AP: Dollar's Plunge Becoming Lynchpin in Q1 Earnings

I see someone has been reading my blog...

I have 2 comments to add to my spiel about how the weak dollar is masking domestic weakness. (i.e. almost all of IBM's revenue growth was "currency exchange" 7 of the 11% "growth")

#1 Earnings season is top heavy (front loaded) with the large multinationals - after this week and next week, we'll be through many of the S&P 500 type of names who are large enough to benefit from this situation. Then we'll be left with a lot of smaller companies who are stuck with only US exposure.

#2 The dollar looks prone for at least some sort of bounce. It has been beaten to death... now in the long run our dollar faces many systematic issues due to our structural imbalances, and many short term issues (mostly the massive inflating of our money supply by Gentle Ben), but just like with homebuilders, retailers, restaurants, financials - nothing goes in a straight line up or down. The weakness in the dollar has been SO pervasive we'd expect at least a modicum of recovery at some point soon. What could be a catalyst? The next Fed meeting - odds are for a 25 basis point cut but at this point the "real returns" (adjusted for inflation) are negative, so I don't see the point of any more cutting. In English? The Fed has basically said we want you out of savings - we are going to punish savers so badly that we are going to make them lose money every day their cash sits in a money market account. Take that prudent people! I'd argue that real rates have been negative for a long time because inflation is WAY understated, but even with the governments fictitious representation of inflation, we are now "negative".

So they will be stopping soon enough, if not this meeting than in the next meeting in mid June. In "theory" that should be a boon to the dollar. But they have created so many other new instruments to flood the system with US pesos, I am not sure if it really matters. [Mar 22: A Historic 9 Days for the Federal Reserve] However, for perception purposes at least, it should create an illusion - and we'll hear CNBC tout how "the Fed is now fighting inflation!" No, that's lies. Just like last time around they "only" cut 75 basis points instead of 100 points and CNBC told us this means they care about inflation. Laughable. 75 basis points is tied with the most they have ever cut in 1 meeting - so somehow by putting language into their statement that inflation *might* be a concern after all that is "fighting" inflation. If I see them raise rates by 75 basis points, then I'll agree they are fighting inflation. Words mean nothing - except to CNBC cheerleaders.

Again, the problem with a "stronger" dollar is it will hurt the 2 areas that have been the only market salvation - US multinationals and commodity based stocks. So it will be an interesting situation if the dollar can actually put on a rally that lasts more than 72 hours. And I'll like to re-emphasize most job creation and economic activity in this country is in smaller businesses - so all this focus on the large US multinationals is a focus on earnings, not economy. What is good for US multinationals (weak dollar so their goods become dirt cheap to foreigners) is net net not very healthy for the average American sifting through his/her average life on Main Street. Or the 1000s of private and public companies who solely rely on the US - the type of companies CNBC glosses over. Last point - if/when the dollar bounces in any meaningful way AND holds it - all these corporate profits by multinationals based on weak dollar - reverse - *poof* gone. That said, I'd rather be investing in these type of companies than those that rely on subprime nation.

• The dollar's plunge might be preventing Americans from taking that European vacation this summer, but it could be the very thing saving their 401(k)s from buckling. Some of the nation's biggest corporate powerhouses -- across all industries -- have used the greenback's retrenchment to shield themselves from slumping profit margins. Declines against world currencies make U.S. products look cheap overseas, and translate into big returns when sales are converted back into dollars.
• Take Coca-Cola Inc. for example. Buying a can of Coke cost $1 in the United States, but the equivalent of about $2 in the U.K. -- one reason the beverage giant was able to sail past Wall Street profit projections earlier this week.
• "If you look at some of the companies that had good quarters, they're doing half or more business abroad," said Phil Orlando, chief equity market strategist at Federated Investors. "The weakness in the dollar is a significant benefit in currency translation, and for those companies that are developing products that will create a boost for export activity."
• The dollar is down about 8 percent against the 15-nation euro, and has touched lows against the yen and Great British Pound. One reason for the slide is that the Federal Reserve continues to lower interest rates -- and that makes the dollar less valuable.
• Atlanta-based Coca-Cola reported said revenue jumped 21 percent to $7.38 billion during the first quarter. It attributed 9 percent of the increase coming from the dollar's decline against other currencies.
• Meanwhile, Caterpillar said strong international sales of the company's bulldozers and other heavy construction equipment overcame weakness in North America. Sales grew by 30 percent outside of the U.S., and represented 58 percent of total revenue.

Earnings Mon-Tue

Earnings I'm watching (not that fundamentals matter right now)...

Monday - there does not seem to be any names that could upset the market early this week; the only flies in ointment might be "sell on the news" reactions in either coal or oil services. The farther these groups run up without any break before earnings, the more prone to profit taking on a "sell the news" reaction.

Fund holding Arch Coal (ACI) - there should be no surprises here as Arch Coal just came out with an update to their guidance 2 weeks ago. I have a relatively small stake right now, awaiting impatiently the "commodities are dead" sell off we get every month to 6 weeks.

Bank of America (BAC) - major bank in the US but really does it matter anymore; whatever these guys say there is clapping and cheering from the rafters because the financial issues are "all taken care of within a few months"

Cemex (CX) - this is a global powerhouse in cement; it is unfortunate for them they are based in Mexico where the real peso is kicking the US peso's behind and is at a 2 year high, whereas if they were based in the US, they'd be able to take advantage of the "weak currency" play that has helped multinational after multinational spin away all their domestic troubles.

Fording Canadian Coal (FDG) - another coal name

Halliburton (HAL) - HAL has been an absolute monster of late - this oil service giant is trading as if its a fertilizer stock. Below is a chart of the Oil Services ETF (OIH) - if you plot a chart of ANY oil service stock the past few weeks it is identical - completely parabolic. Now, to me, this makes little sense because fortunes don't suddenly change at crude $115 versus crude $105 which is where the stuff has been trading for weeks/months, but logic has very little to do with the market in the near term. The market gods say oil services now are important when crude is >$110 so away these stocks go, up up up.



Merck (MRK) - one of these names the market cares about, but I don't

Nabors (NBR) - I've been dusting off my old list of land drillers, which have been near dead for 2 years - showing a ton of strength of late - this is the big dog of the group

Texas Instruments (TXN) - not really a bellweather anymore, but hey it is based in the US and has overseas sales so they will probably show weak organic sales, but "strong" currency exchange and the party for US multinationals can continue

Weatherford International (WFT) - yet another oil services name that is simply going parabolic

Tuesday
AK Steel (AKS) - investors love their steel stocks

Baker Hughes (BHI) , BJ Services (BJS), Smith International (SII) - Oil services. Ballistic. Rinse. Wash. Repeat.

Broadcom (BRCM) - former fund holding, their chips are in everything. Could be breaking out here...

Chicago Mercantile (CME) - former "exchange" darling ; been very quiet of late

Coach (COH) - this will be an interesting report; it's been beaten down for a long time - if it ramps than truly the "everything will be fine in 6 months" mantra will be firmly entrenched. More important than the results are the reaction to results; I actually like this name as they expand into China but unfortunately their 2 biggest markets are Japan and US so I've had to go negative on since late last summer.

Dupont (DD) - anything remotely touching agriculture is ramping. Dupont is one of them.

Encana (ECA) - major natural gas player

Fund holding Illumina (ILMN) - another very interesting situation - very very highly valued and as we've mentioned there has been some strange weakness in medical research outsourcing of late (in the stock prices) - simply due to valuation I could see this one prone to a serious selloff. Competitor AFFX has warned. I only have a small stake and waiting very impatiently for a long time for a serious selloff.

Fund holding Jacobs Engineering (JEC) - I meaningfully added to this position late this week; I would of made this a larger position but anything more than 3% going into earnings makes me nervous. Again, the strange thing with infrastructure stocks is how investors react so severely to 1 quarter - these are multi year, secular growth stories with many long term contracts - their quarters are VERY lumpy yet people dump these stocks or worship at their alter based on nothing more than the recent earnings report. A lot of their sales "should" be overseas as well.

McDonalds (MCD) - pooring of America middle and lower class benefits these guys; along with Walmart these are 2 "huge" stocks I'd buy if I were a very large cap fund manager.

Former fund holding Millicom International Cellular (MICC) - the stock of this "2nd/3rd" cellular name has been quite weak of late, will be interesting to see if its hand wringing over nothing. Or maybe people more worried about food just don't have money for cell phones.

Railroad Norfolk Southern (NFC) - follow the CSX example; booming due to grain, ethanol, and coal exports - but not a sign of domestic strength.

Former fund holding Peabody Energy (BTU) - still love this coal name for the long run but I flipped it out of the basket of coal stocks for another name recently.

Pharmaceutical Product Development (PPDI) - this is one of those contract research organizations we've been looking at to potentially diversify into - the stocks have been acting poorly of late so I'll be interested to see if we have any sort of negative news coming.

VMWare (VMW) - this was one of the hottest IPOs of 2007; how quickly they have fallen.

Yahoo (YHOO) - speaking of how quickly they have fallen ...yawn

A couple of other banks report Tuesday but really does it matter anymore? Everyone is convinced there are no problems that 6 months, some shoe polish, and a few billion in writeoffs won't fix so why even monitor them anymore? At some point the market will recognize the spreading credit malaise into the regional banks as commercial loans, and local loans start to hurt these names but since it will be spread out over a longer period of time - no one seems to be too worried about it for now.

Rice Continues to Explode Higher

We had fun this week in the market - I continue to believe the idea that printing money inflates all assets, including equities to unnatural levels... thankfully it does not cause any ill effects to the rest of the world.

Remember - agflation, food protectionism, social unrest - my 3 themes for this food crisis that is going relatively ignored. Coming to a 2nd or 3rd world country near you. Rice - biggest weekly advance on top of a 50% gain in a previous 2 week period. [Apr 6: Agflation Hits Rice - Prices Up 50% in 2 Weeks] It's all good - Western governments, led by Helicopter in Chief Ben, printing money like mad does not contribute to this. Nope. Nada. Enjoy your grocery shopping this weekend...

• Rice futures rose for a fifth day, recording the biggest weekly advance in at least seven years, on concern export curbs imposed by China and Vietnam will spread as importing nations struggle to meet their needs.
• India and Egypt have curbed sales this year to safeguard local supplies. The gain in rice, as well as energy and wheat, has prompted the United Nations to warn that civil unrest may spread because the poor in Africa and Asia can't afford to eat, and their governments can't fund or find sufficient imports.
• Rice prices today rose to a record for the seventh time this month, and the Chicago Board of Trade raised its daily trading limits after futures rose the most allowed twice this week. Availability of the world's most-consumed grain has decreased as countries restrict shipments in an effort to slow rising food costs and feed domestic populations.
• ``More and more countries will have restrictions on exports,'' Frederic Neumann, an economist at HSBC Global Research, said by phone today from Hong Kong. ``There's some pressure on the Thai government to curtail shipments.''
• The contract gained 13 percent for the week and has more than doubled in the past year.
• China, the world's most populous nation, has started to block or tax some food-related exports to make sure that local supplies remain adequate. The country set a tax on rice shipments at 5 percent this year and started to tax wheat exports at 20 percent.
• The world's fastest-growing major economy announced yesterday that it was increasing the tax on fertilizer shipments to ``control exports'' and damp local prices, according to the Finance Ministry.
• An average household in India spent 32 percent of its income on food last year compared with 6 percent for a household in the U.S., data from the department show. The figure for Indonesia was 43 percent, and 36 percent for the Philippines.

To put into perspective - most homeowners spent 35-40% of their income on their mortgage. Now assume that your mortgage was your food. And your mortgage payment just doubled; just so you can feed your family. Unlike under water mortgages you can't just "walk away" from food...

Listen to those printing presses whirl....keep shoveling those paper dollars into the world system, (and all governments pegged to the USD must also print their currencies to keep their system stable) so we can chase up every hard and soft asset to ridiculous levels... anything to help those NYC bankers. Remember we are at annual pace that for every 5 dollars in your pocket, 1 new one is being created in the US (and this is being replicated worldwide for any government tied to our dollar). Poof.

Bookkeeping: 'Rising Tide' Performance Week 37

Week 37 performance of the mutual fund

Comments: Two more weeks until "our" 3rd quarter closes... it was a great week for the markets, and yet another "best week in 5 years for the market" - we just had one of those 2 weeks ago. Showcases the extreme volatility that remains in the market. It seems long ago but we had a down day Monday and then from there no amount of bad news could bring this market down - from Intel to IBM to Google to Citigroup. The tell tale sign this week was actually Thursday, which was a day the market did nothing... in the face of a handful of quite bad earnings such as Nokia, and Merrill Lynch. Yet no selloff. We also had 2 more inflation reports insisting it's all in our imagination. This is simply a market that wants to go up - aside from "surprise" blowups like General Electric (GE) last week, it's been the case since April 1, 2008. Strange how things turned on a dime like that once the calendar turned.

Looking at the fund (and market) of late, we had the "best week in 5 years" (on the Dow I assume) this week, repeating the same scenario from 2 weeks ago, and another great week 4 weeks ago for the indexes. In between those weeks were 2 not so good weeks. So when the indexes rip off these huge moves, we've had a hard time keeping pace simply because the moves are so enormous and sudden and abstract. Without employing a full 100% long, throw risk to the wind strategy its impossible to really keep up those weeks. That's been the case 3 of the past 5 weeks. In the other 2 weeks when the market corrected or was constrained, we've outperformed by a country mile, generating 10.5% positive return versus the indexes as a more hedged approach worked out. Hopefully the markets calm down to some degree on a week to week basis, and individual stock selection becomes more important than asset allocation again. But somehow I don't count on it. It is hard to believe but before last spring we went a year and a half without a single day where the index (S&P 500) traded +/- 2%. Now we get those almost daily. And week after week of +/- 3% moves. When I review the data, 6 of the past 16 weeks have seen moves of +/- 4% - very extreme action.

Technically, we ended the week at S&P 1390 which is an interesting spot. Right below some previous highs but close enough to be titillating as a precursor to more upside. The general mood seems to be bright/euphoric and when bad news is treated as good news it is hard to bet against the market. I'd "assume" we make a move north of 1400 and onto 1430s at some point next week - taking a peak at what is on the schedule for earnings early next week I don't see anything that should scare the market and as long as we keep rolling out multinationals that can show big growth through currency conversions (weak US dollar drives big revenue gains) we can continue to drink Kool Aid. Granted this is only about 200-300 companies in the entire US, but those are the 200-300 the market fixates on, so as long as they report numbers that make people happy, we can forget about all the bad things under the surface in smaller companies who rely solely on the USA. Remember, the market attempts to look ahead - when it attempted this last October/November and the market ran to new highs, it obviously missed the forest for the trees - we had corrections in November and January, the latter being extremely serious and later in 2008 we required Federal Reserve intervention to prop up the equity markets. So whatever the market was "predicting" last Oct/Nov was clearly a big mistake. So now we enter a new period where the ever hopeful bulls believe everything will be fine soon enough. We'll check back next fall to see if they were correct or not.

For the fund, we entered this week cautious with a very large cash base and a meaningful short exposure (20%) - so obviously when the indexes just pulled their best (Dow) week in 5 years that was not a good match. However, as I stated the past 2 weeks my goal this earnings season is to not give back the gains we've built up for the year; at the risk of missing out on upside performance. So that came to fruition this week, as we did not keep up with the indexes but eeked out a positive return despite having the lowest long exposure for 4/5ths of the week, since fund inception. While I changed stances somewhat on Friday, I still am going to tread cautiously (cash is still nearly 1/3rd as we speak). If this is the beginning of a new era of bull market and "everything truly will be fine in 6 months" there will be plenty of time to catch up later versus the indexes, and more important is to keep rolling out positive returns. Further, almost every sector I am really interested in, save the infrastructure stocks, have already put in quite epic moves in a short period of time, so to keep shoveling money down the throats of these stocks is inviting trouble.

This week the S&P 500 and Russell 1000 once again put in an enormous move, gaining 4.3%. I assume the Dow did even better as those stocks dominated this week's news flow. Rising Tide Growth Fund was like a hesitant baby turtle, just hatched and trying to cross a busy Florida highway - eeking out a 0.6% gain. Way too much cash and way too much short exposure this week to even attempt to keep up with the indexes.

Price of Rising Tide Growth: $11.724
Lifetime Performance to date (vs Aug 3, 2007): +17.24%

Comparable S&P 500: 1,390.33 (-5.11%)
Comparable Russell 1000: 758.19 (-4.77%)

Fund return vs S&P 500: +22.35%
Fund return vs Russell 1000: +22.01%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) 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 April 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: Continuing to Sell Down Baidu.com (BIDU) and Mercadolibre (MELI)

Parabolic charts make me nervous. I realize these names are hot, but I am going to continue to sell down, just like I have done with the commodity stocks I like, as the charts go at nearly 90 degree angle upwards. There will be a sell off in all these names going ballistic; the question is when and from what price point. I'll let other people chase these up, and buy when the last ones on the ship start panic selling.

I cut both these yesterday worried about an adverse Google (GOOG) reaction (wrong! but at least you see the thought process) [Apr 17: Reducing Baidu.com, Mercadolibre Ahead of Google Earnings], and am taking out another layer from both, to sub 0.5% stakes. No change to fundamentals of course - the froth level is starting to set off my radar. We are now reaching level alert Orange on froth...

Baidu.com is up nearly 9% to mid $330s, MELI is up nearly 6% to near $53. They've come a long way in a short time.

For those of you who follow options; and speaking of speculation ....if you wanted a lottery ticket you could of bought Apr 500 calls yesterday for 55 cents... if you bought 100 calls that would cost you $5500

At today's price of $543 for GOOG, you would have $430,000. Not bad work for 24 hours. :) Now that's a bet on black!

Long Baidu.com, Mercadolibre in fund; no personal position but wish I was smart enough to buy 100 April GOOG 500 calls yesterday at 3:50 PM.

A Great Post from Rev Shark over at Realmoney.com

Every so often you get a really good post that is best to simply copy over in full... a person I've been reading for many many years over at Realmoney.com, Rev Shark, hit this one out of the ballpark today. Anyone who was conservatively positioned or who trades in reactionary mode instead of anticipatory trails on days (and weeks) like this one (i.e. me), where the "worst of breed" stocks rally the most. It is frustrating in the short run, but as he says, it's always best to have a system in place and stick with it.

I have gotten a lot of emails and a few comments on how wrong I was on Google via my posts that are published on Seeking Alpha (this is what happens when you say anything even neutral, not to mention negative, on a "cult stock"). (I suddenly feel like Cramer!) Well, it's the "trade", that I stick with. People betting on Nokia, Intuitive Surgical, or even "safe" General Electric going into earnings were completely destroyed the next day. As Rev Shark says, it is gambling. Today the gamblers in Google won, but the same people will lose money on the next gamble and over the course of time a "strategy" of betting on earnings is really no different than going to Las Vegas and putting your chips on black or red. In the end the house will win more than you will. So I stick with the trade strategy of almost always pulling back ahead of earnings, even though you miss opportunities (most recently in Mosaic) along the way. You have no inherent advantage and 50/50 bets are not investing. This way I can buy names like Intuitive Surgical in the $290s today instead of "betting" at the $350s yesterday and being down nearly 20% overnight. In fact I am probably buying the shares from people who "bet" yesterday...

p.s. There is nothing wrong with speculating and putting money into a stock right before earnings; heck it's a rush for some people - but to call it investing instead of speculating is misleading...

Anyhow here is the most excellent post

Days like today, when the market moves up big due to surprise positive news from recent market laggards, can be quite frustrating for many traders. The folks who profit the most on a day like this are permabulls who have been heavily long for a while and are now getting back to even, bottom-fishers who have been buying out-of-favor stocks, and gamblers who bet on earnings. The trading is much more difficult for technicians who buy good sectors and charts and for those who are reactive rather than anticipatory.

If you are lagging the indices today, the most important thing you can do is to not let frustration drive you to abandon your trading discipline. Stick to buying stocks that fit your style and don't start chasing the big moves, unless that is what you typically do.

I often write that if the market is going to start a major uptrend, there will be plenty of time to buy. Even on big gap-up days like today, that remains the case. A good market will give us plenty of trading in the days ahead. You don't need to have all your money at work immediately. More opportunities will develop if you are patient and disciplined.

The strong dollar is putting the hurt on mining and metal stocks. Surprisingly, it doesn't seem to be having any impact on oil stocks, which reversed back up very sharply after a weak open. The oil stocks are going parabolic, and the Oil Services HOLDRs (OIH - commentary - Cramer's Take) ETF is now at an all-time high. I keep wondering how that could possibly be good for a struggling economy, but apparently no one is worried about that today.

S&P 500 Potential Break Out ; Infrastructure Moving to the Top of the Holdings

Looking good thus far for the bulls... 1390 was a barrier but after a few hours of relentless attack the Kool Aid overwhelmed the minions. This now puts us higher than early April and late February 2008 highs. Now we are at 1395 which is a test of early February 2008 highs... once (if) that is broken, there really does not seem to be much trouble until 1430s level. If we end the day at 1400+ it would strike me as extremely bullish. Now I need to go check Monday and Tuesday's earnings reports to see which multinationals can keep propping us up based on the weak dollar ;)



I continue to incrementally add to most of the positions I was adding to this morning to make them larger positions. Unfortunately the fund return is a whopping 0.10% today since being conservative was not the way you wanted to enter the day. The infrastructure group is looking *very* good now with today's moves, and as the charts have strengthened through the day I've moved Foster Wheeler (FWLT) and Jacobs Engineering (JEC) to slots #2 and #3 in the fund. Much like the solar stocks about a week and a half ago, which I moved to a major positions overnight, these are charts that have been consolidating a long time, and finally the herd is moving in their direction. [Apr 2: Adding to Trina Solar (TSL) on Long Awaited Breakout] The sector is different, but the technical breakout condition is identical... For my personal preferences, this is my favorite type of chart - great fundamental stock, long base built, and peaking head over resistance.... (of course there is always a chance these charts can reverse on you) hopefully it gives us the same results. If you missed yesterday's (good timing!) entry on infrastructure - see here.

Long Foster Wheeler, Jacobs Engineering in fund and personal account

You Thought VISA (V) was the Hottest IPO of 2008? Wrong.

Meet Intrepid Potash (IPI) - this is like bringing Google public in 1999... yee haw. Now if this were a real mutual fund, I'd be telling my broker to be getting me as much of this as possible so I can sell to the little folk out there in retail world, up 100% and juice my returns ;). I'll post the details below, but really it does not matter - the name of the company alone should be worth a $20 billion market cap don't you think?

• Fertilizer maker Intrepid Potash has boosted the size and expected price range of its proposed initial public offering, according to a Securities and Exchange Commission filing on Thursday.
• The Denver-based company now expects the offering to total 30 million shares and price between $27 and $29 apiece. Intrepid previously expected the offering to total 24 million shares and price between $24 and $26 per share.
• Based on the estimated price range, the company will have a market capitalization of $2.02 billion to $2.17 billion.
• Intrepid, which was formed in November 2007, plans to use proceeds from the offering to acquire all the assets, other than cash, of predecessor company Intrepid Mining LLC. Remaining proceeds will be used to repay debt and to fund production expenses and other growth opportunities.
• According to its prospectus, Intrepid is the country's largest producer of muriate of potash, or potassium chloride, a fertilizer that helps regulate plants' physiological functions and improves plant durability. The company owns five active potash production facilities in New Mexico and Utah.
• In 2007, the company reported earnings from continuing operations of $29.7 million, compared with $24.1 million in 2006. Total sales rose to $213.5 million from $152.7 million in the prior year.
• Goldman Sachs, Merrill Lynch and Morgan Stanley are serving as the IPO's lead underwriters. RBC Capital Markets and BMO Capital Markets are also underwriting the offering.

So with 30M shares and about $30M in trailing profit, the math is pretty easy = $1 trailing EPS. If its anything like other potash makers it's growing 50%-100% this coming year so maybe it does $1.50-$2.00 EPS in 2008?

Price at $27-$29? The only thing I know about the company is what is stated above, but I say it opens at $60+. Voracious momentum traders will be all over this...

More info since I originally posted this can now be found here.

Bookkeeping: I Have Too Much Cash Trades

I don't want to add too much more unless we break above S&P 1390 because frankly if we don't this is setting up as a beautiful bull trap set by the bears. But I am going to add some exposure in 3 buckets today

Bucket #1 - Every international conglomerate is saying infrastructure is booming but the infrastructure stocks continue to be ignored (we touched on this yesterday in Infrastructure Stocks Still not Understood or Appreciated) So how can every multinational talk about how great things are in infrastructure but these stocks continue to trade listless? It makes no sense, and the charts of these names are finally starting to firm up - I added to Chicago Bridge & Iron (CBI) yesterday - I am going to add more to these stakes

1. Chicago Bridge & Iron (CBI)
2. Jacobs Engineering (JEC)
3. Fluor (FLR)
4. Foster Wheeler (FWLT)

All of the above, other than CBI (not based in USA) should benefit from 'weak dollar' accounting as well, right? Again, I'd rather add these type of names, coming off of near resistance levels on their charts than fertilizers or coal which already have made huge runs and need to pull back at some point.

Bucket #2 - it is ridiculous I am buying these stocks but the herd believes so I don't want to be left in the dust if the "early cycle" hoax continues

1. Homebuilder Lennar (LEN)
2. Homebuilder DR Horton (DHI)

This is on top of the Morgan Stanley (MS) buy earlier today which I also find ridiculous to own. But I need to have more balance in the fund for the times people really believe these things will rebound in 6 months. So this is stuff I plug my nose and buy... believing I will lose money at any moment owning them.

Bucket #3 - things I actually like

1. Blackrock (BLK) - this is a weak chart right now, but if I have to own a financial, this is the one I want
2. Apple (AAPL) - hey they have a lot of international sales - with a weak dollar you know what that means....

Again, if the S&P cannot break north of 1390 all these positions will be money losers in the near term... and the bears will laugh at the stupidity of it all. It's a tough balancing act - intellectually I'm bear, but as market ramps I fall farther behind every moment I sit in cash...

So this is all I will be buying for now... I will need to see a move higher in the indexes to jump in with more. I still have too much cash - 34%. If we start moving over 1390 the more I close my eyes tight and blindly buy stuff... (that's what all the cool kids are doing)

Long all names mentioned in fund; long DR Horton in personal account

Bookkeeping: Restarting Cummins Engine (CMI) as Rest of World Moves on Without USA

Caterpillar (CAT) had good earnings that (drumroll) relied on great international sales, and a weak dollar.

• Booming economies overseas powered Caterpillar's CAT first-quarter earnings past Wall Street's expectations, despite a "recessionary storm" in the U.S.
• Cat CEO Jim Owens said the company sees "robust demand for products used in the global mining and energy industries and for machines used by our customers to build infrastructure, particularly in emerging markets."
• "Even though we're currently weathering a recessionary storm in the U.S., we expect the rest of the world to continue to invest in infrastructure growth well into the next decade," said Owens.

So did Honeywell (HON)

• Diversified U.S. manufacturer Honeywell International Inc (NYSE:HON) on Friday posted profit that topped Wall Street's expectations, as strong growth outside the United States overshadowed weak demand for consumer products such as thermostats and antifreeze.
• Honeywell cited Asia and the Middle East as "leading the way" in growth and noted that two-thirds of its 10.6 percent revenue rise came outside the United States.

These results play on my theme of avoiding the US and looking overseas - even as they *will* slowdown to some degree... there is simply no real growth in subprime nation - we rely on credit creation and consumerism outside of a few export sectors - that really cannot create much other than inflated paper wealth (accompanied by inflation) This is the bed we have sown, so now we lay in it - enjoy.

I am now looking back at old holdings that are industrial in nature and am going back to Cummins Engine (CMI) - which has great exposure to India and China. This was a previous fund position, that I closed in November [Nov 13: Closing Cummins Engine] correctly anticipating a selloff and weak period for these type of names.

For much of the same reasons I closed the other 3 positions earlier today I am closing Cummins Engine (CMI) although I love the story long term and *will* return. This is more of a technical call and slowing US economy call - I still think this is a premium franchise way ahead of the game in China and India.

Frankly folks, the weak US peso is even more of a benefit to US multinationals than I anticipated... company after company is beating simply on currency exchange and roaring foreign markets... kind of makes you jealous to be sitting here in subprime nation. Anyhow, I am a big fan of Cummins and wrote a long piece on the name back in September [Sep 23: Stock to Watch: Cummings Hitting on all Cylinders]

Some highlights:

From Yahoo Finance profile: Cummins, Inc. engages in the design, manufacture, distribution, and servicing of diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide.

Pretty much all you can ask for in an industrial name. Record revenues; strength overseas; raising guidance, etc. I've been looking at other ways to get to those record revenues in the Middle East - ways to take advantage of the massive revenue gains made from crude at double the price it was just a few years ago - the scope of companies is very limited. But here is one.

Cummins has a nice Powerpoint presentation (click to check it out) on their website discussing their firms past, current, and future done on September 18, 2007. Most interesting to me were slides 60 and forward. Presentations on join ventures in China, presentations on joint ventures in India (with Tata no less which is the General Electric (GE) of India), etc. The company has about $700 million in sales in China now, projecting to more than double by 2011. India? I think they just cut and paste the same Powerpoint slides over from the China section of the presentation and copied the word "India" over "China".

And these are not recent initiatives - the company has been on the ground in these countries for many years, laying a framework. In 1999, 40% of Cummins' sales were foreign, 60% US. Now? 50/50. By 2011, foreign sales will be greater than domestic. It pays dividends... it buys back stock... and yes it's an old 'smokestack' type of business, but old is new again.

Technically the stock is breaking out of a very long base (4 months), it is up 8% today so I have to pay up, and I'll add more if I see a break ABOVE the 200 day moving average of $55; stock currently in the $53s. It is still meaningfully down from where I sold it, which was $118 or split adjusted $59. So the stock has done nothing for 5 months, and I can now get back in for 10% lower. We'll see how it works out, I still have major concerns of slowdowns - but this type of position is a nice offset to the commodity heavy stakes I own. Earnings are April 30th so we'll see if the "weak dollar" gives them a huge boost too - but the stock is very cheap. $4.51 in 2008 earnings and $5.39 in 2009 which is a forward PE of under 12 for a solid 20% grower...

I am restarting Cummins Engine with a 2% stake bought in the $53s... and yes I wish I had bought at $50 on the dip this morning ;) I continue to mostly avoid companies that rely on the weak, no growth subprime nation...

Long Cummins Engine in fund; no personal positions

Bookkeeping: 2 New Positions - Intuitive Surgical (ISRG) and Morgan Stanley (MS)

I'll be adding 2 new positions this AM once the market opens

#1 Intuitive Surgical (ISRG) - this is a 1 of a kind medical company which reported a stellar quarter but sold off on the "great quarter but not good enough to make the crazy expectations" game. This is a very pricey stock and I was hoping it would stay down to where it was last night in after hours ($310). Since I cannot buy in premarket or afterhours I am stuck with the opening price which is looking like $320+. Technically the stock hit its 50 day moving average in afterhours. I had planned to buy this company (but missed it by a few bucks) in the mid $200s in mid March. More on Intuitive Surgical here [Feb 1: Intuitive Surgical Very Impressive]

The valuation has been very rich for a long time, but it's essentially a monopoly. The fear has been hosptials (due to credit crunch) would begin pulling back on purchases of the very high end robotic machines. Again, we have to fight the "hidden shadows behind every corner" in a bear market. Thus far it does not appear to a true thesis that the bears are advancing in this name.

This is an impressive report and shows the benefit of its "razor and shaver" strategy - sell the shaver, and make long term, consistent profits off selling the razors indefinitely.

#2 Morgan Stanley (MS) - as I wrote yesterday in my last post, people will ignore the Citigroup (C) number no matter what it is this morning. Here is the bull thinking - if the numbers came in worst than expected this is just the kitchen sink quarter and everything is up from here (which is what happened) & if the numbers are better than expected than we are already turning the corner and everything is up from here. See? There is no way to lose - either scenario it is "everything is up from here". This is the herd thinking and I cannot argue with the herd. Of the 4 major investment banks Morgan Stanley (MS) has the best chart so that is why I am buying it - Goldman Sachs (GS) is obviously the other option. I am not that interested in Lehman Brothers (LEH) or Merrill Lynch (MER) - because while they might have more upside I still think they have more risk. Much like the homebuilders I own, I don't really "believe" in this position but when the market tugs up the financials I need more exposure and going forward if everyone believes the worst is behind us, I need to have more exposure in this group - even if intellectually I disagree.

I wrote a few weeks ago that Ultrashort Financial (SKF) is becoming less attractive [Mar 19: Alt A Mortgages Beginning to Break Down; Ultrashort Financial Not as Cool as it Used to Be], mostly due to composition of the stocks withing it, but also we are reaching a point in financials that much like homebuilders - no matter what amount of bad news you throw at them - people shrug it off and so "oh well, things will be better in 6 months". I don't want to fight the herd, so I'll be reducing this exposure along with Ultrashort Real Estate (SRS) this AM, take the short term hit, and then review at some point later in the future when people return to a more logical view. Again, being intellectually correct yet being run over by a herd of stampeding bulls does us no good. The great irony is all we are really pricing in are the writeoffs from subprime. The whole credit contagion of commercial real estate, alt A mortgages, prime mortgages, credit card writeoffs, student loan write offs, auto loan write offs? Don't worry about all that - it is "all priced in". A suffering consumer battered by inflation and job losses (another 30k potentially gone from Citigroup today) is somehow going to keep paying all this debt. But none of it matters as long as multinationals can sell stuff overseas and benefit from the weak dollar - this is market logic at its best.

I plan to buy quite a few other things this morning since I have a >40% cash position, and I will be focusing on things that have been lagging but might be beginning to break out (i.e. infrastructure). The dollar is strengthening on all these "great" earnings reports, which is sort of ironic because the vast majority of the "great" earnings reports are due to the weak dollar. This could put pressure on commodities so I don't plan to expand exposure there.

We've had a few episodes now over the past few months where commodities sell off, while financials, retailers, and homebuilders ("early cycle" plays) ramp. This could be one of those times; I was thinking it might be time yesterday in fact when the financials rallied on a horrid Merrill Lynch number, and the commodity stocks were selling off. When we enter a true bull market, we'd want to see both groups ramping together, not one or the other. I just am hesitant to chase stocks up 30-40% in 2 weeks (commodities) so if I add long exposure I'd rather do it in sectors that have been lagging.

Again S&P 1390 is key - if we break up above that - we just have to throw all logic to the side and join the herd. I entered this week cautious and not wanting to lose money, knowing I would lag the market if it ramped - which has happened. But that's ok - the fund returns are still positive for the week, just trailing the market. I continue to believe very little of the consumer recession is being priced in, but that's just me...

I'll edit this post with prices and fund holding in the 2 new positions after the transactions are complete. 10:35 AM - I created a 3.6% stake in ISRG buying in the mid $290s to mid $300s. Downside risk is to $265 at which point I will add more. I created a 2.1% stake in MS buying around $48; support is down at $46 - not sure if I'll add more - depends on how much Kool Aid I drink that day

Soon to be long in Intuitive Surgical, Morgan Stanley in fund; potentially long in personal account as well (TBD)
Long Ultrashort Real Estate, Ultrashort Financials in fund; no personal position

Fund Positions by Market Cap - Mid April Update

I haven't done one of these updates in a long time [Nov 13: Fund Positions by Market Cap - Mid November] but here is a comprehensive look at all fund positions by market capitalization (which is a fancy word for "size"). Essentially a company has X number of shares and $X stock price. By multiplying the two you get 'size'/market capitalization (or "cap" for short).

I explained my original strategy in terms of market capitalization back in early October [Breakdown: Fund Positions by Market Capitalization], about 650 blog subscribers ago so let me repeat - I am curious where my strategy would fit in the Morningstar world of market capitalizations.

Why does it matter? Well all conventional wisdom says you should diversify your assets among different sizes of stocks as certain sizes fall in and out of favor with the investment community over time. For example in the late 90s, large cap stocks were all the rage, but the past half decade it's been small cap stocks time to dominate. While I agree with the conventional wisdom that your investments should be spread out among many different sizes, especially if one is a passive investor (i.e. buy a mutual fund and look at it twice a year), this stringent labeling of mutual funds has pushed the mutual fund industry to really limit the ability of their mutual fund managers by forcing many to only allow investments in certain size of companies

The mock fund I have here, and a small % of funds out there in the real world are "go anywhere" funds, meaning they can buy any size. This lets the manager to buy what he/she prefers, rather than be limited by size. I generally prefer (all things being equal) smaller over larger as it is easier to sustain higher growth rates when companies are smaller. This makes the remarkable growth rates of companies the size of Apple (AAPL) and Google (GOOG) the exception, and not the rule.

I measure the fund versus 2 indexes, (1) S&P 500 - whose median market cap is $13.1 Billion and (2) the Russell 1000 - whose median market cap is $5.8 Billion. The median market cap of the Russell 1000 is still smaller (by nearly half) of Rising Tide Growth Fund but represents 1000 of the largest 3000 securities in the Russell 3000, so should be a closer measure to what type of stocks this fund owns.

When I looked in October the median stock was @ $9.9 Billion, and in November $9.8 Billion (both times the median stock was Jacobs Engineering). Now that we are 5 months later, let's see how it's changed...

These are the parameters I use:

1. Mega cap: >$100 Billion market cap
2. Large cap: $12-$100 Billion
3. Medium cap: $3-$12 Billion
4. Small cap: $500 million - $3 Billion
5. Micro cap: under $500 million

As always the exact cut offs are debatable... I exclude any index ETFs or UltraShort ETFs

Mega Cap
PBR $275 B
RIO $188 B
AAPL $136 B

Large Cap
RIMM $66.8 B
POT $61.4 B
MOS $59.4 B
EOG $32.6 B
MA $30.2 B
BLK $26.0 B
NOV $25.7 B
MTL $20.8 B
IBN $18.6 B
DO $18.5 B
KGC $15.3 B
CNX $15.2 B
SLT $14.6 B
FLR $13.9 B
MDR $13.3 B
HDB $12.2 B

Medium Cap
BIDU $10.6 B
JEC $9.8 B
FWLT $9.0 B
CF $8.5 B
ACI $8.1 B
CLF $7.1 B
COG $5.9 B
DHI $5.1 B
GFA $4.7 B
CBI $4.3 B
SGR $4.3 B
MEE $4.2 B
ILMN $4.0 B
SLW $3.9 B
CTRP $3.6 B
HMX $3.5 B
LDK $3.5 B
ATW $3.4 B
ANR $3.3 B
FCN $3.3 B
CLB $3.1 B
DRYS $3.0 B
LEN $3.0 B

Small Cap
EDU $2.6 B
MELI $2.2 B
SOHU $2.1 B
WX $1.2 B
TSL $1.1 B
HURN $0.8 B

Micro Cap
PBR $0.3 B

In this case we have 49 pure stock positions (non ETFs) so the name in the middle, position #25 is Cleveland Cliffs (CLF) @ $7.1B. Again this is not dollar cost weighted median (i.e. larger positions get heavier weights) ...but it's a sharp drop from the nearly $10B slot that the last 2 surveys showed, so this simply means I have a few less positions of the large cap variety and a few more mid cap. Ironically, Jacobs Engineering (JEC) which used to be my midpoint for the last 2 surveys is STILL stuck at exactly the same valuation its been since fall, $9.8B. :)

Google (GOOG) Beats; Shares Up 10%+

Tomorrow Rome parties again... don't worry about whatever Citigroup (C) has to say tomorrow AM - "it's all priced in". Bulls will focus on Google... (the chart lied!) :) Unlike the "beats" by IBM or Intel, this one is legit.

Looking at the S&P 500 (bigger picture) we are now above support, the 50 day moving average, just under 1350, and the last level that gave us trouble was the upper 1380s/1390 level. We close today at 1365, and Google will embolden bulls big time tomorrow, so I expect a big rush of bulls into the door at 9:30 AM, and we might start tomorrow with a sizeable push to take us near that resistance stage in the 1380s. If we break north of S&P 1390 tomorrow, its time to bring out the party favors and funny looking hats since the bulls will romp. (until next week at least) - remember each day is going to bring a potential for a 180 mood swing but I continue to believe short of filing bankruptcy tomorrow, whatever Citigroup says will be treated as "not as bad as we expected" and completely shrugged off. It's all about psychology and Google will bring the bulls back in force... I'll have to look to buy some stuff tomorrow morning as I am extremely overweight in US pesos (cash) if the market breaks off into 3rd gear... but conservative stance will definitely mean we'll trail the market this week.

Intuitive Surgical (ISRG)? Not so much. Very good results - way too much expectation.

We'll see you tomorrow.

• Google's (GOOG) first-quarter profit grew year over year as revenue climbed 42%, and both figures handily beat Wall Street estimates, sending its stock soaring. Shares of Google dipped $5.49, or 1.2%, to close at $449.54 during Thursday's regular session, but were surging 11% in after-hours trading.
• For the quarter, net income grew to $1.31 billion, or $4.12 a share, from $1 billion, or $3.18 a share, a year earlier. Adjusted for certain items, Google earned $4.84 a share. Analysts were expecting $4.52 a share.
• Revenue climbed to $5.19 billion. Adjusted for traffic acquisition costs, revenue came in at $3.70 billion, above analysts' consensus expectation of $3.61 billion.
• Google's earnings release comes a week after rival Yahoo! (YHOO) reached out to Google to outsource some of its search ads. Yahoo! said it will begin a limited test of Google's AdSense, which will deliver relevant Google ads alongside Yahoo!'s search results.

No position

The World's Best Oil Investor Thinks Oil Goes Higher, Not Lower...

For those of you who don't know T. Boone Pickens is probably considered the most astute energy investor period. He is like Buffet of oil, and looks like he was the 369th richest guy on the planet. (Interestingly he is a big investor in wind energy) With everyone and their mother calling for a selloff in oil, he is reversing his short and going long. What I try to remind everyone who blames the high oil prices on oil companies is, oil is not romping in other currencies or gold. In fact, I read if the dollar was stable crude would be roughly $60-$65 right now, or almost cut in half. So it is misguided to blame oil companies as the politicians are trying to do - they need to look in the mirror (for there misguided regulation, and spending which creates massive deficits) and next door to the Federal Reserve which is printing US pesos at an alarming rate. In oil or euros terms crude oil is on a slight upward slope. The problem is the US peso...

Myself, I think crude can get to that next big round number $120, but the whole commodity space is getting frothy so I expect some pullback. The dollar also has to show SOME sign of life and make even some minor jump... right? We have 1 more cut coming on April 30th by the Federal Reserve and I assume at most we will have 1 more after that. I would think the end of the cutting might give some minor strength to the dollar but thus far, other than a few days after the last Fed meeting it has not seemed to have much effect.

Gasoline sales are finally slowing in the US as the prices are now reaching $3.40 nationwide heading for near $4 by Memorial Day driving season (notice the strength in retailers today - woo hoo, ignoring all the facts again)... at some point higher price points create demand destruction - we finally appear to be reaching those levels.

• Boone Pickens, a billionaire energy investor, said he reversed course and adopted a long position on oil, meaning he is betting the price of crude will rise. Pickens, 79, the founder and chairman of Dallas-based BP Capital LLC, said today in a speech at Georgetown University that the price of crude oil will only continue to climb and demand will eventually be dampened.
• ``The position is long, not short,'' Pickens told reporters after his speech. ``I covered the short position, it was a mistake on my part. We missed.''
• Crude oil futures in New York touched $115.54 a barrel today, the highest intraday price since trading began in 1983.
• Pickens said he thought oil was approaching $125 a barrel. Oil will eventually reach $150 per barrel, he said while cautioning ``I won't be investing in $150 oil.''
• Pickens said his BP Capital Energy Equity Fund fell 21 percent in the first quarter of this year. Since 2001, the fund has grown 800 percent, he said. (even the best make mistakes)
• World oil supplies won't exceed 85 million barrels a day because of high depletion rates of existing wells, he said in his speech. This lends credence to his long position. ``There is only 85 million barrels of oil globally in the market coming a day and I don't think you can increase that 85 million,'' Pickens said.
• World oil demand during the four years ending 2008 is rising at an average annualized pace of about 1.4 percent, according to International Energy Agency forecasts.

And the "World of Shortages" paradigm plays on - yes the US recession will slow demand for a bit here, maybe a year or two, but demand will continue to go up globally and supplies simply are not keeping up with demand. For Americans, we need to pray to the currency gods that the dollar strengthens. Granted that would destroy the last bastions of strength in the stock market, but pick your poison - ability to drive to work without taking out mortgage? or higher Etrade account balance? ;)

Contract Research Organizations Weak Again

I mentioned earlier this week the weakness in Parexel International (PRXL) - one of the top US contract research organization (CRO) companies (healthcare) [Apr 14: Keep an Eye on... Parexel International]. Then Tuesday Affymetrix (AFFX) (not a direct competitor) blew up [Apr 15: Affymetrix Blows Up on Warning], blaming a slowdown in research by customers. Now today the whole CRO group is showing some serious weakness. Keep in mind a 5% move down in this group is like a solar stock or fertilizer stock dropping 15%, as these are slow moving entities.

Covance (CVD) down 5%
Parexel International (PRXL) down 7%
Pharmaceutical Product Development (PPDI) down 6%
ICON (ICLR) down 4%

These are the 4 names I follow and was interested in potentially buying at a lower valuation to diversify the portfolio - there are a few others, also weak. Again, healthcare spending is supposed to be a safe (recession proof) haven - I am wondering what is going on; if this is some sort of sector rotation or are healthcare companies having trouble getting funding in credit markets or simply pulling back R&D spend as business slows... strange to see this sector get hit like this without any news...

Looks like most report earnings in the next 2 weeks so it will be interesting to see if the stocks are telegraphing to us "those in the know" are exiting stage right and there is some sort of sector wide trouble.

No positions but watching closely

Bookkeeping: Reducing Baidu.com (BIDU), Mercadolibre (MELI) Ahead of Google (GOOG)

I usually reduce names I own ahead of earnings, willing to give up some gains from a "surprise" in return for protecting myself from large losses. Now I do not own Google (GOOG), and it would make zero sense for Baidu.com (BIDU) to sell off on bad Google news... although Google is a minor competitor in China. However, sense means nothing in the market and if Google misses I would expect Baidu.com to be extended an invitation to the rear of the woodshed. Where I'll buy more.

I keep saying Google will miss; frankly I do not know of course - but the chart action is putrid and in all previous recession advertising is the first thing to go... so it's a risk. For all I know enough ad traffic is moving from traditional places to the internet and Google will smoke the number and we'll be looking at Dow 20K tomorrow on "the bull is back". But I continue to play better safe and sorry and with a nice 2 day spike in Baidu.com I can book some profits as a bonus. So I am going to sell Baidu.com down to a 0.8% position (cut about in half) here near $320. I'd love to buy it tomorrow near $280 on a Google selloff, but now I'm just being plain greedy ;)

It would make even less sense for Mercadolibre (MELI), a South American e-commerce company to sell off on a bad Google number, but logic and sense are never the market's strong suits. Knee jerk reactions, however, are. So I'm going to take about 1/3rd of that position off as we spike nicely to $50, and drop it to a 0.9% stake, and ask the stock gods to let me get back in at $44 tomorrow if Google makes the markets cry. These 2 names are starting to act like fertilizer stocks with these breakouts ;)

Frankly the next 24 hours is all about the Google as whatever Citbank (C) says or writes off tomorrow, CNBC will say "it's in the number" "the bottom is in" "kitchen sink quarter" "the Fed is behind them" "we love Citigroup" and "buy buy buy".

Long Baidu.com, Mercadolibre in fund; no personal positions

Let's Review Some Earnings, and Add some Truth to "Earnings Labeling"

I don't own nor plan to own some of these (although I'd short a few if I could) but we have some names which are good tells on the economy or specific sectors reporting today. We discussed earlier this week what I'd be looking for here [Earnings Wed-Fri] One point before we go on about the "great news" so far in earnings

Intel... they cut their earnings guidance from 34 cents to 25 a month ago. They came in at 25 cents.. which would of been a HUGE miss if they had not warned a month earlier. Humans, with short memories, and lots of Kool Aid celebrated as if they hit a home run. Big deal. Much of their sales is now overseas by the way... no reflection on US economy.

IBM... decent company but its basically a services/outsourcing firm now with 65% of sales overseas. Not a reflection of US economy. Also, they had 11% sales growth... of that 7% is due to currency (i.e. WEAK DOLLAR). Meaning most of their sales growth is due to nothing but currency exchange. So my question is, what happens when the US dollar strengthens? They turn into a 4% growth company. But CNBC cheers.

I could go on and on - the only strength is US multinationals, many of which are relying on currency exchange to show "growth" (the same for Johnson and Johnson) - this does not help US workers, or US economy - it does help to prop up the stock price for those companies. So don't buy any of this "this is a sign of things are fine in the US". If people get their wish of a stronger dollar, I am really fearful because that would hurt the only things working (multinationals and commodities) - then where will we turn to invest? Oh yes... retailers, and financials. Great.

On to the circus....

Capital One Financial (COF) and Harley Davidson (HOG) I continue to believe are shorts on all pops - they are the exact type of companies who the coming consumer recession is going to hurt. So what did they say? COF is up 4% so far today because hey, financials are sexy again and "all the bad news is in the stock!" ;) earnings out after the close. HOG? It's still a pig... cutting jobs, slashing guidance, cutting production, etc etc. It's only going to get worse from here and a name I highlighted in Monday's piece 'Holy (Holey) Crocs!' as something I've been negative on since right near blog inception last summer. Remember folks - everytime someone tells you "stocks are cheap" they are basing it on a fiction of 2008 earnings. As these estimates get cut, cheap turns to expensive fast. For example Harley just got 20% more expensive in the last 24 hours.

• Harley-Davidson Inc. on Thursday said that it will cut motorcycle production and slash about 730 jobs as the sluggish U.S. economy slows demand for its iconic motorcycles.
• The Milwaukee-based motorcycle manufacturer also reported that it expects full-year per-share earnings to drop as much as 20 percent.
• U.S. retail sales of Harley-Davidson motorcycles were down 12.8 percent in the first quarter. Jim Ziemer, Harley-Davidson's CEO called the results "disappointing," but said that Harley-Davidson's U.S. dealers outperformed the heavyweight motorcycle industry, which was down 14 percent.
• About 370 hourly production workers and 360 non-production employees will lose their jobs over the next several months as a result, Ziemer said. (but I am sure they will find jobs at Walmart or Burger King and the unemployment rate will stay near 5% - they take huge pay cuts, and everyone assures us the US economy is fine, thank you very much)
• "The economic slowdown has affected Harley-Davidson along with many other businesses and sectors, and there's no sign of when things may turn around," CEO Jim Ziemer said in a conference call following the release. (what? everyone tells me "in 6 months" everything will be fine... strange)

Merrill Lynch (MER)? Hey only a $9 billion writeoff - that's GREAT news and things will turn the corner anytime now. This is only the 3rd kitchen sink quarter in a row. Eventually they will write off their whole business and by fourth quarter they will show huge gains by "write ups" - so basically most of their business now is accounting machinations. Excellent. We'll hear the same song and dance from Citigroup tomorrow AM. Here is the dirty secret on most financials - after the Fed is done destroying your buying power through printing of paper US pesos, they will live on, have their 1x big bounce after the "ultimate coast is clear", their CEOs will continue make massive amounts of money and bonuses for this "great performance", then most will be trading sideways for a long time, much like tech stocks did after the bust. Many will never regain old highs - because large parts of their business are either gone forever or for a long time. And if the government ever puts realistic capital ratios on them, their leverage will shrink even farther and their profitability will suffer even more. But on the plus side their CEOs, CFOs and the like will continue to rake in huge salaries, bonuses backstopped by your tax dollar - always a silver lining! But I eagerly await these financials to "bottom" for the 8th month in a row (CNBC telling me they already bottomed for 7 of those 8 months - eventually they are going to NAIL this call) By the way Merrill cutting 4k jobs - 4000 new service workers added to the economy - but again the important thing is the top 10 workers in Merrill get their bonuses! Keep focused on the prize. 4000 people is a small price to pay for huge bonuses for those who deserve them at the top :)

Marriot (MAR) I was curious to see what they had to say about the US market... oops. Once again great GLOBAL growth, helped by WEAK DOLLAR and putrid US growth. Notice a pattern? Again, pray the US dollar craters so that these companies continue to show great earnings (but the consumers of America will continue to pay higher prices through dollar destruction). Also a great quote "US is on sale" - like some streetwalker ... psst Mr Middle Eastern or Asian friend... want some shares of Lehman? Merrill? no? Citi? anything? please... buy something - we need capital! please... please.. we need you.

• Marriott continues to benefit from its global footprint, as revenue per available room (revpar) -- a key hotel operating metric -- outside North America rose 18.5% in the first quarter. The rise was 11.5% excluding currency benefits from the weak dollar. Worldwide revpar rose 6%, or 4.5% excluding currency benefits.
• "While performance at our U.S. hotels reflected slowing economic growth, few markets have witnessed discounting and full service room rates rose 4 percent during the quarter," CEO J.W. Marriott Jr. said in a statement. "With the U.S. on sale through a lower dollar, international guest arrivals are energizing demand in several key markets.

So here's my comment - I don't know the mix of sales between US rooms and non US rooms, but if I knew that we could do the math easily. If the rest of the world generated 18.5% growth, and your overall growth was only 6.5%, how bad was the US? Obviously to weigh down that 18.5% growth to such a large degree it had to be poor, but we don't know how poor without the actual sales mix. Summary: US stinks but hey Marriot is "cautiously optimistic". Aren't we all? ;)

Next! Nokia (NOK!) - OUCH. I wrote "chart action of late makes me worried" .... and boy, down 14% for this bellweather. Unfortunately Google has the same chart. Nokia has one problem. It is not located in the US. No, I am serious. If it was all its products would be priced in US pesos and they would of beat sales due to currency and the stock would be up 20% and the whole stock market would be up 50% since we could say, NO SLOWDOWN. US Pesos save the day! But unfortunately they are in that darn European region which has a strong currency and a central bank which actually fights inflation. Too bad for them. America wins again - I suggest all multinationals move HQ to USA, so you can take advantage of the US peso. This is our economic trojan horse - we will destroy all your multinationals one by one through our collapsing dollar. What's that? That hurts the people of the USA ? Nevermind that... details details. Corporations are what matters!

• Nokia reported a 25 percent jump in first-quarter earnings on new demand from emerging markets, but the world's top mobile phone maker missed expectations and gave a downbeat global forecast, sending its shares plunging.
• Revenue increased 28 percent to 12.6 billion euros ($20 billion), from 9.8 billion euros a year earlier, with strong growth of handsets sales in Asia, the Middle East, Africa and Latin America. (I don't see USA in there? Maybe in 6 months when the boom returns...)
• Even though the Finnish company said it expects the global mobile phone market to grow in volume by 10 percent in 2008, it said the market would lose value in euro terms compared with 2007 because of a weak U.S. dollar, an economic slowdown in the U.S, and possibly in Europe. (what slowdown? no slowdown here... move along... we're booming, rebate checks on the way!)
• "Like many European companies that sell abroad where goods are valued in dollars or currencies linked to the dollar, Nokia is suffering," said Pasi Vaisanen, an analyst at Glitnir Bank. "We've never seen it more clearly than now."
• "North America, which despite a slowdown still accounts for 16 percent of global handset demand, remains a serious problem-child for Nokia," said Neil Mawston of Strategy Analytics

In Steel we have Nucor (NUE) which was fine, but seriously all this fuss over 8% growth? And input costs skyrocketing. Hmmm... now this is a bull market folks, it guides down next quarter yet still the momentum lemmings take the stock up today. They won't give up. I continue to believe steel has some very sharp dangers but I continue to be alone :)

• Steelmaker Nucor Corp (NUE) reported higher first-quarter earnings on Thursday, beating Wall Street estimates, despite soaring raw material costs, especially for scrap metal.
• But its earnings forecast for the second quarter was lower than expected. Nucor shares fell in early trading but rebounded later and were up nearly 4 percent.

Last we have conglomerate United Technologies (UTX) which also did not get CNBC's memo, proclaiming everything is fine, the bottom is in, and in 6 months everything will be booming. Maybe Kool Aid is getting too expensive to Fedex due to fuel costs?

• United Technologies Corp (UTX) has seen signs of slowing U.S. and European economies in parts of its housing-related, refrigeration and fire and security businesses, an executive said on Thursday.
• "As we all would have expected, there are some signs of moderation in order rates in a few or our short-cycle businesses," said Gregory Hayes, vice president of accounting and finance on a conference call with analysts. "Where do we see the weaknesses? Well, the U.S. residential business continues to be a challenge."
• He continued, "As you see the U.S. and a few of these European economies slowing, we are taking costs out of the business."
• Growth in emerging markets remains strong, he said.

Again, the same themes ... over... and over... and over

Tonight? 2 huge momentum favorites - one fallen, one still going - Google (GOOG) and Intuitive Surgical (ISRG) - as I've been stating, charts don't give you 100% accuracy but if you trust the chart, Google is looking like a sick puppy. If it disappoints then we go back to last Friday when the world is ending... just opposite of yesterday's "bull market is back baby" thinking. This is why I continue to hide out in cash and a hedged portfolio - risk is too high either way to place bets. But... the companies are telling us the economy here is degrading. Doesn't matter as long as bulls cling to "everything is fine in 6 months" mantra. So we are in between denial and a hard place. Impossible to tell day to day which side of that we fall on.

No positions

Infrastructure Stocks Still Not Understood or Appreciated

I continue to be very bullish on infrastructure stocks but unlike their friends in coal, fertilizer, natural gas, and the like they are not getting much stock respect. I continue to believe people have a misunderstanding and think these are tied to the US economy far more than they are. The ones I favor have big time exposure to overseas markets flush with cash either through petrodollars [Feb 27: $2 Trillion of Petrodollars Needs a Home This Year] or trade balances.

This inward focus is something I focused on in a piece a few months ago [Jan 28: Credit Suisse Bullish on Infrastructure in This Week's Barron's] and I continue to believe people in the US do not realize a whole world is racing ahead with or without us, while we are stuck in the muck of our own design. [Jan 21: A Tour Through the Middle East] <---click on this link for some pictures to show you what I mean. I am going to use the news releases of Chicago Bridge & Iron (CBI) to show you explicitly what people seem to be missing by assuming the world is ending because the US is slowing down. It's an amazing array of contracts, just over the past 30 days. This is a position I am adding to today, and beginning to rebuild as the chart is finally firming up (but could still reverse at a moment's notice). I do believe this entire group will see a meaningful move later in the year since they have lagged year to date yet have just as good of fundamentals as many of the commodities which have raced off like greyhounds...

Here are the contracts and again, focus on WHAT they are building and WHOM the customers are. Almost none from subprime nation (us).

• Mar 26: $140M @ Middle East Petrochemical Complex
• Mar 27: $40M for Middle East Water Tanks
• Apr 3: $45M for Suncor's Oil Sands Storage Tanks in Alberta, Canada
• Apr 9: No terms for Qatar Ammonia Storage Tanks
• Apr 16: $150M for liquefied natural gas project in British Columbia, Canada
  
• Apr 17: No terms for Westinghouse Nuclear Project

This is about 3 weeks of work; these are essentially pseudo energy plays which do not get the respect in my opinion. The belief still remains they are highly cyclical and dependent on the US economy - again 1980s thinking - the same thinking that bears were making 1 year ago in fertilizer and 6 months ago in coal. The current bear story is when crude oil implodes back down to... well $90, all these projects will be cancelled. They were saying the same thing 6 months ago but they were saying when oil implodes back down to $60 at that time. I guess they'll keep moving the price up, and warning of the implosion....

I continue to really like this group and am waiting for the market to recognize the move from cyclical to secular growth which should expand multiples. For now, most charts in this group are very range bound for months on end - trading as if they are a US retailer. The longer they base in a range, the bigger the "eventual" move will be (could be in days, weeks, or months - who kn0ws). However, the customer bases of these companies are flush with cash, and hungry for product.... unlike the "early cycle" stocks the bulls are telling us are such a "value".

Long Chicago Bridge & Iron (and multiple infrastructure stocks) in fund; no personal position

Four New Agriculture ETN's

As I've been stating there are so many ETFs (and ETNs which are Exchange Traded Notes) I simply cannot keep up. But since these have to do with agriculture, this series of four notes caught my eye. They are basically Ultralong, long, Ultrashort, and short vehicles tracking the "Deutsche Bank Optimum Yield Agriculture Index". Now I have no idea what is in that index and my first attempts to google it did not yield anything but if its a basket of soft commodities I'd probably be interested in the Ultralong stake either as a replacement or complement to Powershares DB Agriculture ETF (DBA) which is based on the " Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return™" - for all I know it's the same thing - but the latter is a fancy way to say corn, wheat, soybeans, and sugar.

Or for traders... when Barron's puts out its next "Commodities is Dead" issue you could quickly rush into the Ultrashort version...

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

NYSE Euronext (NYX) today announced that four new Exchange Traded Notes (ETNs) listed and began trading on NYSE Arca.

These ETNs are designed to track the Short and Leveraged Performance of the Deutsche Bank Optimum Yield Agriculture ^TM Index. The following Deutsche Bank ETNs listed and traded on NYSE Arca under the following ticker symbols:

DB Agriculture Double Short ETN (NYSE Arca: AGA)

DB Agriculture Double Long ETN (NYSE Arca:DAG)

DB Agriculture Short ETN (NYSE Arca: ADZ)

DB Agriculture Long ETN (NYSE Arca: AGF)

Long Powershares DB Agriculture Fund in fund; no personal position

Bookkeeping: Adding to LDK Solar (LDK)

I am adding to my LDK Solar (LDK) position today in the upper $33s (added a small touch yesterday in $32s) - the stock is building a nice base after making a spike higher last week (which I sold down the position at). Much like Trina Solar (TSL), I believe this name to be trading at far below fair value, but with risk down to the $30 price point. I'd like to see it break over and above its 200 day moving of $38, at which point I will add more. Or a drop to $30 where there is a small "gap" in the chart which still needs to be filled. Either scenario is fine by me. The closer we get to the election and the longer Americans are paying for gas @ $3.50+ the more I think alternative energy is going to get a push (of all types). I like to say, compared to our current administration even McCain is going to look like a tree hugging liberal. For the 50th times, why we are not employing Americans to build 10 x 10 sq mile solar farms throughout deserts of AZ and NV is beyond me. Now that would be a worthwhile use of our tax money... with some true benefit unlike what we are spending most of it on now.



Almost every position I want to add to has had a huge run, so it is very hard to find candidates to buy on the long side that have not appreciated materially in the past week or two... so I continue to sit on a huge horde of cash, awaiting "a pullback" that has yet to come. I still remain cautious ahead of this Google (GOOG) report, as the only thing that appears to get the Kool Aid bulls down nowadays is surprises - everything else they shrug off as "priced in", no matter how bad. So Google would be a surprise if it disappoints.

Sunpower (SPWR), one of the 2 major American solar companies reported this AM and I actually liked this report, unlike most previous editions of SPWR's results. I really don't care about the current quarter, the commentary about the future is what interests me with all these solar companies. Valuation for SPWR is very high relative to it's Chinese competitors, but the guidance to 30% gross margins, if legit, would be impressive. I still have my doubts, but even holding the line in the mid 20%s would be very positive. I also am liking what I read about their increases in efficiency and thinner wafers - very similar to Trina Solar (TSL). Anything that uses less polysilicon is very important in this environment.

• Excluding special charges, SunPower earned $39.1 million, or 39 cents per share. Analysts, on average, had been expecting 35 cents per share, according to Reuters Estimates.
• Revenue rose 92 percent to $273.7 million.
• Solar power products maker SunPower Corp. on Thursday raised its second-quarter and full-year profit outlook above Wall Street expectations on expectations for strong demand. SunPower said it expects to earn 48 cents to 52 cents per share in the second quarter, above Wall Street's average forecast of 46 cents per share, on average. Analysts' forecasts range from 41 cents to 58 cents per share.
• SunPower said it expects second-quarter revenue of $330 million to $350 million. Analysts predict $295 million, according to Thomson.
• For the full year, the company said it now expects 2008 profit between $2.10 and $2.20 per share on revenue of $1.3 billion to $1.38 billion. In January, SunPower predicted earnings between $2 and $2.10 per share. Analysts expect 2008 net income of $2.07 per share and revenue of $1.27 billion, according to Thomson.
• "We expect SunPower's silicon supply costs to decline by approximately 10% during 2008 compared to 2007," continued Werner. "This cost improvement will amplify our silicon utilization benefits achieved through higher cell efficiency and thinner wafers. We are on track to achieve our planned improvements in our cost structure, and therefore we expect to reach our target financial model of 30% gross margin, 10% operating expenses and 20% operating margin, on a non-GAAP basis, no later than the first quarter of 2009.

If gross margins increase like this, than analysts estimates are going to be shown to be far too low in out years...

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

Reader Investment Pledges mid April Update

Thank you everyone as we continue to make progress - this is a difficult market but I am happy with results so far. Web traffic is really jumping now with nearly 1700-1800 visits a day on weekdays, and close to 3000 page views. The average returning visitor is now staying 5+ minutes on each visit, which is more than double what I've read for the average blog - obviously my long winded entries are the key there.

As traffic increases, hopefully in the coming months I can win over more people with continued positive fund results, in a thus far very tough market environment since launch last August.

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

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

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

Totals
January 7, 2008 = $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008: $1.190M raised

Important info since I get this question a lot via email:
One question asked is the process once the fund is up and running - it would be no different than any other mutual fund out there - you'd get an application, prospectus, send the check to a 3rd party clearing house and away you go. Retirement and normal accounts both available, it is no load, etc - nothing different than all the other mutual funds out there, other than the most transparency in terms of manager decisions and daily feedback. So that's down the road once the fund is created - for now I just need a clear amount of commitments/pledges so I can hit the ground running.

Amount	Who	Where
$75,000	Self	MI
$2,500	Michael D	Oceanside, CA
$7,500	Oth	Parts Unknown
$10,000	Dean D	San Jose, CA
$2,500	Oza P	MA
$20,000	Oren L	Chicago
$10,000	Rob T	NYC
$5,000	Ryan	Seattle, WA
$7,500	Ted	Sunnyvale, CA
$2,500	Brian P	Cerritos, CA
$22,500	David B	Middlesex, NJ
$50,000	Ian	San Antonio, TX
$40,000	"LiquidWindows"	Deep in heart of TX
$5,000	Jonson	LA, CA
$5,000	Jimidean	Parts Unknown
$3,000	Brooks R	Baton Rouge, LA
$5,000	Zlatanscores	Parts Unknown
$3,000	Ben S	Portland, OR
$5,000	Sheng S	Omaha, NE
$10,000	msuberri	NJ
$5,000	David W	Houston, TX
$10,000	Ryan T	NJ
$3,000	NandaK	Nashua, NH
$10,000	WaltF	Parts Unknown (via email)
$2,500	Joe	Scranton, PA (email)
$2,500	Todd	Nashville, TN (email)
$250,000	David R	South Carolina (email)
$100,000	A.F.	Los Altos, CA (email)
$50,000	Satya	Parts Uknown (email)
$5,000	Bobby L	San Jose, CA
$200,000	Ganesh S	Bellevue, WA
$2,500	Michael A	Charleston, SC (email)
$2,500	TJP	Sterling, IL (email)
$37,500	Bob B	VanBuren, AR (email)
$10,000	Pat L	Tuscon, AZ (email)
$10,000	Art H	Auburn, CA (email)
$5,000	Dan D	Augusta, GA (email)
$5,000	Jeffrey H	Greensboro, NC (email)
$50,000	Tom L	San Fran, CA (email)
$10,000	Wesley W	San Jose, CA (email)
$10,000	Tom S (daKat)	Minneapolis, MN
$5,000	Dan W	Mentor, OH (email)
$10,000	Jim G	Marana, AZ (email)
$5,000	Andrey G	Baltimore, MD
$20,000	Doug M	San Fran, CA (email)
$75,000	"Skooker"	Boise, ID (email)
$3,750	Brian C	Milwaukee, WI (email)
$1,190,250

Wells Fargo, Goldman Strategists Agree With Me

There is a newer gentleman over at Realmoney.com named Tim Melvin who I enjoy reading because he brings a view outside of NYC. Most financial sites, writers, investors are so NYC centric that they are relatively clueless about what goes on outside that island. So they have a skewed view of things. Now, living in a 1 state depression I probably have a skewed view of things from the opposite extreme but I think in some ways we are a canary in the coal mine. (although we are an extreme example due to the auto industry)

Today, Tim wrote a good little blurb which coincides with thoughts I've been proposing for a long time. (profits way too high for 2008, writedowns starting to become old hat and people are numb to it, everyone in NYC focused on the banks and credit issue and not realizing there is a whole recession coming behind the scenes that they don't price in, etc) What interested me was that "logical people" in 2 of the best firms (Goldman and Wells Fargo) are also singing the same tune. I continue to wonder out loud how much this massive liquidity infusion by the Federal Reserve, which is inflating every asset on the Earth is propping up stock prices. Remember, this monetary spigot is not a fine tool, but a blunt instrument - every asset with finite supply (wheat, copper, stocks, anything) must go up when more paper money is chasing it. Hence I do believe the market is being supported to some degree by this spigot - I just wonder if its 5%, 10%, 15% or 20%. But I can see continued frustration by those of us using any logic as we watch this market levitate, detached from reality :) But again, Wall Street is not Main Street and if enough liquidity is thrown into the system, ALL assets must go up no matter what the "logic" is - in fact this was one of my '13 Outlier 2008 Predictions'

Markets make a dramatic rally off these lows as all the worlds banks coordinate to flood massive infusions into the system (all this money needs to go somewhere)

Anyhow here is what Tim wrote today:

Let's Not Get Carried Away

As all of Wall Street stands around holding hands and singing kum-by-yah today, exulting in the notion that we only had a paltry few billion of asset write downs and credit losses today, I found in the news two reports from leading brokerage firms yesterday that give pause for thought. In the first, Daniel Kostin of Goldman Sachs said that he expects the market to fall as much as 155 in the near term. He thinks the S&P could fall as low as 1160 as investors reduce their earnings expectations. He points out that although earnings estimates for the first quarter each and every week of the year, lowering the guesstimates by 17%, the full year expectations remain unchanged. Most analysts just took the first quarter reduction and added to the fourth. He sees substantial estimate reductions in the weeks and months ahead weighing heavily on stock prices.

Scott Anderson at Wells Fargo is a tad blunter in his statement. He calls the bullish view of many on Wall Street" borderline delusional" he said that equity markets are not pricing in the economic downturn and agrees that the earnings estimates for the second half of the year are way too high. He pointed out in his brief that The International Monetary Fund had cuts its 2008 global growth forecast 3 times in the last 5 months and was predicting total losses form the credit crisis of $945 billion, far more than Wall Street forecasts.

Today's economic reports tend to give credence to the view. Home starts were down another 11+% to the lowest level in 17 years. Inflation was tame, as long as you don't eat or use any form of energy to drive or heat your home. Clothing prices fell, primarily because no one is buying any. They spent all their money on gas and food.

The separation of Wall Street and Main Street will not continue much longer in my opinion. Eventually the spending habits of those of us outside Manhattan will cause earnings to fall taking stock prices with them. At least two analysts are seeing the picture.

Some Economic/Political Thoughts of the Day

We had some other economic reports today aside from the fictitious CPI report, which I am now officially disavowing all knowledge of. I wrote last month, when the report showed NO inflation [Mar 14: Fantastic News - Inflation Dragon Officially Slayed!] that I hoped it started showing negative inflation so the farce it has become can be shown.

But on to other things, some interesting add ons to items I cover - speaking of inflation, one arguement bulls have is that most input costs into corporations are labor, not materials. Which is factually true in most industries, especially white collar - not so much in manufacturing of course. So how is labor doing? One thing lost in the rush of Kool Aid this morning was this factoid:

A separate report showed that higher prices and rising unemployment resulted in falling wages in March. After adjusting for inflation, average weekly earnings for nonsupervisory employees dropped 1 percent last month, compared to the same period a year ago. It was the sixth straight month that inflation-adjusted wages were down.

And this is the catch 22 ... while corporations will benefit for the inability for wage earners to ask for higher wages - the actual individuals will continue to suffer. So net net win for corporations - shocker right? I believe this is a long term, systematic trend - not a cyclical situation as I outlined long ago. [Do the Bottom 80% of Americans Stand a Chance?] It will ebb and flow, but over time the "median human" in the USA will continue to lose buying power. Now keep in mind the reports are saying "adjusted for inflation" - that means adjusting for government inflation of 3% or so, that people are losing real buying power. Just imagine how much buying power they are really losing if you substituted government inflation with real inflation. This is why I continue to believe we are in for a long secular decline in buying power for the average American. Until the next bubble pops up to temporarily distract he/she from his situation.

Meanwhile one of my favorite topics, the growing wealth discrepancy in America is further highlighted in this NYTimes story - Wall Street Winners Get Billion Dollar-Dollar Payouts. We've already discussed it many times, most recently last week [Apr 8: Hedge Fund Manager - Good Work if You Can Get It] but just amazing to watch the inequity grow - I continue to wonder to self at what point will the masses react to this in ugly fashion? I give it within 10 years if trends continue.

Now in the past we had some ultra rich but they actually created things, like banks or railroads - this current era (which heck, I want to become part of) is trading paper to create their unheard of wealth. And in the compensation system of hedge funds, all you really need to do is take outsized risks and hit 1 big home run, and you have generational wealth. And then if it implodes the next year - so be it. You, and generations of your family are set. Again, I am not anti-capitalist - but a rising tide needs to lift all boats, and it has stopped doing so for much of the past decade. Further, our compensation system in public corporations rewards those at the top whether they win or lose - thats what stuffing your board with friends from other companies (many of which are C level executives) will do for you - heads you win, tails you ... still win. And when you lose for years upon years... maybe you get fired. Maybe. And then you you get your golden parachute. What is derided in 3rd world countries where the government leaders, their crony friends, and the upper 0.5% elite get all the spoils while the rest suffer - is starting to sound mighty familiar, no?

• Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms. Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.
• Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad.
• Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”
• With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.
• In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.
• “To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.
• Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.
• And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry. “Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."

As for the peons in the middle, remember if you have a great lobby in Washington you can get away with anything - as we discussed a few weeks ago with what a joke the "Foreclosure Prevention" act was. [Apr 4: Congress is Rushing to Help Homeowners!!! (Not)] Remember, the homebuilder lobby threatened to pull funding for politicians and tada, within 2 months the tax breaks and money started pouring in from D.C. under the guise of "helping homeowners. [NYTimes: Big Tax Breaks for Business in Housing Bill] You can follow the link for all the disgusting detail - I just put the highlights (lowlights) below. We're in massive debt last I checked, did this change suddenly? Why are we handing out this money like a spigot under these conditions - oh that's right - its fund raising time for elections; gotta make those contributors sing!

• The Senate proclaimed a fierce bipartisan resolve two weeks ago to help American homeowners in danger of foreclosure. But while a bill that senators approved last week would take modest steps toward that goal, it would also provide billions of dollars in tax breaks — for automakers, airlines, alternative energy producers and other struggling industries, as well as home builders.
• The tax provisions of the Foreclosure Prevention Act, which consumer groups and labor leaders say amount to government handouts to big business, show how the credit crisis, while rattling the housing and financial markets, has created beneficiaries in the power corridors of Washington. It also shows how legislation with a populist imperative offers a chance for lobbyists to press their clients’ interests.

In a similar vein, an amazing story on how "insurance" is working now [NYTimes: Co-Payments for Expensive Drugs Soar] - we have a situation where if you really need catastrophic health care insurance - now people are being told "well you are going to have to pay 20-33% out of pocket". So you pay for years, and when you actually need it, the terms are changed. Much like owning a home on coast, with hurricane insurance, and after paying for 20 years, once the hurricane hits, you are told, it's time for you to pay a new amount. That said, Cramerica - for the corporation by the corporation - you do not pay to get people elected so you don't get those sets of rules. By the way, this is a GREAT way to keep inflation down as in aggregate this makes it look like healthcare premiums are slowing their rate of increase! Magic! My advice if you have health insurance... don't get seriously sick - just stick to common things like head colds and broken arms and you should be ok.

• Health insurance companies are rapidly adopting a new pricing system for very expensive drugs, asking patients to pay hundreds and even thousands of dollars for prescriptions for medications that may save their lives or slow the progress of serious diseases.
• With the new pricing system, insurers abandoned the traditional arrangement that has patients pay a fixed amount, like $10, $20 or $30 for a prescription, no matter what the drug’s actual cost. Instead, they are charging patients a percentage of the cost of certain high-priced drugs, usually 20 to 33 percent, which can amount to thousands of dollars a month.
• The system means that the burden of expensive health care can now affect insured people, too.
• No one knows how many patients are affected, but hundreds of drugs are priced this new way. They are used to treat diseases that may be fairly common, including multiple sclerosis, rheumatoid arthritis, hemophilia, hepatitis C and some cancers. There are no cheaper equivalents for these drugs, so patients are forced to pay the price or do without.
• ... the result is that patients may have to spend more for a drug than they pay for their mortgages, more, in some cases, than their monthly incomes.
• “This is an erosion of the traditional concept of insurance,” Mr. Mendelson said. “Those beneficiaries who bear the burden of illness are also bearing the burden of cost.” And often, patients say, they had no idea that they would be faced with such a situation.

On to more cheery news... we've been discussing the housing bust since day 1... today new home construction fell to its lowest level in 17 years. I'll actually take the other side of this and say this is actually bullish. We need less supply of homes on the market and the only hope is for homebuilders to stop bringing massive new supply into the market. There is my positive point for the day. Not so positive for people who work construction jobs, but again we don't really care about humans, we only care about corporate profits - so it's a good thing! ;)

Last, our favorite environmentalist, has finally come to the conclusion 7.5 years into his term that hmmm... maybe that global warming thing has something to it. Not that it's a political year, or this is a political move to help his party out... I would never be so cynical. (this being the same administration which a few years ago was censoring Beltway scientists from using such words in the official government views on global warming) But hey we have a new viewpoint now... just enough time to look "engaged", and "caring" but not enough time to work with Congress to get anything actually done... perfect!

• President George W. Bush today will set a goal for the U.S. to stop the growth of greenhouse gas emissions by 2025, an administration official said, as he tries to head stronger measures from Congress.
• In a speech at the White House later today, the president will outline a path for the nation to help curb global warming. Among the goals is letting power plant emissions peak over the next 10 years to 15 years, after which they must decline, the official said.

So folks, it all fits together - its quite a kaleidoscope... thankfully everything will be fine in 6 months and we can get this market up 15-25% to make all the pain for the peon class go away. You know... an extra $1500 in your Etrade account and an extra $700M for the hedge fund manager, and an extra $2 Billion for this corporation or that corporation. A rising tide lifts all boats....

Potash - We are the champions

And what a day to win the championship!

New Oriental Education (EDU) Beats - Guides Down - but Stock Up

Strange reaction in the stock of New Oriental Education (EDU) today, plus 6 percent- I guess expectations were just low enough that beating expectations for this quarter, along with lower future guidance is ok to keep the stock pumped up. I have only a tiny position at this point in this name, but it was nice to see a return to form for this stock after an abysmal last quarter [Jan 15: New Oriental Education Solid Report, Stock Trashed] - I thought the winter storms in Chinese would cause more of a problem...

• Beijing-based New Oriental Education and Technology Group Inc., a provider of private educational services in China, said Wednesday that third-quarter earnings grew 38 percent as enrollment and deferred revenue jumped.
• Third quarter earnings rose to $11.6 million, or 29 cents per American Depositary Share, from $8.4 million, or 22 cents per ADS, a year ago. Revenue surged 47 percent to $48.1 million for the fiscal quarter ended Feb. 29, from $32.8 million in the prior year.
• Analysts surveyed by Thomson Financial expected third-quarter earnings of 23 cents per share on revenue of $44.3 million.
• New Oriental Chief Financial Officer Louis T. Hsieh noted that severe winter storms forced the company to close dozens of schools and learning centers in late January and early February.
• He said most affected students chose to defer their enrollments to future quarters rather than cancel their registrations. As a result, student enrollments surged 35 percent to 268,400 during the quarter, and deferred revenue balance, or money collected from students for classes in future quarters, more than doubled to $35.8 million at the end of the quarter.
• The company also noted that it has agreed to acquire a 60 percent equity stake in Mingshitang, a Beijing-based private school that specializes in tutoring students who want to retake the gaokao exam, the Chinese college entrance test.

Guidance

• Beijing-based New Oriental Education and Technology Group Inc., a provider of private educational services in China, predicted fourth-quarter revenue below Wall Street expectations on Wednesday after third-quarter results exceeded forecasts.
• New Oriental expects fourth quarter revenue to range from $32.1 million to $33.4 million, which represents a growth range of 29 percent to 34 percent. Analysts surveyed by Thomson Financial forecast quarterly revenue of $35 million.

Another case study of how we have absolutely no advantage trying to predict how the masses will react to earnings information. Even if I had known they were going to beat this quarter but guide down in the next, I would of had no idea how the stock would react. They did the exact same thing last quarter, beating expectations and put out conservative guidance and the stock was mutilated [Jan 15: Horrific Fall in New Oriental Education]. 3 months later they repeat the same situation and the stock is up - mystifying. This is why this time of year (earnings season) is simply gambling when you place bets ahead of earnings...

Long New Oriental Education in fund; no personal position

Bookkeeping: Taking some Fertilizer Profits

While I believe the fundamentals do support this move, the charts for the fertilizer stocks are now reaching parabolic stage, after massive moves last week [71 Stocks Returning 7%+ Last Week] so I am going to continue to reduce my exposure and await a pullback (let me emphasize many traders on Wall Street buy charts like this, not SELL - they love buying 52 week highs so I am taking a contrary stance). These moves in Potash (POT) and Mosaic (MOS) and CF Industries (CF) have been breathtaking (along with another 4-5 fertilizer stocks I follow which I do not have in the portfolio). I am cutting back on all 3. That doesn't mean they cannot go up another 30% straight from here. It is just getting a bit too hot and heavy for my taste and I can see a line of lemmings about 7 miles long to pile into these names at this point. Potash does report next week...

My Ultrashort Basic Materials (SMN) "Insurance" is whacking the portfolio today but as I said when I bought it... if its hurting me, that means the rest of my portfolio should be doing well.

Long all names mentioned in fund; long Mosiac, Ultrashort Basic Materials in personal account

Google (GOOG) Not Participating in Today's Kool Aid

Maybe Google (GOOG) will pull an Intel (INTC) and rally off a "better than expected" number - but I continue to be troubled by this chart action - on a day like today when Intel is pulling almost every tech stock up, Google remains moribund. I don't think Google has quite the same low expectations Intel had, so this sort of action makes me thinks "people in the know" are exiting stage right before the masses take a hit. I could (as always) be 100% wrong... but charts have a bad habit of not lying too often...



As for the general market - remember folks, as I wrote last week

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 thing

So today we are in situation b - the beginning of a new golden era...

Tomorrow or in 2 days we could be back to situation a - the world is ending... especially if we have a Google "miss". Volatility and 180 degree mood swings will be expected as lemming nation is out in force.

p.s. I am not even going to comment on this mornings inflation report! If you really believe inflation is 2.4% annualized I have a bridge to sell ya... the work of fiction coming from the government is truly insulting at this point. Hence I refuse to comment on it other than loud snickering. Remember, our import report showed last week imported goods are running at a 15% inflation rate - yet somehow 13% of that disappears by the time the government gets done with its magic.... but the lemmings say no inflation, so no inflation it is! Buy buy buy!

Blackrock (BLK) Quarter Solid but a Bit of a Miss

Blackrock (BLK) is a prime example of the irony in the stock market. Other companies that have been pummeled in financials, even the "most respected" such as JPMorgan (JPM) (profit cut in half) and Wells Fargo (WFC) are showing significant reductions in profitability but their earnings are "better than expected" .... meanwhile Blackrock is growing like a weed (relative to the financial space) but expectations were so high, it was not able to surpass them with it's results. So the names whose businesses have been hit hard are jumping this AM on their earnings, and Blackrock is taking a bit of a hit. Again, it is all about expectations.... when expectations are rock bottom as it is for most financials , and those sharply lowered expectations are beaten - the lemmings clap like seals and it's time to "buy buy buy" - same for Intel, which just lowered its guidance in March yet "beat it" not 4 weeks later.... so the whole market rejoices this "strength". People have short memories. Even if business is sharply degrading year over year - as long as you beat the recently reduced estimates the champagne corks come popping off - same thing is happening in retail whenever those names pop.

And the companies which are growing year over year, are treated like dirt, because they are only matching or slightly missing estimates which have not been lowered 3-4 weeks ago :) It is ironic, but this is the market - and something that will flummox newbie investors all the time. Again, gun to head if I were forced to buy banks, JPMorgan and Wells Fargo would be two I'd be getting into, but just like Intel's report was not that good, neither were these - but the bar is set so low that almost anything positive can be spun by the bulls into "awesome stuff!" I'll stick with the best of breed...

• Money manager BlackRock Inc (BLK) reported higher first-quarter profit on Wednesday as assets under management grew, but earnings fell far short of Wall Street estimates, hurt by market turmoil.
• "As the second quarter begins, markets remain highly unstable and continue to be a challenge for investors worldwide," Chairman and Chief Executive Laurence Fink said in a statement.
• First-quarter profit was down from the 2007 fourth quarter, but BlackRock, the largest publicly traded U.S. asset management company, said its new business pipeline stood at a record $105.8 billion as of April 14.
• Net income for the first quarter was $242 million, or $1.82 per share, up from $195.4 million, or $1.48 per share, a year earlier. Excluding costs related to compensation expenses, the company earned $1.90 a share. Analysts' average earnings forecast was $2.00 per share, according to Reuters Estimates.
• Assets under management, the main driver of revenue and profits at money management companies, rose to $1.364 trillion as of the end of March, up 18 percent from a year earlier, driven by acquisitions.
• Performance fees earned on its hedge funds tumbled to $42 million in the first quarter from $153 million in the fourth quarter. The firm said this was mainly "due to fewer performance fee contracts with performance measurement periods that concluded in the first quarter."
• "Solid quarter but clearly the bar just got too high for (BlackRock)," Douglas Sipkin, analyst at Wachovia Capital Markets, wrote in a note to clients. "The combination of weaker performance fees and weak non-investment income was too much to overcome to maintain the same level of outperformance." But Sipkin added that he was heartened by the firm's $106 billion business backlog.

Long Blackrock in fund; no personal position

A One Stop Shop for Solar - Get TAN

A new ETF hit the market yesterday (there seems to be a slew every week); this one focusing on the solar space. Now, in general, I prefer individual equities over most ETFs because I like to pick and choose among individual companies, or build a small basket of names in a sector, as opposed to buying 20,30,or 50 names - but I actually like the new Claymore Global Solar Energy ETF (TAN) for multiple reasons.

First, it is a relatively concentrated approach - 25 names. As with my fund I prefer focus rather than buying 100s of names.

Second, unlike some ETFs the top 2-3 positions do not dominate the ETF i.e. carry 35-40% of the weighting; in this case the top 3 holdings make up 23% of the index but many stocks carry 3, 4, and 5% weightings.

Third, the global nature of the ETF - solar, unfortunately, is an area the United States is way behind on - most of the major firms are European or more recently Chinese. So in 1 fell swoop an American investor can get exposure to the major European firms such as Renewable Energy, Q-Cells, and Solarworld, which are difficult to get access to for most individual investors.

Fourth, I'm a big believer in solar in the long run - it is not a fad like most pundits sneer at on TV or on most web sites. That said, it is a lot like any emerging industry - we have no idea who the eventual winners will be and there will be significant potential displacement. So the landscape 5 years from now or 10 could be very different than it is now [Jan 3: The Long Term in Solar] So by buying a large basket of names, one reduces the risk associated with individual company exposure.

Fifth, while I do not know the eventual winners, I continue to believe in the long run that size, scale, and R&D investment will give a leg up - and the top weighted stocks in this index are chock full of those type of companies. Will those be the names that the speculative momentum traders run up the most in the near term? Perhaps not. But they should be the ones with the best chance to be left standing in half a decade - as I believe some of the smaller names being run up 80% in 3 weeks or down 60% in 2 weeks, probably will be trading on pink sheets by 2013.

I've pointed out some "one stop shop" ETFs in the past in other sectors I really like - agriculture [Sep 7: This MOO for You? An ETF to Play the Global Agriculture Boom] and coal [Jan 14: New Coal ETF (KOL) Introduced from Van Eck Global] but this one is probably the most advantageous for the "small guy" versus buying the individual names for the reasons I laid out above. Granted, the BEST way to invest is to give your money to a potential mutual fund manager who blogs daily, and knows these individual names inside and out - but until that becomes a reality, it might be time to get a TAN. ;)

Please note, I expect the volatility in this ETF to be immense as solar is the home playing field of momentum traders and speculators....

Long Trina Solar, LDK Solar in fund; no personal position

Chinese Agree to $576 Price Point for Potash

Fertilizer stocks are off to the races yet again this AM... we appear to have hit an amazing contract number in China of $576 but I am not clear if that is landed cost (including shipping) or not.

EDIT @ 11:17 AM: A couple of readers have emailed me that the $576 does NOT include shipping so the true landed cost is $700 or so for China (which would be equivalent to the $625 Indian cost) - in English this means China is paying more than India - which is truly an amazing situation and my $500 pie in the sky forecast for China was actually surpassed by $76. Most people were thinking China would pay $400 - hence my $500 was very aggressive. And it came in at $576.

Either way it is a tremendous number as it would equate to $450 even if it does include shipping. My dream scenario was $500 as I outlined a few weeks ago [Mar 27: Canpotex Potash Contracts Secured with India @ $625]

The last frontier is China, and as I stated I'll be thrilled with even a $500 price point with the volume China will bring to the table.

Really there is not much more to add to this story from what I've been saying since day 1 in the blog; this is truly an amazing secular bull market, the likes of which I don't recall seeing - period. The intensity of the price increases have surpassed even my most rosy projections. And I don't yet see any slowdown ahead. Even if prices leveled off at these levels for years it would be a gold mine of profits.

• Chinese fertilizer importers agreed on Wednesday to pay more than triple what they did a year ago for potash imports. North American exporter Canpotex has agreed to sell potash in 2008 to Sinofert Holdings, the largest distributor of fertilizers in China, for $576 per tonne, a whopping $400 per tonne higher than the price it paid a year ago.
• Belarussian Potash Corp, the Russian counterpart of Canpotex, also agreed to raise prices to Chinese importers by $400 per tonne.
• Due to the timing of this settlement and demand in other markets, Canpotex has only 1 million tonnes to commit to Sinofert through the remainder of this year, Potash Corp said in a statement. "Significantly higher potash prices and extraordinarily tight supply have become much more firmly entrenched since China's previous contract was signed 14 months ago," Potash Corp Chief Executive Bill Doyle said in a statement.
• China, which is the world's largest importer of potash, usually buys the crop nutrient at a significant discount to other large importers like India and Brazil. But this year China lost some of its pricing leverage as Indian importers, who normally price potash contracts after China, jumped ahead of the queue due to tight global supplies of the crop nutrient.

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

CSX (CSX) Benefiting from Grains, Ethanol, and Export Coal

As we mentioned earlier a lot of people are misreading the strength in the railroads for an imminent uptick in the economy and/or that the economy is far better than the "media" portrays. In fact, the reality is the few things we have left to export are a boon to CSX (grains, coal), and the boondoggle that is ethanol is providing the rest of the upside. Tonight's report confirms this. I usually don't focus on the rails but it simply is a confirmation of all the themes we've been behind.... and thank god for export markets or this economy would be imploding...

• U.S. railroad CSX Corp (CSX) reported a better-than-expected profit on Tuesday, citing strong pricing, fuel surcharges and growth in shipments of coal for export and ethanol, despite a slowdown in the automotive and housing sectors.
• Like the other U.S. railroads, CSX has managed to maintain strong profits, despite falling freight volumes over the past few quarters, thanks to strong pricing. The question posed by some analysts is how long the railroads can continue to deliver such strong results in the face of a possible U.S. recession.
• Apart from coal and ethanol shipments, CSX said grain shipments were up and described the industrial economy as "stable."

I do have to say for the first time I am wondering out loud, despite the incredibly powerful farm lobby, if potential scenes of social unrest and rioting and reports of deaths from starvation will shake the US and Europeans insistence on "food for fuel" instead of "food for food". If it does change, it won't come easy but if things degrade over a period of months into even worse shape than they are now, I would imagine the public pressure worldwide would be immense. Granted, maybe Iowa voters are even more powerful heading into this November but "Iowa voters" versus "poor worldwide perishing" is an easy call if you take out the politics of it all. This could be a potential risk to the fertilizer story, if not in reality (ethanol is only a minor part of the story) but simply in perception. However, I doubt any changes would happen unless widespread deaths were being reported and multiple 3rd world governments fell... lining the pockets of politicians is job #1 so it will take cataclysmic events for that to change. So any changes to our boondoggle policy would be a long time coming, but the first fingers are being pointed as we speak as the Western world wakes up to the problems I've been typing about for quite a while.

• The idea of turning farms into fuel plants seemed, for a time, like one of the answers to high global oil prices and supply worries. That strategy seemed to reach a high point last year when Congress mandated a fivefold increase in the use of biofuels.
• But now a reaction is building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people. Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in the seemingly inexorable rise in food prices.
• Many specialists in food policy consider government mandates for biofuels to be ill advised, agreeing that the diversion of crops like corn into fuel production has contributed to the higher prices. But other factors have played big roles, including droughts that have limited output and rapid global economic growth that has created higher demand for food.
• Ethanol supporters maintain that any increase caused by biofuels is relatively small and that energy costs and soaring demand for meat in developing countries have had a greater impact. “There’s no question that they are a factor, but they are really a smaller factor than other things that are driving up prices,” said Ron Litterer, an Iowa farmer who is president of the National Corn Growers Association. (no bias of course) :)
• Senator Charles E. Grassley, Republican of Iowa, called the recent criticism of ethanol by foreign officials “a big joke.” (again, no bias whatsoever) He questioned why they were not also blaming a drought in Australia that reduced the wheat crop and the growing demand for meat in China and India.
• The senator’s comments reflect a political reality in Washington that despite the criticism from abroad, support for ethanol remains solid
• Representative Jim McGovern says “If there was a secret vote, there is a pretty large number of people who would like to reassess what we are doing,” he said. (see, when it's secret there is no political backlash from voters... it's all about the votes...)
• Bush's spokeswoman, Dana M. Perino, said the president had urged officials to look for additional ways to help poor nations combat food insecurity and to come up with a long-term plan “that helps take care of the world’s poor and hungry.”
• A fifth of the nation’s corn crop is now used to brew ethanol for motor fuel, and as farmers have planted more corn, they have cut acreage of other crops, particularly soybeans. That, in turn, has contributed to a global shortfall of cooking oil. (unintended consequences strikes again - but definitely an investing theme)
• Europe’s well-meaning rush to biofuels, the scientists concluded, had created a variety of harmful ripple effects, including deforestation in Southeast Asia and higher prices for grain.
• “Ethanol is the one thing we can do something about,” he said. “It’s about the only lever we have to pull, but none of the politicians have the courage to pull the lever.”

So much like the Federal Reserve with its policy of "crossing our fingers and hoping" that inflation will dissipate as the US economy slows, let's do the same "hope" policy in regards to this summer's weather in the US and Russian (and satellite states), so the two main exporters of crops don't suffer supply disruptions - because instead of action, hope & finger crossing is usually the best solution!

As an aside, Intel (INTC) reported "in line" which in this skittish market is enough to drive the whole stock market up. Again, the mood swings will switch daily as we absorb one set of numbers versus another. I assume the fictional CPI inflation report tomorrow morning will be tossed aside (hey if you don't eat or use energy, inflation is nil!) and the Intel news will be what the bulls will cling to. Again, it was nothing special and Intel is yet another multinational who can use international strength to offset US weakness but any shred of good news will be enough of an excuse to tell us everything is fine, and just look out 6 months when the economy is back to boom times. And then the bears will come out 24 hours later, and then the bulls... and then... well it's going to be like a ping pong game.

Long Powershares DB Agriculture Fund in fund; no personal position

Earnings Wed - Fri

So far earnings this week have been relatively uninspiring even with the lower expectations ... Intel (INTC) should dominate the mood this evening and judging from the chart it doesn't look too promising. CSX (CSX) on the other hand looks like the global bull market in all things commodities just refuses to cease and desist. I continue to believe there is simply no reason to take any outsized risk ahead of all these reports, so I am not doing much and just waiting to see the reactions to each report. And continue to monitor the guidance - I believe the companies will begin their confessions either this quarter or next on how 2008 is not shaping up to expectations (aside from a select group of multinationals)

Here is how the rest of the very busy week shapes up and what I'm looking at

Wednesday
Fund holding asset manager Blackrock (BLK) - I expect continued slow, steady wins the race - unlike semi-competitor State Street (SST) which just reported and is getting a 7% hit today, BLK from all we have been told has nothing in the way of subprime exposure - the only difficulties could be from the credit markets i.e. auction rate securities. I wouldn't mind seeing a selloff to add to this quite small stake. I continue to watch in mock horror as the equity market ignores all the issues the credit market has... like a child that must touch the hot stove multiple times to learn - the General Electric lesson is already forgotten... remember the bond guys are considered the nerds and the equity guys the testosterone laced jocks... it appears the latter are going to run full blast into the wall...

• During the first quarter, "unprecedented illiquidity continued in the fixed-income markets," State Street Corp Chief Executive Ronald Logue said during the firm's quarterly earnings call Tuesday. "At the end of the fourth quarter things seemed a little better, but in February the markets froze up again, and then equity markets declined rapidly," the CEO said. As a result of continuing illiquidity, the mark-to-market on State Street's investment portfolio rose in the first quarter. "We also saw an increase in the unrealized loss on the assets held by our conduits," Logue said

eBay (EBAY) - this stock is already dead to me.. just a value tech play whose peak growth is over - but some people still care so I'll peak at it at least. If they spun off PayPal that's something I'd be interested in.

Gilead Science (GILD) - I fear all biotech or pharma names due to high risks, but this is one who is simply a performer, and market favorite.

IBM (IBM) - well they are IBM - they'll usually find a way to make numbers - any material weakness must be noted as a bad sign for the economy but it's becoming quite a global entity

JPMorgan (JPM) - they own the Fed in their back pocket so they'll be fine

Fund holding New Oriental Education (EDU) - very interesting situation here; after a disappointing quarter the stock sell off sharply and then proceeded to rally very nicely all quarter (which is rare in itself), and now has sold off sharply in the past week ahead of earnings - that makes me worried but it is a very small stake so I'll watch and see how things play out. Wouldn't mind a sell off here as well...

Coke (KO) - see IBM

Wells Fargo (WFC) - well run but the macro forces of CA will probably weigh on this name for quite a while.

Thursday
Too many banks to mention but I'll look at credit card company Capital One Financial (COF) - continue to believe they will be in growing trouble each quarter that passes, but with any financial the stock could rally on "it's terrible but not a complete and utter disaster" sort of thinking

In solar, also ran Evergreen Solar (ESLR) which is simply rising with the entire tide, and American polysilicon maker Sunpower (SWPR) which has put on quite a rally with the entire space of late - always looking for updates on gross margins, polysilicon picture etc.

Google (GOOG) after the close - definitely will affect Friday's open; I sold this a few weeks ago - a lot of moving parts but we've never seen Google perform in a recession so guessing the results/reaction is a total crapshoot.

Harley Davidson (HOG) - see COF - any spikes & these are names one would want to bet against - conspicuous baby boomer consumption at its best - again could benefit from same washed out "better than expected" Kool Aid thinking but that will be short lived

Intuitive Surgical (ISRG) - I totally missed buying this on the dip in mid $200s by about $10. It's had a huge run since but that makes it more risky to me. Expectations are sky high and some "rumblings" out there that due to credit conditions (not that equity market players care) *might* cause some hospitals issues in terms of ordering their very expensive robots. This one will be interesting as the momentum traders love this name.

Marriot (MAR) - I'm curious on any updated on US travel - any slowdowns from consumer

Merrill Lynch (MER) - another huge report since investment banks run Wall Street and this name is prototypical Wall Street.... along with Citibank, these are the epicenters of bad mortgages. But with a new CEO that is respected they seem to be getting a relatively free pass for now.

Nokia (NOK) - best of breed in its space - any weakness would be detrimental of course to the market; chart action of late makes me worried

Nucor (NUE) - steel! I admit, I am flabbergasted by the ability for steel companies to pass along any cost - their inputs are rising at enormous rates yet the stocks ramp - which can only assume that they have no margin pressure and any cost they have to eat, they just pass along to the end customer. I still find them risky and would rather own the companies charging them hand over fist for the inputs.

United Technologies (UTX) - like GE but without the finance? This is a company that you just take for granted - I expect the same theme of great international story and slowing domestic story. Now, this quarter it will actually be more interesting, because if they repeat any of the issues of GE in terms of inability for customers to buy big ticket items due to credit markets we go from an outlier event to a pattern. And a very bad pattern. So another company that is far more interesting than normal in terms of what they will say.

Friday
Caterpillar (CAT) - repeat after me; overseas markets booming; US economy poor. Rinse. Repeat.

Citibank (C) - yet another of "how bad will it be" and just a case of will it beat massively lowered expectations. Just a lot more writedowns, layoffs, selling off parts of the business, and capital infusions needed. But the stock could pop at any time because we'll hear for the 87th time "this is the kitchen sink quarter" - same goes for every other financial; but this one is the poster child for bad behavior.

Honeywell (HON) - see UTX - another big bad US multinational eating it up overseas but poised to face weakness domestically.

Manpower (MAN) - a key tell on the temporary workforce in America and "blue collar" temps especially. Canary in the coal mine type of company.

Schlumberger (SLB) - key big cap oil services name

Fund my Mutual Fund Stock Invitational - Championship Game

Well the oddsmakers from a few rounds ago were correct - it's all come down to this: Apple v Potash.

Scouting report:

Apple coming off a trouncing of Johnson & Johnson, is the ultimate consumer convergence play - style, cache, a relentless head coach who bends the rules but is the visionary back from exile, and legions of die hard fans that will travel across the country to support their team. They've transformed themselves from a pure play computer maker to a digital age entertainment company. Always 3 steps ahead of the competition. Their guards, iPhone and iPod get all the glory but their bread and butter center, Macs (think Tim Duncan), are the real story here - fundamentally strong, quiet, efficient, effective. How can you beat them? You must ignore the international story and hope the US consumer is felled to such a degree they give up their electronic fashion statements... first goes Abercrombie jeans, then go Apple products goes the story.

Potash, took out the venerable Warren B in the semifinal game.... after being mired in the also ran fertilizer league for years, this now powerhouse conference sent Canadian country boy Potash to the tournament (over objections by tournament director who preferred Mosaic). Ridiculous price increases without relent have propelled this name to higher highs by the quarter. Pricing power, margin expansion, and the ability to bring new product on line in the long run are it's strengths. Led by a trio of guards - curly haired Potash gets all the press, but Phosphates has grown 6" over the summer and this 6'9" player now plays "Small forward" and has been the center of strength of late; and don't forget the supporting role of Nitrogen. How can you beat them? Worldwide famine and outrage at Western country policies of "fuel instead of food" initiatives could cause a change in ethanol policy/subsidies in latter 2008 or 2009. While this would be more of a perception problem than a reality check - all that matters to investors minds is perception.

Game On!

Bookkeeping: Taking Profits in the Energy Patch

It has been an amazing run of late in the oil service names, drillers, and natural resources so I am taking another layer off, anticipating a selloff relatively soon. That said I've been saying that for a few days now and they just keep ticking up. It has been nice to see the deep sea oil drillers FINALLY partake in a rally... they've been the ignored group for much of the past half year. I am cutting back ($4-$6k sells) in the following names as I am starting to get antsy on the duration and magnitude of some of these moves without any pullback. (and yes the underlying fundamentals are clearly fantastic)

1. Sector oil services: National Oilwell Varco (NOV), Core Laboratories (CLB)
2. Sector deep sea oil drillers: Atwood Oceanics (ATW), Diamond Offshore (DO)
3. Sector natural gas: EOG Resources (EOG), Cabot Oil & Gas (COG)

On the flip side of that... in a somewhat related trade (not energy but "commodities" in general) - I am increasing exposure in Ultrashort Basic Material (SMN) to just under 4% of the fund as a "hedge against myself"

Long all names mentioned in fund; long Ultrashort Basic Materials in personal account

Could the USA Lose it's Triple A Rating?

My first comment when I read this story was... how does the US still have a triple A rating? Oh wait, the way S&P and Moody's rate things, anything with a heartbeat gets a triple A. But in reality, we are a subprime borrower, dressed in fancy emporer's clothes. I've been warning (among others) about how the steps taken the past few months to INCREASE (not decrease) risks to Fannie Mae (FNM) and Freddie Mac (FRE) are making them more and more likely to be fully nationalized down the road. Nationalized is a nice word for tax payer bailout. Barron's talked about this just a month ago [Mar 10: Is Fannie Mae the Next Government Bailout?]. Frankly it is quite pathetic that these 2 entities are trading like solar stocks or Chinese small cap stocks [Nov 20: Freddie and Fannie Trading like Chinese Small Caps] - they are supposed to be bastions of stability... yeh right.

I've outlined all the layers of risk we've been adding to these 2 entities over the past few months, earlier in the blog, so I won't rehash. Why would we be doing this? Because the mortgage market has essentially frozen. These 2 entities used to support less than 50% of the mortgage market - in the past quarter it is now 80%+. Meaning truly "private" enterprise has less than 1/5th. They are now becoming more and more levered by the month to help "support" the mortgage market... taking on more and more assets that are falling in value as home prices wither and homes continue to go upside down. So what's the end game here? Potentially fatal for these 2...

• The potential cost to U.S. taxpayers of bailing out Wall Street firms stricken by the credit crisis could grow to as much as $400 billion in a deep and prolonged recession, Standard & Poor's estimated yesterday.
• That bill would soar by another $1.4 trillion if it included the cost of bailing out Fannie Mae, Freddie Mac and other government credit agencies, whose losses could be so massive that the U.S. government could lose its AAA rating in what would be a calamity for the U.S. Treasury and the dollar.
• "Even under a severe stress scenario, the contingent fiscal risks of broker-dealers will not threaten the AAA rating on the U.S. government," said John B. Chambers, chairman of S&P's sovereign ratings committee, but because the government credit agencies have grown to such an enormous size, their insolvency would put pressure on the U.S. government's own finances.
• Peter Schiff, president of Euro Pacific Capital, questioned why the government has opened itself up to such big liabilities and at the same time set in motion another round of risk-taking by brokerages that may require future big bailouts. The government for decades has provided insurance for bank depositors but until last month had provided no guarantee for brokerages.
• "Leveraged speculators need to know that it is not 'heads they win, tails the taxpayers lose,' " he said. "By bailing out lenders who extend excessive credit, the Fed simply invites more of that behavior."
• "By interfering with this process, the Fed simply guarantees more losses and even bigger bailouts in the future," he said. "Wall Street executives amassed fortunes by making extremely risky bets. Now that those bets have soured, why is it taxpayers that have to swallow the losses?" (because the sheep have no idea what is happening...)
• Congress and the Bush administration recently increased the potential costs to taxpayers by increasing the risks to Fannie and Freddie, reducing their capital requirements and allowing them to purchase riskier loans made to troubled subprime and jumbo borrowers, S&P said.
• The goal of most of the government's rescue actions has been to avert a severe recession, S&P said, but they have also greatly increased potential costs to taxpayers by opening the door to bigger bailouts. The agency noted that the cumulative risks and losses to banks and brokerages keeps deepening each month the housing recession worsens.

Well I'd be worried about this, but I've been assured the economy will be fine "in 6 months" so this is just a lot of hand wringing over nothing (cough). But just in case folks - have that wallet ready when Uncle Sam calls on you.

No positions

Affymetrix (AFFX) Blows Up on Warning

Affymetrix (AFFX), which is a competitor to fund holding Illumina (ILMN) warned last night and is being taken to the woodshed today, down over 1/3rd. What is more troubling than the actual warning is the reasoning - a slowdown in research by customers. That's not really something you expect in healthcare - I wonder if this is in anyway related to the drop off I mentioned yesterday in Parexel International (PRXL) [Keeping an Eye on... Parexel International]- they are not directly related but both provide (for lack of better word) - 3rd party research to the pharma business. That is supposed to be a safe haven immune to slowdown. So news like this makes me concerned; not just for Illumina but the sector (and economy). Again, this stuff is supposed to be "recession proof". Hmm.... will have to monitor this to see if its company specific or part of a larger trend.

• Affymetrix Inc (AFFX), a maker of microchips used in genetic research, cut its 2008 revenue outlook by about 3 percent, citing expected lower research spending by pharmaceutical and industrial customers.
• For 2008, the company expects revenue of $490 million to $510 million, compared with its prior view of $505 million to $525 million.
• Cowen analyst Doug Schenkel said sales of the company's GeneSpring GX software missed expectations, and may have fallen as much as 20 percent from last year. He said he does not see any signs that demand from biopharmaceutical companies will increase, and wondered why Affymetrix did not cut its forecast further.

Long Illumina in fund; no personal position

Bookkeeping: Locking in Trina Solar (TSL) Gains

As mentioned yesterday, I would be happy with $43 or so on Trina Solar (TSL) considering I upped my stake from 1.6% to 5.1% yesterday AM with purchases in the $38-$40 range. With the spike yesterday, and somewhat slow start this morning, I've decided to cut the position back to "normal size" of 2.2% (it had appreciated to about 5.3% with the price spike), so this puts it in line with my other major long positions. My sales are roughly the $43 bogey I was looking for.

I am underweight on all long positions; usually I hold my top positions in much larger scale but since I am being cautious at this point with earnings season, I am far less exposed than normal. Again, I see 'potential' short term upside in this name to $45 or so but I don't want to be too greedy and am willing to miss out on some opportunities. Rarely do we get such a quick opportunity for profit, so I am going to take advantage of it, and lock in the realized gains. If Trina Solar continues upward I still have a decent sized stake to partake... I still believe fair value is much higher now.

With this name and many others I am actually now hoping for some pullbacks - we have a lot of overextended charts in my favorite names so I don't really wish to chase these names and buy high ... but they do continue to show incredible strength day after day.

Long Trina Solar in fund and personal account

WSJ: Factories Fading, Hospital Step In

Before I get to the main thrust of this story, yesterday I discussed the weakness that will be coming to the casino business (or already has in Atlantic City!) but mentioned Las Vegas as the next to be hit... well it is starting this morning with news of 400+ job cuts at MGM Mirage (MGM). Not to worry though, the casino market will be coming back "in 6 months" when the economy screams higher...

• Las Vegas casino operator MGM Mirage (MGM) has said it is cutting 440 jobs, the Wall Street Journal reported on Tuesday, signaling the effect of a slowing economy on the casino industry.
• A significant part of the cuts will be made in Las Vegas where MGM Mirage owns 10 properties, the report said, quoting the casino operator's spokesman Alan Feldman. "It's no secret: Business levels are down," Feldman was quoted as saying in the report.

Now on to the main part of the post - a very interesting story in Wall Street Journal this morning on the changing face of our economy - I've bemoaned this move to a "service economy" where all we do is circulate the same dollars from 1 person to another (while the Fed prints more money) therefore making us all feel more rich. But it's simply transfers of the same paper from 1 person to the next - not bringing in money from the outside. In a recent blog entry [Apr 2: The Underemployment Rate is Rising] I mentioned how more and more jobs in this country are now government or healthcare. Which is ironic because to cut the national debt and try to become solvent we should be cutting jobs in these 2 areas - so it's a catch 22, worry about the near term and keep inflating jobs into these 2 sectors? Or worry about the long run costs and try to streamline these 2 sectors? You know the answer - we kick the can on everything in this country and will worry about the long term another day. I wrote

Last point, we have 2 huge bureaucracies - federal government and healthcare. To keep the government from going even more insolvent we should in theory be cutting jobs from these 2 white elephants. Healthcare costs spiral out of control and we hire more people - I believe healthcare is now 16% of GDP. But how do you cut costs without cutting jobs? Thats the other dark secret - most of our recent gains in jobs are either government or healthcare related. So how do you fix the long term problems in either? Chicken or egg? They are sapping our national wealth away by their huge excesses/costs BUT they also provide the main job growth as well.

So again, this is my beef with our economy - most jobs are simply transfer of paper money (that is produced in ever inflated amounts) from 1 person to another - you wash my car, I'll walk your dog, you cut my hair, I'll fix your drywall hole... it's a zero sum game. But as the Fed creates more paper out of thin air we all feel "more rich". As inflation ramps... so it's a mirage of a wealth effect - that is the "service economy" in a nutshell. Is it any wonder our booming markets are agriculture? coal? - things people outside the country actually want and need? That actually brings money INTO the country - but as a % of economy its shrinking by the decade. So we can create another 10K paper pushers. Eventually the government (local/state) will push back since it cannot support this job creation - but the federal government can go on creating jobs forever since the only issue it creates is more debt. And as we all know - that is not a problem to the people running the country. As for healthcare, well it is now headed for 20% of all GDP (16% currently). On it's way to 30-40% in at current pace of growth in the not too distant future. So 1/3 or more of our GDP will simply be "servicing each other's medical needs". So combine that with federal government, defense, and you have a triple play of the vast majority of our GDP in 15-20 years.

• In this aging manufacturing region, where old-line industries like paper factories are falling away, health care has emerged as the employer of last resort. Between 1998 and 2007, the Bangor metropolitan area (pop. 150,000) lost about 3,700 jobs in manufacturing, but gained 3,500 jobs in health care. For many residents in Bangor, the hospital is replacing the mill as the passport to the middle class. For others, it means lower wages and fewer opportunities to advance.
• This trend extends nationally, and it could help blunt the effects of the faltering U.S. economy. Demand for health care tends to stay strong during recessions. Cash-strapped consumers are more likely to cut back on new appliances or cars than emergency-room visits.
• Indeed, while the number of manufacturing jobs nationwide fell by 48,000 in March and by 310,000 over the past 12 months, health-care employment rose by 23,000 last month and is up 363,000 jobs on the year, according to the government's most recent data.
• Yet health care is more likely to be an economic driver in many towns and cities -- especially if a Democrat is elected president. Sens. Obama and Clinton support overhauling the nation's health-care system to cover millions of people who are uninsured -- and that could increase health-care spending, which now accounts for 16% of the gross domestic product.
• There are downsides to health care's ever-increasing role. A community that relies on health jobs can end up with a weaker economy, one overly dependent on government programs like Medicare and Medicaid. Greater inequality is a risk, too. In health care and other service industries, there tends to be a wider income gap between what the highest- and lowest-paid workers earn than there is in manufacturing. Surgeons can have salaries in the high six figures, while personal-care attendants often make little more than minimum wage.
• In the late 1980s, according to calculations by the Economic Policy Institute and the Center on Budget and Policy Priorities, liberal think tanks in Washington, incomes of Maine families in the best-off fifth of earners made 5.4 times as much as those on the bottom, on average. By the mid 2000s, average incomes of the best off were 6.3 times those at the bottom. Most states saw even greater widening of income disparities.
• The health-care boom has also upset the economic balance in this sprawling, largely rural state. When manufacturing drove the economy, well-paying factory jobs were spread throughout Maine's rural and urban counties. But higher-paying health-care jobs are concentrated in urban areas.
• In 2005, the average health-care wage in Maine's rural counties was $26,841 a year, $10,000 less than in the urban counties. Statewide, the average wage for all jobs was $32,393.
• Today, Mr. Arsenault works at a hospital in Lincoln, about 50 miles north of Bangor, setting up the operating room and handing instruments to surgeons during surgery. He makes about $16 an hour, $5 less than in his last year at the mill. (typical example and if you multiply it by millions of people moving from "old economy jobs" to "new economy service jobs" it adds up)
• One concern about the health-care industry is its heavy reliance on government money. In Maine hospitals, Medicare and Medicaid together accounted for 59% of gross patient revenues in 2006, according to the American Hospital Association. Nationally, those two government programs accounted for 55% of gross patient revenues. (so really, half of healthcare is government)
• That could leave the state vulnerable as the government and employers try to pare health-care costs. Faced with a budget crunch, Maine legislators cut $46 million out of the state's Medicaid budget for the 2008 and 2009 fiscal years. Because of the cuts, the state will lose an additional $92 million in federal matching funds. The Maine Department of Labor estimates that about 5,000 jobs could be adversely affected by those cuts.
• After six months of classes at Eastern Maine Community College, he became a certified nursing assistant, a job that paid just $7.75 an hour, half of what he was making at the mill, and with no benefits.

Holy (Holey?) Crocs (CROX) !!

Ouch. The mine field that is earnings season took out another - Crocs (CROX) has put out a horrendous warning; going from .45 EPS to 0.00 to -0.05 in the first quarter. Yikes.

• "Retailers in general are planning more cautiously, and therefore, we did not experience the level of at once business we originally expected," he said. "In addition, because of our current expense structure, a shortfall in sales versus our expectations disproportionately impacts our earnings results."

I point this one out because we used to own the name - I sold it back in January in the $30s (at a loss) even though it looked "cheap" - the chart was just not telegraphing good things. Then I revisited the name about a month and a half ago as the stock was roughly $19; it looked even cheaper but the chart was still a disaster [Mar 5: Revisiting Crocs (CROX)] I wrote:

I came upon Crocs (CROX) which when we last discussed [Jan 18: Closing Crocs], I was selling for a sizeable loss in the mid $30s. I looked again today, and had to avert my eyes from the carnage. It now trades at $19. Or 7x 2008 earnings. So it has lost 50% more of its value in 6 weeks - during a time the market has been essentially range bound and in fact retail has had short spurts of Kool Aid buying.

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising] It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go. I was looking at a chart of Whole Foods (WFMI) and that's a perfect candidate - its held up "ok" because it relies on the upper middle class who can afford to pay $7.00 for organic milk. Well, when economics start to hit, people are going to have to stop being so "healthy" and buy what they can afford. That's just reality. Hence this looks like the prototypical short. As is Harley Davidson (HOG) [Jan 25: I Can't Believe this Pig...err HOG was up Today] [Sep 7: More Retail Tells? Harley Davidson and Office Depot], as is just about every restaurant in America [Sep 19: Tough Times Ahead? Restaurants] - even magical Chipotle Mexican Grill (CMG), as if just about every retailer in America ex-Walmart (WMT), etc. These stocks bounce every time the bulls pass their... well bull... that the consumer will be back any moment now and just "trust us" because in 6 months they'll be back in the malls spending like mad. Just. Plain. Wrong. These are going to be shorts for a long time. It won't be so easy as when I first called it out in early fall because we were still in the "no recession at all" camp, and the stocks had just began to weaken from much much higher levels. Now you have to short in smaller time frames, realizing dead cat bounces occur every 3-5 weeks as a "hopeful rally" will ensue. At which point, once it tuckers itself out - you short again. Keep repeating until CNBC finally tells us "we're heading into a deep, long recession" - and then you'll probably want to go long since the bottom will be in.

Simple as that. Next to go on the food chain will be entertainment - think casinos - Wynn (WYNN), Las Vegas Sands (LVS), MGM (MGM) - it is all going to suffer [Nov 1: A Top in Casino Names? Wynn and Las Vegas Sands] - that's an "extra" you don't "need". Disney (DIS) will hold up ok due to our cheap US peso bringing in foreigners but regional amusement parks without that international name recognition are going to suffer the same fate. Sorry to sound alarmist but this is the coming reality of a strapped, indebted US consumer whose real wages have been pummeled for years (this has not suddenly happened 18 months ago; it's just now catching up to us without the house ATM to hide the pain), and now is taking it on the chin with the Fed policy to devalue their currency to the tune of 1:5 ratio. Each dollar they now own becomes even more worthless.

So when you ask for specific names from me - its simple - what can you do without? What would you give up first, second, and third as your budget closes in on you? What will you sacrifice to pay for food, gasoline, heating, and air conditioning? Whatever you will skip on - short that stock each time the "early cycle" proponents run them up for a 5-7 day cycle, on wishful thinking. Even cheap holey shoes that cost half a ticket to a professional ballgame are seeing the pullback. The only people immune and the only products immune are those catering to the top 1% - Porsche yes - Ford no. 60' yacht - yes. 22' Sea Ray powerboat - no. Avoid the "no's" which frankly is almost everything facing the domestic consumer. We're heading into a long, drawn out recession... I've said it since last summer and as each month/week/quarter passes more denial will turn into acceptance and more earning cuts will have to happen across the board. The people in denial rely on government reports, which are for the most part another pile of fiction work.

Again, my blog readers and investors in general are the "well off" in this country - you need to step outside your shoes and think how the typical mom and pop guy in this country are living, the ones without the Ameritrade account, without a 401k account, who never watch CNBC, who don't know who Uncle Ben is, who work 2-3 part time service jobs to survive (or 1 full time service job that pays 20% less than the old manufacturing job they used to have), who don't have the kids playing travel soccer, or gymnastics class... and think how their spending and what they are cutting. How are they coping with a sudden 20-30% food inflation? 40% year over year gas price increases? 30% home heating? I'm not talking the bottom 10% the government helps; I'm talking the middle 50% who are left to their own devices and we used to call the Middle Class. And then assess how all the factors affecting the "investor class" (CNBC viewers, blog readers) are hitting them - at a rate far far worse. [Jan 16: Interesting Human Economic Toll Piece in NY Times] Then invest accordingly.

Long none mentioned; I'd be short many if I could in my Marketocracy.com account

My Plan with Trina Solar (TSL)

Just wanted to update my thoughts on Trina Solar (TSL) based on this morning's premarket news, which I was very bullish on. The market has kindly rewarded this name, which still remains very undervalued versus peers.

I added substantially in the first 30-60 minutes of the day in the $38, $39, $40 range, taking the position from 1.6% to 5.1% of the fund. I still have some much cheaper shares of course... using technicals we have some resistance ahead at $45. What we want to see from a bullish perspective is the stock to rip right through that resistance level (it's 200 day moving average) and off to the races to about $56 is possible. In this market environment where so many economic reports and earnings reports will cause a lot of volatility, any stock will not trade in a vacuum so my above scenario would have a higher probability in more serene times. So if the stock can make some more movement towards $45 I will let go a good portion of the position and then re-assess. If the stock cuts like butter through resistance than I'll buy back and hold on for a more lengthy ride. If the stock retraces I'll add on a retrace. Either way I want to have a larger position in this very undervalued name that has languished for quarters on end due to the overhang of this polysilicon plant. Now with that removed, it should trade nearer to it's peers valuation and in fact I'd argue it deserves a premium valuation as it probably had among the best quarter of all the solars in the last earnings period. [Mar 4: Long Suffering Trina Solar Finally Gets Some Relief] I now feel much more comfortable holding this name as a major position in the fund over the longer run; but I remain a defensive player in the near term, because this is the type of market where gains turn to losses overnight.

So if not for the day to day thrashing in this market, and potential for large scale sell offs (we have 2 inflation reports coming tomorrow and the day after which could cause some carnage), I'd be more willing to just sit and wait for this stock to trend up to some of my targets. My fair value for this name is now in excess of $60 (just to get Trina at near peer value to some competitors), but very doubtful in this environment we get a straightshot there. So we'll do some trading along the way; and if the stock strengthens into the close today (near $42 currently) I'll probably take some off the table just to protect today's gains, going into inflation reports that might finally knock some reality into the market participants that inflation is real, and even the government reports which understate it by 2/3rds are going to start showing it.

Long Trina Solar in fund and personal account

Petrobras (PBR) Just Went Vertical

Just noticed a huge spike in stock price in Petrobras (PBR), one of the few oil exploration companies in the world who can actually increase reserves [Dec 12: Petrobras Having a Good Day] [Nov 8: Petrobras Soaring Today] - looks like this is the news.

If true this would be ridiculous - the Tupi discovery was enormous and if this is 5x as big... well, did I mention this was ridiculous. Off the Tupi discovery alone, I believe Petrobras was headed to be the largest company in the world, passing Exxon; before what could be happening today. Again, we love to own monopolies - this would be like owning public shares in Saudi Arabia's oil reserves.... whew.

• An offshore find by Brazil's state oil company Petrobras (PBR.N: Quote, Profile, Research) in partnership with Repsol-YPF and BG Group, may be the world's biggest oil discovery in the past 30 years, the head of the National Petroleum Agency (ANP) said on Monday.
• Haroldo Lima told reporters the find known as Carioca could contain 33 billion barrels of oil equivalent, five times the recent giant Tupi discovery. "It could be the world's biggest discovery in the past 30 years," Lima told reporters.
• Petrobras last year put Tupi's recoverable reserves at between 5 billion and 8 billion barrels of oil equivalent, most of it light oil.

Long Petrobras in fund; no personal position but this is one to throw in the kitty for the grandkids stock account

Fund my Mutual Fund Stock Invitational - Final Four

A shocker in the previous round as old man Buffet wins over the entire US government aka Goldman Sachs...

Potash continues its Davidson-like run through the tournament....

Here is a summary of the previous round

********

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 and overlook steady and quiet 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. You can't stop Warren; you can only hope to contain him!

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

Keeping an Eye on.. Parexel International (PRXL)

I'm a growth investor, and frankly it is very hard to find growth in the US market - all my spare time is spent trying to find ideas outside of commodities and/or non commodities that I already own - and the pickings are slim. Even technology which many people see as a growth sector is chock full of older established slower growth companies, and aside from a handful I just don't see much growth there. Financials? Very few. Retail? hah. I go sector by sector and see very little growth out there - even in the healthcare field. So it is hard to diversify across sectors when you are looking for growth - because most of the growth is very concentrated. One group I have liked in healthcare are the medical contract research organizations - i.e. drug research outsourcing. No FDA approval risk, no government reimbursement risk, etc. I have one stock in this sector, a Chinese company called WuXi PharmaTech (WX) - which after purchasing last fall [Nov 5: Two New Foreign Positions Added Today] has been a total dog despite some very good earnings reports [Mar 12: WuXi PharmaTech - Very Good Earnings]. I don't have a large position thankfully since the stock has recently fallen off a cliff but it is a perplexing situation. Most of the US companies have very high valuations so I have been reluctant to add any, and an Irish company I've been in, in the past ICON (ICLR) is also pricey. [Feb 21: ICON with a Solid Report]

However, one of the US players, Parexel International (PRXL), has fallen precipitously the past few days and its now on my radar - I like relative value so when a stock falters it begins to interest me. However, a few caveats - it is the only US company to be falling like this so that's a red flag, and it's temporarily fallen so hard it is now below its 200 day moving average. So it could portend something company specific is happening; with earnings on the 23rd I have been debating whether to add this name. Still debating.... one could buy here, and if there is an earnings blowup, be down 30% instantly on the 24th of April. I always get suspicious of this type of price behavior because if nothing else, Wall Street is a game of insiders - and this sort of action might be people "in the know" getting out first... so I am going to hold off, and if the earnings report is solid and the stock remains in this level, I will probably buy then as the stock has fallen from the mid $27s to the mid $23s (15%) in just a week, which in this sort of sector is a huge move. (it would be like a fertilizer or solar stock dropping 40%) This is the proverbial "falling knife" - in fact as I type this the stock has fallen from $23.60s to $23.10s. So this is on my "hot watch list" and in a few weeks we'll have more information to see if this will be a good addition to the fund.

Here is an article with some good background on the pros/cons of the industry

• Even though big pharmaceutical companies are stumbling and biotechs are staggering, smart investors have been making money in the sector by thinking a bit differently -- specifically, by betting on companies that conduct tests for drugmakers.
• Large drug companies are furiously cutting costs, while biotech start-ups often lack the financial cushion to conduct a full set of their own trials for experimental products. That leaves a growing niche for contract research organizations, or CROs, to which drugmakers outsource clinical and preclinical trials. As a result, many CRO stocks have soared as major drugmakers' shares have stagnated.
• The two largest CROs by market capitalization, Covance (CVD) and Pharmaceutical Product Development (PPDI), both enjoyed stock gains of 31% for the 12 months ended Feb. 15. Both have market caps of just over $5 billion.
• During the same period, Ireland's Icon(ICLR), with a market cap of $1.8 billion, had a stock surge of 48%. Parexel International (PRXL), whose market cap is $1.6 billion, climbed 61%.
• Analysts remain cheerful about CROs' future. Wachovia Capital Markets predicts the industry will outperform the overall market for the next three to five years. Pointing out that approximately 25% of drug development is outsourced, the firm issued a report in late November saying that could rise to 35% to 40% within half a decade.
• "We believe CROs will be a particularly strong sector [in 2008], given that there is a clear mandate from Congress to increase testing of drugs both before and after Food and Drug Administration approval," adds UBS analyst Robert Gilliam in a report to clients. CROs are attractive because "they are not directly exposed to Medicare cuts, drug price controls or other government-related pricing pressures," he adds.
• Also, investors should note that just about every major CRO has had some setback in recent years to affect the momentum of their sales, profits or stock price. Ill-fated acquisitions, management shake-ups, failed clinical trials, canceled contracts, strategic blunders or disputes with the FDA can derail a CRO.
• In theory, the ideal CRO offers both diversity of geography and services. Clients want to control expenses and speed up the drug-development process, so it's important for CROs to operate on many continents, especially those with developing markets. This approach gives them a cost advantage as well as the opportunity to reach more patients in clinical trials.
• For services, a CRO ideally wants to offer a mixture of preclinical trials, early-stage human trials and late-stage clinical trials, along with FDA-mandated post-marketing tests that are becoming more important for keeping drugs on the U.S. market.
• Animal tests and the early-stage human trials take less time, and they provide less revenue per test than do bigger late-stage and post-marketing trials. But because a CRO can conduct many more animal and early-stage human trials, these tests can provide a steadier revenue stream. In addition, the impact of a single early study's failure or a client's cancellation isn't as great as it would be for a multiyear, late-stage clinical trial.

Long WuXi PharmaTech in fund; no personal position

WSJ: Food Inflation, Riots Spark Worries for World Leaders

The rest of the world is finally catching on to a theme we've long been discussing - the food crisis. It finally hit the front page of the Wall Street Journal and as you know - unless it hits Barron's or the Wall Street Journal it doesn't matter in the investing world - Don Coxe and I are finally vindicated [Jan 18: One Lovely Voice Agrees with Me on Food Inflation] Remember the themes here - agflation, food protectionism (countries hording their own supplies to feed their own people), and massive social unrest. The government in Haiti fell this weekend. [Jan 30: Hungry Haitians Resort to Eating Dirt] And don't think it is not happening here in the lower rungs of our society - food banks are at severe shortages and the poor are suffering mightily....

We're always early here [Mar 31: Tensions Rise as World Faces Short Rations], so this is old news for readers and the basis for our investments in agricultural products/related products. And there is no easy answer - in fact we are helping to cause the problems with our ethanol boondoggle. [Mar 27: Farm Lobby Beats Back Assault on Subsidies]. It is actually quite a war - rich, Western countries using food for their energy needs - and poor developing countries with people starving. I cannot stress enough the social stress aspect of this; food is very different from oil - desperation will set in with food.

WSJ: Food Inflation, Riots Spark Worries for World Leaders

• Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.
• Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank -- putting huge stress on some of the world's poorest nations. Even as the ministers met, Haiti's Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country's capital was racked by rioting over higher prices for staples like rice and beans.
• Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses.
  
• World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires half to three-quarters of a poor person's income, "there is no margin for survival," he said.
• Many policy makers at the weekend meetings of the International Monetary Fund and World Bank agreed that the problem is severe. Among other targets, they singled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes.
• "When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels," said India's finance minister, Palaniappan Chidambaram, in an interview. Turkey's finance minister, Mehmet Simsek, said the use of food for biofuels is "appalling."
• But the weekend's meeting produced few concrete results. Mr. Zoellick recently urged rich nations to contribute another $500 million to the United Nation's World Food Program, but he said that the U.N. has received commitments for only about half the money. (typical)
• Last week, British Prime Minister Gordon Brown urged the G7 nations -- the U.S., Britain, Canada, France, Germany, Italy and Japan -- to develop a comprehensive strategy for the food problem, encompassing trade, agricultural productivity, technology, biofuels and short-term aid for poor countries. In the past, Britain has taken the lead in pushing the G7 to write off the debts of the world's poorest nations.
• The situation in Haiti underscored some of the problems afflicting the world's poorest countries. Haiti has enough food in the marketplace to feed its populace, but prices have increased beyond the means of many of the urban poor to pay for it, said Michael Hess, an administrator in the U.S. Agency for International Development's Bureau for Democracy, Conflict and Humanitarian Assistance. "People are making two bucks a day," he said. "And we're seeing food prices go up around the world."
• Aggravating the problem, in some countries food inflation has prompted a wave of protectionism. Countries usually impose trade barriers to imports to protect local industries and try to boost exports. But food-trade protectionism works the opposite way. Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tariffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward "self-sufficiency." (this is my theme of food protectionism that I said will be coming... well it is now here)
• About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to "resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups." He said, "They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries." (Does the King of US Socialism really have any right to say anything? Kettle? Pot? Black?)
• During informal conversations and interviews, ministers mainly agreed that the U.S. policies on biofuels were especially harmful. U.S. ethanol is made from corn, which, ministers said, could be exported to feed the hungry, and benefited from tariffs that block Brazilian ethanol, which is produced much more efficiently from sugar cane.
• The White House's Mr. Connaughton said the U.S. is working on developing "second generation" biofuels that would use varieties of grass or agricultural wastes -- not food -- as source material. "That's where we need to get to go," he said. (all in good time folks, if a few hundred million globally need to die so we can subsidize Iowa voters, so be it)

And again, don't discount the effect of the country with 20-25% of world's GDP, inflating its paper money supply at a rate of 20% as an exaggeration of inflation of ALL assets, including food. That's adding to the problem (not the root cause, just an inflammatory) And on we go... big talk, no action....

Long Powershares DB Agriculture Fund, and a bevy of fertilizer in fund

Trina Solar (TSL) Drops Plans for Polysilicon Plant

Very bullish news from my perspective out this morning on Trina Solar (TSL) - a major overhang has been removed with the decision to scrap their planned polysilicon plant. Trina was attempting to become the first fully integrated solar panel maker by owning the whole supply chain from polysilicon to end panel... ambitious - and when it was announced a few quarters ago it came as a surprise to everyone. Further, they never announced how they were going to fully fund the project, and this created an overhang over the stock due to fears of stock dilution. It was also a major distraction from their core business. Last, in the long run, polysilicon production will be a very commoditized (sp?) low margin business, and better to simply contract with the bevy of producers that will be online in 2010+. Getting their own plant up and running would take years, so the most likely scenario is they'd be launching their plant into a supply equilibrium (versus current shortage) or in fact, glut. And eventually this polysilicon market will glut... so the inherent advantage of having your own plant will diminish over time.

This news makes me much more positive on the near term fate of the stock; and I applaud management for rethinking the decision instead of being stubborn and not reacting to market realities.

• Trina Solar announced its decision to discontinue the development of its previously announced 10,000MT polysilicon production facility having a total estimated cost of $1 billion.
• "We have made this strategic decision after careful assessment of our raw material requirements, in conjunction with recent and favorable long term polysilicon market and supply condition developments." said Jifan Gao, Trina Solar's Chairman and CEO. "Furthermore, we wish to reaffirm our strong working relationship with our partner GT Solar, which continues to provide us with advanced multicrystalline technology platforms to support our target of 350MW of annualized module capacity by the end of 2008."
• As a result of recent favorable changes in the polysilicon supply environment, Trina Solar now believes it has greater access to polysilicon feedstock to support its growth objectives. To address its forward polysilicon requirements, the Company will continue to sign long term contracts as a means to meet its strategic supply needs. Additionally, Trina Solar will consider strategic investment options in future polysilicon projects which offer attractive economics and involve smaller investment requirements, although no projects are currently under consideration.

From company website:

The Company’s decision to discontinue the development of a polysilicon production facility at Lianyungang, Jiangsu province was due primary to changes in market conditions. The Company’s strategy will continue to focus on three areas: lowering of module manufacturing costs, development and advancement of our of core technologies, and further development of a strong brand in the marketplace.

Supply-demand conditions in the polysilicon market have changed considerably. The Company believes that it now has greater access to long-term contracts with improved delivery and payment terms for polysilicon to meet its planned capacity expansion requirements in the next several years.

The average price of polysilicon, though remaining high in the short term, is expected to decrease in the long term as a significant portion of polysilicon manufacturing capacity currently under construction becomes available. Long-term contracts now generally have prices that will decline over time. These contracts will allow the Company to reduce its per watt polysilicon costs over time and to expand its margins in the long term.

As a result, the Company does not see the need to commit capital to building its internal capacity for polysilicon production, but will still evaluate investing in other projects opportunistically where attractive economics are offered and that involve notably smaller investment scale.

*****
I'll be adding to my position in Trina Solar (TSL) this morning pending after watching how the early trading plays out. The sector is a bit overbought is the main issue into rushing in at this point...

Long Trina Solar in fund, no current position in premarket but could change during today's session

Earnings Monday - Tuesday

Last week was the traditional launch of earnings season, but this week is when the onslaught really begins. Due to large amount of names to review, I'll break down the week into smaller pieces for the next 3 weeks or so...

Names I am looking at for Monday and Tuesday

Monday
Eaton (ETN) - this is a one of those quiet manufacturing type of companies - in the wake of GE I will be curious to see if we see similar issues in other names such as Honeywell (HON), Unitech Technologies (UTX) and the like. GE has so much business that is financial related it might be more of an outlier in terms of the issues it faced, but if we start to see weakness in the other more pure play mfg plays it's time to worry. Remember, the only thing holding up the market right now is international strength of these multinationals (ironic isn't it?). I still believe international markets are booming but they are indeed due for a slowdown - when China slows from 12% GDP growth to 8% how will the market take it?

Philips Electronics (PHG) - another large international based multinational

Tuesday
CSX Corporation (CSX) - I contend people are mistaking the boom in rails due to international growth (hauling out our farm products, coal, fertilizers, and the like) for a "sign that the US economy is going to rebound any minute now". The rails benefit from the wealth effect being created overseas by governments and people - wanting our resources. But hopeful bulls, straining for any signs of strength to offset all the weakness, point to the strength in transports as a reason for glee. Remember folks, the rest of the world is moving on without us. They won't be immune to our slowdown but when you are a creditor and have savings life is a lot easier than the opposite.

Infosys (INFY) - these Indian outsource companies are just fascinating to me - they used to be the darlings of the market but as Indian white collar demand higher wages, and the rupee explodes higher in value (as opposed to US pesos) - more and more of the benefit to outsource to India is being lost. From an economist standpoint this is just such an interesting thing to see play out. If the US dollar continues to free fall, I kid you not - the US is going to be a great place to locate plants to take advantage of "low cost wages" with people "who speak English" well - the same reasons we used to outsource to India. Ironic isn't it?

Intel (INTC) - still enough of a bellweather to move markets

Johnson & Johnson (JNJ) - another bellweather who like GE just never misses with all its moving parts and various businesses. I'll be looking to see signs of inflation and future price increases in their product lines which will continue to rage against the US lower and middle class.

Washington Mutual (WM) - a little less interesting now that they got the $7 Billion (at a huge cost) but the first of our major financials to report.

Unintended Consequences of the Coming Socialization of the Housing Market

I've argued many times that the best thing, as a nation, despite short term pain - would be for housing prices to fall nationwide to a level that would allow most homeowners to only spend 30-35% or their income on housing costs. [Dec 6: Analysis: What Should Median Housing Prices Be Today?] This would allow people to for example... buy food and heat their homes... without stress of wondering how they'll afford to do it. Or do crazy things like... well, save or invest. By people I mean people not in the upper 10-15%. Heck this would even allow for a huge flow of spending and consumerism which is what our economy is based on. But it would require a shorter term, painful period of adjustment of home prices from their completely out of line (in major urban areas) levels, where "typical people" with "typical jobs" have to resort to financial engineering just to have a roof over their head. When you have a chart like this below, you see bubble-economics at it's best - the market will eventually overwhelm the interference the government is trying to achieve until a true equilibrium is met... when a police officer can afford to buy a home in the city he patrols would be a good measure - you know - like in the 60s, 70s, or 80s. Right now we are trying to build a dam in the price erosion to keep prices inflated at say 2004 or 2005 levels. Not going to work - until people can afford normal homes with normal payment terms with 5-10% down with normal median incomes - we are not done with our little correction...



I found a great article on SeekingAlpha.com discussing one major unintended consequence from the coming proposed bailouts - one of many we create by interfering with "free markets" - i.e. ethanol boondoggle, keeping interest rates at 1% for ages, etc. Well we are going to embark on a new era of "solutions" which will create even more problems... again, the best thing would be a quick (albeit painful) readjustment period in housing prices, which would allow people currently renting to afford homes. But the government seems inclined to (attempt to) stem home price deflation by any manner possible... this is socialism at it's best.

• If I understand its terms right—and I think I do—Barney Frank’s ballyhooed $300 billion plan to stem subprime foreclosures figures to take a bad situation and make it even worse. Reason: the plan would give up-to-date borrowers a powerful incentive go delinquent on their loans, perhaps on a massive scale. This is supposed to help fix the problem?
• But as it’s written now, here’s how the Frank plan would work. The holder of a delinquent subprime mortgage would take a writedown on the loan, then dispose of its loan in a short sale funded by the issuance of a smaller, government-guaranteed FHA loan. In return, the holder escapes further credit risk. Fine. The specific size of the loan writedown, though, would depend on the size of the new FHA loan, which in turn would be set according to terms “the borrower can reasonably be expected to pay.” In particular, the maximum allowed loan-to-value ratio of the new mortgage would be 90%.
• As I say, if the government has ever before put in place such a powerful inducement for wholesale borrower delinquency, I can’t recall it. Let’s walk through some numbers and you’ll see what I mean.
• Take two neighbors, who both took out 0%-down, $300,000 ARMs, each with a 5% introductory rate, in mid-2006. Since then, the houses they bought have fallen by 10% in value, to $270,000. At reset (which will happen any month now, to around 8%) their monthly payment will rise to $2,000 from the current $1,250.
• OK so far? The only difference between our two borrowers is that Borrower A is current on his loan, while Borrower B is delinquent, and so qualifies for relief under the Frank plan.
• And, indeed, Mr. B applies for relief. His new, FHA-funded loan comes to just $243,000—90% of his home’s $270,000 appraised value—so his monthly nut (at the same 8% he would’ve been paying under the terms of the old loan) is now just $1,620. Still-current Borrower A, recall, is paying $2,000 per month, after reset, for the identical house. Oh, and Borrower B now has $27,000 of equity in his home, while A is upside down by $30,000.
• What do you suppose the Borrower As of the country would do at this point? I’ll tell you one thing: a lot of them would go delinquent on their mortgages on purpose, to qualify for the same sweet deal that the Borrower Bs have gotten.
• You might object at this point, and say that that Congressman Frank has built safeguards into his bill—like, say, insisting on a government claim on any subsequent home-price appreciation--to prevent intentional delinquency from happening. You would be mistaken. Sure, the feds would have a claim on any gains the borrower realizes after a sale. But the size of that claim declines the longer the borrower stays in the house, and falls to zero after year five in any event. In the meantime, the borrower gets an immediate $57,000 boost in his equity, to $27,000 from minus-$30,000.

We are telling every American (currently 1 in 10 homes nationwide, and growing by the day) who is "upside down" on their mortgage (value of home less than they owe) to apply for Mr Frank's program. And then everyone else who plans to stay in their home for at least 5 years and has less than 10% equity? Do the same - you go from sub 10% equity to "10% equity" instantly, and a lower mortgage payment to boot. And the plan still makes sense for those who plan to move in 2,3,4 years - all you need to do is give up some of the "gains" from selling your home to the government (not all of it though!) - which is still more than the "no gain" you would have (since you are underwater!) if you did not go delinquent and get a new government sponsored mortgage. So you go from having to bring money to the table at closing to get out of our mortgage, to getting a windfall - even if you only live in the house 1 year... magic! Talk about incentive to go bad on a mortgage!

Now that I think about it what is to stop people who have more than 10% equity (say 20-25%) to take a 2nd mortgage or a home equity line of credit, take the cash out of the home ATM, and then you too will be under 10% equity - and then can default! The government will quickly come in and give you 10% equity - magic! And you get to keep your cash out which you probably bought a nice SUV or did a kitchen remodel with. Fantastic!

And so once again, by trying to step in and stop the market from going where it will eventually go - we will create moral hazard and unintended consequences left and right. Just about par for the course from this short sighted Nanny state.

Bookkeeping: Weekly Changes to Fund Positions Week 36

Week 36 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: 35.9% (vs 14.0% last week)
53 long bias: 43.7% (vs 75.6% last week)
8 short bias: 20.4% (vs 10.4% last week)

61 positions (vs 63 last week)
Additions: Alpha Natural Resources (ANR), Ultrashort Basic Material (SMN)
Removals: Schering-Plough (SGP), Millicom International Cellular (MICC), Peabody Energy (BTU), Thornburg Mortgage (TMA)

Top 10 positions = 25.7% of fund (vs 36.2% last week)
31 of the 61 positions are at least 1% of the fund's overall holdings (51%)

Major changes and weekly thoughts
After some hopeful technical action late last week, and early this week, the market reverted back to recent form with a break of technical support on Friday, off the General Electric (GE) miss. I expect a very similar pattern to continue into the future as we have had since last summer. A bevy of bad news - first taking down the market, then being ignored by the market - as scarred bulls emerge every few weeks singing songs of "early cycle recovery", "everything is priced into the market", "don't fight the Fed" and "you have to ignore the bad news and look out 6 months from now". This has been the calling card for a few quarters now, and shall remain so for quite a long time into the future I believe. Almost everyone in the market under the age of 50 has never experienced anything but shallow, short recession so that is their playbook - they will stick to their playbook until the facts overwhelm then - and even then - deny the facts and sell hope. So we have to constantly balance the reality on the ground versus the ignorance of said reality by the equity bulls - and continue to doubt every rally but respect the power of the herd during those rallies.

I continue to propose my stance since blog inception in August 2007 [Aug 31: Et tu, September?]- what we are embarking on is the first consumer led recession since the late 70s, early 80s - rife with inflation in things we must have, asset deflation in housing, wealth destruction, and an exposing of the "gutting of the Middle/Lower Class" we we rip away yet another illusionary wealth effect bubble. This was an outlier position then; and remains so - but slightly less so. All the theories I laid out were battled by bulls last summer and fall (with the market reaching highs in October 2007 no less) - when "there will be no recession" was the battle cry. Now the battle cry has morphed to "shallow, short, quick recession". They were wrong before; I contend they will be wrong again - BUT as long as "they" believe - the market will have it's fits and starts upward. Bottom line - in the long run stock prices are a reflection of earnings - as earnings degrade through the year (2008 full year estimates are much much much too high), unless one believes the market should see multiple expansion in a recessionary environment than one must propose lower stock prices are ahead. Or, taking into account the tidal wave of paper money being thrown into the system, stock prices that are held up at overinflated levels due to nothing else other than massive liquidity injections, in an environment where savers are told "you are dead to us". And you pay for this "benefit" in every other facet of your life through massive inflation.

For the fund, I spent the early part of the week (and late last week) allowing that the technical action had finally improved even though it made no sense from a fundamental standpoint for there to be any bullishness with the constant bad news flow. I don't buy any arguement that all the current data is "backward looking" - in fact I think in 6 months today's news flow will look like "good times". As stocks began reversing and the market could not break out to a new intermediate high (S&P 1390) I started getting suspicious and reigned back long exposure and began rebuilding short. The fund positions reigned supreme this week, and to be blunt, I actually hurt myself by being cautious as many names in the portfolio really ramped hard this week, but I was less exposed than I had been in the past in some names. That said, if the pattern of the past few months repeats - first they sell off the early cycle names as they realize their dreams of early cycle recovery get put off for another few weeks; the stocks that deserve a premium as they are not exposed to the subprime US market hold up for a while; and then eventually the negativity reaches the level where even those premium stocks get sold off 3-7 days later. At which time the early cycle names start recovering - and CNBC tells us about how this is the bottom (for the upteempth time).

Frankly, I am following this pattern because in the past I stuck to my guns that the premium names with little to no exposure to subprime nation should hold up (better), but I've been proven wrong as the baby gets thrown out with the bathwater. This market has not discerned between good and bad stocks for much of the past few months - everything gets sold off in rotational fashion. So this time around I don't want to give up as much outperformance as I've had to in the past when my commodity type stocks take 20-30% hits, so assuming this pattern continues, I've cut back exposure far more than I'd like to and am sitting in a lot more cash. Now I will say - this pattern is getting so predictable I am starting to doubt it would be so easy as to repeat itself - when things become so predictable on Wall Street they usually get exploited. But I'm willing again to play it safe and miss out on some upside as to protect shareholder value. The #1 rule of making money is trying not to lose it. Each time I've gotten about 20-25% ahead of the indexes I measure myself against, we have a major selloff that hits my type of stocks and I promptly lose 10% versus the indexes - so I am going to try to maybe halve that if it happens again. So that's my thinking today. Further, it's earning season which is always a time similar to dancing on a mine field.

Last, I spent the week closing out some minor positions that had not participated in the rally since a week ago Tuesday. (Similar reasoning to why I let go of Google last week) When the bulls are out in charge, and the technicals firm up for the first time in months as they did last week and early this week, and certain stocks do not participate that makes me worry, so I began shelving some of these stakes.

As an aside, this weekend was the first I started seeing the food shortages I have been predicting for a long time, finally hitting the mainstream press - saw an ABC TV news report, saw the first wave of blog articles on SeekingAlpha.com noticing this "brand new situation" - etc. Welcome to the party folks - always late, but there is always room on the bandwagon. I am also seeing a bevy of people writing about inflation all of the sudden - again, something we said was a predictable outcome a long time ago - but fought tooth and nail by the masses up until... well the past week it appears. Remember, your Federal Reserve assures you as the US economy slows, inflation will disappear like magic - they apparently forgot the 1970s and early 80s.

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

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

1. Monday, I closed drug maker Schering-Plough (SGP) after the fundamentals I had bought on looked like they materially changed. Instead of selling at $14 in the panic selloff last week, I waited for a rebound and was able to get our near $17. I do believe the stock could certainly rebound to say $19-$20 or so, but I am not willing to buy more and risk it at this point so I decided to simply exit and use the cash elsewhere. The stock ended the week in the low $17s.
2. I started taking profits off of some of the major holdings in the portfolio, especially in the coal group, and even larger profits in the 2 solar names, Trina Solar (TSL) and LDK Solar (LDK) as they had very large runs in a short period of time and I wanted to lock in profits. I also began expanding the Powershares DB Agriculture Fund (DBA) as the chart began firming up - too bad rice is not a component of this index.
   
3. Ironically by that afternoon an update on earnings by Arch Coal (ACI), caused a relatively traumatic selloff in the coal names and in fact the whole market dived - the irony of it all was upon reflection all they did was reiterate earlier guidance but in this trigger happy, shoot first environment people sold. Obviously many investors in the "new sexy" sectors of coal, fertilizer, and the like have very little long term conviction. I bought more Arch Coal on the selloff (replacing the shares I had sold off in the morning), which I promptly sold off the next day 10% up.
4. Tuesday, I closed 2nd/3rd world cellular play Millicom International Cellular (MICC) - I continue to like this stock from a fundamental point of view but the chart was beginning to look poor and again, this was not a stock that was partaking in the recent rally. So like a good hunter I cull the weak and sickly and out she went in the mid $95s. By end of week MICC was down to $87s.
5. Due to all the great news in the metallurgical coal space, I made a slight change in my coal exposure moving from Peabody Energy (BTU) to Alpha Natural Resources (ANR). Frankly, I like both names a LOT, but I want to run a concentrated portfolio and don't see a need for 5 coal names - even 4 is a lot. Alpha Natural has a higher exposure to metallurgical coal and a lot of pricing potential for its 2009 vintage of coal as much of it is not yet under contract so hence the switch. I had to choose one name to go, and Peabody was the one. I did not buy a huge stake in ANR yet simply because the stock (and sector) was extended, so I have a beginner stake I plan to add to on pullbacks.
6. I had been adding to a large stake in Russian steel/coal/iron ore name Mechel (MTL) in the $115s to $120s range 2 weeks ago - I was curious why it had not participated in the rally last week while many of its brethren were taking off - for whatever reason it rocketed up with a few day lag. On Wednesday, within a few hours of writing an early morning blog entry on the name, the stock began to rocket hitting mid $140s Wednesday, and then into the $150s Thursday. I took profit both days, anticipating the pattern of "the end of the commodity story; it's all a bubble anyhow" that always seems to hit these names. So Mechel is down from a nearly 5% stake to 2%. Only due to the market's propensity to hammer every stock eventually, regardless of fundamentals.
   
7. Speaking of which, I began a stake - which I added to later in the week in Ultrashort Basic Materials (SMN) - which frankly is full of names I believe have the best prospects. But since much of my portfolio is based on these names (or similar) on the long side, and they have had significant rallies this week - I am holding this hedge so when (if?) they sell off I have at least something in the portfolio working for me. Granted it's only 3% of the portfolio but better than nothing. And if I am wrong, and these type of stocks don't sell off - more power to me; that means the rest of the portfolio is doing well and I simply will lose a bit on this insurance policy.
8. Thursday I closed high end mortgage company Thornburg Mortgage (TMA) - far and away the worst position in terms of realized loss for the fund. This one simply did not work out, so instead of holding on for no good reason I ushered it out the door.
9. Friday, Trina Solar (TSL) was an absolute outlier holding on to gains all week despite the selloff on Wall Street. I did take some off the table early in the day anticipating the GE news would cause everything to sell off - well I was mostly correct as the market worsened as the day went on, but Trina Solar held up like a champ. I continue to believe fair value is significantly higher but again, I am employing a very conservative stance which is more about protecting capital than chasing outsized gains at this moment.
10. As the week ended I took off about 5% of my short exposure late Friday, going from 25% to 20% simply because I am sure "hope" can be introduced as some point in the coming week. It will be another tricky time and for those who have been around a while, you see I have modified my short exposure strategy quite a bit. Not only have I added 2 new Ultrashorts in the past 2 weeks, I have not gone overweight in the Financials or Real Estate as I have in the past (many times holding 6%+ stakes). Simply put there are so many federally mandated backstops and "hopes" by longs in these groups, that the underlying long positions can remain elevated far above where I believe they should be on "faith" in either Federal Reserve bailouts or Federal Government bailouts. (that's socialism for you). So while I continue to be bearish on these groups, I don't know if the market will agree. As we've seen there have been times that these groups have in fact rallied 20-30% off washed out bottoms as "hope springs eternal". Therefore, I've just adopted a broad based short exposure, assuming if there is a sell off, some of the Ultrashorts will do better than others. Since logic is abandoned in this market, it might not necessarily be the type of stocks at the vortex of our problems.

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