Fund my Mutual Fund Stock Invitational - 4th Round

Off we move to the Elite 8 - I'll keep polling open til mid day Monday since some people don't check in on weekends. The oddsmakers seem to be favoring a Potash v Apple final...

Technology Region
(1) HP v (3) Apple - Apple in a rout with 82% of the vote - already trash talking to Potash as its cocky attitude makes it smirk at J&J

Health/Home
(2) J&J v (5) Altria -J&J pulls out a close one as health finally wins out over sickness - 54%

Financials
(1) Berkshire v (3) Goldman Sachs - the senior class at Berkshire pulls off a close one - the entire government came to root for Goldman and tried to sway the refs! Did not work, a 2 vote win for Berkshire

Industrials
(2) BHP v (5) Potash - the young gun Potash takes out venerable BHP with its deep bench, 75 to 25%

71 Stocks Returning 7%+ This Week

I didn't realize how well the fund's positions did this week until I looked at this weekly review. Perhaps because I had cut back so many positions during the week, I did not realize how much they were ramping. So aside from asset allocation it indicates the fund holdings were back in favor this week - but again, a heavy emphasis on commodities which are sure to be sold off soon enough by panic selling if past history is any indication. What the market giveth....

1. Market capitalization $2 billion+
2. Stock price $10+
3. Average Daily Volume 100K+
4. Weekly Return 7%+

Names in green we own; in blue we have owned in the past or discussed. (Please note we sold Schering-Plough, and Peabody Energy this week) Somehow we managed to own 5 of the top 6 names in the entire market this week ... and 9 of the top 16. It was obviously a week for "natural resources".

Symbol	Company Name	% Price 1 Week
MEE	Massey Energy Co	27.5
CF	CF Industries Holdings Inc	26.3
VMW	VMware Inc	20.4
SGP	Schering-Plough	19.8
MOS	Mosaic Co	19.8
ACI	Arch Coal Ord Shs	17.7
FCL	Foundation Coal Holdings Inc	17.5
XCO	EXCO Resources Inc	17.2
CXG	CNX Gas Ord Shs	16.9
ANR	Alpha Natural Resources Inc	16.7
BBL	BHP Billiton ADR	15.6
BHP	BHP Billiton ADR	15.5
MELI	Mercadolibre Inc	15.2
BG	Bunge Ord Shs	15.2
DRYS	DryShips Inc	14.7
MTL	Mechel ADR Rep 3 Ord Shs	14.7
FDG	FORDING INC	14.0
ESI	ITT Educational Services Inc	13.6
BTU	Peabody Energy Ord Shs	13.3
CLR	Continental Resources Ord Shs	12.9
PXP	Plains Exploration & Production Co	12.8
WTI	W&T Offshore Inc	12.6
AGU	AGRIUM INC	11.9
NOV	National Oilwell Varco Inc	11.9
SPR	Spirit Aerosystems Holdings Inc	11.5
TRA	Terra Industries Ord Shs	11.0
TCK	Teck Cominco Ord Shs Class B	10.8
SD	SandRidge Energy Ord Shs	10.7
SNDK	SanDisk Corp	10.5
SCHN	Schnitzer Steel Industries Inc	10.4
SQM	Sociedad Quimica y Minera de Chile	10.4
CNQ	CDN Natural Resource Ord Shs	10.4
MRK	Merck & Co Ord Shs	10.4
BHPLF	BHP Billiton Ord Shs	10.3
FCX	Freeport McMoRan Copper & Gold	10.1
CNX	CONSOL Energy Inc	9.8
AAUK	Anglo American ADR	9.8
DV	DeVry Inc	9.7
MR	Mindray Medical International Ltd	9.5
RRI	Reliant Energy Inc	9.5
APA	Apache Corp Ord Shs	9.4
NIHD	NII Holdings Inc	9.3
POT	Potash	9.2
HK	Petrohawk Energy Corp	8.9
DE	Deere & Co	8.9
AKS	AK Steel Holding Corp	8.5
JASO	JA Solar Holdings Co Ltd	8.4
EMN	Eastman Chemical Co	8.3
COG	Cabot Oil & Gas Corp	8.2
GGB	Gerdau SA Depository Receipt	8.2
CMP	Compass Minerals International Inc	8.0
OCR	Omnicare Ord Shs	8.0
APOL	Apollo Group Inc	8.0
SU	SUNCOR ENERGY INC	7.9
ATN	Atlas Energy Resources LLC	7.8
WLL	Whiting Petroleum Corp	7.8
IVN	IVANHOE MINES LTD	7.8
SID	Companhia Siderurgica Nacional ADR	7.8
CNH	CNH Global NV	7.5
CLWR	Clearwire Corp	7.4
CLF	Cleveland Cliffs Ord Shs	7.3
CY	Cypress Semiconductor Corp	7.2
PCS	MetroPCS Communications Inc	7.1
SLT	Sterlite Industries ADR	7.1
PCU	Southern Copper Corp	7.1
DVN	Devon Energy Ord Shs	7.1
SAP	SABMiller Sponsored ADR rep 1 ord shs	7.1
KLAC	KLA Tencor Corp	7.0
ELN	Elan Depository Receipt	7.0
CCJ	Cameco Ord Shs	7.0
MON	Monsanto Co	7.0

Bookkeeping: 'Rising Tide' Performance Week 36

Week 36 performance of the mutual fund

Comments: We had a generally quiet week, where bad news was constantly ignored as the S&P 500 trended above the 50 day moving average for the first 4 days of the week. Wednesday and Thursday the market sold off a bit, testing S&P 1350 on the bottom but never (magically) breaking through. No amount of bad news, even horrid retail sales, could do this market in because each line item of negativity was met with "yeh so what you factual thinker - we're looking to tomorrow and in 6 months everything will be fine" Singing of "Tomorrow" could actually be heard emanating from trading floors across NYC each time a new fact came out - this is called "drowning out the bad news". And then Friday hit... and a sell off led by General Electric (GE) surprising the hordes of NYC Harvard MBAs with a dirty thing called...."reality". After a bout of denial early in the morning (old habits die hard), eventually the Kool Aid ran out (lasted 4 days this week!), and the NYC traders retreated awaiting the next solution from the Nanny state to bail them out and/or prop up the market (preferably both). Uncle Al and Uncle Hank were busy with that darn G7 meeting but already have been hard at work, laying out the plans for the next way to kill off free markets and further put risk on individual tax payers back [Fed Makes Plans for More Historic Actions] and away from the tired & poor of the top 0.5% in NYC (ok well not poor, they're all millionaires many times over - but they are tired!). Next week is a new week, where more 'free market' solutions can be introduced to make sure those who take outsized risk in lightly regulated markets are not made to pay the price. Looking forward to it!

I spent most of the week constantly mocking the "6 months everything will be fine" mantra - but then again I've been doing that for nearly 3/4 of a year now. When I was not busy doing that, I was reading about massive inflation, global famine, and socialization of losses. Then again, I've been doing that for a while too. In between, I was watching the charts, and starting to doubt what looked like a breakout move Monday [A Lot of Reversals Today] and then turned chicken [Getting More Conservative - Waiting for Direction]. Outside of that Mechel (MTL), the top holding most of the week outperformed nicely, giving us a snazzy boost. And the Ultrashort exposure helped Friday.

Most stocks I am interested in have had large runs in a short span and in the past when that has happened, the market has taken away those gains shortly thereafter. So my "great outperformance" quickly turns into "good outperformance" in those weeks. So this time around I am trying to mitigate that issue, while understanding I can't turn into a 80% short exposure like a hedge fund could. So I'm raising oodles of cash instead. We sit in the same spot we've been sitting for a long time - bad news on the ground, acceptance of bad news/fear in the bond market, and denial of bad news in the equity market. It's Groundhog Day.

We enter this earnings season in very similar fashion to the horrific January season - denial the economy is really that bad (but we've moved from "no recession" to "short, light, and shallow recession" so that's progress in 90 days), way too high earnings estimates for any domestic facing company, way too much belief the Federal Reserve can fix all our problems (although they've made historic moves to meddle with free markets since last earnings season), and awaiting handouts/bailouts from the government - the home builders are getting theirs [Congress is Rushing to Help Home Owners!! (Not)]; and the rest of corporate America awaits theirs. Once all the important corporate donors are fed milk from the federal governments breast, we'll move on to finding a bailout for the masses of peasants. All in good time peasants.

We are in week 36, so amazingly only 3 weeks left in my "3rd quarter" of year 1. Time has flown, but our country's policies have changed quite a bit in that time - I continue to believe the actions being done will be in historical text and marveled at in the future. After a very strong week led by a huge 1 day gain in the indexes last week, the market gave back much of that this week led by a large 1 day loss (Friday). The S&P 500 and Russell 1000 both lost 2.7% this week. Rising Tide Growth Fund's conservative stance this week led to my favorite type of week; with both relative (vs indexes) and absolute outperformance - gaining 1.0%.

Price of Rising Tide Growth: $11.650
Lifetime Performance to date (vs Aug 3, 2007): +16.50%

Comparable S&P 500: 1,332.83 (-9.03%)
Comparable Russell 1000: 727.18 (-8.67%)

Fund return vs S&P 500: +25.53%
Fund return vs Russell 1000: +25.17%

Last week's results here.

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

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

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

Please click here: fund performance for previous updates

Bookkeeping: Lightening Up on Some Short Exposure

Looks like an ugly close - I am going to lighten up a bit on my short exposure here, since the reflex will be some sort of premarket rally in futures helped by the Invisible Hand, and a weekend full of Kool Aid drinking. Plus the G7 finance mavens are meeting, so I am sure they can come up with some socialistic program to stop free markets from working correctly. Ironically all these Europeans are going to be taking advice from Americans on how best to be a socialist... oh the irony of it all. Always some risk from the short side, with socialism running high in America.

We weathered this week very well, so I'm going to simply lock in some profits. One thing I am not reducing is the Ultrashort Basic Materials (SMN) because that's a hedge versus the commodity stocks I own (and continue to believe in) and as we've seen over and over - after they go out and shoot the stocks that deserve to be shot every 3-4 weeks when they realize the recovery won't be in "6 months" (the early cycle fare) they eventually find a reason to sell off commodity stocks shortly after. So I've cut them back even more today, and am sitting in cash awaiting to hear the excuse to sell off fertilizer, coal, iron ore, copper, etc 20-30%. It should be coming in the next week or two - my belief is the next reason to sell them will be "China is slowing from 12% GDP to 8% GDP" etc. But the reason doesn't really matter - they will find any reason and we'll get the panicked people on CNBC and doom and gloom articles about how it's a bubble. Starting to get so predictable it's tiring but this time I hope to be less exposed than I've been in the past. It looks like S&P 1310-1315 will be the next floor to test, but that doesn't mean it has to happen Monday. However, S&P level 1350 might be the new ceiling if we don't see a quick rebound early next week.

Long Ultrashort Basic Materials in fund and personal account

Bears Win Again?

Doesn't look good for the Kool Aid swiggers unless we have a quick reversal back above S&P 1350 in the next 2.5 hours. This is not a chart you'd want to take home to mom; especially in the face of earnings season.



Taking a quick look at next week's docket, Tuesday is going to be mighty interesting with the likes of Intel (INTC), Washington Mutual (WM), Johnson & Johnson (JNJ), and CSX (CSX) - the latter I expect very good things from as our grains, corns, and coal gets sucked up across the globe.

But there is still hope as we have 2.5 hours for Uncle Ben to helicopter drop Kool Aid over our collective heads and get us dreaming of unicorns, mermaids, and "everything will be fine in 6 months". I have been incrementally adding short exposure, not buying a thing, and sitting in the Swiss Alps (neutral). If we continue to break down into the close, I'll add more.... again, expect the day to day action of the next few weeks to return to volatility after a very quiet past week. Each day the world will either (a) be ending or (a) the beginning of a new golden era ... based on a few bellweather earnings reports each day. All of it is nonsense and overreaction, but that's how the lemmings do things so you have to respect the power of a horde of 2 ounce monsters ruining your portfolio in the short term!

This is truly one of my favorite pictures of all time; and represents all that is wrong with human herd behavior (below)

Blackrock (BLK) Gets 2 Downgrades

Tough day for asset manager Blackrock (BLK) with 2 separate downgrades. I don't have a major stake right now since the valuation has been a bit rich and the stock overextended, but we've pulled back from $230s to $210... I'd like to get more at $190 if possible. Hence, I have to agree with this downgrade on valuation - just hard to see much upside from where it's been trading of late. Still an amazing franchise with the best management....you wouldn't know it's a financial company based on it's 6 mo chart. [Jan 17: Blackrock Continues to be a Safe Haven in Financials] This is actually one of my favorite buys in the fund since my general thesis is find a rising tide and just about any boat will do the trick... but buying the right financial has been like walking through a scary neighborhood at 2 AM in the morning and trying to find the right safe house. ;)

• Goldman Sachs and Wachovia analysts downgraded BlackRock Inc. Friday, saying the investment manager's stock price will not likely be able to sustain its recent growth.
• Goldman Sachs analyst Marc Irizarry removed the New York-based company from the firm's "Americas Buy List" and lowered his rating to "Neutral" from "Buy."
• As the stock approaches his $225 price target, Irizarry said its upside price potential is limited. His target implies he expects the stock to rise only about 2 percent above Thursday's $220.39 close.
• Already, BlackRock shares trade at a 40 percent premium to its sector, compared with a 22 percent historical average premium, he said. Shares have risen 39 percent in the past 12 months, compared to a 6 percent drop in the value of the Standard & Poor's 500 index, he noted.
• We think BlackRock has done an excellent job of managing its franchise during the credit crisis," Irizarry said in a note to clients. "However, at these levels we believe the stock's valuation is full."
• Wachovia analyst Douglas Sipkin cut his rating to "Market Perform" from "Outperform" and his 2008 earnings estimate to $9.03 per share from $9.71 per share. Analysts polled by Thomson Financial expect, on average, earnings of $9.23 per share for the period.
• "While performance at BlackRock remains healthy, we doubt that the level of outperformance is sustainable," Sipkin said in a note to clients.
• During the onslaught of the credit crisis, investors moved cash to safer investments at BlackRock, but now may look to increase risk -- and potential profit -- as interest rates fall, by moving cash to riskier bets.

Long Blackrock in fund; no personal position

This Day in Bankruptcies - Another Airline and Our First Major Retailer

I am debating whether I need to start a new blog keyword "bankruptcies" for the coming era....

We've just nailed our fourth airliner in over a week (one in Italy), out with Frontier Airlines, and our first major retailer (I don't consider Sharper Image to be a major name but they filed last month). As for airlines, filing Chapter 11 is simply part of their business plan - it happens every 4-5 years - so *yawn* - but really 4 airlines in just over a week even wakes me up a bit. (I guess my headline is a bit misleading as "bankruptcy" is a bit different than "filing Chapter 11") As for Linens 'n Things? Just the first of many in retail in my eyes... thankfully this all shall pass in 6 months or I'd be worried about the economy...

• Frontier Airlines Holdings Inc. Friday said it and its subsidiaries filed for protection under Chapter 11 after an "unexpected attempt" by its principal credit-card processor to substantially increase a "holdback" of customer receipts threatened to severely impact Frontier's liquidity.
  
• The Denver holding company for Frontier Airlines said it intends to continue normal business operations Friday and throughout its reorganization process.
• Frontier said its principal credit-card processor very recently and unexpectedly informed the company that beginning April 11 it intended to start withholding significant proceeds received from the sale of Frontier tickets.
• The news comes after two other discount carriers, ATA Airlines Inc. and Aloha Airgroup Inc., recently filed for bankruptcy and discontinued operations, squeezed by soaring fuel prices and a slowing economy.
• Frontier in December said it would lay off 10% of its work force not directly related to flight operations and has restructured its route map to eliminate unprofitable routes.
• Frontier's Chapter 11 cases were filed Friday in U.S. Bankruptcy Court for the Southern District of New York.

• Linens 'n Things Inc., a home-furnishings retailer caught by an increasing debt load and shrinking housing market, is expected to file for Chapter 11 bankruptcy-court protection by Tuesday, several people familiar with the matter said.
• A Linens 'n Things filing would mark one of the first major retailers to seek bankruptcy protection in this economic downturn. The New Jersey retailer, which sells home products like towels, bath rugs and kitchen appliances, has about 590 stores in 46 states and employs 17,000 people.
• Linens would be one of the largest buyouts to go bust since the credit crisis took hold last summer. In February 2006, Apollo Management LP acquired Linens for $1.3 billion. The housing crisis made the home-furnishings space ultracompetitive, and the debt on the company's balance sheet gave it diminished flexibility to ride out the downturn. (I wonder if the bonds for the leveraged buyouts are part of that package Lehman packaged to the Federal Reserve?) :)
• In a recent letter to investors, Apollo founder Leon Black acknowledged that the company was troubled, explaining that while it had made operational improvements, its financial results "remain challenged." Apollo filed to go public in a share offering this week. (isn't that ironic??)
• Linens also is working to avoid or delay filing for bankruptcy protection by meeting Monday with its lenders and largest vendors to work out an agreement, but a deal is unlikely.
• "This is probably the first major shoe to drop in this retail sector, and we aren't at the bottom," said Mohsin Y. Meghji, principal of Loughlin Meghji + Co., a bankruptcy and restructuring advisory firm.

I see Mr Meghji does not work on Wall Street or else he'd realize this IS the bottom; this is not a problem; and everything will be fine "in 6 months". Did he not drink his Kool Aid today?

Bookkeeping: Taking More Profits in Trina Solar (TSL) on Cowen Upgrade

I continue to believe Trina Solar (TSL) is an undiscovered story in the solar space - however pending dilution due to its controversial decision to expand into the polysilicon production space has caused a long head wind. Today Cowen upgraded the name causing a nice 5% spike in an ugly tape. I am going to use this jump to sell down more of the position here in the mid $36s range - again I am playing very conservative right now in this market - this does not mean Trina will fall in price; I am simply reducing risk. Trina Solar remains dirt cheap on a valuation basis, but until we hear how exactly the company plans to fund it's polysilicon adventure we remain at risk on a daily basis from waking up to a 10-15-20% type of dilution announced overnight (and associated stock sell off). Frankly, I am flabbergasted that nearly half a year after announcing this new direction there has not been clarity on the funding - I can only assume they are waiting for a spike up in the stock price before issuing new shares...

Technically, the chart is showing first signs of life in months...and the % of secured polysilicon (as opposed to needing to go the spot market) is a big plus for Trina.

• Cowen is out positive on Trina Solar (NYSE:TSL) this morning raising their Street high 2008 estimates to to reflect the new GCL supply deal, which boosts secured silicon to 95% of targeted production. We believe Street consensus is too low on operating margin, and too high on interest expense (poly plant interest should be capitalized). Silicon coverage for 2009 also looks good, with perhaps 15% still to come from new sources.
• Raising 2008E E/ADS To $4.05 Vs. Prior $3.64, Street $2.90. They raised revenue to $750MM (vs. prior $710MM, St. $709MM), based on shipments of 195MW (in line with 95% coverage of 200-210MW target). Since 15% of poly is covered by the new contract, they boosted GM by 50 b.p., to 23.8% (vs. St. 23.1%).
• Sees 50%+ upside vs. the market in 12 months and reiterates Outperform.

Long Trina Solar in fund; no personal position

The More Things Change....

... the more they stay the same. The same shenanigans on Wall Street that caused all these issues, now are being done again - only this time with your Federal Reserve helping out. Here is Lehman Brothers (LEH) in a "brilliant" move - more creating new "innovative financial products", packaging essentially junk bonds all together - going to ratings agencies to slap a good rating on it, and then instead of having to find a sucker to buy it like they did for the past half decade, they have a ready make customer... the Federal Reserve. Remember, this was the same logic that caused the mortgage securities market to collapse - if you package a lot of junk (subprime, Alt A mortgage loans) together, it makes it 'safer'. And people bought that. Until it collapsed. Now because no one believes in that fantasy anymore, they have to find a new sucker - and it's us.

This is only $3 Billion as a "test case" - just wait until the floodgates open. The same stuff that caused all this mortgage backed securities disaster is just repeating; the same agencies giving the same ratings; only this time the "customer" is willing, able, and happy to accept all bad junk for indefinite periods of time. And in the end, whom is the Federal Reserve? You. So you, my friend, are now "the customer" because no one else is willing. And this is "progress". I wonder if anyone in D.C. other than Ron Paul really understands the implications of what we've now released by giving investment banks free reign to the Fed's balance sheet....

• Financial engineering helped get Wall Street into its current credit-market problems. Now, Wall Street's Lehman Brothers Holdings Inc. is using a little engineering -- and some help from the U.S. Federal Reserve -- to bolster its finances.
• In recent weeks, Lehman moved $2.8 billion in loans, including some risky leveraged-buyout debt that has been difficult to sell, into a newly created investment vehicle it named "Freedom," which in turn issued debt securities backed by the loans.
• About $2.26 billion of the securities received investment-grade credit ratings from Moody's Investors Service and Standard & Poor's. Lehman then pledged some of the securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, according to people familiar with the matter.
• The result for Lehman: By repackaging unsold debt and turning to the Fed's new borrowing facility, it was able to turn loans that had been mostly shunned by investors for months into cash it could use to finance its business.
• The Lehman deal shows how some of the issues brought to light by the credit crunch -- such as the market's dependence on credit-rating firms and Wall Street's affection for complex investment structures -- are still very much a part of market activity.
• "The loss of confidence in structured-finance ratings is at the heart of the current market crisis," said Ed Grebeck, chief executive of Tempus Advisors, a debt-strategy firm. "For investment banks to go back to the ratings firms and say, 'Here's a new structure for you to rate investment grade' -- that's shocking to me."
• As of the end of February, Lehman held $17.8 billion in leveraged loans. These are typically issued to companies that have below-investment-grade, or junk, credit ratings and were commonly used to finance leveraged buyouts. The market prices of such loans have dropped significantly from levels nine months ago.
• A number of Wall Street executives called Lehman's move "brilliant" and said they may follow suit. One senior finance executive at a rival of Lehman's said his main reservation with Lehman's move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash. (yes it is brilliant - if you are a Wall Street executive looking for ways to offload junk)

Just lovely.

GE Warnings and Import Prices Show us Real Inflation

Two important stories this morning...

1) I have stated countless times that 2008 estimates are far too high - in the end stock prices are a reflection of earnings. Not in the day to day white noise and emotion; but in the long run. For the bulls case to be true, if my thesis of 2008 full year earnings falling is accurate, than we need to count on PE multiples expanding just to stay FLAT on stock prices. As earnings fall, if PE multiples stay consistent, then prices must fall. Analysts have been flat out wrong... again, I point to how wrong they are just on the 1st quarter of 2008 [Mar 31: Classic Example of Analysts Overexuberance] I wrote:

....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.

General Electric (GE) which is notorious for always matching or beating earnings by 1 cent, since it has so many moving parts - missed by a whopping 7 cents. Bulls will say "yes but 5 cents was due to financial problems in March and that is the PAST - look to the future kiddo!" That's the same refrain we've been hearing, and will continue to hear as we live in a world of denial. Now, why should I be happy about the future when GE itself now is dropping its full year forecast despite fantastic overseas growth? The (a) US market and (b) financial piece of GE are just that worrisome.

• General Electric Co. pulled an unpleasant surprise on investors Friday, reporting a 6% drop in first-quarter net profit -- largely over trouble in its financial-services businesses -- and revising lower its 2008 outlook.
• It was the first material guidance cut in memory, said Oppenheimer analyst Christopher Glynn in a note, reflecting the difficult U.S. environment.
• From continuing operations, the Dow Jones Industrial Average component earned 44 cents a share, well short of the FactSet Research-compiled mean analyst estimate of 51 cents a share.
• "Demand for our global infrastructure business remained strong, but our financial-services businesses were challenged by a slowing U.S. economy and difficult capital markets," said Chairman and CEO Jeff Immelt in a statement.

GE is a poster child for what I have been saying - any company with material exposure to the US consumer/economy is going to take a hit; analysts are way too confidant in 2008 estimates; if you don't have international exposure you are sunk. Analysts think Q4 2008 estimates are going to be 30%+ higher than 2007 Q4 estimates if you believe the hyperbole they are spinning. Do you believe that? In the fact of a recession that is just getting warmed up? If so you should be buying hand over fist. Because remember "everything will be fine in 6 months". This continues to be a dangerous environment for both bulls and bears. It is dangerous for bulls because they continue to drink Kool Aid that everything will be fine in just a quarter or two. It is dangerous to bears because the bulls have a lot of sway and the Federal Reserve and Government will do everything in their power to keep asset prices (including equities) inflated as we live in denial.

2) Speaking of asset prices inflated, my favorite measure of TRUE inflation is out today and it is even more alarming than it has been in the past. If you are new to the blog here is the reality behind the lies being told to you in government reports - look at the chart in this link to show you what inflation would look like if the government was not constantly changing methodology to assure us that it only exists in our imagination [Mar 16: A Picture is Worth a Thousand Words - Inflation]. We import almost everything into this country now (save some food). Import prices have been flying for much of the past year [Dec 12: Real Inflation Showing in Reports Not called CPI/PPI] & [Jan 11: Another Myth Falling Flat - Exports Will Save the Economy] & [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis] - we've been seeing 12-13%ish year over year import price increases. That is our REAL inflation.

What was last months figure? We are now up to 15%.

• Import prices surged in March, lifted by not only oil but also the biggest jump in nonpetroleum costs on record, a worrisome sign for inflation.
• Overall import prices rose 2.8% last month, after increasing an unrevised 0.2% in February, the Labor Department said Friday. Wall Street expected import prices to climb 2.1% in March.
• During the 12 months since March 2007, prices increased 15%.
• Prices excluding petroleum increased 5.4% in the 12 months since March 2007, nearly double the 2.8% climb between March 2006 and March 2007. The 1.1% March increase in non-petroleum prices marked the largest one-month increase since the index was first published monthly in December 1988. Driving it was a 3.6% advance in prices for non-petroleum industrial supplies and materials; that advance was pushed mostly by prices for unfinished metals, but natural gas, finished metals and chemicals also rose.

We have been living in a disinflationary world for the past 2 decades thanks to the chase for lower cost goods globally - first into Mexico, than into China. That era began ending a few months ago, and had a sharp uptick this month, as imports from China increased 0.7%. That's a huge move... considering two months ago it was 0.1%

• Import prices from China increased 0.7% in March. Prices for imports from Canada rose 3.2%. Import prices from the European Union advanced 1.6%. Japan inched up 0.1%.

We've been laying the groundwork for this since September in the blog [Sep 11: Chinese Inflation Highest in 11 Years - Why do you Care?] I wrote

Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation.

And now we are bearing the fruit...[Feb 3: Chinese Inflation Hits American Price Tags]

Inflation is real. It has supply/demand imbalance and a "World of Shortages" theme behind it [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears] & is being fed by your Federal Reserve [Apr 4: To the Newbie Economists Out There - a Horde of Helicopters Has Moved In] . And it is the most regressive tax on the lower and middle class that there is. So instead of blaming oil companies, if people were financially educated they'd be taking their case to the government and it's central banks for our policy of destructing the dollar.

If there is one post you read this week, it should be this one, and all the associated links. These are warnings I've been shouting for a long time, but all the pieces are coming together. The equity market can continue to disavow reality for only so long... but it pays to at least understand all the economics that are affecting you in your real life (Main Street) so you know why things are happening the way they are. It should anger every person that instead of fighting inflation, our system of little risk control, massive executive compensation even when a CEO fails, and bailing out banks is causing the Federal Reserve to do just the exact opposite of what it should be doing to fight inflation (raising rates). As each investment banking CEO rakes in bonuses, massive compensation & golden parachutes, funded by the Federal Reserve backstop of their balance sheet, the middle and lower class of the country continues to wither under the same policies. But that's our form of capitalism; a system of "heads we win; tails you lose - either way we will be supported by the government because we are too important to fail" - moral hazard at it's best.

Remember, all assets are inflated by these policies - including the equity market. I've been throwing around 12-13% as my gauge of what true inflation is. If that is accurate and multiple sources of analysis say it is, then one could opine the equity market is also overinflated by 12-13% due to said inflationary policies. Hence a market everyone calls "resilient", I simply call overinflated due to the same "price inflation" we see across the board. Again, I repeat this weekly - a 8% stock return in a 12% inflationary environment, means you are losing money. Although in this case its a -6% stock market return instead of a -18% stock market return YTD due to "asset inflation". So keep that in mind when cheering how the market shrugs off all bad news... an avalanche of liquidity has that effect. Take that flooding of paper money out of the system, and I'd opine that the market would be down another 12-13% that the "inflation bonus" is causing.

WSJ: Borrowers Keep Piling on Debt

Back to the real economy - I wrote last week [Apr 4: Late Payments on Consumer Loans at 16 Year Highs] and many times in the past that I believe credit cards will be the last thing people let go of, as they lose their house ATM, stop paying the mortgage, drain their 401ks, and deplete their savings... wait strike that last part, most Americans don't believe in savings (or can't afford to believe in them with their wages stagnating).

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.

I've discussed this in a series of blog entries in the past (shouting into the wind of course because "hope" trumps reality)

1. Aug 28: Getting more Short ETFs
2. Sep 15: Consumer Spending Continues, Where is the Money Coming from? Credit Cards
3. Dec 10: Consumers Increasingly Turning to Credit Cards
4. Dec 23: Unpaid Credit Cards Bedevil Americans
5. Jan 10: Credit Card Warnings Here, Credit Card Warnings There

We've been focusing recently on lighter fare such as global famine or how best socialism can work in the US, so it's been a while since we've discussed this subject - something plain to the view if someone actually looks and does not bury head in sand (ostrich) as most economists seem to be doing. What was most interesting to me from research last fall was how for the first time ever people were choosing to pay credit cards instead of mortgages. In the "old days" when people had to put (gasp) 5% down, or heck 10% (dare I say 20%) and had skin in their mortgages (i.e. a down payment) it used to be reversed; save the house first and foremost. But we've created a whole new class of home consumer through our "innovative financial" products and they'd rather pay down the cards (so they buy minor things like gas and food), and are cool with giving up the house that many got 100% (or 110%) financing - the same people we are trying to bail out with your tax dollars :)

This story shows this addiction we have... many people out of habit, and others out of desperation (before they eventually fall into bankruptcy) to credit cards. Notice the predicted trend of people needing to use cards for day to day items - gas, food, medicine, etc. Much of the recent increases is not for HDTVs like the pundits like to tell you; especially from the right. It is people trying to survive the day to day. This has been a trend for a long time, something I've argued for many years - but masked by the house ATM. This is why the country requires asset inflation - new bubbles - to constantly create short term "infusions of cash" for people over the last decade - because from normalized economic activity wages are not keeping up with life costs (mostly a situation of the last decade). So we will continue down this path until a new bubble can be formed that large parts of society can partake in, temporarily relieving the stress... this appears to be the government strategy - keep kicking the can down the road until a new bubble can be formed somewhere.

Much like the government, when facing a shortfall, we borrow more. Only, unlike the government we don't have unlimited creditors (nations across the globe willing to buy Treasuries they have been losing money on as the dollar free falls), or a printing press. So eventually, as individuals, (unlike our country) we face an end game. But it will be dragged out for a while more since this depletion takes time... we should really start seeing the effects by this fall going into summer 2009. Again, since it's not a glorious blow up or 1 time event like a Bear Stearns we can ignore this "white noise" as investors and continue to believe everything will soon be fine. But as most things economic; its a slow erosion; only after lapping at the shore for months upon quarters will the full affects be seen. But the first waves are beginning to crash in...only when every spigot is exhausted by a large swath of the nation will Wall Street move from denial to recognition of the tidal wave. (boy did I do a great job of using a whole "sea" of oceanic verbage there!)

• The credit crunch has made it harder for Americans to indulge in their love affair with debt. So what are they doing? Borrowing more.
• While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and tapping more of their home-equity lines of credit to dig themselves in deeper.
  
• Average balances on credit cards and home-equity lines of credit are growing rapidly, rising 9.5% and 8.1%, respectively, in the first quarter from a year earlier, according to new data from Equifax Inc. and Moody's Economy.com. (see chart to right, home equity ATM spigot now off, on we move to HELOC and credit card spigots)
• Borrowing is climbing quickest in the regions where house prices plunged most sharply, making it tougher for people to extract money in cash-out refinancings. Credit-card balances rose nearly 15% during the first quarter from a year earlier in California and Florida and more than 20% in Nevada -- all states caught up in the housing bust, according to Equifax and Economy.com.
• The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators and nonprofit groups. (we've discussed this many times)
• Across the country, consumers are increasingly relying on credit cards to stay afloat. This week, the Fed reported consumers are boosting their use of credit cards. In February, Americans had $951.7 billion in total revolving debt, most of it on credit cards -- a seasonally adjusted annualized increase of 5.9%. Although that increase has slowed from the 7.1% pace in January, it is up 8.2% from year-ago levels.
• Credit counselors say they have started seeing more people turn to their credit cards to cover everyday items. "Food, fuel and medicine -- people are charging their day care, even their tithes to church, and any incidental items.
• In a conference call last month, Discover Financial Services Chief Executive David Nelms told analysts that sales growth in the first quarter "generally became more concentrated in everyday categories such as groceries, gas or discount stores, with less growth in specialized retail segments such as department stores and home improvement."
• In a separate survey released last week, Discover said 52% of consumers it surveyed in March expected to spend more in April on household basics by cutting back on discretionary expenses, such as vacations, or by setting aside less money for savings and investing. That is an increase of 12 percentage points from its February survey and close to the highs seen last November, when gas prices spiked.
• The Fed's aggressive rate cuts have helped make home-equity lines of credit, whose rates are typically pegged to the prime rate, more attractive compared with fixed-rate home-equity loans. For example, utilization rates on home-equity lines -- or the percentage of a credit limit that has been charged up -- increased to 46% in the first quarter, the second consecutive quarterly rise since early 2005, according to data from Equifax and Economy.com.
• But home-equity lines, once a major alternative to credit cards, are also getting harder to access. In recent months, certain lenders, such as Countrywide Financial Corp., Washington Mutual Inc. and Bank of America Corp., have reduced or frozen certain borrowers' home-equity lines of credit, especially in markets that have been hit by a slump in housing values.

So once again I'd like to emphasize we are not in the middle or tail end of this recession (regional - don't worry you farmers, you're good!). [A recession that the same people who denied its existence up to 2 months ago are already calling for an end to? ironic] We are just in the beginning; our perfect storm awaits us... full steam ahead.... (is that an iceberg I see?)

Fund My Mutual Fund Stock Invitational - 3rd Round

Some interesting results in our second round [full results here], setting up some very good matchups in the Sweet 16 - again we'll do 4 a day so we can get to the Final 4 in 48 hours

Remember it is the most price appreciation over the next 12 months, not 1 month.

Technology Region
(1) HP v (12) IBM - IBM's dream season ends, HP moves on with 63% of the votes
(3) Apple v (2) Google - Interesting to see readers don't believe Google off these washed out levels has more upside than Apple, Apple with 70% (again, Apple is like Ron Paul - a huge following on the internet!)

Health/Home
(8) McDonald's v (5) Altria - Altria with continued strength and 59% of the vote
(3) P&G v (2) J&J - Johnson & Johnson in a close one 55-45%

Financials
(1) Berkshire v (5) Mastercard - the old man still has it; Berkshire with 64% - now he has to go up against the entire government aka Goldman Sachs.
3) Goldman Sachs v (2) JPMorgan - in the battle of government supported vs Federal Reserve supported, the government wins out - Goldman with 2/3

Industrials
(9) Exxon v (5) Potash - 2 routs in the Industrials with Potash @ 90% and...
(6) Alcoa v (2) BHP - ... BHP with 90%

Bookkeeping: Taking More Mechel (MTL) Off the Table

Mechel (MTL) is quickly approaching my informal target of $160; just breached $150 so I am taking some more off the table here in the $151s. In a bull market this chart is actually a "buy", but I'm playing chicken and conservative, so I am selling instead of buying more. (plus I missed the $146 price I would of bought at since it moved when I was not watching)



As for the S&P 500 if it breaks out from here it would actually be very bullish as it 'retested' support @ 1350 (where it magically bounced to the exact point - shocker, eh?) - and if it can ever pick up some volume and break through that 1390-1395, one must revert to full out Kool Aid bull again praying at the cathedral of "it will all be fine in 6 months". I will say this market continues to ignore each and every bad piece of data thrown at it, so you have to respect the animal spirits even if they are nonsensical. Using logic is what killed me when I was a young investor... now I simply let the price action dictate short term action even if fundamentals scream completely opposite. Remember - animal spirits took us to all time highs in the S&P in Sept/Oct 2007 just as we were about to enter the worst credit situation in history, only to be saved by historic moves by the Federal Reserve. So don't buy the "the market is a great discounting mechanism and the price action clearly signals great things to come." The bond markets and equity markets have been going in opposite directions for 80% of the time the past half year - and bond guys are generally considered to be much smarter than equity guys...

I will be content to underperform if we rally between here and S&P 1395, since I have large cash and short exposure. Still playing conservative as most of my favorite names have had very large runs and have pulled back very little so I don't really see spots where I'd like to add more exposure. I'll change tact if we break the levels mentioned above.

Long Mechel in fund and personal account

NYT: Inflation Spanning Globe

In the category of "where have you been?" the Wall Street Journal finally figured out inflation is spanning the globe. In a related note, most NYC traders and the majority of the Federal Reserve continue to disavow such hearsay. This article summarizes what I've been saying for... well, a long time. Except, every number is understated and the theme that inflation has just picked up recently is simply a joke.

• Inflation is back. (No, it's been here a while if you live in the real world) [Dec 12: Real Inflation Showing in Reports Not Called PPI/CPI]
  
• It comes at a most inconvenient time. The Federal Reserve is sharply cutting U.S interest rates -- the opposite of the usual response to rising inflation -- to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated. (no, it's not complicated - the middle and lower class gets destroyed as top 1% get saved/subsidized. See when you use the truth, it is really quite simple, isn't it?)
• In the U.S., consumer prices in February were 4% above year-ago levels. (try 12%, but humor me...)
• Rising prices for food, energy and other raw materials account for much of the pickup in inflation rates. High food and energy costs hit developing countries -- where consumers spend a larger share of income on those necessities -- particularly hard. In recent weeks, protests over rising costs have shaken countries from Vietnam, where prices are up 19.4% from last year, to Egypt. (thankfully the Federal Reserve promises it will all go away as the US economy slackens... like it did in the 1970s... what's that? Oh nevermind then) [Mar 31: Tensions Rise as World Faces Short Rations]
  
• On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years, threatening recent strides in poverty reduction. (don't worry about it; that mostly affects humans who are not American therefore it does not matter...and the fact 1 in 10 Americans is now on food stamps is also not a problem - they don't invest in stocks - hence they don't matter to the Fed's calculus)
• But the fact that inflation is rising almost everywhere suggests some of its causes are global. (CNBC tells me it's all due to speculators - would CNBC lie to me?)
• As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. (Asians are not Americans; heck they are not even Canadians - again please note this does not matter - isn't the WSJ an American newspaper? Why all this focus on countries with names I never care about unless they win an Olympic medal.... did I mention everything will be fine in 6 months?) [Apr 6: Agflation Hits Rice - Prices Up 50% in 2 Weeks]
  
• The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren't facing recession. (Really? So when we cut rates here and flood the world with US pesos, we cause pain for our middle and lower class, but also pain for every country pegged to our dollar - killing their lower and middle class? Haha! If only I cared - the most important thing is to save the top 1%. Fox Business told me, if we cut the rate for the top 1% that would help as well as it would create jobs... so please continue this process Ben; it is working like a charm!)
• An increasingly global economy may also be a culprit. Globalization got some credit for low inflation in recent years: The economic rise of China, India and the former Soviet Union helped expand the global work force and increase manufacturing capacity, holding down the prices of many goods. But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries. (Well this I care about because if it means I need to pay 2 more cents at Walmart since Chinese workers are getting a 6% pay raise, I am now officially outraged and we need to do something - like move all manufacturing to Vietnam! And after they get their 3 cent/hour wage increase, we move to Indonesia... then we keep moving everything from 1 country to another, there are at least 180 counties where we can exploit labor so my toilet paper never rises above today's pricing!) [Feb 28: China Raising Minimum Wage] [Feb 21: Rising Factory Costs Erode China's Edge] [Feb 3: China's Inflation Hits American Price Tags]
• For now, rising food and energy prices are inflation's prime drivers. Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation. But commodity-price gains are beginning to work their way through the global economy. Even if commodity prices stay where they are, global inflation could continue rising for months to come as companies react to previous price rises.
  
• Kimberly-Clark Corp., maker of household goods, began raising prices in February between 4% and 7% for some paper products, including Huggies diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods Corp. raised the selling price of its chocolate bars 13% in February after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc., which owns the Champion and Hanes apparel lines, has warned that sustained high cotton prices could filter through to retail prices. (ah but you forget the substitution affect - when Huggies goes up by 7% the government will assume people switch to diapers made with fig leaves... BOOM! Inflation solved. Paper towels go up by 6%? Consumers switch to using their shirt sleeve to clean up the Kool Aid spill. BOOM! Inflation solved! Underwear? Who wears that stuff anymore? No underwear = no inflation! BOOM! Inflation solved. If you only understood how we measure inflation you can see all of this can be explained away FOREVER - muhahah! It's genius! Seniors?! Here is your 2.7% cost of living adjustment, enjoy!) [Sep 28: Barry Ritholtz on Bloomberg Finally Seeing the Truth in CPI]
• Germany's recent wage gains are a flash point. Last week, some two million public-sector workers Germanwon a nearly 8% pay raise over two years, their biggest settlement in 16 years. In March, some 93,000 German steelworkers won a 5.2% wage hike, while train drivers picked up an 8% pay increase spread over two years. (laughable amounts in America - we are tough here - we can survive year after year with 0-3% wage increases as inflation goes 10-12%! Hell, when we lose manufacturing jobs, we go to service jobs and lose 25% of our income and still survive here! 4-5.2-8% pay raises? You have to be kidding me....darn socialists in Germany.... don't you realize having labor costs rise at that level cuts into corporate profits! How can anyone run a country where the consumer actually has a living wage that keeps up with inflation? That will kill corporate profits in the long run - just destroy them. That's no way to drive up the stock price and line the pockets of executives... losers - you call yourself capitalists...)
• In Slovenia on Saturday, some 10,000 protesters from across the Continent gathered at a conference of central bankers to agitate for higher wages. They got a cold response. "It would be an enormous mistake to imitate Germany," ECB president Jean-Claude Trichet told a news conference afterward, noting recent German wage restraint allowed workers there some space to catch up. (I hereby Jean-Claude Trichet honory American - now we're talking!)
• In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. But they are generally confident that inflation will recede as rising unemployment prevents workers from winning wage increases. (Now we're talking capitalism - a worker class that cannot win wage increases in the face of rising inflation! That's a great long term plan! It's worked like a charm the past 7 years as we went through an economic boom where the median American's real wages fell - that's a thriving society in my book! Who can imagine how median wages will react in a recession if that's how they react during a 7 year expansion? Hopefully we can get them to drop 5-10%! That means more corporate profits and better executive pay! Yee haw! [NY Times: For Many, A Boom That Wasn't])
• Similarly, inflation is stoking instability amid the Middle East's energy-fed boom. In Qatar, a rich emirate jutting into the Persian Gulf, surging revenue from natural-gas sales have led to more government spending. This year's budget is 46% higher than last year's, and more than four times the spending of just six years ago. Much of that is going to build highways, airports, infrastructure and schools. Says Yousef Hussain Kamal, Qatar's finance minister: "The surplus is huge." [Feb 26: NYTimes: Rising Inflation Creates Unease in the Middle East] (I am so sick of hearing about these countries with oodles of cash. We have oodles of cash too - printed by the day and helicopter dropped... so take that! Damn creditor balances - that is not a way to run a country. You need to go deep into debt and run a massive deficit decade after decade (and hide your war costs in off balance sheet accounting!) - again, enough talk about these foreign places with funny names - more focus on America please!)
• "Inflation almost always falls during economic downturns. The Fed has history on its side," says Julian Jessop, an economist with Capital Economics in London. He expects inflation to be much lower globally a year from now, and the new IMF forecast does, too. Nonetheless, he says, "The outlook for inflation is much more uncertain than it has been for a while." (yes I also believe "hope" and the "cross your fingers" strategy is what we should book our hopes on. I mean it works like a charm in the stock market, so why not for our centrally planned economy err I mean capitalist, free market (on the way up) and only socialist on the way down economy. Now about those bailouts....)
  

Really, as cold hearted capitalists living in Cramerica (for the corporation, by the corporation) all this weak liberal stuff about the world's poor does not interest me. I have one concern - I want the stock market driven up with inflated US pesos (working like a charm today!). The only thing I care about is my Ameritrade account. The rest of this article was really quite useless information. There were way too many references to the other 95% of humans on the globe, who truly do not matter. So I need Ben to continue his helicopter drops so that every asset in the world is driven up (inflated) in price. Therefore as wheat, rice, corn skyrockets, I can gloat as my XYZ stock also rockets up, making me feel warm and fuzzy and "paper rich". And that's all that matters, inflating one bubble after another - this is what we do in America and the rest of the world can kiss our inflation on it's inflationary behind - the rest of this left wing liberal stuff about "famine" or "the world's poor" I will let the Canadians or French worry about. This is Sparta!!

So what happens again when you combine inflation with lack of growth? [Dec 17: Greenspan Jumping on my Stagflation Theory] Oh yes, a recovery "in 6 months". See you then - I'll have my unicorn waiting.

Bookkeeping: Closing Thornburg Mortgage (TMA)

I am closing my very ill advised venture into Thornburg Mortgage (TMA), far and away by biggest loser in the fund. My goal here was to play the refinancing boom (and the "early cycle" rebound) but timing is everything and Thornburg was a victim of a run on the bank similar to Bear Stearns (BSC), far worse companies did not suffer what Thornburg did. At the time I wanted to find some alternative ways to benefit when the market went to its "early cycle" Kool Aid without buying homebuilders directly - but my choice of stock could not of been worse. Since then, I've decided to just play the homebuilders themselves which is ironic since I think they are in far worse shape than Thornburg was, but the market is the ultimate decider. I was hoping for some buyout offer maybe in the $3-$4 range but Thornburg just decided to dilute shareholders to the ultimate degree to survive - I don't blame them; they appear to have very good management and just a victim of circumstance and bad timing this time around so shareholders lose.

Since the fund is doing very well this is as good as time as any to get this $25K loss off the balance sheet and "book it Danno!" I've been cleaning out quite a few positions of late whose charts have been weak (not participating in this rebound) and I did not feel any conviction in adding to, and this one fits the bill. I am selling my remaining 0.4% stake in Thornburg Mortgage in the $1.20s.

No position

Walmart (WMT) Continues to Suck Wind from All Other Retailers

We have noticed this trend for quite a while here, but Walmart (WMT) is taking away more and more US business as consumers go into a death spiral [Jan 15: Will There Be Anywhere Left to Shop in 2010?]. But nevermind that, the stock market is up, because this is a backward looking number and in 6 months everything will be fine... we continue to whistle past the graveyard. Remember, Walmart is turning into a de facto grocery store so as inflation ramps up in food, just by selling the same amount of units their same store sales will increase...

As expected, Walmart solid, Costco (COST) doing fine on bulk purchases and a lot of gasoline sold and everyone else taking it on the chin... some scary numbers out there especially in apparel (one of the easiest things to cut back on - it is non essential to add more clothing). Target (TGT) is also alarming because it's where the middle class usually shopped, but alarming drops there as well, considering it's size. Abercrombie & Fitch (ANF) is my bellweather for discretionary teen spending and even they had -10% same store sales. Kohl's is another bellweather for me. Just ugly. I remain amazed I still hear people denying there is a recession... hope is all powerful.

Some of the ugly numbers, SSS = same store sales (all these missed analysts expectations by a country mile)
Target (TGT) -4.4% SSS
Gap (GPS) -18%
JCPenney (JCP) -12.3%
Abercrombie & Fitch (ANF) -10%
Kohls (KSS) -15.5%
American Eagle (AEO) -12%
Limited (LTD) -8%
Nordstrom (JWN) -9.1%
Saks (SKS) -2.9% <--- short of analyst estimates but relatively speaking holding up!

The few winners aside from the few mentioned above are Aeropostale (ARO) +2.5% SSS, which is a "value" name for teen retailing and... well some drugstores.

The pooring of America continues as the middle class gets gutted by inflation, and lack of access to their house ATM. This was long predicted - now it's starting to really show in the numbers. [Dec 8: Do the Bottom 80% of Americans Stand a Chance?] The fantasy of a "all clear" in 6 months continues by ivory tower set in NYC. More job losses coming as shops close and cut back staff, lower home prices coming, and more inflation as the Fed continues to print dollars to save NYC bankers. $3.75-$4.00 gas this summer....it will continue to worsen in 6 months. That's the hilarity of this "rebound in 6 months" fallacy, albeit we might get a short uptick with the rebate checks. I continue to look for another "stimulus plan" to be announced before the next election - continuing our downward spiral of debt to pass onto our grandchildren.... anything to win votes.

No positions

Paul Volcker Speaks

Refreshing to hear Paul Volcker, the Federal Reserve prez pre-Greenspan speak. Compared to Uncle Al who is trying to give us economic updates on a weekly (daily?) basis, and defend his legacy of easy money and total lack of regulation (free markets fix everything) Volcker has not said much but when I read what he says, here is another intellectual who agrees with much of what some of the "outliers" have been saying (the group who has been ignored by the Kool Aid mongers the past few years). There seems to be something in the water the past decade where no one in power seems to ever admit they make a mistake - very disconcerting. This is the trap Greenspan seems to be spinning into.... anyhow, I digress. I just prefer the truth, no matter how painful it is; hence listening to guys like Volcker is much more interesting and enlightening.

First from NY Times: Ex-Fed Chairman Chides Current One

• The biggest financial crisis in a generation — a downturn that officials at the Federal Reserve acknowledged in minutes released Tuesday might be “prolonged and severe” — is turning the traditionally reserved and omniscient central bank into an institution that seems to be in the throes of family therapy.
• In a speech on Tuesday, Paul A. Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben S. Bernanke, for toeing “the very edge” of the bank’s legal authority in orchestrating last month’s bailout of the beleaguered investment bank Bear Stearns.
• “Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Mr. Volcker told members of the Economic Club of New York. (does that sound familiar? Sort of like what a President and VP do during times of "permanent war")
• His remarks came on the same day that Alan Greenspan, Mr. Bernanke’s immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing as “unfair” claims that his policies stoked an untenable housing bubble.
• Indeed, Mr. Volcker also implicitly questioned Mr. Greenspan’s cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.” (All I can say is Bravo for someone with clout to say that out loud - its a farce system of wealth transfer and huge risk taking with little penalty for those who take the risks)
• Mr. Greenspan said he did not regret a single decision he made during his time as the Fed chairman. (sounds like a President I know who said in an interview I saw last year that he could not think of one mistake he made - these guys are just "perfect" apparently - egos are a dangerous thing)

From the Wall Street Journal: Volcker's Demarche

• 'You don't have to predict it. We're in it." Thus did Paul Volcker respond to a question Tuesday about whether he still predicted a "dollar crisis" in the coming years. We hope current Federal Reserve Chairman Ben Bernanke is paying attention.
• Mr. Volcker, a former Fed chief, has a well-earned reputation for straight talk, but there is always strong institutional pressure not to second-guess one's successors at a place like the Federal Reserve. This makes his speech to the Economic Club of New York all the more remarkable for the sharp questions he raised about inflation, Fed independence and moral hazard.
• Mr. Volcker noted that when "concerns about recession are rife," the central bank will be tempted to "subordinate the fundamental need to maintain a reliable currency" to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.
• The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend.
• We all know how that ended, and Mr. Volcker knows better than anyone. He was the one who, at the end of that decade, had to step in and raise interest rates to punitive levels to break the back of that bout of inflation. With commodity prices spiking again – soybeans are $12 a bushel today compared to $7 a year ago – Mr. Volcker is warning the Fed not to let inflationary expectations become embedded once again.
• Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry. He did not argue that no government intervention was warranted – the crisis was, he said, "too threatening" for the government to stand aside. (again, I am shocked that someone of his stature says that out loud - fantastic stuff)
• But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet. Unless the Fed can shut the door it opened with its guarantee of $29 billion worth of Bear Stearns paper – which "seems highly unlikely," in Mr. Volcker's words – it will have to take on oversight of the institutions it is now implicitly back-stopping.

Marvelous stuff. The truth shall set us free - if people are willing to listen to it.

Bill Miller is #596! Ouch.

How far the mighty have fallen ... Bill Miller is a mutual fund manager who had an incredible streak of 15 years in a row of beating the S&P 500 (this ended in 2006). He took large contrarian bets in concentrated fashion so hence why I have followed him with interest. I saw an article a few months ago about how he was buying financials, homebuilders, and the like and I just felt bad. Maybe over a 4-6 year time frame, but for the short term.... not so much (although I can at least understand the homebuilders because about 2 months ago they stopped going down no matter how bad the news was - but he was buying 2 years ago, not 2 months ago).

That said, I am not posting this to criticize him; I can only hope one day to have a mutual fund (hint hint) that other people can criticize me for my strange ideas.... but it has been a mighty fall, he only beat 4 of his 600 peers this last quarter in his mutual fund category. It just shows why it is not worth it to bottom fish too early in my book; when stocks do turn up from a very beaten down sector, if you miss the first 20-30% move, no big deal - if it's truly a new bull market there should be years of gains ahead...

• Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago on losses from longtime holdings such as Sprint Nextel Corp. and newer bets including Bear Stearns Cos.
• The $12.2 billion fund fell 20 percent, trailing all but four of 660 rivals that buy stocks of companies with market values of more than $15 billion, according to data from Morningstar Inc. in Chicago.
• Last year, Miller lost 6.7 percent, including dividends, compared with the average 6.2 percent gain among similar mutual funds.
• The manager, whose 15-year record of beating the Standard & Poor's 500 Index came to an end in 2006, is lagging behind the U.S. benchmark for the third straight year. It's his longest slump since he joined Baltimore-based Legg Mason Inc. in 1981.
• ``It's been an absolutely hideous quarter, but you cannot write him out,'' Russel Kinnel, director of fund research at Morningstar, said in an interview. ``He's had uncanny luck in previous years where everything worked out, but this time he's been where you just didn't want to be.''
• Miller, 58, made his name by finding out-of-favor companies such as General Motors Corp. and Eastman Kodak Co., holding them for years and ringing up gains when other investors discovered them too. He also owns fewer stocks than competitors, making his strategy riskier. Value Trust had 51 stocks as of Dec. 31, about one-fourth the number held in similarly managed funds, Morningstar data show.
• This year, just two of Miller's top 10 picks have had positive returns. One is New York-based JPMorgan Chase & Co., the third-largest U.S. bank by assets, which has gained 5.9 percent. The other is Yahoo! Inc., the Sunnyvale, California-based Internet-search company whose shares are up 20 percent in 2008 after a $44.6 billion unsolicited bid from Microsoft Corp.
• Sprint, his seventh-largest holding, has dropped 50 percent as the Overland Park, Kansas-based mobile-phone company loses customers to rivals and cuts prices to lure them back. New York- based Bear Stearns, which accounted for 1.2 percent of fund assets, has plunged 88 percent. The fifth-largest U.S. securities firm agreed last month to be acquired by JPMorgan for $10 a share, down from a peak of $158.39 a year ago, to avert bankruptcy.
• Miller put about 21 percent of assets in financial and housing-related stocks as of Dec. 31, two groups that have been pummeled by the worst real-estate slump since the 1930s. Communications and technology stocks, which accounted for about one-third of assets, have tumbled on concerns that earnings growth will slow.
• Miller loaded up on financials last year after saying that the selloff among banks and brokers made them the cheapest since 1990. Miller had 19 percent of assets in financial stocks such as Bear Stearns, Citigroup Inc. and Merrill Lynch & Co. as of December, up from about 15 percent a year earlier.
• Amazon.com Inc., the fund's biggest holding, has fallen 17 percent in 2008 after more than doubling in value last year. Miller started buying shares of Seattle-based Amazon, the biggest Internet retailer, in 1999. He pared his stake to 6.9 percent of assets as of year-end from 8.8 percent in September.
• Miller's housing-related stocks, which he started buying about two years ago, include lender Countrywide Financial Corp. and homebuilders Pulte Homes Inc. and KB Home.
• The fund manager has stayed out of energy stocks since a rally began in 2003, a decision Miller has rued as oil and natural-resources shares surged during the past four years.

Bed Bath & Beyond and Tomorrow's Retail Spin

Just a warning for tomorrow morning's spin. At the beginning of each month we get the same store sales numbers from major retails. Analysts have been slashing their expectations constantly as they move from "denial" to "somewhat reality". After multiple slashings, some of the retailers are going to "beat" i.e. "well analysts were expecting a 7% drop in same store sales, but it only came in at 5.5%!" At that point the drumbeats and salsa music will start on CNBC as the party begins... chants of "the consumer is back" will reign, Kool Aid will be dripping off the bibs of various pundits, and the clapping of seals will commence. Continue to smirk to self, and ignore them.

The importance is the direction of sales ... down. And these numbers do not account for inflation. If you believe (cough) inflation is 3%, then sales need to go up 3% just for unit sales to be flat. So negative sales are actually far worse than they look on the surface since they do not adjust for inflation. Now the question is what is "priced into the stocks" - these stocks have already been decimated, but I continue to believe they are in serious trouble. There is not going to be a quick rebound. Remember, everyone is counting for this magical $600 check to save the consumer, and a light, shallow, and "done in 6 months" scenario. I continue to believe that is utter nonsense. But outside of a few names which deserve some kudos i.e. Walmart, Costco, it's going to be the "bullish" case proposed for a "reason to bottom fish". Much like the financials and homebuilders, we are going to see constant selloffs, punctuated by dead cat bounce; short covering rallies of huge magnitude - unless your timing is perfect, catching those moves up will be very difficult. But on each move up, we will hear "no really, this is the bottom" - the constant refrain we've heard from these groups for 6+ months now. One day they will be correct... but not yet.

Now on to Bed Bath and Beyond (BBBY) the first major name to have reported. I've been constantly harping how full year 2008 guidance is just plain wrong in any company facing the US consumer. So stocks that look "cheap" are not cheap, because the estimates are a work of fiction. Let's look at what BBBY has to say... a case example of what I see happening across the board this quarter and next quarter as people move from denial to reality.

Guidance

Q1 2008
Last year's number: 38 cents
Analysts' guess for this year: 36 cents
BBBY reality check: 26-30 cents

Full Year 2008
Last year's numbers: $2.10
Analysts' guess for this year: $2.15 (signifying morbid "growth", but still growth)
BBBY reality check: Earnings to be 3-15% lower than $2.10

i.e. "Assuming no significant change in the macroeconomic environment, the Company estimates that its fiscal 2008 earnings per diluted share will decline from a low double digit percentage to a mid teens percentage from the $2.10 per diluted share reported for fiscal 2007. This estimate is based, in part, upon the assumption that the comparable store sales for all of fiscal 2008 will be relatively flat to slightly negative.

**********
Takeaway: Don't worry about facts on the ground- everything will be fine "in 6 months", pundits assure me.

Reality Check: See above. And repeat for company after company relying on the washed out US consumer. Retail. Restaurants. Done. Continue to cling to Ultrashort Consumer Services (SCC) although its top 2 components (MCD/WMT) are going to be beneficiaries from American shoppers "moving down" (not by choice). [Target Shoppers Turning into Walmart Shoppers] Not so much for the rest of the index...

Long Ultrashort Consumer Services in fund and personal account

Bookkeeping: Taking some Mechel (MTL) Off the Table

Mechel (MTL) which we talked about this morning is up 10% in a bad tape... I am going to take some off the table here to protect some gains... did a lot of buying in the $115-$120 area in the past 7-10 days, so here at $143s its a nice gain. It is now approaching all time highs, and if it breaks $145+ it will be off to the races technically (I'd probably add more there). However, in a bear market environment gains can be fleeting so I am taking a layer off; but it remains my top long position... I believe fair value is much higher & this remains one of my top 3 favorites in the entire market from a fundamental point of view.

I am reducing my stake from 4.6% of fund to 3.3% with today's sale. I'll consider adding back shares either on a breakout to new highs or a pullback to support.

Long Mechel in fund and personal account

Bookkeeping: New Position to Hedge Against Myself

I am going to start a position today in Ultrashort Basic Material (SMN). This is essentially a bet against the whole portfolio. Each time the market sells off, the financials, retailers, homebuilders, real estate items go first... the portfolio does well.... then in due time the commodities get whacked for no good reason other than "it is their turn".... and the portfolio gets hit. Since I cannot short individual names, the best way to offer at least a little protection against the inevitable "commodities are dead" time we revisit every other week is this ETF. I actually like most of the names in the top 10, so again, this is simply a trading/hedging technique to offset a large part of my portfolio. To be truly effective I've have to make it a large part of my portfolio but I already have quite a few other instruments of a short nature so I will probably keep it in the 0-4% range in terms of portfolio weight.

1. Monsanto 11.8%
2. Dupont 7.8%
3. Freeport-McMoran Copper & Gold 6.8%
4. Dow Chemical 6.4%
5. Alcoa 5.4%
6. Praxair 4.9%
7. Newmont Mining 3.6%
8. Air Products 3.4%
9. Nucor 3.3%
10. Mosaic 2.8%

Again, I actually like or have owned many of these names plus others in the index, but at least with some exposure I can derive some benefit on those days when the market bushwhacks (sp?) commodities. And if it works against me (which in some ways I hope it does), I will simply consider it portfolio insurance - that means much of the rest of my portfolio must be doing well.

Technically, the chart is near a recent low, so as I've been kidding, we are due for a "death to commodities" moment in the next few weeks, at which point these ETF should ramp up. I am going to start today with a 800 share stake in the $33.70s, or a 2.0% stake. When/if the market breaks below 1350 and we start to see some of these basic material charts roll over, I'll probably double this - obviously Monsanto (MON) and Freeport (FCX) are 2 charts from the long side we can observe for signs of topping out since they make up nearly 20% of this ETF. When the market takes its pound of flesh from these names, I'll quickly reduce the exposure since these are my favorite groups.

And as oil hits $112, I can only smugly laugh at the Federal Reserve's insistence that inflation will abate in the 2nd half of 2008. Well 2.5 months to go. The "cross my fingers and hope" strategy fails again - keep printing paper money fellas, that solves everything.

Long Ultrashort Basic Materials in fund and personal account

Back to Critical Technical Juncture on S&P 500

As I wrote yesterday [Getting more Conservative - Waiting for Direction] we're in a narrow range, S&P 1350 being the floor - for the bull party of denial to continue we need to see a bounce off this level. Would the bear of been so cruel to draw in the Kool Aid drinkers only to crush them? If 2001-2002 is any example - yes. Even more emotionally awful for bulls is the fact that last week's breakout actually was the first of the year that created a higher high - oh the market; she can be so cruel.

As I stated I am up to 30% in cash, and if/when we break 1350 I'll be adding materially to short exposure. Even if we bounce here off 1350 (which would be expected since the Invisible Hand is sniffing around), we need to start seeing some volume - this market is just listless after that huge move last Tuesday. It is one thing to hold up in the face of continued bad news, but without drawing in new buyers that can only last so long. Maybe the January low is our bottom - with historic government intervention anything is possible - this market in my view should be substantially lower if true reality was being reflected. But remember, as I state almost every week ALL assets will be inflated over and above where they should be, including equities when paper dollars are dropped from the skies at historic rates. That's what an avalanche of liquidity will do - inflate everything. So before we smugly cheer the market's "resiliance" let's remember 8% returns in a 12% inflationary environment means we've lost yet again in real terms. But since 12% inflation magically turns in 3% once the government reports are done with their "magic" we believe we have won. Nanny states are comforting like that...

Further it's been well over 5 days since an article has come out proclaiming the death of commodities so it's long overdue that these stocks sell off 20% as people scream fire in the theater, and the fund takes a 5% hit :) It's almost becoming predictable... so I'm warning you in advance. When this happens, we'll take the hit, I'll be buying while others are crying, the fund performance will stink that week (or 2 weeks), and a month later we'll be selling to the same people who were crying.... when they buy the stocks from us at +25% in price. And keep repeating.

As we type the S&P is at 1355 and I continue to hang out in the Swiss Alps (neutral territory) for the fund...

Soros Believes Global Subprime Costs to Reach $1 Trillion & Fed Makes Plans for more Historic Actions

I continue to be bemused by the equity market denials in the face of a news flow that is approaching putrid. I know.. I know... it's ALL priced in.

Fedex warned a few weeks ago, not a problem - everything will be fine in 6 months - take the stock up.

UPS warns last night - not a problem - everything will be fine in 6 months.

Washington Mutual (WM), the nation's largest S&L, needs to essentially dilute itself by double to survive, and was being considered by JPMorgan (JPM) as a take out candidate for LESS than it trades today ($8) - not a problem - everything will be fine in 6 months.

Housing prices continue to contract at historical rates - not a problem - everything will be fine in 6 months.

Jobs evaporating but since its only 5% (no, it's really 12% but the government adjustments make it 5% so people can say, hey its historically low) - not a problem - everything will be fine in 6 months

Consumer dying on a vine but hey ABC retail company beat analyst earnings estimates that were lowered 3 times in the past 90 days - not a problem - everything will be fine in 6 months.

Inflation ramping across the globe - not a problem - everything will be fine in 6 months.

Food riots starting in the developing world - not a problem - everything will be fine in 6 months.

I could go on - there are about 50 other line items; I'll spare you. But this market is being propped up in faith of the Federal Reserve bailing it out PLUS faith in the Federal government bailing it out. In a capitalist system the irony is hilarious. The entire lynch pin is bailouts. A faith in the Federal Reserve that even the Federal Reserve does not have in itself.... even more ironic. Otherwise they would not be coming up with back up plans that would be even more interventionist!

If everything is "not a problem" I wonder why the Federal Reserve is drafting plans for even more historic moves - as I said the past week this increase in money supply of epic proportions (diluting every dollar you have in your pocket) is outright fear of deflation (1930s style). But that't not a problem either. Nothing is a problem. At this point I believe the market must be pricing in a direct nuclear strike on NYC - that would probably be met with a 20% gain in equities since the nuclear fallout would be cleaned up within "6 months". Nothing is a problem. Everything is priced in.

The Federal Reserve has 2 jobs - provide price stability (which it has completely ignored since last summer), and keep job growth near peak (which the other branches of government are helping it do with skewed statistics). As Jim Rogers says, nowhere are the actions it is doing now anywhere in it's charter. It's become a plaything to support asset prices... and it continues down it's path of morphing into a Plunge Protection team tool. Can you imagine the biggest credit contraction in history, along with the first nationwide home price crash and not one public homebuilder or major bank is going to be allowed to fail? Instead our government is giving the homebuilders tax breaks, and the banks cannot fail because any major bank to fail is interconnected to all others and hence if 1 fails, it would cause contagion. (sounds like Japan all over again - no one is allowed to fail) So all you need to do as a bank, is grow to a size large enough where you are connected with as many others as possible... then take all the risks you ever want - because you will never be allowed to fail since the whole system can crumble. What kind of system do we have where 1 bank can bring down the entire financial system globally? A useless one where regulation has been p*ssed on. So the morphing shall continue for the Federal Reserve... I don't see anything about preserving jobs or price stability in this article.

• The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.
• Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.
• No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear. (and this is their job?)
• The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.
• The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally. (they're not even allowed to do it by law, that's where Congress can come in and "help")
• Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.
• The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.
• Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such "quantitative easing" only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.
• Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear.

As I've been saying for months; unprecedented times we'll come back and read in history text. [Mar 22: A Historic 9 Days for the Federal Reserve]

As for George Soros, good news and bad news. When last we heard from the legendary investor (before the Federal Reserve made it clear it will print as much money as possible and sacrifice the middle class via inflation to prop up the banks), he was saying things were extremely dire [Jan 22: Soros Says World Faces Worst Financial Crisis Since World War II] The good news is he sounds so much more happy now; now the world only faces $1 Trillion of losses in subprime ($200B down, $800B to go!!) Fantastic. I am surprised the market has not ralled 5,000 points on this prediction. This is on the low end of the Roubini $1-$3 Trillion figure [Mar 13: Scary Stat of the Day: Roubini Calling for $1-$3 Trillion in Losses] I also assume all the losses will be taken in the next 30-90 days because we can't have these writeoffs ruining our happy autumn because that would just RUIN our "everything will be fine in 6 months" thesis. See folks, this is the beef with the "financials will be back, retail will be back, housing will be back, and everything will be fine in 6 months" scenario. It's taken 9 months to drag out $200 Billion in global losses from these "black box" banks who refuse to provide transparency. And thats with housing prices at much higher prices then they are now (or will be in the future), that's with employment at higher rates, thats with positive GDP for much of that time frame, thats when people had far less stress on their credit cards, or auto loans, or student loans, or personal loans.... yet it took 9 months to get that first $200 B of confessions. So if any of these lunatics aka some of the greatest investors of all time, are correct and we're looking for another $800B (or more), in writeoffs how are we going to get that all done in time for our party in 6 months (when all problems go away?). And how will we replace all that lost capital? Oh wait... that one I know... print....print....print...print. As an aside I continue to be shocked gold is not $1200+ off all this news... but since everything is going to be fine in 6 months maybe I should be more shocked gold is not back down to $200. Because in a non inflationary, everything is fine (Ben promised world) gold should be near worthless.

• Billionaire investor George Soros said on Wednesday that global losses are likely to top $1 trillion from the subprime mortgage debt crisis, which he called the most severe since the Great Depression.
• "Losses being recognized now amount to $1 trillion," from the subprime mortgage debt crisis, said Soros, when asked about a similar estimate from the IMF. "I think that is a fair estimate, but that number is likely to still grow," as house prices in some countries including the United States continue to come under severe pressure, he said.
• "Certainly the regulators have failed, for instance, to regulate the mortgage market," Soros said. (George, all regulation is bad, Fox News told me this - regulation kills business and innovation - get with the program! Self policing is the way to go - humans look out for the best interests of each other - this episode clearly shows that. The free market regulates itself!! Wait... that's true only on the way up -on the way down socialism of losses onto the taxpayers back fixes everything! But nevermind that small issue - just keep repeating "regulation is evil and stifles business" 100x a day and eventually you will believe it)
• He added that the "acute" phase of the financial crisis may have passed with the collapse of Bear Stearns Cos (BSC), but warned that he expected that there will be an impact of the credit market crisis on economies that is yet to come.
• Soros said global economies are in a period of rapid deleveraging and that will keep financial markets volatile. "We are in a period of financial wealth destruction ... and now we have deleveraging," he said, adding the situation will lead investors to preserve capital. He declined to comment on what he's investing in at the moment.

Anyhow, dear readers, nevermind this... as we preach on a daily basis... keep the faith and "everything will be fine in 6 months". Keep the faith, keep piling into equities (I highly recommend financials by the way), and shut your eyes and we'll wake up in 6 months all better off (and rich). Just believe Dorothy. Just believe.

Mechel (MTL) Continues to Acquire Most of Eastern Europe

I cannot keep up with all the transactions Mechel (MTL) is doing - all I know is this company is becoming a powerhouse. I was hoping to keep this one under the radar but I just noticed Cramer had to get behind this stock on Monday's show. Drats; the cat is out of the bag - now we can expect a lot of volatility and impatient investors who think the stock is terrible if it does not go up 5% a day, or the "story is over" when it drops 4%. I much prefer stories before the masses find them i.e. solar spring 2007, fertilizer summer 2007, coal fall 2007 -it's a much smoother ride without the masses of momentum traders pushing the stock around like a punching bag.

Mechel is currently my top position and I just cannot be more pleased with the news flow out of this company the past 2 quarters. Yet another acquisition today; smaller than their usual, but they continue to roll up a lot of resources, piece by piece. Further, it's Russia's largest producer of metallurgical coal which I have been blathering about constantly the past few days. [Posco Agrees to 200% Coal Price Increase] So by having their own coal supply not only do they not need to pay the huge price increases coming in the sector, since they have their own production in house - they can sell excess to other steel makers. Win. Win. Talk about a diamond in the rough. With my focus on companies not reliant on the subprime USA, companies like this are precious. (Even though it is due to sell off 20% the next time some publication says the commodities boom is dead)

• Mechel (MTL), Russia's sixth-largest steel maker, has expanded its presence in Romania by acquiring rebar and wire rod producer Ductil Steel for 142 million euros ($221 million), the company said on Tuesday.
• New York-listed Mechel said in a statement it had agreed to purchase 100 percent of Ductil, which last year produced 340,000 tonnes of crude steel.
• Mechel, controlled by billionaire chief executive Igor Zyuzin, already owns two plants in Romania -- Mechel Targoviste and Mechel Campia Turzii. The acquisition of Ductil gives it access to plants in Buzau in the east of the country and Otelu Rosu in the west.
• "The integration of Ductil Steel's production and marketing facilities will allow Mechel to further develop its steel business, particularly in Romania and eastern Europe," said Vladimir Polin, chief executive of Mechel's management company.
• Mechel, also Russia's largest coking coal miner, has earmarked $2.7 billion by 2011 to increase steel production by 26 percent and improve its coal, iron ore and nickel mining operations. The company has also been on an acquisition spree recently. In the last year it has bought the Bratsk Ferro-Alloy Plant and large coal deposits in the Russian Far East, as well as agreeing the $1.5 billion acquisition of ferro-chrome producer Oriel Resources

Long Mechel in fund and personal account

Shaw Group (SGR) Misses Its Numbers

Nothing works 100% of the time, but I always find it fascinating at how accurate a stock price is in telegraphing "much of the time" how earnings will pan out. I always get wary when a stock does not participate with its peer group and Shaw Group (SGR) has been one of the weaker charts in the infrastructure group.

Much like with fertilizer, coal, natural gas, mining, I've built a basket of a various global infrastructure companies for the fund. In any one quarter I don't know which one will outperform the other, so hence the basket - I like all of them for the long run. That said, I am most amused by this group because these are companies that rely on very long term, large scale projects yet they are either in favor or out of favor due to the most recent earnings report (90 day period). For example, in August my top 2 positions were McDermott (MDR) and Foster Wheeler (FWLT). Like everything, they were hammered in August during the selloff but then once the sell off abated - they rallied hard. Later in the fall, Foster Wheeler had a good quarter and its stock rocketed, McDermott had a good quarter (in my eyes) but not good enough and then it's stock got punished. And people ran into some other names in the sector i.e. Chicago Bridge & Iron (CBI) or Shaw Group (SGR) while ignoring Fluor (FLR). Then in the most recent earnings round, Foster Wheeler (FWLT) was not up to the "standards" of the lemming nation and it got sold off hard [Feb 26: Adding to Foster Wheeler on Earnings Miss] even though NOTHING has changed in the long run (in fact things are getting better) but with our focus on the next 90 days and nothing else, it was punished. And people have been running into previously ignored Fluor and McDermott of late (best charts of the group) while punishing (up until 4 days ago) Chicago Bridge & Iron and Shaw Group. So a complete and utter reversal of attitude towards each company every 90 days based on what the stocks did in their most recent quarter; even though this business is built on multi year, massive projects. It is one part sort of sad, and one part amusing to see this behavior by investors, but if nothing else predictable. Anyhow, I take a basket approach because all their long term stories are excellent, but they get bashed around month by month on nothing else but the most recent numbers.

With that said, Shaw Group (SGR) has been one of the week ones the past few months, and has never regained its 50 day/200 day moving averages. It made an attempt each of the past 4 days but failed. Hence I had not rebuilt the position thinking those "in the know" knew what was coming (not that the market is skewed towards insiders or anything). Today they report solid results but lagged analysts estimates and we have a 4% sell off in the name. Did anything change in the long run? Not one iota, but until the chart condition improves this is the type of name that will just drift around. And once again, we have a chart that "told us" something was amiss - I'd say this works out about 3/4 of the time, and in the stock market anything that works to 75% accuracy is something I treasure.

• Shaw Group Inc. said Wednesday it swung to a profit in the fiscal second-quarter, as revenue rose led by sales in segments that make pipe fittings, and design and build power plants. However, Shaw missed Wall Street expectations as a one-time charge cut into one segment's profit.
• The engineering, construction and environmental contractor earned $8.9 million, or 11 cents per share, compared with a year-ago loss of $61.5 million, or 77 cents per share. Excluding the company's Westinghouse segment, which took a $40.6 million non-cash, pretax foreign exchange loss in the quarter, net income was $37.3 million, or 44 cents per share. Revenue leaped 37 percent to $1.65 billion, from $1.21 billion
• Analysts, who typically exclude one-time items, expected profit of 54 cents per share on revenue of $1.7 billion, on average, according to a poll by Thomson Financial.
• The company attributed the revenue jump to growth in its fabrication and manufacturing segment, as it continues expansion plans. Also, Shaw said its fossil and nuclear segment was helped by progress on air quality control and coal-fired power plant projects.

Long all names mentioned in fund; no personal positions

More Jim Rogers...

We can never get enough Jim Rogers around here.... truth and reality are in short supply and this is one of the few guys who brings it, and since he has a lot more credibility than no name blogger named I, maybe people will listen. Then again, they don't listen to Soros, Robertson, Grantham, Schiff, or Paul. [Feb 18: Jeremy Grantham has some Sobering Words for "2nd Half" Recovery Crowd] Maybe we're just hopeless....

SeekingAlpha.com has a nice 3rd party interview here, I'd recommend to read the whole thing but due to length I'll just bring over some of the key blurbs:

• Although the United States faces perhaps its most daunting economic challenges in at least a generation, "in America, most people do not understand that there is a problem." (Amen, that's my top frustration)
• Because of these weak-dollar efforts - as well as the billion-dollar bailouts - "America is now the largest debtor the world has ever seen."
• Although the central bank seems intent on engineering a U.S. economic rebound by creating an ultra-weak dollar, no country in history has ever emerged from a serious financial crisis by "debasing its currency."
• The bottom line: The strategies that the central bank is currently employing are nothing short of "outrageous," Rogers said.

Below is part of the Q&A

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

Keith Fitz-Gerald [Q]: There’s a confluence of money flowing into and around China. Do you believe that the U.S., with all its current problems, will get left out?

Jim Rogers: Absolutely.
The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.

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

Q: My take is that former Fed Chair Alan Greenspan and current Fed Chairman Ben S. Bernanke may go down as the worst central bank chairmen in history. Do you see it differently?

Rogers: [Bernanke] and Greenspan together will probably bring [about] the end of the Federal Reserve. We’ve had two central banks in America that failed. This third central bank will probably fail, too, because of Bernanke and Greenspan.

There’s just so much they can do. Maybe that balance sheet is infinite. I doubt it. And it can be said to be infinite; they just print money like Zimbabwe or someplace. But that has to come to an end, eventually.

Maybe Bernanke is going to get into his helicopter and fly around collecting rents now. Maybe when they repossess all the property, he’s going to be the rent collector. But then when they eventually take on all the car loans, I guess he’s going to be collecting car payments, too. And credit card debt, when they take over all the credit card payments, I guess he’ll be hauling us all out saying: "Your credit card’s overdue."

This is insanity.

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

Q: Is there a circumstance under which you could see the U.S. recovering, or do you think this country is doomed to be an economic also-ran?

Rogers: Historically, nations that have gotten themselves into this kind of situation have only gotten out following a crisis or a semi-crisis, or some gigantic stroke of luck.

The U.K. got out because they discovered the North Sea. Now, you give me the largest oil field in the world, or one of the largest oil fields in the world, I’ll show you a good time, too. (I'll raise you the North Sea and I'll show you corn ethanol! Take that!)

So if you have a stroke of luck [you can escape these kinds of problems], but otherwise, nobody’s ever sorted out these problems without some kind of gigantic crisis or semi-crisis first.

In America, most people do not understand there is a problem! The few who know there’s something going on don’t understand what it is. Most of them who understand it actually think it’s good that the currency’s declining. America’s not going to do anything until things get very, very bad. (on this I agree - that is how we do everything - always reactive, never preventative, and only reactive when its crisis mode - my worry is I cannot think of what they will "do" that will "solve" this)

Others that offer the rejoinder to this - that the declining dollar makes America competitive - [that] has worked in the short term. But no country has ever restored itself by debasing its currency, not in the long term, not even the medium term.

Many places have tried to debase their currency as a solution. It’s never worked, other than maybe in the short-term, for a while.

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

Q: Are we looking at a Japanese-style lost economic decade?

Rogers: The Federal Reserve is making the same mistakes that the Japanese made. They’re trying to say: "We won’t let anybody fail. We’ll print a lot of money. We’ll drive interest rates to zero. And we don’t want anybody to fail. We’ll put on as many Band-Aids as we have to."

Well, putting Band-Aids on a cancer patient is not a good solution.

So whether it’s like the ’90s in Japan, or the ’70s in America, remains to be seen.

[One-time U.S. Federal Reserve Chairman] Arthur Burns, who headed the central bank in the ’70s, did exactly what Bernanke’s doing. He raced in and printed money and said: "Oh, everything’s gonna be OK."

But the economy never recovered, inflation went through the roof, and the dollar was under duress. Eventually they had to bring in Paul Volcker and interest rates went over 20%. And eventually they killed inflation and they solved the problem.

They’re making exactly the same mistakes that Burns made. For whatever reason, though, this problem is going to last longer than previous difficulties in America. And it’s probably going to be worse.

Because, now, America is a debtor nation. Now we’re the largest debtor nation in the world. At least in the ’70s, we were still a creditor nation. Japan could survive because they were the largest creditor in the world at the time. So they didn’t fall off the face of the earth.

America’s now the largest debtor the world has ever seen. What’s happening in the U.S. is not going to be fun.

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

Everytime I feel like I am a bit crazy after reading webpage after webpage, news story after news story, financial TV show after TV show denying anything is significantly wrong that we cannot get through in the next 6 months, and it's all a short term blip, I am thankful to read some of the comments of some of the greatest investors that ever lived - many of which were listed in paragraph 1 of this blog entry. All who continue to ring the alarm bell, and essentially are marginalized. It makes me realize, maybe I/we are the sane ones, and most others (who appear to live in denial or ignorance) are the crazy ones? ;) Or worst case scenario if I/we are incorrect about this financial tsunami, I can be put into the loony bin with a very select group of gentlemen ;). Where we can trade stocks together....

It should be a very interesting 3-5 years ahead. We've seen some of the most historic financial interventions/times in the past few months - I expect more unprecedented action, both financial and political in the year or two upcoming. Get your popcorn.

Getting more Conservative - Waiting for Direction

The market is at (yet another) interesting point. We've had a sizeable rally the past week, held the gains, and now are getting the inevitable "back and fill" pullback. Bulls would love to see buying interest pop up as these stocks pull back; bears will argue this is yet another head fake in a series of head fakes. While my economic views are poor, heck maybe dire - the economy and the stock market can disassociate for long periods of time. Just like they did in September/October 2007. So I remain open to any outcome,even if I disagree with almost every bull arguement of why everything will be fine in 6 months so the stock market should roar now in anticipation of the rosy 2nd half of 08.

Since we could go either way I continue to trim positions (taking a layer "off") by 10-15% in many of the top holdings and build up cash reserves (now near 30%). I would of liked to see a push through S&P 1390+ but we appeared to have topped out for now, and are in a tight range of about 30 S&P points 1350-1380. Until we get more decisive I'm going back to my Switzerland stance... i.e. neutral. The Kool Aid was fun while it lasted.... most of these commodity stocks have had a very nice 2-3 day run but could be about to roll over again. I have my shopping list and, as always, will be buying my favorites on the inevitable.

This remains a traders market... not an investors. Below S&P 1350 we get bearish again. North of 1400 or so, bullish. Right now, we are in another indecisive no man's land, and with the day to day volatility that each day's earnings reports will be bringing I expect a lot more of "nothing works for more than a few days" type of trading. It remains a very difficult environment for people who rely on trends to last for more than a week...

The Fed's minutes from last meeting come out at 2 PM - remember there were 2 dissenters versus the depth of the last cut (2 is rare, 3 would mark outright rebellion). I don't know if there will be any language about inflation but I assume the dissent is some people on the FOMC who realize inflation is actually real for people who make less than $125K a year. The market continues to poo poo inflation, but as with all things unless Barron's/Wall Street Journal/or a Fed official reminds them of it, they will ignore it or explain it away. Thus far Fed officials are summarily dismissing inflation. I do believe in the coming 6 month period they are going to be forced to acknowledge it - and only at that point will the people on Wall Street say "hey maybe it is a problem after all". And stocks will sell off... or should ;)

Now on to Airline Fare Inflation

These are all little stories in a larger patchwork of much higher living expenses for the US consumer.... in fact global consumer, as the "World of Shortages" leads to a permanently higher cost of living. As we get story after story, from sector after sector, this just continued to build my thesis of a long period of strain for the US consumer, and no "2nd half recovery". No one likes to talk about it, but living standards will degrade for many (especially the "working class") as real wages continue to falter at a rate of increase below "life costs" - essentially meaning you fall behind more year after year. Why should the top 20% care? Well their taxes are going to be raised to help keep the bottom half from falling off a cliff.

In the long run a much lower cost of housing will be a necessary requirement for the great masses to keep up with other costs in their lives that will be ramping. But to get from here (expensive housing relative to incomes) to there (cheaper housing relative to incomes) requires a wretching adjustment - an adjustment current homeowners will suffer through in most regions (ex agricultural & energy related regions of the country). And the government is only kicking the can down the road with their "housing" programs to try to stop market forces from happening. All of us will be better off in the long run if our housing costs return to 30-35% of income rather than the 40-50% many are now being forced to pay. This would leave more for everything else we need in life. But housing prices/rents must come down for this to happen. I expect a lot of non essential spending, such as travel, to take a hit in the coming years. And despite the best efforts by banking lobbyists to make bankruptices expensive and much more difficult on the consumer - we'll have a large wave of personal bankruptices in the next few years to boot. The consumer will simply be overwhelmed in the bottom half of our population... the leading edge is now here. So no it is not going to be "fine in 6 months". In fact we have just started [Apr 4 - Late Payments on Consumer Loans at 16 Year High]; if you want to talk about lagging indicators as people are trying to justify with the employment reports - let me tell you that foreclosures and bankruptices are a lagging indicator - "today's fallout" will take quarters to show in the actual numbers... the bankruptcies of today are fallout from events 6,9,12 months ago - when the economy was "booming" and home prices were 10-20%+ higher.

• The burden of oversized mortgages and credit-card debt is proving to be overwhelming for an increasing number of consumers, as rising gas and food prices squeeze household incomes.
• That is showing up in bankruptcy filings that surged 22 percent for the first quarter of the year, as consumers crumbled under the financial strain of heavy debt, problem mortgages and rising prices for gasoline and food, according to figures released last week by the American Bankruptcy Institute.
• "Households are living on such thin budgets, there's a vulnerability that middle-class families, in particular, are having to deal with more and more," said Samuel Gerdano, executive director of the American Bankruptcy Institute.

Now the way the government reports inflation they have a cute thing called "substitution" - when something gets too expensive (beef) their measurements assume you move down (substitute) to a lower value item (say... spam) - so hence your inflation is flat or maybe even goes down. That's the magic of government reporting. So as airlines raise fares I can only assume they will adjust their reporting to assume you will bike, or heck walk from New York to Miami, or Boston to San Diego. So inflation does not rise .... seniors won't be getting accurate cost of living adjustments, and we can talk up how inflation is benign since the government reports "make all the inflation boo boos go away". But in fact, behind the scenes they are working extra time to in fact exaggerate the problems - talk about 2 faced. [Apr 4: A Horde of Helicopters has Moved In] This is essentially a gutting of the middle and lower class - inflation is the most regressive tax.

Now an economist might argue - as demand falters (as less of the population can afford say gasoline, or airline tickets) prices must fall. The best cure for high prices is higher prices... which will strip demand and then lead to eventually lower prices. Sounds nice on the surface. Unless you are in a global competition for goods with money rich countries... and you're country is a massive debtor. In that scenario prices continue to rise and your in stagflation world. Have you noticed how much oil (near all time high) has fallen as the US falls into recession? This has all the pundits scratching their heads - their ethnocentric, US based views do not allow for a "global competition for resources" scenario... simply put, "their playbook" says crude should of fallen 20-40% by now as the US enters recession. So they grasp at this in confusion (doesn't fit "the playbook") and call it "speculation in commodity markets". Further, how do you run an airline with lower fare prices (responding to a falloff from consumer demand) if you cannot make money even at current fares? All tough questions. But I'm sure the answer is somewhere in the "early cycle playbook".

• The shutdown of ATA Airlines, Aloha Airlines and Skybus Airlines -- all three within one week -- signals a turbulent ride for business and vacation passengers alike as the nation's largest carriers struggle with soaring fuel prices and a limp economy.
• Consumers can plan on shelling out considerably more money to fly and they'll have fewer choices when doing so. At the same time, they will be asked to pony up for services that once were part of the cost of a ticket, according to experts.
• "The days of discount flying are over," said Julius Maldutis, president of consulting firm Aviation Dynamics and a veteran industry analyst. Of course, there will always be specialty-discount carriers like Southwest Airlines and JetBlue, but Maldutis warned that flying for cheap on major carriers will go the way of the horse and buggy.
• "It's not only because of higher oil prices," he said, "but also because of the shrinkage in terms of the domestic capacity by the major carriers and the smaller specialized carriers shutting down."
• The airline industry, never fully recovered from the aftermath of Sept, 11, is now grappling with the precipitous and seemingly unwavering climb in the costs of jet fuel. At more than $108 a barrel, the cost of crude oil is two-and-a-half times what it was in 2003 and last year emerged as the industry's biggest cost item, outpacing labor. Fuel now accounts for 30% to 35% of an airlines' cost, nearly three times its historical average.
• "All the low-hanging fruit has been picked," Stempler said. "They're trying to conserve fuel by putting planes on the ground and reducing service to small communities."
• On Thursday, Northwest Airlines became the latest major carrier to say it was trimming the number of planes it would put in the air. The Minneapolis-based carrier also said it was hiking fares and tacking on fuel surcharges and baggage fees.
• Airlines often operate like a herd. If one decides to charge $25 to check a second bag and customers don't complain too much, then the others will follow suit. Fuel surcharges, for example, didn't start to surface until the middle of last year and by the end of 2007 averaged about $20 per domestic roundtrip. It's now about $50 on domestic flights and nearly four times that on international flights.
• The second-bag-will-cost-you initiative was launched in February by United and, besides Northwest, has been copied by US Airways, Delta and on Friday, Continental Airlines. American Airlines has filed a request to charge the baggage fee in Canada and has said it was considering the move in the U.S.
• A weaker economy, however, could prompt carriers to cut fares but it may also force other airlines into precarious financial positions. (and then we're going to a see a series of bankruptcies, these companies are serially bankrupt - every 3-4 years like clockwork)

I'll keep repeating it, unless your in Iowa, Nebraska, Oklahoma, parts of Texas or any agriculture or natural resource based area - expect to see a coming wave of clothing stores closing, restaurants closing, and "service" mom and pop stores closing. Each taking away jobs... which leads to more job losses. And as home prices decrease, state govt budgets must be cut - so less "services" offered, and more job cuts at the state and local level. The federal government can continue ballooning our deficit to the moon to create new jobs (kick can down road theory), and healthcare will continue creating massive job gains at the cost of $8000+ per capita costs to each American. (double any other country on the globe). But outside those 2 sectors (federal jobs/healthcare) we are going to have some serious pain. The masses can be conveniently ignored by ivory tower NYC jet setters but in sectors relying on the bottom 60% in this country to spend spend spend, their long term growth patterns will be shifting down, and their near term growth patterns are going to look alarming in the coming 2-6 quarters. This is still being completely dismissed on Wall Street, in lieu of "2nd half recovery" Kool Aid. Just like the mortgage mess was dismissed 6 quarters ago by the same folk who now say "oh my gosh what a shocker" - the same folks at the center of it all. But when we look back in fall 2009 it will be plainly obvious.

Hedge Fund Manager - Good Work if You Can Get it

To break into the top 100 of "money manager's" pay in 2007, you had to clear $75 million. Best in class last year made $3 billion. Not bad work; these are truly epic times in terms of wealth generation for mankind - reminiscent of the Rockefeller era...all for essentially betting on the direction of paper as opposed to creating a railroad or some sort of tangible product. Quite amazing really.

• A hedge fund manager who successfully bet on the slump in the US housing market, John Paulson, has come out top in the trading world, taking home a record-breaking $3bn (£1.5bn) in earnings last year. Paulson, 52, of the eponymous New York firm, ousted energy trader John Arnold - who made $1.5bn in 2006 after a successful bet on the direction of natural gas prices - from the top spot.
• You need to have made at least $75m last year to make it into the list of the 100 top-earning fund managers compiled by Trader Monthly magazine. A handful took home 10-figure pay cheques after making smart sub-prime mortgage and other related bets.
• Analysts said Paulson set a new record for payouts on Wall Street. He anticipated the nationwide decline in US house prices and record defaults on investment-grade mortgage bonds. Paulson's Advantage Plus fund was still up about 8% by mid-March while many other hedge funds have suffered heavy losses recently. Analysts estimate the average fund lost 5% in the first quarter of this year.
• In second place was Phil Falcone at New York-based Harbinger Capital Partners, the former Harvard hockey star, who made an estimated $1.5bn to $2bn from housing-related bets.
• James Simons, head of New York's Renaissance Technologies, who came very close to rival Arnold's income last year, has dropped down to the third spot with $1.5bn to $2bn.
• Four of the top traders were based in London and made it into the top 10 for the first time. Chris Hohn of The Children's Investment Fund came sixth after taking home between $800m and $900m last year; followed by Noam Gottesman and Pierre Lagrange of GLG Partners and Alan Howard of Brevan Howard Asset Management, whose 2007 paychecks all totalled $700m to $800m.
• As a group, the 100-best paid fund managers earned $30.3bn last year, 26% more than they took home in 2006. All but a handful on the list come from hedge funds.

Bookkeeping: Changing Coal Allocation - Peabody Energy (BTU) Out - Alpha Natural Resources (ANR) In

Frankly, I have to say I was very surprised by the magnitude of the metallurgical coal price increases we discussed yesterday [Posco Agrees to 200% Coal Price Increase]. This really reminds me of my experience in fertilizers which I went bullish on about a year ago, and while all my macro trend reasons for buying that sector played out, the actual price increases we have been seeing surprassed all my (very rosy) expectations [Oct 23: Analysts Still Doubting the Fertilizer Stocks] v [Apr 3: Today's Upgrade in Fertilizer Stocks]. Then again, this theme has played out in almost every commodity - while $100 crude oil seems normal today there was a time not long ago when Goldman Sachs came out with talk of a "super spike" to $100 in crude that was laughed off. Now it's the floor. Same for copper, wheat, corn, etc. You name it... the "World of Shortages" is playing out as anticipated but with even higher prices than I thought when I first played out this scenario a few years back.

Specific to coal, I went bullish in September 2007 calling it the forgotten commodity - the stocks were flailing back then and generally ignored as people ran into every other commodity. [Dec 6: Coal Stocks Quitely in a Bull Market] Much like fertilizer was ignored up to about 4 months ago. Now coal is becoming sexy all the sudden. But much like fertilizer I believe "out year" analysts expectations are far too low now.

I already have a basket of 4 pure play coal names, and other names with some ancillary coal exposure. So I don't want to add 1 more and continue on a path of portfolio bloat. So I have to make a very tough decision. I want to add Alpha Natural Resources (ANR) due to it's heavy metallurgical coal exposure, along with a lot of non contracted supplies in 2009. So something has to go. I don't have any great reason to drop Peabody Energy (BTU) which I like due to its Australian operations (in conjuction with its main US business), so it's relatively random. The stock has been underperforming the group a bit of late, but that does not mean it won't be the best performer going forward - this is why I buy a basket. I don't know which one will perform the best - but a rising tide lifts all boats... so again, this decision is nothing company specific and if I wanted a portfolio of 100 names I'd buy about 3 more coal names, but 4 should do the same trick 7 will do.

Now let me explain why I want Alpha Natural Resources (ANR) in the fund. I've been looking at this name for the past few weeks... ironically just when I was going to buy it, it priced a secondary offering with convertible notes to boot. Normally I hate convertibles but the story here is so good I am going to ignore that. With the money raised (already priced - and oversubscribed!), it looks like the company is going to be acquiring some assets in coal as it expands its business, which the market might treat negatively in the short run but thats the market being short sighted as usual - so when the announcements are made of some acquisitions - the stock might fall temporarily. But for the long run acquiring resources that are going up sharply in price is never a bad thing.

• Coal producer Alpha Natural Resources Inc (ANR.) is actively looking for companies and reserves to acquire, President Kevin Crutchfield said on Monday. "We were actively looking at acquisition opportunities ..." Crutchfield told analysts at the April 6-10 Howard Weil Energy Conference in New Orleans, adding that his company was set to benefit from high coal prices.
• Crutchfield said his company has 19 million tons of planned 2009-2010 metallurgical coal production uncommitted and unpriced, as well as 25 million tons of thermal coal production over the same two-year period that was also uncommitted and unpriced.
• Alpha supplies Appalachian coal to electric utilities, steel producers and heavy industry and is the largest U.S. supplier and exporter of metallurgical coal. Alpha and its subsidiaries operate 58 mines in four U.S. states.

And in that last bullet point above is why Alpha Natural Resources needs to be part of the portfolio. While thermal coal is also set to rise, and each company has some exposure to thermal AND metallurgical, the increases in metallurgical are simply stunning (+200%). I have been using Massey Energy (MEE) as my proxy on metallurgical coal, and we've seen how that stock has reacted the past few days [Apr 4: Massey Energy Flying on Higher Met Coal Prices].... I believe ANR (which is the largest metallurgical US producer) has been more subdued due to this offering but when I analyzed the 2009 production of both that is not priced yet, ANR actually has the advantage.

Looking at their most recent earnings releases, Alpha Natural Resources stated that 8 million tons of their metallurgical coal (which goes into steel) has not been priced - considering they produced 11 million in 2007 this is a huge majority.... further 2/3 of their 2009 thermal coal is not yet priced. So why do we care about that? Well contracted coal already has it's price set... so even as the spot market for a commodity increases you cannot take advantage of it. Sort of like the drybulk shippers - some rely on long term contracts, some take the risk of being unhedged and relying on spot prices (which fluctuate up and down). The difference in the coal market, the trend is 1 direction - up. So those with a lot less committed 2009 production are going to see huge increases in earnings potential in 09. So I am going to be buying now before the world catches up to this idea.

Compare ANR's position to Massey Energy, which as I stated above, is also in great shape. Of 44-46M tons in 2009, 10M is unsold (6M of which is metallurgical). So that's over 25% of production unhedged... which provides upside... but as a % of total production Alpha Natural Resources has a far greater amount unhedged. So again, this is a rising tide, and picking among multi million mansions - you can't go wrong (versus picking among the scrabble in financials which is like picking among the best run down shack). But I do think this stock has some great upside as incremental price increases will affect a greater amount of 09 production. So hence my switch today.

I am beginning a modest stake in Alpha Natural Resources (ANR) today - I am not building a huge initial stake since we are overdue for a "commodities are dead" moment when these stocks drop 15-25%, CNBC shouting heads tell us the commodities bull is dead, people panic, blog readers start sending me comments about what a fool I am to buy commodity stocks, and the world is ending. When that happens I'll be accumulating shares, and then selling them to people who love to buy stuff 30% higher when CNBC says "commodities are not dead after all!" And so we'll keep repeating, at higher and higher plateaus over the years, while hedge funds roll in and out of these stocks, 1 week declaring commodities are a bubble and the next week the next best thing since sliced bread.

p.s. all that fuss yesterday about Arch Coal (ACI)? What a joke. Just like when Monsanto (MON) repeated the same guidance they gave a week earlier and the stock was sold off, upon further review all Arch Coal did was repeat previous guidance - and since CNBC reported it as a miss, it took the stock down. That's why I put the word "miss", in quotation marks. As I stated yesterday I took that opportunity to buy [Arch Coal "Warns"] It is now up 8% for the day and 10%+ since I bought it yesterday afternoon, so I am going to take some off the table here from what I bought yesterday. Not bad for about 2 hours work.

I bought 350 shares of ANR today in the $48s to create a 1.5% stake. I'll be buying much more the next time the market puts a stake in the heart of commodities, and hedge funds panic sell.

To offset this, I am selling my Peabody Energy (BTU) 1.2% stake in the $59.30s. I've held Peabody Energy since Sept 13, 2007 and have cleared about $6K in profits. Again, let me reiterate I like Peabody Energy a lot. I just am trying to keep the fund concentrated in terms of # of positions.

Long Massey Energy, Alpha Natural Resources, Arch Coal in fund; long latter 2 in personal account

Bookkeeping: Closing Millicom International Cellular (MICC)

I am continuing to look for underperforming names in the portfolio to keep reducing the # of names. Millicom International Cellular (MICC) is a "2nd/3rd world" cellular company, whose fundamentals and exposure I really like, but the stock has not participated at all in this rally. With earnings a few weeks from now that makes me suspicious. Technically the stock is trading below both moving averages - very similar to Google (GOOG) in fact which I sold in a similar technical condition [Apr 3: Closing Google Position]

Both these names share a situation where I don't like how the action is developing in a strong move up by the market (generally not participating) so I don't have confidence to expand upon very small positions; so I'd rather just cut out the name and revisit later. As always, this in no way, shape, or form does not mean the stock cannot go up, or is about ready to make a major move. I just don't anticipate it at this moment.

I only have a 0.3% fund weighting remaining so I am going to exit from now and then re-assess when the technical condition improves. I began this position in November 07 [Nov 7: Starting a Position in Millicom Cellular], and am exiting roughly flat.

No positions

Posco (PKX) Agrees to 200% Coal Price Increase

It's starting to feel a lot like fertilizer around here, with this metallurgical coal price situation... wow! I guess the ArcelorMittal (MT) CEO was accurate last week [ArcelorMittal Sees Metallurgical Coal Prices Rising 150-200%]. Posco (PKX), a South Korean steel giant, today agreed to a 205-210% increase in coking coal. Tremendous. I was hoping Massey Energy (MEE) would fall off a cliff with the Arch Coal (ACI) news, but it did not even go negative on the day. Bummer. Now I have to wait for Barron's to tell me about the death of commodities again so I can rebuild my position there. Because remember, when the US domestic economy slows down the whole rest of the world shuts down... or so thats what the pundits tell me. And Bernanke who pledges that inflation will go away in the 2nd half of 2008. Remember everyone, play the Lotto in 2nd half 2008 - it will be a time of good fortune, mermaids, and unicorns - we'll all be rich as employment ramps up, inflation dies, real wages skyrocket, home prices rebound, credit becomes easy to get, earnings rebound... all in "6 months".

And remember, almost every coal company has some exposure to metallurgical coal. And if you read the last paragraph, it looks like thermal coal is also set to see a large increase. All good... unless your a consumer. But don't worry CPI will tell you energy went up 3% again this year.

• Steel prices are poised to rise further after an Asia steelmaker yesterday agreed to a tripling in price of its supply of coking coal in a settlement that is likely to set the benchmark for the steelmaking industry.
• South Korean steelmaker Posco said it had accepted a 205-210 per cent rise for its supplies from Australian miners.
• Analysts said that the agreement was likely to be followed by other steelmakers in the region and in Europe, resulting in higher inflation in emerging economies.
• The increase in the cost of coking coal as set by the Posco settlement was larger than the level expected by the market and the industry and comes on top of a 65-71 per cent rise in iron ore prices this year. Iron ore and coking coal are the two main expenditures for the steelmaking industry.
• Analysts said that steel prices might need to rise up to 20 per cent to cover the jump in coking coal cost. (no inflation there!)
• Steelmakers raised the prices of their products 10-20 per cent in February and March after the cost of iron ore went up.
• Alan Heap, commodities analyst at Citigroup in Sydney, said that the coal markets had tightened further as a result of production losses in Queensland and reduced Chinese and South African exports.
• "We now expect coking coal contract prices to be set at $285 a tonne," Mr Heap said. That compares with current prices of about $85 a tonne.
• Spot transactions of coking coal have reached up to $375 a tonne for premium Australian coal, according to Mr Heap. He added that some steelmakers had purchased significant volumes of spot coking coal from US suppliers at very high prices, highlighting the degree of supply shortage in the industry.
• The increase in coking coal prices is likely to be replicated in thermal coal for power plants, with Australian miners seeking to double the prices to about $110-$125 a tonne, according to brokers and analysts.

We talked about the implications of South Africa/Chinese shutdowns when they happened [Jan 27: China Has a Power Shortage; South Africa Has a Power Shortage] - but the biggest storm in half a centry in China got almost no attention stateside because all that matters to American investors is... America. If it doesn't happen here, it doesn't matter... and keep repeating to self "when the US is slowing down, every commodity must die because only the US matters". [A Long Term View on Commodities]

They'll see...

Long Massey Energy, Arch Coal in fund; long Arch Coal in personal account and wish I was long Massey Energy in personal account

Arch Coal (ACI) "Warns"

Once again highlighting why it never hurts to take profits - Arch Coal (ACI) apparently is disappointing the street with guidance of 70-110% earnings growth - not good enough! Stock falls. Essentially a wide range in which the bottom is far below the current consensus... $2.00 - $2.50 (analysts in at $2.48). The stock was near $53 this AM, now back at $47. I don't have the old guidance ahead of me, but this range is up sharply from last year's $1.21, but analysts got ahead of themselves and were looking for 100% earnings growth. For a coal company? eek.

• Arch Coal (ACI.N: Quote, Profile, Research), a key coal producer, expects big growth in per share earnings this year, company Chief Executive Steve Leer said on Monday.
• Earnings per share were seen coming in at $2.00 to $2.50 in 2008, up sharply from $1.21 last year, Leer said in a presentation at the April 6-10 Howard Weil Energy Conference in New Orleans.

More important (to me), in this day to day noise... i.e. wow you only plan to grow 80% instead of 100%, sell it off!.... is the comments of a coal shortage....sort of coincides with a lot we've been hearing ... shortages mean 1 thing ... higher prices. All good to me as an investor (not so good if you like to heat your home) The "World of Shortages" theme continues to play out week by week, month by month, under the radar. Again, for the 100th time - the US is in a global competition for resources; all these folks stuck in 1980s thinking of "when the US slows, the price of every commodity will fall off the cliff" are ethno-centric, narcissistic, and over the long run will be proven wrong (over the short run, the dominant thinking of when the US is slow, prices must go down can control the stock price downward)

• Global coal supply will fall short by up to 35 million tons in 2008 and the deficit is set to grow going forward, ensuring that prices remain strong, the CEO of coal miner Arch Coal Inc (ACI) said on Monday.
• "We estimate that global supply of coal will be short between 25 and 35 million tons this year," Steve Leer told analysts at an energy conference.
• "We will end up using more and more coal going forward," he told analysts at the April 6-10 Howard Weil Energy Conference in New Orleans. He said very strong international markets were leading a strong domestic market.

We're addicted to energy... I've said many times, why the Federal Government is not throwing 10 x 10 sq mile solar grids in AZ and NV is beyond me. Or nuclear plants. Or refiners on old army bases. Any solutions from those knuckleheads? I do realize the solar lobby (does it exist) does not line the pockets like the farmers, banks, or homebuilders, but throw the peons of this country a peanut Washington...

I'm so "concerned", by this "earnings disappointment" I am going to take this opportunity to buy more here in the $47s, replacing what I sold this AM around $52. Thank you.

Long Arch Coal in fund and personal account

A Lot of Reversals Today

A lot of reversals today in stocks that were strong for ... a whopping 2-3 sessions. :) The market continues to be finicky. I did cut back the solar companies a bit more as they reversed and showcased their extreme volatility (this is why I don't like to hold large positions in them for extended periods). I do see some gaps in the chart which look ominous so I'll remount positions if we reach those levels. Same for the fertilizer names - there are some serious gaps in charts that will be filled eventually... or soon.

I did reverse the Foster Wheeler (FWLT) trade today, which was really my only major purchase of the day, and took some more incremental profits in a few other names. I'll be watching the charts of any names I recently added to, and if they begin to fall down below key moving averages I'll cut back exposure. So I might be adding or subtracting the same name a lot as it peaks above or trends below a moving average.

I've moved cash to 21% and started rebuilding Ultrashorts but again we are at the conundrum of what exactly to add... financials, real estate, etc are actually the strong parts of the market right now. So I'm just adding a bit to everything since I don't know what mood the market will wake up tomorrow (punish financials? love financials? punish commodities? love commodities?)

I'll update my holdings soon since I made some haircuts today. We seem to be having a lot of trouble with S&P 1380 right now (breaking above it). So we're in a tight range, 1380-1385 to the top, and 1350 to the bottom. If we can get back over 1390 or so we will have surpassed another recent high (late February) and then we have to deal with the next high in the upper 1390s (early February) and should be able to continue to move upward. But this is a lot of resistance to work through as the past few days have shown... we need more buyers coming to the market for this to continue up...



After a couple of "easy days" the market continues to be difficult. After a 3 day break, when the stocks stalled, we are back to early cycle strength and some commodity weakness. Nothing lasts for more than 3 days in this era. I just don't trust a market that is led by financials or retailers... no good can come from it considering the damage that is going to be coming from Main Street in these names. On the plus side we are holding a lot of good gains; on the negative side I have a gut feel if the market begins to trend down a lot of people are going to shoot first (sell) and ask questions later. The market has eroded trust for many players with its behavior the past few quarters. So a more hedged position until we make a break one way or the other is once again appropriate.

Long Foster Wheeler in fund; no personal position

ArcelorMittal (MT) Sees Metallurgical Coal Prices Rising 150-200%

I've totally missed the run in steel stocks, other than my quick in and out foray into US Steel (X) - I sold about 40% ago... oops. With huge increases in pricing in its 2 main inputs, coking coal and iron ore - I have been amazed that these companies have been able to pass their prices along and not see their margins contract. But I have been playing them in a secondary way by buying stocks which produce their inputs.

Arcelor Mittal (MT) is the de facto global giant in steel right now - a case study for how emerging market multinationals are becoming powerhouses. I missed this piece last week but it would help explain in part why Massey Energy (MEE) has been flying of late - the CEO of MT believes metallurgical coal will see price rises of 150-200%. I don't know if I can comprehend that, as it is seems very aggressive but he is a lot closer to the business than I am... and anything that fits into my "World of Shortages" thesis works for me [Alert: Commodities are Dead]... but hey remember... Barron's says "commodities are done"...

Again at some point the growth in China must slow (and these commodity stocks will be thrown to the trash temporarily), but even at 4-6% GDP growth; in a country of 1.2 Billion... it's still going to create massive dislocation for hard commodities. And then there's India...

I still contend we are in the early innings of a very long secular story here - which will have many short term ups and downs more due to traders emotions than anything fundamental.

• The price of coking coal, a key ingredient in steelmaking, is expected to rise by 150 percent to 200 percent, driving up steel prices further, the head of the world's largest steel manufacturer, ArcelorMittal (MT), said on Wednesday.
• President and Chief Executive Officer Lakshmi Mittal also said the company sees global steel demand growing by 3 percent to 5 percent over the next decade, although demand in China will likely slow, with the slack taken up by India and other developing economies.
• ArcelorMittal, which makes 9 percent of the world's steel, is well on its way to producing 150 million tonnes of steel per year by 2012 and expects to be 75 percent to 85 percent self-sufficient in raw materials by 2014-15, Mittal said.
• His son, Aditya Mittal, the chief financial officer, told Wall Street analysts that demand from China's developing industrial infrastructure and other emerging economies had led to an average 7 percent growth in the steel market in the last seven years.
• But steelmakers have been hit by big increases in the cost of raw materials such as scrap metal, which is soaring, and iron ore, which rose by 65 percent last month.
• Coking, or metallurgical coal, another vital raw material, is also expected to rise in price. "High (steel) prices are mainly driven by the costs -- energy pricing and the coal price, which is still to be decided in negotiations between the coal producers and the major customers," Lakshmi Mittal told Reuters during a break in the company's investor day.
• "Negotiations are ongoing and the new benchmark price will be announced in a few weeks and then we will be able to pass it on to customers," he said.
  
• Asked what size of increase in coal prices he was expecting, Mittal said 150 percent to 200 percent. He said the Europe-based company had recently raised its steel prices by as much as $150 per tonne as a result of higher iron ore prices.
• During his presentation, Lakshmi Mittal said Chinese steel consumption was still strong. There were signs its growth rate was slowing, though he still anticipated it growing by 6 percent to 10 percent per year until 2012.
• Also, he said, China's steelmaking industry was no longer a low-cost alternative, as costs there were also rising. (Maybe we can use cheap 3rd world American labor now?)
• ArcelorMittal's strategy, he said, was to keep down costs by producing 110 million tonnes per year of its own iron ore by 2012. The company recently acquired three coking coal mines in Russia and had been allocated blocks of steam coal in India.

There is definitely a potential for the stocks with metallurgical coal to pop when the negotiations for pricing are complete - while I've been very bullish on coal, I did not anticipate this level of price increases. Massey Energy is the purest play on metallurgical coal...

Long Massey Energy in fund; no personal position

Bookkeeping: Some Morning Transactions

As I wrote this weekend I planned to begin cutting back on some of the solar exposure as I have a heavy overweight in these names (this does not mean they cannot run much higher, but I bought quite low and prudent to take some off the table) and I'm also taking some profits in other names - aside from the solar stocks, these are not major sells, just $4-$8K. The solar stocks are about $15-$20K. Simply the other side of my layer in, layer out strategy - these stocks have had very large moves in 3 days... if it is just the beginning of a larger move, that is fine but I will treat all rallies with suspicion until we move into a true bull market. I am more than willing to give up "lost opportunities (more upside) in this type of market while locking in gains.

1. Tech names: Baidu.com (BIDU), Apple (AAPL)
2. Coal names: Peabody Energy (BTU), Consol Energy (CNX), Arch Coal (ACI), Massey Energy (MEE) - the latter name is up another 10% on top of Friday's 20% gain! wow.
3. Solar names: Trina Solar (TSL), LDK Solar (LDK)

I added quite a lot of Foster Wheeler (FWLT) in the $64s as it went into a similar position many names exhibited last week - a breakout above major moving averages.... barely. It will be a candidate to be cut back if it breaks back down, but it could be at the beginning of a nice move. Still among my favorites fundamentally and finally the chart is agreeing.

EDIT 2PM: I reversed the FWLT trade and am sitting watching now. If the stock makes a meaningful move back above $64.50 or so I'll get constructive again. But it broke back below $63 - this leads to a lot of volatility in trading around these moving averages.

I'm also beginning to re-expand my Powershares DB Agriculture Fund (DBA) on the coming food emergencies. My only worry here is the hedge fund behavior which seems to dominate the commodity markets, but the chart is firming up here too. On the other hand, there is no earnings report for this ETF so we have no risk of 40% implosion :)

Long all names mentioned in fund; long LDK Solar, Trina Solar, Baidu.com in personal account

Bookkeeping: Closing Schering-Plough (SGP)

Since I bought Schering-Plough (SGP) the story has changed in a material way [Mar 31: Taking a Hit on Schering-Plough]. As I scanned the portfolio this weekend looking to cull the weak in the herd, this was an obvious candidate.

The stock plummeted last week to $14, which it hit as a low on 3 different days, but in the past 2 sessions (including this morning) we've retraced to near $17 (about 20% off the lows), so I am taking this opportunity to exit and take my $3500 loss. I sold my 600 shares or 0.8% remaining stake in the $16.80s. Certainly there could be more upside from here in the stock price (potential to get to $20), but with the near term outlook a lot more uncertain, I have better candidates at this time where I'd like to apply money.

No position

Agflation Hits Rice - Prices Up 50% in 2 Weeks

We've been talking about the coming food crisis due to "agflation" (accelerated with central banks flooding the world with paper money) for a long time. [Mar 31: Reuters - Tensions Rise as World Faces Short Rations]. The past 2 weeks we've been focusing on rice, but I was blown away by this article I was reading today, that says rice has increased by 50% in the past 2 weeks, and 10% Friday alone. Shocking. Especially considering this is a staple food for much of the globe. I was simply doing a Google Search on term "food prices" and looked at the news tab and was struck at just in the first 5 pages (50 news articles) how many countries were represented - Bangladesh, Philippines, Guam, Kenya, India, Vietnam, Liberia, Pakistan, Haiti, United Arab Emirates. And that's just the first 3 pages.

Remember the key situations here are "food protectionism"; countries will be hording their own food, exaggerating the problem even further and "social unrest"; people will be desperate to feed their families. And this is a very real risk to the "middle class" growth in these emerging markets we've been relying on. [Feb 26: NYTimes - Rising Inflation Creates Unease in the Middle East]. Remember, this is my whole thesis on crops... as we move from 1 season to another to overplant 1 thing, it creates a shortage in another... and this is a rotational crisis, in an ever expanding spiral upward in prices. [Apr 3: Corn Jump to $6 - Start Stocking up on Soda Pop] But on to the scary stats on rice...

• A global rice shortage that has seen prices of one of the world's most important staple foods increase by 50 per cent in the past two weeks alone is triggering an international crisis, with countries banning export and threatening serious punishment for hoarders.
• With rice stocks at their lowest for 30 years, prices of the grain rose more than 10 per cent on Friday to record highs and are expected to soar further in the coming months. Already China, India, Egypt, Vietnam and Cambodia have imposed tariffs or export bans, as it has become clear that world production of rice this year will decline in real terms by 3.5 per cent. The impact will be felt most keenly by the world's poorest populations, who have become increasingly dependent on the crop as the prices of other grains have become too costly.
• Rice is the staple food for more than half the world's population. This is the second year running in which production - which increased in real terms last year - has failed to keep pace with population growth. The harvest has also been hit by drought, particularly in China and Australia, forcing producers to hoard their crops to satisfy local markets.
• The increase in rice prices - which some believe could increase by a further 40 per cent in coming months - has matched sharp inflation in other key food products.
• The consequences are visible across the globe. In Bangladesh, government-run outlets that sell subsidised rice have been besieged by queues comprised largely of the country's middle classes, who will queue for hours to purchase five kilograms of rice sold at 30 per cent cheaper than on the open market.
• ... moves by some larger supermarkets in Thailand to limit purchases of rice by customers.
• The shortage has afflicted India, too: on Monday, the government banned the export of non-basmati rice and also raised the price of basmati rice that can be exported.
• And although China has said it is secure in its supplies of rice, the fact that the government has offered to pay farmers more to produce more rice and wheat suggests otherwise.
• '33 countries around the world face potential social unrest because of the acute hike in food and energy prices'.
• 'In virtually every East Asian country, high food prices are raising headline inflation and contributing to a significant decline in the real income of the poor, most of whom spend a big chunk of their income on food,' he said last week.

Meanwhile in the US of A, where food makes up a far lower % of spending, expectations are for a record number of people moving to food stamps... brace yourself, nearly 1 in 10 Americans now.

• Government officials are projecting the number of Americans receiving food stamps will reach a record twenty-eight million later this year. Over the past year, more than forty states saw the number of food stamp recipients rise. A ten percent jump in food stamp recipients was recorded in six states: Arizona, Florida, Maryland, Nevada, North Dakota and Rhode Island. In West Virginia, one-in-six residents now receive food stamps.
  
• Well, two things are happening. One, people are losing jobs, their losing hours of work, their wages are going down, so they need more assistance from the government in the form of food stamps and other help. And two, food prices are rising faster than they have in many years, and they’re particularly rising for staples that low-income people buy.

But thankfully the home market bottoms in 6 months (allowing house ATM to churn back on), real wages begin increasing, inflation goes away in 6 months, malls will be packed with discretionary spending, and everything can go back to normal... because a Fed printing money at the rate of 20% annual rate to bail out NYC bankers from their stupidity does NOT contribute to inflation [Apr 4: A Horde of Helicopters Moving In].... right? Bueller?

And you wonder why 80%+ of Americans believe the country is heading in the wrong direction...

Earnings Preview this Week

As always the official start of earnings period comes with Alcoa (AA); still a quiet week overall as we really begin next week with the meat of the season...

A quick look at names of interest or fund holdings this week

Monday - Alcoa (AA), China Petro & Chem (SNP)

Tuesday - Sealy (ZZ): judging from the chart, mattresses are not selling very well in this economy

Wednesday - fund holding Shaw Group (SGR) - I've cut this back late this week to avoid earnings risk, and it's rallied nicely the past few days. The weakness the past month or so has been very curious. Severe underperformance compared to peer group. Circuit City (CC) will tell us how badly Best Buy (BBY) continues to destroy it and shareholders will continue to cling on hope of a buyout. Bed Bath and Beyond (BBBY) is one of those nice mid level retailers who will say something bad, but maybe it's not as "bad as expectation" - all depends on how hopeful investor are that day; many retailers have been hit so hard simply saying our same store sales fell 11% instead of 9% might rally them 15%. I would expect, not specific to this name, but in general a constant refrain of slowing down expansion plans, cutting back on hiring (or in fact firing), and having trouble providing guidance throughout the retail space outside of a handful of names.

Thursday - very brief fund holding FCStone (FCSX) reports; hopefully we'll get some clarity on how the troubles in the credit market are affecting it as the rumor mongering has simply destroyed this stock; this could potentially bounce nicely if they reassure investors... Genentech (DNA) - one of the grandfathers of biotech. Pier 1 Imports (PIR) - another chronic underachiever in the home furnishings space - currently rallying on the "worst is behind us, home sales should be booming in 6 months or insert your own reason here"

Friday - General Electric (GE) - expect the same refrain; subprime US flattish (or slowing) - creditor nations booming.

77 Stocks Returning 12%+ this Week

A very generous week in the market with a lot of gains; it was a very "sunny" week to be a financial; and a lot of former fund holdings had a stellar week; I count 11 names in the list below...

The list below contains stocks

1. Stock price: $10+
   
2. Market capitalization: $2 billion
3. Average trading volume: 100K+
4. Stock price return: 12%+

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

Symbol	Company Name	% Price 1 Week
VRTX	Vertex Pharmaceuticals Inc	40.9
ESI	ITT Educational Services Inc	32.0
CIT	CIT Group Ord Shs	27.6
MEE	Massey Energy Co	27.4
LDK	LDK Solar Co Ltd	25.6
YGE	Yingli Green Energy Holding Co Ltd	24.8
SFI	iStar Financial Ord Shs	24.6
SLM	SLM Ord Shs	22.0
SNDK	SanDisk Corp	21.5
BX	Blackstone Group LP	21.4
UBS	UBS AG Ord Shs	21.2
ATN	Atlas Energy Resources LLC	20.8
JASO	JA Solar Holdings Co Ltd	20.7
LEN	Lennar Ord Shs Class A	20.5
BRP	Brasil Telecom Participacoes ADR	20.4
STP	Suntech Power Holdings ADR	19.7
TIE	Titanium Metals Ord Shs	19.4
DV	DeVry Inc	18.9
NIHD	NII Holdings Inc	18.7
LUK	Leucadia National Corp	18.5
GGB	Gerdau SA Depository Receipt	18.3
WRNC	Warnaco Group Inc	18.2
SGMS	Scientific Games Corp	17.9
ATI	Allegheny Technologies Inc	17.7
APOL	Apollo Group Inc	17.6
CSE	CapitalSource Inc	17.1
NOV	National Oilwell Varco Inc	16.7
FNM	Fannie Mae Ord Shs	16.6
LEH	Lehman Brothers Holdings Ord Shs	16.3
RCI	Rogers Communications	16.1
CY	Cypress Semiconductor Corp	16.0
LRCX	Lam Research Corp	16.0
FO	Fortune Brands Ord Shs	15.8
MER	Merrill Lynch Ord Shs	15.8
CF	CF Industries Holdings Inc	15.7
KB	Kookmin Bank ADR	15.7
CBI	Chicago Bridge & Iron Co NV	15.6
C	Citigroup Ord Shs	15.6
AMLN	Amylin Ord Shs	15.5
MR	Mindray Medical International Ltd	15.2
FST	Forest Oil Corp	15.2
AZN	AstraZeneca ADR	15.2
HERO	Hercules Offshore Inc	15.0
SQM	Sociedad Quimica y Minera de Chile	15.0
STRA	Strayer Education Inc	14.8
CRM	salesforce.com inc	14.6
LULU	lululemon athletica inc	14.5
SPP	Sappi Depository Receipt	14.5
JDSU	JDS Uniphase Corp	14.3
SJR	Shaw Communications Ord Shs	14.2
EXPE	Expedia Inc	13.7
ICE	IntercontinentalExchange Inc	13.6
MBI	MBIA Ord Shs	13.5
VAL	Valspar Corp	13.4
VMW	VMware Inc	13.4
SCHN	Schnitzer Steel Industries Inc	13.3
URS	URS Corp	13.3
AKS	AK Steel Holding Corp	13.3
PKX	Posco Depository Receipt	13.2
ELP	Companhia Paranaense de Energia	13.1
RPM	RPM International Inc	13.0
PWR	Quanta Services Inc	12.7
COH	Coach Inc	12.7
PCU	Southern Copper Corp	12.7
PHM	Pulte Homes Ord Shs	12.6
STZ	Constellation Ord Shs	12.6
WYNN	Wynn Resorts Ltd	12.6
CLF	Cleveland Cliffs Ord Shs	12.5
RDC	Rowan Companies Inc	12.4
BRCM	Broadcom Class A Ord Shs	12.4
CLI	Mack-Cali Realty Corp	12.3
FIG	Fortress Investment Group LLC	12.3
DRQ	Dril-Quip, Inc	12.2
REG	Regency Centers Ord Shs	12.2
APH	Amphenol Corp	12.2
TNB	Thomas & Betts Corp	12.0
NVLS	Novellus Systems Inc	12.0

Bookkeeping: Weekly Changes to Fund Positions Week 35

Week 35 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: 14.0% (vs 27.4% last week)
56 long bias: 75.6% (vs 48.5% last week)
7 short bias: 10.4% (vs 24.1% last week)

63 positions (vs 62 last week)
Additions: Ultrashort Consumer Services (SCC), Lennar (LEN)
Removals: Google (GOOG)

Top 10 positions = 36.2% of fund (vs 35.8% last week)
37 of the 63 positions are at least 1% of the fund's overall holdings (59%)

Major changes and weekly thoughts
The markets started the week celebrating a $19 billion write off by UBS, and a sizeable dilution by Lehman Brothers to it's shareholders... in the "forward looking" mechanism of the Street, these are "past issues", and the latter especially showed that there was interest in buying stakes in the investment banks at the right price. You can't really blame people, because now these investment banks have the same access to the Federal Reserve balance sheet as commercial banks, with almost none of the same regulation. Nirvana. The market continues to hold steady the rest of the week, celebrating the weekly unemployment figures increasing past 400K for the first time, as well as a worst than expected jobs number (which is still massively understating the situation), along with a 0.3% increase in unemployment. All great things to this market, because that's the "past" and we need to look forward 6 months when everything will be "better". I forgot to mention 142,000 of this month's jobs were by the birth/death model [Jan 27: Monthly Jobs Report & Birth/Death Model] - meaning if the government weren't totally guessing at how many "new businesses" are being created (in a contracting economy), job losses would in March would of been 220K instead of 80K. But when you can plug any number you want into the employment report, you can create any magic figure you'd like. Anyhow, the bottom line as investors is bad news is now being shrugged off, so we have to remain temporarily bullish.

I entered the week very cautious with my highest combination of cash/short exposure since inception last August and it cost me on Tuesday as the market went ballistic on the above mentioned "great news". Since we were able to make a new high, I decided to reverse course and cut back short exposure/cash and move materially into long positions - adding nearly 30% long exposure as the week went by. In this topsy turvy environment where hope means more than fundamentals I am relying more than usual on technicals. Looking at the broad index (S&P 500) we broke above a key "moving average", the 50 day, for the first time in 2008, on Tuesday. Further for the first time in 6 months we made a higher high than the previous high (from last week). So 2 bullish technical conditions.



On individual stocks, as I've said all week, I'm seeing bullish setups for the first time in a long time in many names. Simply said, these are stocks that have been under their major moving averages but broke above during the week - when this happens I generally am going to always be adding exposure, no questions asked. I am showcasing 3 charts below, from unrelated sectors, who all show the exact same technical condition.







These are 3 names; there were probably 20 names in the fund which showed similar setups this week. Which showcases to me, that once the market showed any signs of stabilization, many names in the fund were the type of stocks people were flooding into. Compare this to a lot of retailers, financials, and homebuilders which despite frantic moves in the first few days of the week are still below key moving averages.

Now where from here? I continue to remain cautious due to the economic backdrop. For the overall S&P 500, I do not want to see 1350 broken. That does not mean the index even needs to make a substantial move up, simply treading water is fine by me. If the market somehow breaks through its 200 day moving average of 1440, well then we just have to clap our hands and be impressed - and turn into full blown bulls. Somehow I find this improbable but then again some of the actions we've seen by "outside" forces have been improbable as well.

For individual charts, it is very simple - if this is just a fake out I will be culling back positions I bought this week as they fail, and fall back below the moving average they broke above this week. It is actually quite simple and frankly I have a list of 30 stocks in the portfolio all in almost the exact same position. So depending on the market action these all could be "holds" for a while longer, or quickly cut back (even if I need to take small losses across the board). Because by cutting once they break down below a moving average you (generally - not always) save yourself from a substantial drop. Now again, this is a lot of technical trading mumbo jumbo - nothing to do with fundamentals. But I like all the stocks I hold (save for perhaps the homebuilders) on fundamentals - it's just a matter of moving with the market. The fundamentals have really meant almost nothing since late last fall for many stocks. So until we re-enter a true sustained bull market, the technicals will dominate.

I do plan to cut back on my 2 solar names this week, as they have quickly gone to a 10%+ exposure, and I have some very nice short term gains. This does not mean they are not in inning 3-4 of a larger move, but I've already benefited from a substantial move and I'll let someone else take the risk of buying these stocks up 30-40% from their lows. I still like these names for the longer run, but again - this market... especially entering earnings season in which I believe many domestic based companies (not the type we own!) will be cutting guidance for 2008 is not one I want to be too giddy about. Remember how wrong analysts have been just in the past 3 months [Mar 31: Classic Example of Analysts Overexuberance] So I'll be pruning positions when I have nice gains, potentially leaving additional gains on the table but I remain very conservative for the time being.

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. I had a topsy turvy week with top position Mosaic (MOS) - I was building it early in the week, and took it up to 6% - but since my general plan is to cut exposure ahead of earnings, I went conservative and dropped it to near 1% of the fund before the Friday's earnings - nothing to do with the fundamentals, but the worry about the "reaction" to earnings which are always so unpredictable. Of course Mosaic came through as always, and the stock ran - I ended up adding about half of my position back (3%ish exposure) Friday. I'll be adding the next time there is a raid on these stocks but with the market (for now) benign we might have more upside in the near term, so I was willing to pay up to get part of my position back (same story for Potash but in smaller scale). These moves cost about 0.6-0.7% of fund performance, but this is the price of "insurance".
   
2. Tuesday, I locked in a very nice short term gain in iShares Signapore ETF (EWS)
3. Baidu.com (BIDU) is actually a great case example of how technicals dominated my short term thinking this week; on Tuesday the stock made a nice move up and was approaching a serious resistance point - so I cut back my exposure but said I'd be willing to buy back either on a break above this key resistance or a pullback. Well we promptly got a move up over this moving average within 24 hours so I added back my exposure plus more... now again, I could just as easily be selling off this exposure if the charts break down next week - when we cross up/down through key technical levels I will change course overnight if necessary.
4. I continued adding to Huron Consulting (HURN) on Tuesday as the stock was showing some good strength (+10%) since the selloff last week on its earning warning. I did take a bit off the table later in the week, to lock in some gains.
5. As we broke to a more positive condition on the S&P500 I added a 2nd homebuilder (plugging nose) - with Lennar (LEN). My strategy with these are, I need something when 90% of my portfolio is being trashed during the "commodities are dead" periods, so I am using these homebuilders... I only have a 3% exposure with my 2 names, so I'll add them when they dip and sell them when they pop. Frankly, I don't think the home market is coming back for a few years, but as long as people continue to insist it's coming back in "6 months", the stocks will have some strength.
6. I made a series of buys late Tuesday on the technical strength of the indexes - the "Ben is my friend" trade.
7. Wednesday, long time portfolio dog, Trina Solar (TSL) finally broke above a key technical moving average in the mid $30s so I added very quickly in scale. I would love to see a mid $40s print in this name, but anything north of $40 would be constructive.
8. I was adding to Apple (AAPL) in drips and drabs throughout the week.
9. I added to my other consultant, FTI Consulting (FCN) on a pullback - the strength in this stock has been very impressive, but we finally got some profit taking so I began adding - the stock is still very pricey so unless it falls quite a bit more I won't be adding much from here.
10. Late Wednesday, I added to LDK Solar (LDK) on the "Hey you Forgot about me" trade - the chart looked identical to Trina Solar the day before so it was a bit of a hunch; I only took the position to 1.2% of the fund, but the company announced a nice deal afterhours and stock popped the next day where I added a lot more.
11. I sold down Zhongpin (HOGS) as it approached resistance - this was an identical move as to why I sold Baidu.com, but unlike Baidu.com Zhongpin reversed course and fell once it hit resistance. I'll look for a move above (or a pullback) to be adding more.
12. Thursday I added to my entire coal basket, as the stocks charts (once again - I'm a broken record) began to turn positive. This proved extremely fruitful the next day, as Massey Energy (MEE) broke off a 20%+ type of move; so I took some profits in that name specifically. The other names also looked very good Friday.
    
13. I had been adding to Core Laboratories (CLB) in drips and drabs as the stock began to show signs of life; Thursday, I added to my other oil services name National Oilwell Varco (NOV) as once again... the chart turned positive.
14. I closed Google (GOOG), simply because it was not participating to the same degree a lot of other names in the portfolio were. This does not mean it won't rally next week but in terms of relative strength at the time, it was not showing it. Instead I was focused on adding to Baidu.com and Apple this week.
15. I began a stake on Ultrashort Consumer Services (SCC) as jobless claims broke 400K for the first time, which is essentially a retail short (although McDonald's is among the top 10 holdings). This is an imperfect tool for what I want to do... I cannot short individual names - but I think the consumer is in a lot of trouble and we are just in inning 1/2 of what is coming as the spiral of job contraction, lack of house ATM, emptying of 401k balances, filling up of credit card balances, and the cruelest tax of all (inflation) conspire to batter the middle class. The top 10% will go on about their merry way... but those are not the people filling up Kohl's, Target, JcPenney on a weekly basis. So this instrument actually has one of my favorite retailers in this environment, Walmart (WMT), as it's top holding, and McDonald (MCD) #2, so it's not exactly what I want, but it's all I have available to me to bet against the consumer. If the retailers bounce upward on this Kool Aid rally, I will add to this position materially - I expect a lot of store closings, reduced guidance, and in fact PULLED guidance from retailers and restaurants in the next 2 earnings periods as they feel the brunt of the consumer led recession.
16. Friday, I spent the day simply looking at chart formations like the 3 above and adding a smaller long layer into many names that turned bullish. Again, I'll reverse these buys on a moment's notice if the charts begin to break down. The market mood remains hope/government interventions vs reality - each week one or the other can win, but I am quite confidant they will ping pong back and forth, so when we move back to reality - I'll be quick to acquiant myself with cash/more short exposure.

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