 online marketplace for Latin America. It facilitates the buying and selling of merchandise in the same way that eBay and Amazon do. Items range from computers, cameras and MP3 players to furniture and household items to cars. The business, unlike eBay's auction-based model, is primarily driven by fixed price transactions. In that sense, they are closer to Amazon. Mercado also has an online payment offering a la Paypal called Mercado Pago, that is seeing good adoption and has huge potential to facilitate commerce in the Latin America market.
• Some of MercadoLibre's strength comes from simply outliving its local competition. Language and culture, I believe, are substantial barriers to international competitors, as the big companies have discovered in China. (Even so, eBay holds a 20% stake in MercadoLibre--a smart strategy for the U.S. company.) The region does not have an active venture capital industry, so future competition is likely to be limited. Those factors give MercadoLibre a nice, clean runway to build their business without a lot of interruption and dominate Latin America's e-commerce industry.

I've stated in the past I doubt Mercadolibre (MELI) will be an independent entity in the long run; in fact I am surprised each quarter that passes that it remains on it's own. Valuation? Off the charts. Scarcity value? Also off the charts. When dreamers are putting $15 Billion valuations on Facebook, which can't find a way to generate meaningful revenue, I can only cringe - here is a far more valuable entity for less than $2 Billion. An interesting company all around.

Long Mercadolibre in fund; no personal position

Washington Post: Bush Gives in on Mortgages & States Buckling Under Loss of Revenue from Home Value Bubble

This is about the 5th Bush homeowner plan- I can't keep track anymore but I believe the last one was just 7 weeks ago [Feb 12: Another Week, Another Mortgage Bailout Plan], but the first where something they denied they'd ever do - use taxpayer funds - is now on the table. Not surprising to readers of the blog as we've been saying this will eventually happen as far back as last fall. But it shows how dogmatic conservative views are tossed out the window when votes are at stake. Remember, I said 2008 will be the year of the "walkaway" (hand in keys, walk away from mortgage) - fully 1 in 10 people are now underwater on their mortgage and if prices continue to fall to where they "should", I believe we are going to 1 in 6-7. The fact we are going to bail out people who put nothing down or bought at the peak of a bubble is truly astounding. As I keep saying over and over - amazing times we live in - the type of things people will be reading about in history texts.

Once again, this raises so many questions as the devil is in the details but we'll talk about that another time. For now, your nanny state awaits you - your left pocket is being robbed to pay your neighbor's right.

• The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.
• The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government.
• If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry (yes, the most important constituents) and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners.
• The initiative now being crafted could provide relief to a select group of homeowners who are "under water" on their mortgages, a term that describes the situation when falling home prices leave borrowers with negative equity. These homeowners would have to agree to stay in their homes after refinancing, be able to afford the new monthly payments and have lenders who are willing to go along with the plan, officials said.
• An estimated 8.8 million households currently have negative equity, due in part to the rise of loans that often required no money down. Negative equity becomes a problem when the homeowner can no longer make mortgage payments. If the homeowner had some equity, the loan could be refinanced or the house could be sold. But a homeowner who is under water cannot afford to do those things because the new loan or sale proceeds would not cover the cost of the existing mortgage.
• In a recent report, Merrill Lynch identified negative equity as a prime cause of rising default rates, saying borrowers who already have poor credit records are often deciding it makes sense to walk away from their homes when the values fall.
• Federal Reserve Chairman Ben S. Bernanke has called on lenders to restructure some loans, arguing that it would be less costly to forgive some debt than to foreclose on the properties. [Mar 4: A lot of "News" Today that We've Been Discussing for Months]
• To spur bankers to action, Frank and other Democrats are working on legislation that would allow the FHA to insure an additional $300 billion in mortgages on which lenders have agreed to accept partial losses. Under Frank's proposal, the new loan could be worth no more than 85 percent of the home's current appraised value. It would also have to meet FHA loan limits, which were raised significantly by the economic stimulus bill recently signed by the president and are currently set at about $730,000 in the Washington area. Homeowners would have to meet stringent eligibility requirements and would be required to share any profits if they sold or refinanced within five years.
• Depending on its final scope, the proposal could further rile conservatives in Congress alarmed by what they see as a new tendency by the White House to interfere with market forces. (who knew I was a conservative in nature?)
  

So in an era where...

• ...the median down payment is 9% (down from 20% in 1989), 29% of buyers put nothing down, and many borrowed more than the cost of their home [Feb 29: Faced with Mortgage Default, some US Homeowners Walk Out]
• ...for the first time on record (since records began in 1945) people owe more on their home in aggregrate than equity [Mar 6: House ATM Creates Overleveraged Americans]
• ...Alt A mortgages from 2005-2007 vintage are defaulting at a scary rate [Mar 19: Alt A Mortgages Beginning to Break Down]
• ...home prices are falling 10%+ year over year [Mar 25: Home Prices Fall 11.4% in January]

...I'm supposed to step in with my tax dollars and provide support? Got it. And what is my government going to ask me to do in 9 months when all the same things continue to happen, and home prices drop another 5-10%? Pony up again to help my fellow "indebted, bought at the top, didn't read the document, put nothing down" citizen? Are we going to yet again refinance the already government refinanced loan once the home hits 15% price depreciation? Ok, I'll start saving now...

As I keep repeating here is the big secret - while it stinks for all of us homeowners now to see the value of our asset degrade, the best thing that could happen to Americans as a whole is to devote a much lower % of our monthly expenditures for housing costs. There is only 1 way to get there - the median home price (and associated rentals) need to fall in price. Then we'd have money to pay for things we are fighting globally for ... i.e. fuel and food. But instead we want to support these prices artificially. This is pure Washington DC logic at it's best.

When Bush gets back from Europe we need to fear this from the short side because the Kool Aid will be rolling (no matter what devil is in the details) and as the article said best "That may offer encouragement to the banking industry - yes last I checked socializing losses offers a lot of encouragement.... when times are good you win, when times are bad, the taxpayer loses. Wall Street wins either way. Who wouldn't be encouraged in that system?

****************

Meanwhile, your state government is cutting services and potentially raising your taxes (another thing we predicted) because the housing bubble is what helped support state government spending the past half decade and unlike our federal government which can print print print, the local governments don't have that luxury. So who gets squeezed in the middle? Us. I've said countless times this "housing is 4.5% of GDP" is a red herring - our whole finance based economy is based on bubble asset pricing; especially in the past decade on housing values.

• State budgets have been hit hard by a worsening national economy, including rising costs for energy and health care. In addition, fallout from the subprime mortgage crisis -- declining home sales, deflated property values and mounting foreclosures -- has caused a slide in states' anticipated tax receipts. Revenue from property taxes, sales taxes and real estate transfer taxes is affected.
• Instead of raising taxes, most states with shortfalls are curtailing services, and the effects are already being felt nationwide. Some of the most dramatic cuts are being made in California, Maine and Rhode Island, according to budget experts, with New Jersey not far behind.
• At least half of the nation's states are facing budget shortfalls, some of them severe, and policymakers in most of the states affected are proposing and passing often-painful measures to trim costs and close the gaps. Spending on schools is being slashed, after-school programs are being curtailed and teachers are being notified of potential layoffs. Health-care assistance is being cut for the elderly, the disabled and the poor. Some government offices, such as motor vehicle department locations, will start closing on weekends, and some state workers are receiving pink slips.
• Some analysts worry that the impact is being felt disproportionately by the most needy. "It's disappointing, the extent they tend to focus their cuts on the most vulnerable, It does appear to disproportionately affect low-income people."
• In most states, talk of raising taxes has become politically perilous, particularly with residents already hurting from falling housing values and a worsening economy.
• California is facing the worst budget crisis, with a $16 billion shortfall, and Gov. Arnold Schwarzenegger (R) has proposed a $4.8 billion cut in education services. About 20,000 teachers, counselors, librarians, nurses and other support staff members have received notice of potential layoffs, according to the state's Education Department.
• A recent 50-state survey by the Associated Press showed that hundreds of thousands of poor children, the disabled and the elderly stand to have their health coverage eliminated as a result of budget cuts, and more than 10 million people would lose access to dental care, specialists and name-brand prescription drugs.
• Budget experts said they see a repeat of the pattern that happened during the recession of 2001: States generally cut health services and medical benefits first, because these costs are often rising more rapidly than others, and the savings tend to be immediate.

Thankfully this will all be fixed in 6 months.... when the consumer/housing/retail/financial rebound begins! So says the early cycle playbook.

AP: Food Price Inflation Changes How we Shop

I had mentioned the potential for tough times ahead for restaurants a long time ago [Sept 19: Tough Times Ahead: Restaurants?] - the stock prices began foretelling this way ahead of the reality on the ground, but now the reality on the ground is catching up. Or at least some parts of the media are catching up to the reality... perhaps this is nature's way of solving the American obesity epidemic?

• Steadily rising food costs aren't just causing grocery shoppers to do a double-take at the checkout line — they're also changing the very ways we feed our families.
• The worst case of food inflation in nearly 20 years has more Americans giving up restaurant meals to eat at home. We're buying fewer luxury food items, eating more leftovers and buying more store brands instead of name-brand items.
• For Peggy and David Valdez of Houston, feeding their family of four means scouring grocer ads for the best prices, taking fewer trips as a way to save gas and simply buying less food, period.
• Soaring prices are causing shoppers to rethink long-held habits such as store loyalty. Wal-Mart and other supercenters that sell food now account for 24 percent of the market, according to the most recent annual survey of shopping habits by Hammonds' organization. [Remember - we pointed out this potential shift from Target shoppers to Walmart shoppers here in December, and the strength in the chart of Walmart stood out like a sore thumb when we looked at what was holding up in the depths of the January selloff - it is no coincidence - it is large scale "pooring" of middle class America; living standards slowly seeping away; not realized by those who run the Street - this story is full of people with "normal jobs" i.e. teachers - we are not talking low end wage jobs. Upper middle class management/professionals? Still doing ok - their issue is more tied to mortgages - the gap between have and have nots will continue into a gulf as we move forward.]
  
• Gina Pierson, a music teacher in Columbia, Mo., buys her family's staples at local grocery stores but makes regular trips to Wal-Mart to supplement the weekly shopping list. Like many families struggling to get by, Pierson and her husband, a public school teacher, are adjusting their approach to buying, cooking and eating food. Restaurant meals are now almost a luxury.
• In 2007, the FMI survey showed the average number of weekly shopping trips falling below two per household for the first time.
• Paula Curtis, a mental health worker in Montpelier, Vt., said her grocery bill has been steadily climbing by $10 to $20 a week. She has cut back on meat, fruit, vegetables and snack food, and buys milk at the gas station, where she said it's cheaper. "Every time I go, it's more and more," she said. "I make a list, but I don't necessarily get everything on it because I can't afford everything."
• Those who can't absorb the added expenses are increasingly seeking help from food pantries. America's Harvest, which distributes nearly two billion pounds of food and grocery products each year to more than 200 food banks across the country, estimates that its overall client load increased by 20 percent in the fourth quarter of 2007. [And don't forget the shortages that are now becoming rampant at food banks]
  
• The jump has been even higher at the Central Missouri Food Bank's pantry in Columbia, a college town halfway between Kansas City and St. Louis. The food pantry served 7,200 people in 2007, an increase of more than 50 percent over two years, said executive director Peggy Kirkpatrick. Columbia used to be considered inflation-proof because of its high-paying university jobs and proximity to the state capital, 30 miles away in Jefferson City. "That's not the case anymore," she said.
• Not all shoppers are struggling with the changes. At the Whole Foods Market in downtown Seattle, Beth Miller didn't think twice about paying $6.39 for a gallon of organic orange juice, or $4 for a dozen eggs at the store, which specializes in organic and natural foods.
• Among retailers, the surge in commodity prices — from corn, now in high demand because of increased ethanol production, to wheat that has tripled in price over the past 10 months — has some industry observers suggesting that higher food prices aren't a temporary fluctuation but instead may be here to stay. "We don't exactly have a crystal ball," said Whole Foods' Perry Abbenante, a senior global grocery buyer. "But I'm not sure (prices) are going back. We're preparing for a new threshold."

But don't worry, CPI food and energy included will show something like 4% inflation - nothing to worry about... sorry I forgot to mention everything will be fine in 6 months (it's been 72 hours since I've stated that and I didn't want my readers to feel any angst) So please carry on... fall 2008 is going to be nirvana.

[Do the Bottom 80% of Americans Stand a Chance?]

Philip Morris International (PM) Now Set Free

Back in mid January we were looking at various sectors during the heart of the market meltdown to see what was truly a "safety" sector [Jan 19: Even Altria (MO) is Getting Hit & Some Walmart Commentary] - we mentioned back then the interesting potential of the spinoff of Philip Morris International (PM) which has now come to fruition with a nice first day gain.

• Shares of Philip Morris International Inc (PM), the world's largest non-state-owned cigarette maker, rose as much as 5 percent on Monday morning in their first day of trading after the company was spun off from Altria Group Inc (MO)
• Investors have long anticipated the Philip Morris International spinoff as a way to get a pure play on the growing overseas tobacco business without being tied to a shrinking U.S. cigarette market. The company trails only state-run China National Tobacco Co in terms of global market share.
• Philip Morris International has forecast annual growth in earnings per share of 10 percent to 12 percent. Altria expects its own earnings growth to be 8 percent to 10 percent annually.
• Earlier this month, Philip Morris International Chief Operating Officer Andre Calantzopoulos said there were plenty of areas to grow the cigarette business, noting that only one in six smokers around the world smokes a Philip Morris brand.
• He said the company has little or no presence in large cigarette markets like China, Vietnam, India and Bangladesh.

So once again, the thesis here is get the addictive steady state growth of Altria but without the legal hassles of America...

• Altria (NYSE: MO) completed the long-awaited spinoff of its subsidiary Philip Morris International (NYSE: PM) last Friday, and the Marlboro Man is finally free to roam the globe unfettered by the legal and marketing shackles of the U.S. domestic market.
• Benefits for both the slimmer Altria and the new international company will be realized, but I think the international division will flourish on its own thanks to its leadership position in the international cigarette market and the strength and marketing potential of its global brand.
• Philip Morris International, or PMI, is the world's leading tobacco company and the third most profitable international consumer goods company. It generated revenue in excess of $55 billion and operating profit of roughly $8.9 billion in fiscal 2007.
• The company sells its products in some 160 countries and owns seven of the top 15 brands in the world, including Marlboro, Parliament, Virginia Slims, and L&M. In all, PMI held a 15.6% share of the international cigarette market in 2007. The company is especially strong in the higher-margin premium segment of the market, where it estimates that it held a 52.4% share (excluding China) in 2007.
• While cigarette consumption in the U.S. has been declining, the international tobacco market is an entirely different story as volume growth has been rising overseas.
• And to put the strength of the Marlboro brand in perspective, consider this: In 2007, Marlboro's volume of 311 billion units was larger than the next three best selling international brands combined. It also outsells the total combined volume of all of British American Tobacco's (NYSE: BTI) global drive brands.
• I can't help but believe that PMI's brands will only increase in strength as the company is now freed from marketing and regulatory constraints that were part and parcel of being part of Altria.
• Shares of Philip Morris International opened today at around $51, or roughly 16 times fiscal 2008 earnings estimates of $3.11-$3.17, while offering a dividend yield of 3.6%. (Did I mention that management has already authorized a two-year, $13 billion share buyback program?)
• This valuation is fairly in line with those of its smaller competitors, British American Tobacco and Imperial Tobacco Group (NYSE: ITY). But I believe that PMI should trade at a premium to these players given the company's leadership position in the international markets, its strong global brands and the fact that management has stated that it expects earnings growth of 12%-14% in 2008

Looks like another backdoor play into the growing Asian middle class.... now if we could only make sure they have food first, and then we can feel more confidant they have money for these addictive "treats".

No positions

Bookkeeping: Adding more Mosaic (MOS) Ahead of Earnings

Bought 100 shares here in the $98s as the stock has pulled back 6%; I continue to marvel at the price of this stock, which should be north of $120 in my book. Earnings are this Friday, and aside from the great story in potash, the story in phosphate might be even more unbelievable in the near term. Continue to believe this quarter's estimates of $0.95 are too low. Normally I don't buy anything ahead of earnings due to the heightened risk but this is one I will bend that rule for.

Mosaic (MOS) is now a 5% stake in the fund, up from 4.2% entering the day. If the stock is dropped to $90 or so, I'll move this back up to a 6-8% type of position. If we ever see low $80s again it will probably go to a 10%+ position...

Note this is not a "technical" buy - the chart is actually showing a series of lower highs, so one might argue for the very near term it is actually a good short (which I could not argue with) but the focus in this fund is longer term fundamentals, and I can't find a space with better so I'll continue to layer in as the stock drops. Main concern with these type of "winning" stocks is hedge funds continuing to need to deleverage and sell what they can since they cannot sell the illiquid junk.

EDIT @ 12: 58 PM: Added another 50 shares @ $100. Now up to 5.4% stake

Long Mosaic in fund and personal account

Taking a Hit on Schering-Plough (SGP)

My one "safe stock" in the "safe sector" of healthcare is getting demolished today, down 25%, as its cholesterol drug faces some major questions. I had reduced this exposure a bit to just over 1% of the fund, but 25% is 25%. And this only reinforces my long term view that it is never smart to invest in drug stocks as an FDA approval or disapproval or a good study or bad study can push you up or down 30% completely out of the blue. Essentially riverboat gambling. This is what happens when one leaves their comfort zone - exactly the same issues that happened when I went against better judgement and moved into the "I need some mortgage/housing related stocks since the early cycle Kool Aid is strong". Blah.

I am not adding or reducing at this point - we'll see how things shake out. Schering still has a far better than average pipeline so it should be ok in the long run, but in the long run we'll all be dead. (in no large part from ineffective drugs the used car salesmen of the drug industry sell us at inflated prices)

• Shares of Merck and Schering-Plough plunged Monday to their lowest levels in years as new clinical data raised questions about their cholesterol drugs. The companies market the cholesterol drug Vytorin through a joint venture, but earlier this year, partial results from a clinical study showed that Vytorin was no more effective at limiting plaque buildup than Merck's Zocor, a drug that is already available in generic form. Vytorin is a combination of Zetia and Zocor.
• Full results from that trial were released Sunday. Analysts said they saw little positive news and expected sales of Vytorin and Schering-Plough's drug Zetia to keep declining.
• Schering-Plough shares plunged 26.4 percent to $14.33 in early trading, touching their lowest levels since August 1996.
• Wall Street expects prescriptions of Vytorin to keep declining in the wake of a recommendation by leading physicians to use of the drug only after initial therapy with older statins, such as Lipitor and Crestor.
• Lehman Brothers analyst Charles Butler downgraded Schering-Plough shares to "Equal Weight" from "Overweight," on the news, and he cut his price target to $20 per share from $35. He said prescriptions of Vytorin will keep falling, and because Schering-Plough relies heavily on the joint venture, he slashed his profit estimates over the next five years.

Long Schering-Plough in fund; no personal position

USDA Crop Report

While weather will have be the determining factor on what actually is harvested, as I predicted last week [Cutting Back on Powershares DB Agriculture Fund - Focus on Fertilizers for Now] when I wrote

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

Well, lo and behold, corn plantings are down 8%. This in fact, was probably the easiest prediction (aside from bulls touting Kool Aid during every downturn about how everything is fine) I've made on this blog. Simple supply and dynamics at play. Unfortunately for Americans corn has been so subsidized for ages that it literally permeates every part of our food chain. So in 6-12 months when corn begins a new leg up, you are going to be paying for this in a very large way. And it plays right into my prediction of a coming "meat" shortage as corn is a major input in feedstock for chickens/cattle/etc. But maybe your wheat bread will stabilize... for a year... until next year's crop report when farmers will flock back to corn to take advantage of the huge increases we'll have in 12 months. And so we'll keep going...

Now where is that Ultralong cotton ETF....

• U.S. farmers will plant more soybean and wheat crops this year after prices reached records, while corn and cotton acres will drop, the U.S. Department of Agriculture said.
• The government survey showed growers will seed 74.793 million acres with soybeans, up 18 percent from 63.631 million last year, the USDA said today in a report. Spring-wheat planting will jump 7.8 percent, as corn planting drops 8.1 percent and cotton acres fall 13 percent, the USDA said.
• Increased soybean and wheat planting may help refill dwindling inventories, while declining corn output may squeeze supplies available for ethanol makers, including Archer Daniels Midland Co. Prices for most farm commodities reached records this year on booming demand for food, fuel and animal feed.
• ``The acreage shift into soybeans and away from corn was larger than people expected,'' said Greg Grow, director of agribusiness for Archer Financial Services. ``The markets sense we now need to raise corn prices at the expense of soybeans,'' to increase the incentives for farmers to plant corn this year, Grow said.
• Soybean acreage also may increase because the crop produces its own nitrogen fertilizer, making it less expensive to grow than corn. ``Corn is a crop that has much higher input costs, especially with regard to nitrogen that is now over $900 per ton,'' said Joel Karlin, a product manager at Western Milling in Goshen, California. ``Soybeans are a good option for those that want to replenish the nitrogen in their soil.''
• Corn is the biggest U.S. crop, valued at a record $52.1 billion in 2007, followed by soybeans at $26.8 billion. Wheat was in fourth place, behind hay, with a value of $13.7 billion.
• The USDA said 9.39 million acres will be planted with cotton this year. That's down from a forecast of 9.5 million acres last month and 10.83 million acres planted last year, as growers plant more valuable crops.

Reuters: Tensions Rise as World Faces Short Rations

I've posted comments about the coming food crisis for many months - and quite a few just last week. I plan to continue to, as I am reading it almost nowhere in the investing "world" - outside of the social acrimony, this has the potential to be very destabilizing to many of the areas, frankly, I like to invest in, so it's a big issue. Maybe this will be my Peter Schiff issue - the one I called early that when it comes to fruition will draw me nationwide fame and accolades? Somehow I think not. But at least you'll know first...

Remember, my key terms here are "agflation" and "food protectionism" (the latter being when countries start to horde their own resources). I need to create a new blog label for all the entries on this topic as it's becoming a pervasive theme - I think I'll go with food crisis. Again the scary thing is... we are just beginning down this crisis. This could be Darwinism playing out in front of our eyes in the years ahead - only the limiting factor will be wealth. If you're poor, your done - if you're not you survive. Scary stuff.

Tensions Rise as World Faces Short Rations

• Food prices are soaring, a wealthier Asia is demanding better food and farmers can't keep up. In short, the world faces a food crisis and in some places it's already boiling over. Around the globe, people are protesting and governments are responding with often counterproductive controls on prices and exports -- a new politics of scarcity in which ensuring food supplies is becoming a major challenge for the 21st century.
• Plundered by severe weather in producing countries and by a boom in demand from fast-developing nations, the world's wheat stocks are at 30-year lows. Grain prices have been on the rise for five years, ending decades of cheap food.
• World population is set to hit 9 billion by 2050, and most of the extra 2.5 billion people will live in the developing world. It is in these countries that the population is demanding dairy and meat, which require more land to produce.
• "This is an additional setback for the world economy, at a time when we are already going through major turbulence. But the biggest drama is the impact of higher food prices on the poor," Angel Gurria, head of the Organization for Economic Cooperation and Development, or OECD, told Reuters.
• Global food prices, based on United Nations records, rose 35 percent in the year to the end of January, markedly accelerating an upturn that began, gently at first, in 2002. Since then, prices have risen 65 percent.
• In 2007 alone, according to the U.N. Food and Agriculture Organization's world food index, dairy prices rose nearly 80 percent and grain 42 percent.
• "The recent rise in global food commodity prices is more than just a short-term blip," British think tank Chatham House said in January. "Society will have to decide the value to be placed on food and how ... market forces can be reconciled with domestic policy objectives."
• After long opposition, Mexico's government is considering lifting a ban on genetically modified crops, to allow its farmers to compete with the United States, where high-yield, genetically modified corn is the norm. The European Union and parts of Africa have similar bans that could also be reconsidered.
• A number of governments, including Egypt, Argentina, Kazakhstan, and China, have imposed restrictions to limit grain exports and keep more of their food at home. (food protectionism) This knee-jerk response to food emergencies can result in farmers producing less food and threatens to undermine years of effort to open up international trade.
• "If one country after the other adopts a 'starve-your-neighbor' policy, then eventually you trade smaller shares of total world production of agricultural products, and that in turn makes the prices more volatile," said Joachim von Braun, director general of the International Food Policy Research Institute in Washington. (it is human nature to self preserve and take care of your own, so I believe this is the path we are destined for)
• In Argentina, a government tax on grain led to a strike by farmers that disrupted grain exports. Vietnam and India, both major rice exporters, announced further curbs on overseas sales on Friday, sending rice higher on U.S. futures markets.
• In the next decade, the price of corn could rise 27 percent, oilseeds such as soybeans by 23 percent and rice 9 percent, according to tentative forecasts in February by the OECD and the U.N. (I think a lot more than that)
• Waves of discontent are already starting to be felt. Violent protests hit Cameroon and Burkina Faso in February. Protesters rallied in Indonesia recently and media reported deaths by starvation. In the Philippines, fast-food chains were urged to cut rice portions to counter a surge in prices.
• The Chinese, whose rise began in earnest in 2001, ate just 20 kilograms (44 pounds) of meat per capita in 1985. They now eat 50 kilograms (110 pounds) a year. Each pound of beef takes about seven pounds of grain to produce, which means land that could be used to grow food for humans is being diverted to growing animal feed.
• As the West seeks to tackle the risk of global warming, a drive towards greener fuels is compounding the world's food problems.
• "Turning food into fuel for cars is a major mistake on many fronts." said Janet Larsen, director of research at the Earth Policy Institute, an environmental group based in Washington. "One, we're already seeing higher food prices in the American supermarket. Two, perhaps more serious from a global perspective, we're seeing higher food prices in developing countries where it's escalated as far as people rioting in the streets."
• Similarly, palm oil is at record prices because of demand to use it for biofuel, causing pain for low income families in Indonesia and Malaysia, where it is a staple.
• But despite the rising criticism of biofuels, the U.S. corn-fed ethanol industry enjoys wide political support because it boosts farmers, who suffered years of low prices, and that support is likely to continue. [Mar 27: Farm Lobby Beats Back Assault on Subsidies]
• John Bruton, the European Union's Ambassador to the United States, predicts that the world faces 10 to 15 years of steep rises in food costs. And it is the poor in Africa and, increasingly, South East Asia, who will be most vulnerable. (but they don't buy stocks, so nothing to worry about)
• "It's actually the greatest time in the world to be a farmer around the world," Babcock said. "We are going to see fairly substantial increases in production because farmers have never had such a large incentive to increase production."
• But others note that expensive seeds and fertilizers are out of reach of farmers in poor countries.
• Around the beginning of the 19th Century, British political economist Thomas Malthus said population had the potential to grow much faster than food supply, a prediction that efficient farming consistently proved wrong. Now, at the beginning of the 21st century, some are revisiting his predictions.

Posts just from last week on the subject

1. Mar 24: UN Agency Appeals for $500M to Avoid Food Aid Cuts
2. Mar 25: This Day in Agriculture
3. Mar 26: US Government's Humanitarian Relief Agency Cutting Back
4. Mar 27: UN Report: Asia Faces Jump in Food Costs
5. Mar 28: This Day in Food Crisis - Rising Rice Prices Spark Concern Across Asia

These stories and my downbeat long term outlook on this crisis are the bedrock for the thesis to continue to invest in the entire agriculture theme, specifically the fertilizers and (once hedge funds are done playing with it) back into the Powershares DB Agriculture Fund (DBA).

So at this point it appears the only ones stressing this are Cramer, me, and Don Coxe [Jan 18: One Lonely Voice Agrees with Me on Food Inflation]. January was about the same time the very first inklings of this problem finally started hitting the press [Jan 21: Food... Food... Food], but it still appears to be largely ignored. The warning signs of this potential uptick in agflation is the main reason I have been watching the main US food producers (Smithfield Foods (SFD), Tyson Foods (TSN), Pilgrims Pride (PPC), and Sanderson Farms (SAFM)) as far back as last summer at the beginning of the blog. Remember, my next prediction is a future shortage of beef.... that might take 9-18 months to play out... but as it becomes more expensive to raise cattle, they will get slaughtered in larger numbers *now* causing a shorter term glut and suppressed prices, but potentially leading to a longer term shortage as the economics simply do not work without a meaningful increase in prices (which US consumers will at some point balk at due to their stagnant real (inflation adjusted) wages).

Inflation - it is truly the most sinister of taxes...

Classic Example of Analysts Overexuberance

From this quick Reuters article, comes exactly the reason that the US stock market is NOT "cheap" as pundits continue to cry out across the financial media. I've been saying since last year 2008 estimates for any company touching the domestic economy are too high, and will get slashed as the year goes by. But we will go through denial stage (remember most economists in most major firms did not even begin calling for even a potential for recession until December 2007!) ... and we continue to go through denial stage as the mindset now has only fallen to "a mild and short recession".

To see this earnings degradation starkly in just the first quarter (current quarter) here is the progression by 'consensus' (the herd got it very wrong)

• At the beginning of the quarter, analysts projected 4.7 percent earnings growth during the period. (folks that is 3 months ago...)
• Last week? 5.5 percent decline projected
• This week? Earnings for Standard & Poor's 500 companies are now expected to fall 8.1 percent in the first quarter

So in the span of 3 months we have a 12.8% swing in earnings projections - and that's for the 1st quarter which in THEORY should be the easiest to project for companies and analysts since it's the nearest to when they made said projections. If they are that wrong on Q1 how wrong do you think they will be on Q3 and Q4? I've been warning about this incessantly and will continue to warn because 2nd half 2008 projections are far too high (they are built on the "2nd half recovery" thesis) - and as they fall, if the market has any efficiency left in it, stock prices should as well. And no, these earnings shortfalls coming in the 2nd half of 08 are not "already built into stock prices". We did not even accurately build in earnings shortfalls 3 months ago. That doesn't mean we go straight down (or up) in the stock market; it simply means this is going to be a tough year, unless you believe P/E ratios expand at the same time earnings expectations fall (thus holding prices steady). Once again, the canary in the coal mine are these retailers who are beginning to simply pull future guidance altogether since it is pure guesswork at this point. Anything levered to the US consumer remains at serious risk... this is why all these "early cycle" rallies are pure folly when analyzed with any rigor.

Job Market 2009

I found this video on Toro's blog, and it is laugh out loud funny... unless you're a white collar professional in finance that is ;) The exact reversal of 2004-2006 - my how quickly things change ...

Howard Davidowitz on US Consumer

I couldn't copy this over to the blog but here is a 4 minute audio file worth listening to... kind of funny to hear this in a NY accent - makes it sound even more ominous! :)

Same ideas we've been discussing for a long time - consumer under major duress and discretionary spending will be going down the tubes as people flee to bulk warehouses and Walmart... as I keep saying, all the current focus is on saving the banking system, but we have a "minor" problem called a consumer led recession that is being completely ignored. But since the bailout of the over levered, risk loving NYC bankers is the important thing that leads to the wall to wall CNBC coverage ;)

Thankfully "everything will be fine in 6 months" (post government bailout of home mortgages)... or I'd be worried.

"In this kind of economy, with the consumer so scared, we're going to see companies like Penney in big trouble," says retail consultant Howard Davidowitz. The chairman of Davidowitz and Associates says J.C. Penney's slashed profit forecast reflects a consumer who's limiting his spending to necessities. "The things Penney sells are optional," says Davidowitz. "You've probably got 24 sweaters in your closet. You can live without another one."

Time to Enter Vimpel Communications (VIP)?

I'm starting to get very interested in Vimpel Communications (VIP), a Russian mobile (moving to integrated) telecom player. I've invested in this stock a long time ago in my personal account (2004-2005 time frame) and after falling asleep a few times watching it do nothing, sold it off - of course much too early. Starting in middle 2006 it's rocketed, along with its peer Mobile Telesystems (MBT). The pickings in US listed Russian stocks are extremely limited; most choose to list in London (I suppose its a Cold War thing...). Many stocks are also simply a proxy on the energy trade, of which there are easier ways to play then going through Russia. I've also had my beefs with the way business is run in Russia, but upon reflection and watching how the US business world works, I can't really say we are not throwing rocks from our glass house to criticize any other economic/political system, after what we do in our system that generally transfers wealth up to the elite few (no different than Russia, just with better packaging).

First, let me preface this by saying I don't touch US based telecom because it's a saturated market, and I like secular growth. I even have been a bit wary of international telecom because frankly it seems to go from growth to saturation quite quickly, and Russia is already appearing to be hitting that situation; but some of the moves from Vimpel of late have been interesting, especially it's move to become an integrated player combining land line with its mobile business, creating the potential for "package" services that are very popular in the US. Back in late December, Vimpel announced a $4.3B deal to buy Golden Telecom - that pretty much marked the top in Vimpel stock price, north of $45.

• Russia's OAO Vimpel Communications agreed to buy broadband and fixed-line operator Golden Telecom Inc for about $4.3 billion. Under the deal announced Friday, VimpelCom will pay $105 for each Golden Telecom share, a 5% premium to where the shares closed Thursday.
• The deal gives VimpelCom, Russia's second largest mobile operator, a foothold in Russia's growing market for broadband, as well as the slowing business of fixed-line telephony. Golden Telecom is also Russia's largest player in the business of providing telecommunications services to businesses.

As usual, the minute a deal is announced the acquirer gets struck down, and seems to have a ceiling on it's stock price - in Vimpel's case, it's been an even uglier road as the company has lost over 35% of its value in just over 3 months. But the transaction completed in late February 2008 so that overhead should begin to dissipate. Even as recently as a month ago the stock was near $39, but a "disappointing" earnings report mid month along with general retrenchment from the Russian market has booted the stock. By disappointing I mean "wonderful growth numbers but not good enough for analysts".... a typical situation on Wall Street. My 2 risk factors are relative saturation of the Russian mobile market, plus degrading margins (in this case attributed to stock based compensation)- but the risks at $29 should be far less than the risks at mid $40s or mid $30s.

• Vimpelcom (VIP), Russia's No.2 mobile phone operator, on Wednesday posted an 86 percent jump in fourth-quarter net profit but fell short of market expectations and saw its shares fall by about 5 percent.
• The net profit, in U.S. GAAP terms, was up to $368.1 million against an average forecast of $401.5 million in a Reuters poll of nine analysts.
• The OIBDA margin fell to 45.7 percent from 47.5 percent a year ago, below analysts' forecasts of about 49.3 percent.
• "This shortfall to expectations was primarily due to higher than expected expenses related to stock-based compensation for management, which is a non-cash and non-recurring item," analysts from Uralsib Bank wrote in a results review.
• Vimpelcom's Chief Executive Officer Alexander Izosimov told reporters the expenses amounted to $118.7 million in the fourth quarter, up by $78.2 million from the third quarter and by $94.5 million over the fourth quarter of 2006. "As the share price rose by more than 50 percent in the fourth quarter, allocations to stock-option programmes increased. This has no burden on the company's cash flow," Izosimov said.
• Without those expenses, Vimpelcom's OIBDA margin would have exceeded 50 percent, the company said.
• Vimpelcom, owned by Russian Alfa Group and Norway's Telenor , said revenues were up 38 percent to $2.01 billion, but again missed the analysts' average forecast of $2.025 billion.
• The average monthly revenues per user (ARPU), an indicator of client quality, rose in Russia to $13.50 from $10.90 in the fourth quarter of 2006 and was slightly higher than a poll figure of $13.40. In Kazakhstan, Vimpelcom's second-biggest market, the ARPU fell to $13 from $13.80, above a market view of $12.60.
• In 2007 as a whole, Vimpelcom's total revenues rose by 47.3 percent to $7.17 billion, while OIBDA amounted to $3.6 billion.
• "The main potential for growth is in broadband Internet. Growth will be rapid, similar to what we saw in the mobile phone market," Izosimov said.

Golden Telecom also appears to be quite a healthy company...

• Russian fixed-line telecoms operator Golden Telecom, which has been recently acquired by Vimpelcom (VIP.N), said on Tuesday its full-year 2007 net profit rose by 78 percent to $152.6 million.
• The company said in a regulatory filing its 2007 revenues, to U.S. GAAP, rose 51 percent to $1.29 billion from $854.62 million in 2006.

These are just not the type of numbers you see in US based telecom.... or Western Europe. And the Crackberry is coming to Russia through Vimpel as well...

• Subscriber growth has slowed in Russia, where most people already use cell phones. But users there are burning up more minutes on mobile phones and sending more text messages, boosting the company's revenue. Izosimov wants to keep moving in that direction.
• And VimpelCom plans to start selling Research In Motion's (NasdaqGS:RIMM) BlackBerry devices in Russia in early 2008.
• "At first, it looks like a luxury category to the population. Then, it becomes absolutely normal because disposable income reaches a certain level. There's a lot of intrinsic value in the communications (ability) we provide."
• Izosimov says wireless usage has boomed even in Kazakhstan, where food inflation has roiled consumers. In 2008, he says, VimpelCom will focus on adding more high-spend customers in Kazakhstan, not just subscriber growth.
• In Ukraine, though, VimpelCom will be focused on grabbing market share. VimpelCom has 2.2 million active subscribers in Ukraine and needs to double that, he says.
• VimpelCom hopes to get a lift from entering its first market in Southeast Asia in 2008. It's in talks for a joint venture in Vietnam.

Technically, the chart is at an interesting place. The stock has pulled back all the way to its 200 day moving average which is a key technical support/resistance level. A break through this level and the stock could break down much further - a bounce off this level, and we should be in good shape. $29 is also the area the stock sold off to in the January panic, so it is again - simply a key technical level to hold. If we do get a rebound here the $34s provide some resistance as the 50 day moving average is there (and falling sharply by the day).



In terms of profits, we are looking $2.00 in 2008 EPS and $2.50 for 2009 - I would anticipate a 18-22% type of growth rate for the next few years as mobile (and land line) slow down to saturation but broadband starts to take off in mother Russia. So we have a forward P/E ratio of 14.5 compared to Mobile Telesystems (MBT) sub 12, but Vimpel has (in general) the better operational metrics.

I will be watching Vimpel for a reversal off of these levels, and be interesting in buying north of $30-$31 or if there is a break of this support level (from which the stock could drop quite a bit to reach any new support). But from a fundamental point of view, while saturation always overhangs any telecom player, the macro trends of natural rich Russia will probably lend to an easier time on the middle class of that country relative to the US in the next few years - despite the dysfunctional governments of both.

Long Research in Motion in fund; no personal positions

Bookkeeping: Weekly Changes to Fund Positions Week 34

Week 34 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: 27.4% (vs 8.5% last week)
56 long bias: 48.5% (vs 84.4% last week)
6 short bias: 24.1% (vs 7.1% last week)

62 positions (vs 64 last week)
Additions: N/A
Removals: KHD Humbolt Wedag (KHD), MFA Mortgage Investments (MFA)

Top 10 positions = 35.8% of fund (vs 36.2% last week)
29 of the 62 positions are at least 1% of the fund's overall holdings (46.8%)

Major changes and weekly thoughts
The markets continue to trade in listless fashion in my opinion, and we remain in no man's land. After a large rebound post Federal Reserve actions, we seem to be heading back to reality. But what we see now is really nothing new from what we've been seeing for months on end so I have nothing really to add at this point. Congress comes back to work Monday so the drumbeat for homeowner bailouts will continue constantly and when it eventually does come to pass (and some form of it will), the market will rocket as losses will have been passed from the capitalist system to the taxpayer's back (I mean at the debt levels we are at, whats another few hundred billion). And so we'll cheer as investors. That, sadly, is pretty much the roadmap to "victory" for investors at this point. Rob one of your pockets to pay the other.

As I've been stating constantly this week, due to the huge imbalances on both sides of the ledger (downside risk due to "economic reality" combined with "credit contagion" versus upside risk due to "multiple interventions of various types") there is no clear path. Both longs and shorts have risk, longs from natural course being allowed to play out, and shorts from unnatural meddling from outside the system. More important than fundamentals, or risk assessment or any form of analysis - is the simple question of "is the government bigger than the system". Sadly, this is what our markets have devolved to. I don't have any answer so I continue to play conservative and watch sadly as it all plays out. Remember, every form of government intervention into the system i.e. reducing balances on mortgages - raises 20 new unintended consequences... i.e. if we reduce balances now and tell homeowners, don't worry about that $300K you own, it's now down to $200K - what do we say in a year if home prices continue to fall? Another round of principal cuts? And whom exactly qualifies? And how do we ever speak with a straight face to any other country about their need to "let market forces work"? So many thorny issues but I guess a central command economy brings those questions we need to now find answers to. I expect to see continued raging battle between market economic forces (deflation of capital/credit system) vs government interventions being a theme for a long time. We'll see how the market accepts the new round of financial writeoffs relatively soon. Remember, the one thread holding this all together is the belief in powers of the Federal Reserve. If that belief system is shaken, we have a lot to fear. As readers, just keep in mind, you are living through times that are simply historic and the pros/cons of the actions taken by the powers that be will be analyzed and debated for many years to come. We are in a new era. [Mar 22: A Historic 9 Days for the Federal Reserve]

I continue to focus outside the US, and on companies with customers who actually have bright prospects instead of relying on government interventions. Most weeks it works; some weeks (such as last week) when government intervention is cheered and the Kool Aid of a booming consumer coming back in "6 months" it does not. I continue to believe it will work more weeks than not, but I also believe at some point the sheer avalanche of government interference plus liquidity thrown into the market will push every asset up, at the cost of inflation to the man on the Street. But as cold hearted capitalist (who happen to live on Main Street) we have to simply wait for that moment and rejoice in our investor brain while being dismayed with our regular Joe brain. Sadly, most of the regular Joes do not participate in the market except for their $3600 balance in their 401k, so they will only feel the negative effects. But this is the system, so we play by it.

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

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

1. Monday, as the S&P made a valiant move upwards towards the 50 day moving average, I took a slew of sales in 12 names, assuming this move would fail - while beginning to slow build up my short exposure which entered the week at only 7%. I will continue this strategy over and over (and over). Just like in a bull market, I'd be buying dips into the 50 day moving average, in a bear market I am doing the exact opposite and I will be selling moves up. One day it will be wrong to do so, and I'll miss some gains and have to reverse course. Just like in January 2008 it was wrong to buy the dip as we turned from a bull market, officially to a broken bear. [Jan 16: S&P 500 in Worst Condition in Half Decade]. When those "turns" happen, we'll trail the market for this short period, but they happen very rarely - and the most dangerous thing to investors is to listen to these serial "bottom callers". They've now been wrong for nearly half a year, since the early October highs. By the time they are correct, most of your capital will be wiped out. Remember, almost every pundit you hear has a vested interest in keeping you in the market and buying stuff - Wall Street is a game of selling junk and gathering assets - so of course "hope" is the main thing sold. This is why the market can be so confusing to anyone who doesn't know what is happening behind the scenes. It's basically a used car lot full of people with shiny MBAs and fancy titles. One day this "bottom is in call" will be correct and they'll come on TV or on their websites and say "I TOLD YOU SO!". Continue to smirk and move on.
2. I exited KHD Humbolt Wedag (KHD) on its 13% pop. I continue to like this Hong Kong based infrastructure company but want the market to recognize some value in this name, instead of trashing it constantly. With my purchases of some smaller Asian market ETFs and natural gas stocks last week, I am starting to get a larger portfolio than intended in terms of # of names, so I used this week to begin culling some of the smaller stakes. This was one.
3. Tuesday, since I was confused about the near term prospects of the market, I sold off some of my commodity exposure and began a move to high cash position. The charts for gold, silver, crops, and the like - while rebounding this week - looked prone to more profit taking and with yet another variable we have no control over (hedge funds forced to liquidate by antsy banks) the risk factor continues to be as high as I can ever remember it (in both directions). Until fundamentals matter again, it is just hard for an investor such as myself to make any sense of this type of market where bipolar changes of 180 degrees happen nearly daily.
4. Wednesday, I took Goldman Sachs upgrade of the coal names as an opportunity to lighten my exposure. Again, I still like the fundamentals, and long term - but this is risk aversion - and a market where fundamentals mean little. Many of the coal stocks broke back below their 50 day moving average and spent most of the week trending back up towards it, but still sit below. I'd like to see them move above and stay there before expanding my exposure.
5. I continued to add short exposure Wednesday as we seemed to have once again began a failure of breaking through the 50 day moving average on the S&P 500, and created the 8th lower high since October 2007 - I added as the week progressed across all 6 names.
   
6. I closed MFA Mortgage Investments (MFA) - the stock has rebounded (some) from a very rough patch but with the prospects for more credit market dislocations I don't want to take the risk. I bought this name so I could get exposure to the "homebuilding/mortgage" rebound fluff without direct exposure to the homebuilders themselves, but frankly it appears safer to buy homebuilders than any 2nd degree or 3rd degree related stocks. By 2 forays have been disasters.
7. Thursday, I added to one of my "placeholder" positions (position so small, I am simply keeping them in the fund waiting for a catalyst) in Huron Consulting (HURN). The stock fell 30% on an earnings warning, so I took the opportunity to materially increase my exposure at what is hopefully a low price. While the bottom might or not might be in, I'd rather own it at $40 than $60.
8. I cut heavily into both of my solar names into the 3 day rally this week - Trina Solar (TSL) and LDK Solar (LDK). These stocks are explosive when they do move, but for many months they have been moribund. Despite difficult fundamentals, in my opinion, I expect the speculators to ignore any fundamental issues dealing with the tight polysilicon market and run these stocks up in a massive way at some point in the next 3-6 months. Just a question of when and from what price point they start. I'll be looking to add back to these 2 positions on a pullback, along with expanding to another name or two to rebuild my "solar basket" on a material pullback in the space.
9. Friday, I cut back my crop ETF - Powershares DB Agriculture Fund (DBA) - I will sound like a broken clock but risk of hedge fund locusts simply overwhelms return potential at this time. I used to use this ETF as an alternative to cash but at this point until the coast is clear in terms of hedge fund behavior I'll stick to real cash. We have a crop report coming Monday which people will obsess over but frankly all it takes is some bad weather and these crop prices will ramp again - no crop report or allocation study is going to tell us where things will be in 2 months, 4 months, or 6 months but knee jerk reactions are the way of the Street so I'll step aside from now and look to return in the future.
10. I did sell down my Foster Wheeler (FWLT) exposure throughout the week as the stock rebounded smartly from its ridiculous fall to mid $40s last week, to near $60. In this market I am going to take those quick gains and head to the exit. I'll look to add at lower prices.
    

81 Stock Returning 9%+ this Week

Despite the indexes not showing much action, a lot of churning under the surface as risk taking appetite appeared to increase, and many stocks shunned for 2 months were favored by the speculative set - showcased by moves back into some high beta technology, Chinese stocks, and solar. A big push back into smaller types of companies as this list is heavily weighted with stocks in the $2-$3B market capitalization range. I continue to find it interesting to see when the solar stocks move, they move en masse - without any differentiation - which makes this group still seem risky to me - there cannot be 100 winners in solar but they are treated all the same 90% of the time - either they are all "bad" or "good", depending on the mood of the market. This would highlight investors clearly have no way to determine the ultimate winners or losers in this group so they run up (or sell off) everything together. Last, the "commodities are dead" trade that was so popular last week, lasted all of 3 days - as it was reversed this week.

One group that caught my eye that has been dead for a long time are the land based US focused driller - Nabors, Patterson-UTI, et al. These have struggled for a long time but finally broke out this week, perhaps on the strength of the natural gas trade.

As always, criteria for the list below

1. Market cap >$2B
2. Stock price $10+
3. Average volume 100K+
4. Return 9%+

Green we own; blue we have owned in the past or discussed

Symbol	Company Name	% Price 1 Week
GU	Gushan Environmental Energy Ltd	50.8
CLWR	Clearwire Corp	38.4
STP	Suntech Power Holdings	33.5
RMBS	Rambus Inc	28.8
JASO	JA Solar Holdings Co Ltd	26.8
LDK	LDK Solar Co Ltd	25.6
YGE	Yingli Green Energy Holding Co Ltd	23.5
SPWR	SunPower Corp	20.7
CIT	CIT Group Ord Shs	20.5
HK	Petrohawk Energy Corp	19.2
GA	Giant Interactive Group Inc	18.6
PTEN	Patterson-UTI Energy Inc	18.5
FSLR	First Solar Inc	18.1
MON	Monsanto Co	17.7
CLR	Continental Resources Ord Shs	17.3
BJS	BJ Services Co	17.2
WLT	Walter Industry Ord Shs	16.3
ANR	Alpha Natural Resources Inc	16.1
EQIX	Equinix Inc	15.4
WBD	Wimm-Bill-Dann OAO	14.7
MOS	Mosaic Co	14.6
PDS	Precision Drilling Trust	14.1
CY	Cypress Semiconductor Corp	13.8
VRTX	Vertex Pharmaceuticals Inc	13.4
MDR	McDermott International Inc	13.3
WHQ	W-H Energy Services Inc	13.1
EAC	Encore Acquisition Co	12.6
MXIM	Maxim Integrated Products Inc	12.6
BRCM	Broadcom Class A Ord Shs	12.5
TLM	TALISMAN ENERGY INC	12.3
SPN	Superior Energy Services Inc	12.2
OII	Oceaneering International Inc	12.2
CTRP	Ctrip.com	12.2
DRC	Dresser-Rand Group Inc	12.1
TCK	Teck Cominco Ord Shs Class B	12.0
LEAP	Leap Wireless International Inc	11.9
AZ	Allianz ADR Reptg One Tenth Ord Shs	11.9
WFT	Weatherford International Inc	11.8
SM	St Mary Land & Exploration Co	11.6
CEO	CNOOC ADR representing 100 Class H Shares	11.6
MEE	Massey Energy Co	11.4
MR	Mindray Medical International Ltd	11.4