Bankrate.com: Average Joe Still Can't Afford a Home

This is the quandy I've been pointing out multiple times... with a "normal" mortgage, with a "normal" down payment, many people are still priced out of most major urban areas, even with this first wave of price reductions. [What Should Median Home Prices be Today?] This is why homes still need to go down substantially in many (not all) areas.... the lowering of wages through a move to "service economy" only exaggerates the issue. Now here is the interesting story developing. As home prices closer to major cities got out of reach, the working class (teachers, policemen, et al) moved farther and farther away... this way they can still have their 2500 sq foot house, offset by a 45 minute, 1 hour, 1 hour + (especially in CA) commute. Now those same people need to deal with $4 gas. Uh oh. What breaks? The GM Volt can't get here quick enough....

I continue to say the best thing for middle class America is a sharp reduction in home prices; while the period of downward adjustment would be painful - a lower price level and lack of speculation keeping home prices permanently "low" with just mild yearly appreciation would allow people to save.

• Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families. But even with homes more affordable, the median price in many markets is still out of reach for a median-income family.
• Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets. (think about that for a minute, other than nurses are we happy that the other 4 categories are America's fastest growing type of jobs? Not exactly the type of jobs that create a move up and out of middle class)
• "Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.
• In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.
• That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%.
• The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. (but those are our fastest growing type of jobs???)
• Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures. (yes, I like that word... illusion)
• The fact that a bank says you can afford a home doesn't necessarily mean you can, Barakat says. A lender is concerned about an applicant's ability to repay debt; it has no interest in whether there's enough money left for the borrower to send children to college or to invest for retirement. Many homeowners fail to recognize this and buy homes at the expense of other liquid assets and investments. (goes back to the crisis that is our national financial illiteracy)
• For the first time since the Great Depression, Americans have a negative savings rate of 4%. It's been captured or stolen by high mortgage payments," says Barakat.
• Cutting back on outings and vacations may decrease the fun in life, but saving less and putting away less for retirement also increases financial risk.
• Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have little choice but to move farther outside the city, increasing their commutes.

Again I apologize for dropping in these pieces of reality into the blog. If I were a good financial pundit I'd simply say "everything will be fine in 6 months, rebate checks coming next week, everything is so rosy I can almost cry." So please enjoy and smell the roses along the way, the boom is soon here.

Bookkeeping: 'Rising Tide' Performance Week 38

Week 38 performance of the mutual fund

Comments: One more week until our 3rd quarter of life closes and it was a solid week. My goal entering (any) earnings season, but especially this one is simply to stay afloat, not give back much of our gains, and try to keep close to the pace of the market if it remains strong while holding good amounts of cash and hedges. So far, two weeks in, it has been working. With 50 some names on the long side we usually will encounter a few blowups in earnings along the way - that is just probability, but none so far.

As for the markets it was a bit of a sleepy, rangebound week. S&P 500 level 1400 remains a ceiling but we almost got there late Friday with a push to 1399.11 before pulling back a bit... oh so close. The majority of the week was dominated by ignoring all bad economic news, and clutching to the strength of US multinationals as reasons to hope for the US economy. Domestic based companies have lowered guidance so much that their "better than expected" reports were cheered, even though year over year comparisons are quite awful for many of these companies. I spoke of a potential rotation shaping up [Sector rotation?] and the strength in financials and especially retailers continued Friday. I guess hope never ends for those rebate checks (hello, those will be used in gas stations and grocery stores) - but I guess news that these will be out earlier than expected was enough to push up the retail stocks. Whatever the reason is moot - it is what it is. Aside from that we had a massive, 6 hour sell off in commodities... what a "correction". While I wrote about a week and half ago that I expected the Fed to stop cutting rates after this meeting and the dollar to bounce - by the middle of this week I was reading that logic EVERYWHERE - which probably means the dollar won't bounce after all since everyone is already anticipating. Or that flub of a bounce this week was "the bounce". If so, the US consumer is in even worse shape. But great for those multinationals! Here is the problem - after next week, we are pretty much done with multinationals and are going to need to rely on (plug your nose) American companies who rely on Americans. Boo. Hiss.

For the fund, I stood conservative most of the week, but once the "correction" in commodities occurred, I took the opportunity to rebuild some positions in coal, iron, fertilizer, etc. Somehow these stocks cannot keep going up (can they?) without a more meaningful correction.... but I've been saying that for a few weeks now. So we need to make hay while we can, realizing a correction, when it comes, will be swift and punish the portfolio. In the meantime I drank some Kool Aid and bought some investment banks to help balance out the portfolio allocation away from commodities. Thursday, I was looking at some Kohl's and JC Penney based on charts, but could not listen to the devil on the shoulder to buy those. As I wrote in my sector rotation piece, if I were a very short timing hedge fund I'd probably go into retailers for a week, enjoy the Kool Aid, get my 10% move, and leave. But that's not our strategy here. (but it would of worked nicely through 2 days) - today alone Kohls up 5%, Ralph Lauren Polo 4.5%, Coach 4%, JCPenney 3%. Once these rebate check dreams fall flat on their face we'll have an excellent shorting opportunity in these same names....

This week the S&P 500 gained 0.5% and the Russell 1000 +0.6%; with much of our portfolio in cash or hedged in short exposure (except for Friday) Rising Tide Growth Fund was able to gain 0.8%, so we returned to a week of absolute and relative (vs indexes) gains. One more week and we are 75% of the way through year 1. My goal of beating the indexes by 15% remains intact.

As an aside, blog traffic really took off this week. If you are new (or not so new) and enjoy the blog, please read this post on how to pledge a future investment. I also posted an entry earlier this week on how I am doing compared to my peer group of "mid cap growth" mutual funds thus far; I'll update that monthly.

Price of Rising Tide Growth: $11.818
Lifetime Performance to date (vs Aug 3, 2007): +18.18%

Comparable S&P 500: 1,397.84 (-4.60%)
Comparable Russell 1000: 762.52 (-4.23%)

Fund return vs S&P 500: +22.78%
Fund return vs Russell 1000: +22.41%

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: Selling Diamond Offshore (DO) - Will Buy Noble (NE) Later

I am closing my smallish 0.5% stake in oil driller Diamond Offshore Drilling (DO) after yesterday's "decent, but we still missed" earnings. I take that as a sign they are not managing the Street's expectations very well. While all the oil service plays should move together (i.e. if crude continues up, I am sure this name will continue up) I prefer to stick with the better performers.

I've had Diamond Offshore since day 1 of the fund, and somehow managed to lose $2200 on it. This is a 1 year chart, and since August its done ok, but my timing of trades on this issue has been poor to have lost money. While this has been in the portfolio for a long time, it has never been a huge stake. (chart is not working, I'll update this post later)

I'll most likely replace this name with Noble (NE) which had "better" earnings and has a very nice relationship with Petrobras (PBR). But since Noble is very extended I am not going to do this "flip" today. Both stocks have returned about 10% in the past 6 months, so it might a moot point frankly. I still think this entire group is undervalued and they are being priced as cyclical companies, in a secular growth environment. Noble for example has multiple years of backlog waiting, yet people are pricing the sector as if crude is going back to $45 in a few months. This has been my frustration with the entire sector for quarters on end.

• Noble Corp (NE) said on Wednesday its first-quarter earnings rose 54 percent, exceeding Wall Street estimates, as oil and gas exploration companies paid higher day rates for its offshore drilling rigs.
• Profit soared to $384 million, or $1.43 per diluted share, from $250 million, or 93 cents per diluted share, in the same quarter a year earlier.
• The average daily rental rate for the company's rigs jumped 35 percent from a year ago to $163,772.
• Sugar Land, Texas-based Noble added almost $5 billion in possible revenue backlog during the first quarter.
• Noble has 62 rigs operating in areas including Brazil, the Middle East, India and West Africa.
• Noble (NYSE: NE) lining up a massive contract renewal on five deepwater rigs that are already in Petrobras' service. The deal adds up to roughly $4 billion of revenue potential across 29 rig years, with individual contracts extending out as far as 2016.
• The huge backlog addition allows Noble to undertake some major refurbishment work on three of the rigs.
• Click here to see the graph of how much dayrates will rise for Noble in the Petrobras relationship

Long Petrobras in fund, no personal position

Bookkeeping: Adding more Mechel (MTL) on the "Pullback"

While still in a primary bear market, I just have to consider these commodity charts to be in their own bull market. While I'd prefer to buy around the 50 day moving average, in a bull market, you just have to be happy for a pullback to the 20 day, which is what we got today in Mechel (MTL). As opposed to buying some other names that are still nowhere near support at least we have a stock price near some support level here, so I am adding to one of my favorite names. The stock is down about 12% from peak way back.... Tuesday. I missed the exact top but cut back near $159 [Apr 22: Off with Some Mechel], so I'm getting back my position at 9% discount and away we go.

I'm adding in the $144-$145 range and moving Mechel up from 2.4% to 3.1% of the fund.

I began this company in early November 07 [Nov 5: Two New Foreign Positions Added Today], and frankly it's grown into one of my favorite ideas - much like the fertilizers and Apple (AAPL) I don't really keep up with the daily news on these, knowing it's going much higher over time - with the momentum trader bumps along the way. Unfortunately, Cramer discovered it as well but it still seems to be a relatively good secret (Yahoo message board volume is about 2% of fertilizer stocks or solar stocks for example) Talk about being in all the right places (steel, coal, iron) at all the right times with a totalitarian ...err, I mean friendly democratic... government at your back. Now if they only bought a Russian potash mine...

Some earlier posts...
[Dec 12: Mechel Reports Earnings, Considers Mining IPO] & [Apr 9: Mechel Continues to Acquire Most of Eastern Europe]

Long Mechel, Apple in fund; long Mechel in personal account

We're Stuck! S&P 500 Range Bound to the Extreme

This chart says it all. We continue to have trouble peeking our head over S&P 500 level 1400. And 4 of the past 6 sessions we've hit or come within a whisker of 1370. Talk about a narrow range - thats 2.2%. On the plus side the longer we hold above the 50 day moving average (1355 and rising) the more bullish it is, but we really need to start getting moving... 200 day moving average is up ahead as resistance @ 1435 if we can ever clear 1400. Otherwise we're stuck for now. It's hard really to make any short term call either way; we could just as easily pop over that 1400 and make a good solid 3-4% run, as we could fall back 3-4% down to 1355. Not much of a hint either way, back to "white noise" areas on the charts. Sort of snoozer action right now.



What's working today? Stop me if you've heard this before... coal, natural gas, fertilizer. While I'm happy because I re-upped these positions yesterday I still would prefer to take some short term losses and see these names correct a meaningful 15-20% to load the boat, while everyone shrieks on CNBC about the death of commodities, and how the dollar is going to strengthen to par with the Euro within months. Our US peso is so inept it can't even create a 3 day rally... and looks like our "Economist in Chief" (it's just a mild slowdown, a patch in the road) wants to go out with 3 wars on his hands... no better way to end a tremendous era. Oil Prices Up on Word US Ship Fired on Iranian Boats. I try not to be political here because that is sure to turn off 50% of the readers (and my thought process is 95% of "them" are terrible for "us", regardless of party) but can I please utter "Cmon January 2009... please get here."

As an aside I don't normally comment on surveys, but hmmm... Consumer Sentiment worst in 26 years... you mean like the early 80s? The last time we had stagflation? Nah, never. We don't have either (a) a recession OR (b) inflation so how could we possibly have both? Nah. Impossible.

• Consumer confidence fell for a third straight month in April, hitting its weakest in 26 years, on heightened worries over inflation and the sagging housing market, a survey showed on Friday.
• The April result is the lowest since March 1982's 62.0, when the "stagflationary" period of low growth and high inflation was still an issue for many Americans
• "More consumers reported that their personal financial situation had worsened than any time since 1982 due to high fuel and food prices as well as shrinking income gains and widespread reports of declines in home values," the survey said.
• "Never before in the long history of the surveys have so many consumers reported hearing news of unfavorable economic development as in the April survey."
• Nearly nine in 10 consumers thought the economy was now in recession, Reuters/University of Michigan said. (thankfully, 1 in 1 Economists in Chief don't believe so)

Thankfully everything will be fine "in 6 months" or I'd have to be worried. Let's get this stock market going up... everything... will... be... fine. It's all discounted baby.

Excellent Piece on Vale (RIO) in WSJ Today

I need to begin calling CVRD by its new name Vale (RIO)... I am still used to the old name it has held in the past. Either name, an excellent in depth piece in today's Wall Street Journal on the company. As my "World of Shortages" theory plays out over the coming years [Sept 27: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day], the "value" of the inventory in the ground that the 3 major mining titans own, will only increase. And as I've said many times it is a darn shame very few Brazilian stocks are available to American investors.

Some earlier posts on this name [Feb 19: CVRD Secures 65% Increase in Iron Ore Pricing] & [Mar 26: CVRD Pulls Out of Xstrata Deal] Again, while I like all commodities I think you cannot just throw a dart - wheat is very different from gold, which is different from copper, which is different from potash. While both copper and iron ore are base metal commodities the former is priced on the spot market, while the latter is mostly in long term contracts. Since I'm a conservative chap I like having 65% 1 year price increases locked in and not being thrown about by the hedge funds as they decide copper is worth X today and X-10% in a week and X+15% 4 weeks from now. I am actually adding a layer into my Vale position today, as the stock has pulled back to its 20 day moving average of $37. This takes it from 1.3% to 1.7% of the fund. I am hoping to see a price of $35, or its 50 day moving average, before adding in any more scale. Plus again, I still anticipate some commodities weakness shortly which should afford us some better entry points.

Unlike some of the other names in the fund this is a relatively slow mover due to its huge size but much like Brazilian brother Petrobras (PBR) one of those mega global giants that are going to be benefit for many years. While I generally don't like buying such huge companies (by market cap) since the potential for appreciation is more limited than smaller fare, these 2 are just too good to pass up. These companies also highlight another of my favorite themes - "reverse colonization" (grabbed this term from Minyanville last year so I can't take credit)- former Western powers assets are now going to be gobbled up by the formerly "2nd and 3rd" world countries they once dominated. Case in point will be the assets America has and will continue to sell off to pay for its major structural imbalances to budget. Irony at its best.



This is a very lengthy article so please click the link if you want the whole thing; some Cliffs notes below

• When Companhia Vale do Rio Doce arrived in the small Canadian mining town of Sudbury a year and a half ago, Mayor John Rodriguez recalls wondering: "Who are these Brazilians?"
• As the Rio-based mining giant muscles its way to the front of the global business stage, more and more people outside of Brazil are finding out. In 2006, Vale swallowed Sudbury's biggest employer, nickel company Inco, for $17.8 billion -- and set out on a campaign to win over the town's skeptical residents. Vale is now the world's second-largest mining company, and the biggest maker of iron ore, a key ingredient in steel.
• Late Thursday, its push to diversify beyond iron ore came back to bite it. The company reported first-quarter net profit of $2.02 billion, down 8.8%, which it blamed in part on a drop in nickel prices and losses from trading positions related to certain commodities.
• Like many mining companies, Vale is vulnerable to fluctuations in metals prices. But Goldman Sachs analyst Oscar Cabrera says Vale also struggled this quarter to boost production at the pace expected by the market, failing to produce as much iron ore and nickel as expected. During the second quarter, newly negotiated iron-ore prices are expected to boost revenue.
• Emerging-market companies such as Vale have been climbing the ranks of the world's biggest and most successful firms in recent years. With China's booming economy boosting demand for raw materials and other commodities, companies like Russian steelmaker Severstal and Brazilian pork and poultry processor Perdigão SA have prospered. Prices for Vale's iron ore have risen by double-digit percentages in four of the past five years, and this year's price hike of 65% is expected to add as much as $12 billion to annual revenue.
• Using their new financial clout, these once-obscure emerging-market companies have been buying up firms around the world. Last year, they struck $294 billion of such deals, up from $40 billion in 2003, according to research firm Dealogic.
• Brazilian steelmaker Gerdau SA bought Chapparal Steel Co. in the U.S. for $4.4 billion. Mexican cement maker Cemex SA took over Australian construction group Rinker Group Ltd. for $16.7 billion. Last month, India's Tata Motors Ltd. bought the Jaguar and Land Rover luxury brands from Ford Motor Co. for $2.3 billion. (reverse colonization)
• According to Dealogic, Vale's purchase of Inco is the largest-ever takeover by a Latin American company. In late March, Vale dropped its effort to buy Swiss rival Xstrata PLC for more than $80 billion after the parties failed to agree on takeover terms -- a deal that could have made it the world's No. 1 miner, overtaking rival BHP Billiton.
• Vale has been growing at a torrid pace. Last year, it hired 9,281 new employees in Brazil, leaving total employment world-wide at 124,013. It mined enough iron ore to fill 50,000 Olympic-size pools, and generated $39.7 billion in revenue -- nearly 10 times what it did in 2001.
• According to a February securities filing, Vale shares were the largest single holding of George Soros's Soros Fund Management LLC, which held $238 million in shares.
• Steelmakers had long held the upper hand in price negotiations with ore producers. But booming demand from China turned the tables. Suddenly "there was a Chinese on every corner looking to buy ore...and willing to pay any price," recalls Mr. Stoliar, Vale's former planning director. In 2005, the price steelmakers paid for ore rose 68.8%, nearly doubling Vale's profit that year. Ore prices have continued to rise, at a pace Vale executives admit they never imagined.
• The growing demand for metals plays into the hands of the biggest producers, which can make the investments necessary to open new mines, many in remote areas of politically unstable countries. The cost of mining also has been rising. Prices have leapt for everything from explosives to the big off-road tires used on mining trucks, which can cost about $15,000 apiece. Vale estimates that the cost of opening Southern Range, a new Brazilian iron-ore mine that isn't yet open, has risen to $10 billion, from $2 billion several years ago.

Speaking of reverse colonization, let me leave you with this graphic below. And again, as commodity prices rise worldwide, sovereign wealth funds and governments of these natural resource rich countries only gather more wealth in a great transfer of wealth [Feb 2: $2 Trillion of Petrodollars Need a Home This Year] from countries that need said resources. And they then use that money to come back and buy the assets from underneath those same countries. In the context of this chart you can see what an indignity it is that our government fights off solar investment and the like... oh well, we get what we deserve as detached voters who let the politicians run amuck. I mean we have very important things to worry about, i.e. whether Obama wears his lapel pin with American flag or if Hillary went hunting with her daddy when she was 7. Stuff like that...



(click to enlarge)

Long Vale, Petrobras in fund; no personal position

Natural Gas: Another Sector that Won't Quit - Southwestern Energy (SWN) +15%

Much like fertilizer, I've been waiting (im)patiently for a pullback in the natural gas group.

While I've been devoted to coal since early last fall, I missed the first part of the natural gas move but woke up to the movement in mid February [Feb 11: An Interesting Development in Natural Gas]

I posted the charts of 6 stocks (this is a very large sector with many large, medium and small players) whose charts were beginning to show some very interesting strength. Let's look at the price appreciation since

CHK +30%
DVN +25%
EOG +35%
KWK +27%
RRC +15%
SWN +39% (with today's spike)

I was a bit skeptical of the early move, so it took me some time to begin to "believe" and I created 2 positions a month later [Mar 17: Beginning First Natural Gas Play - Cabot Oil & Gas (COG)] and [Mar 19: Second Natural Gas Play - EOG Resources (EOG)] I have only had about a 2% stake with these 2 combined so I believe I really missed the boat on this one. Since then I've been waiting for this pullback than never arrives.

I'm still wondering what exactly is driving this group - my guess back in February was perhaps as some coal companies are moving from 10% of production for export to 30%, that is leaving less "energy resources" in the US, which natural gas is coming in to fill the "relative shortage"; coal being much easier to transport overseas. Or it could just be tracking up with the massive move in crude. Either way, with results like this from Southwestern Energy (SWN) - you just have to sit back and applaud.

• Southwestern Energy Co's (SWN) quarterly profit more than doubled, beating Wall Street expectations, helped by an increase in production and higher realized natural gas prices.
• The company raised its second-quarter natural gas and oil production outlook.
• For the first quarter, the company reported net income of $109 million, or 31 cents a share, compared with $51 million, or 15 cents a share, a year ago. Analysts on average were expecting earnings of 25 cents a share, before items, according to Reuters Estimates.
• Gas and oil production rose 71 percent to 39.1 billion cubic feet of natural gas equivalent (Bcfe).
• Southwestern's average realized gas price was $7.70 per thousand cubic feet (Mcf), including the effect of hedges, up from $6.71 per Mcf in the same quarter last year. (consider the spot market price is north of $10 and you see the earnings power coming in the future)
• Average realized oil price was $96.55 per barrel, compared with $55.17 per barrel in the year-ago quarter.
• The company raised its second-quarter natural gas and oil production outlook to 41.5 to 42.5 Bcfe, up from 36.0 to 37.0 Bcfe.

What I really like about Southwestern is their ability to not only partake in the price increases, but increase their production. This was one I seriously considered but definitely a lost opportunity. Hopefully we get some panic in this group as the dollar "strengthens" ;)

Long Cabot Oil & Gas, EOG Resources in fund; no personal position

Shoes Beginning to Fall in the States

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury. I wrote about this a few times in the fall and winter [Dec 16: California in a State of Emergency - Coming to a Theater Near You] I wrote

Here it begins folks.... as I stated in this week's piece [The Web of Credit Snares Another: Cleveland]

One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.

I don't know when (or hey, even if) the equity markets will finally come to the realization of the scope of the coming damage, as the bond markets obviously have. But this is only 1 of many shoes. Again, do you expect home values to go up in 2008? How will California's 2009 budget look? In just over a month the projected shortfall in CA has risen from $10 billion to $14 billion. Give it another 12 months... as many people sitting on overinflated 'assets' are finally going to sell at 20-30% lower prices. Remember, new homes are being sold off at 40% off levels seen in 2006 as home builders desperate to get rid of inventory price at fair value....

Why do you care if you don't live in California? Well it will be hitting a lot of other states for one, and secondly eventually the "real economy" affects the market ... eventually... no matter how persistent the 'invisible hand' is in seeing that this not happen. I will repeat, by the time these political candidates get to their primaries the economy is going to be the 1st, 2nd, and 3rd issue. We're just getting started here.

Fiscal Emergency for California

All in good time folks... most of the economic issues of the real economy will take quarters to play out while Wall Street wants its solutions "now" and can't forecast out more than then their next paycheck cycle.... they continues to refuse to see the impact the real economy is happening on Main Street. Today, an AP article is stating these effects we predicted are now happening. It also ties into my "regional recession" theory - this is why I keep saying if you live in Texas, own a farm, or in a Western Plains state you have no clue what all the fuss is about. The US itself will be bifurcated between the haves and have nots - the haves are those who are like mini Brazils or Russias - those rich in natural resources. The have nots? You relied on a service economy, auto industry, or housing boom. This is why I was laughing in early 2007 when everyone said, don't worry about housing, it is only 4.5% of GDP. For god sakes, our entire tax system is based on inflating that asset... and do you think states save for rainy days? Hah. Well the thunderstorms are coming now.... and it's just starting.

• The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that's true for the nation as a whole, a survey of all 50 state fiscal directors concludes.
• The situation looks even worse for the fiscal year that begins July 1 in most states. "Whether or not the national economy is in recession -- a subject of ongoing debate -- is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures.
• The weakening economy is hitting tax revenue in a number of ways: People's discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house.
• The situation is grim in Delaware, with a $69 million gap this year, and bleak in California, with a projected $16 billion budget shortfall over the next two years, the report said. Florida does not expect a rapid turnaround in revenue because of the prolonged real estate slump there.
• By mid-April, 16 states and Puerto Rico were reporting shortfalls in their current budgets as the revenue those budgets were built on -- typically, taxes -- fell short of estimates. That's double the number of states reporting a deficit six months ago. (just wait until next year when THIS year's reduction in median home prices nationwide hits every state)
• The NCSL said the news is even worse for the upcoming fiscal year, with 23 states and Puerto Rico already reporting budget shortfalls totaling $26 billion. More than two-thirds of states said they are concerned about next year's budgets. (It's going to be more than 23 once we actually get there, trust me)
• It also noted the silver lining for states where the economy is based on energy, such as North Dakota and Wyoming. Alaska is making so much money from oil that it announced an estimated surplus next year of $8 billion, almost twice the state's annual budget. (regional recession, regional recession, regional recession) In North Dakota, revenue is above legislative predictions by 13 percent, and in Louisiana, the oil and gas sector is robust.
• Twelve states, including Georgia, Idaho and Illinois, reported that personal income tax collections were failing to meet estimates, and in eight of these, collections were even below a reduced forecast.

The WSJ also has a related article today - Economy, Credit Woes Foil Big City Projects. Even "stable" areas like Seattle (I have a lot of readers there, hello) are having trouble in this area.

• A proposed $7 billion downtown Seattle project has become the latest major urban development to be scotched or delayed because of the credit crisis and a faltering economy.
• The Seattle project joins other projects in New York, Phoenix, Atlanta and Las Vegas that have been shelved, scaled back or beset by financial problems in recent months. Many city officials hoped they would provide jobs and economic activity that could help make up for a housing-market downturn that still hasn't reached bottom.

Again, I keep repeating this: The pundits who are telling you we either have shallow recession or are coming out of recession are the same fellas who denied recession was even possible 6 months ago. How the same people who denied a recession was even possible, now have the cajones to tell us don't worry, we are going to be out of it by end of summer, is beyond me. Credibility = zero. We are in fact just beginning our "regional recession". Think 2nd inning, not 9th.

Avalanche of Earnings Today

I think this might be the busiest day all month for our holding's earnings... before we get to that, first a quick note on the market.

S&P 1400 remains a ceiling we need to get above to get fully bullish. S&P 1350 is the floor; below that we turn into bears. So in between (where we are now) we are a bit ambivalent, and for now remain range bound as we have been for a while. The market does continue to shrug off bad news so it would appear up is the more approximate short term direction, especially if we get this "rotation" I spoke about - the leadership in this market has been so narrow (luckily the type of stocks we own), but that is not healthy. While I doubt we can have a sustained move led by the "new bull era" stocks in retail, financials, and homebuilders - it certainly could be an illusion for a few days or a week or two. So we are at the upper end of our range we have been stuck at. Each time we get here, we get beat back like a red headed stepchild. Microsoft (MSFT) is not helping matters after hours but then again, earnings results have been ignored and the market just wants to go up most days of late.

While these individual company reports are important, right now we are in an environment where sectors are more important than the individual companies - if the sector is down it doesn't matter much what the company says, and vice versa.

1) I've cut back "Chinese Google" Baidu.com (BIDU) as it's had a very nice run here, and it's gone from "expensive" to "astronomical", but valuation does not seem to matter much with this name - again it has scarcity value - there is no other Baidu.com. Earnings continue to impress. I have no clue why they are bothering with Japan when they have the 2nd biggest internet market (which will be the largest soon enough) to themselves.

• Profit soared at Chinese language Internet search provider Baidu.com(BIDU), which also guided second-quarter revenue above current expectations.
• The company said Thursday that net income for the first quarter jumped 71.5% to $20.9 million, or 60 cents a share, in the first quarter, matching the estimate consensus of analysts polled by Thomson Reuters.
• Costs related to Baidu's Japan operations in the first quarter totaled $4.3 million, which reduced earnings by 12 cents a share.
• Revenue jumped 108% to $81.9 million. That topped estimates by Wall Street analysts, who were looking for first quarter revenue of $75 million. It also beat the company's own guidance of $73.1 million to $75.1 million.
• Online marketing revenue for the first quarter was $81.7 million, representing a 108.5% increase from a year ago. The growth was mainly driven by increases in the number of active online marketing customers as well as revenue per customer.
• For the second quarter, Baidu expects to generate revenue in the range of $111 million to $114 million, above analysts' estimates for $101 million.

2) I don't see the Bucyrus (BUCY) news out yet as of 6 PM EST. This is one of 2 major mining equipment suppliers - essentially providing much of the "stuff" that actually does the mining.

3) Fertilizer maker (non potash) CF Industries (CF) beat by 60 some cents, which it did last quarter as well but not good enough in this market and the shares are down in after hours. Also the gain looks due to mark to market more than anything... so not a 'real beat' in my book. This name does not have potash exposure but is a top nitrogen play along with phospates. Nitrogen is my least favorite of the 3 nutrients since it is the most easily replicated (i.e. in China) so for the long run this type of company is far more at risk than the "wide moat" that potash provides some of the other names. Again, the sector rotation is the #1 thing right now - no matter what is said, these stocks are going to be in a sell off for a bit of time here. Much of this beat was already priced in, the tremendous run up in these names of late. I am hoping to add more of this around the 50 day moving average of $125 (I added a touch today). Lower would be even better; it's at $130 in after hours so I might get my wish tomorrow.

• Net sales rose to $667.3 million, up 41 percent from first quarter 2007, driven by substantially higher prices for all products. Phosphate volume increased modestly, but nitrogen volume declined from year-earlier quarter, as wet spring weather affected timing of fertilizer application in some grain-producing regions
• Operating earnings totaled $251.6 million, up from $90.1 million in year-earlier quarter
• First quarter results included $69.6 million in non-cash, pre-tax unrealized gains, or $0.78 per diluted share on an after-tax basis, from mark-to-market adjustments on natural gas derivatives. The gains compare to $38.5 million in non-cash, pre-tax unrealized gains, or $0.44 per diluted share on an after-tax basis, from mark-to-market adjustments included in first quarter 2007 results
• During the first quarter, phosphate volume increased modestly thanks to increased export sales, but nitrogen volume was down from the year-earlier level. CF Industries’ nitrogen sales are concentrated in the U.S. Corn Belt and other grain-producing regions. Weather conditions have led to a later start of field work than last year in some markets.

Some comments about (a) nitrogen prices which are a major input to its business and (b) the hissy fit investors put up a few weeks ago due to the "reduction in corn acreage" in the USDA farming report

• Looking at nitrogen specifically, CF Industries has a strong forward order book under its FPP, reducing margin risk from potential summer and fall spikes in natural gas costs.
• Wilson also discussed reported results of the USDA “Prospective Plantings” report. Issued at the end of March, it predicted that farmers would plant 86 million acres of corn this year, down from earlier estimates of approximately 89 million acres and down from 2007’s final acreage of 93.6 million. Corn is the most nitrogen-intensive of major U.S. crops.
• “Putting the estimated 86 million acres into perspective, it would still be the second highest corn acreage since 1944. Beyond that, there’s potential upside in corn acreage this spring,” Wilson explained, noting that in 2007, actual corn acreage came in more than 3 million higher than the intentions report predicted. Increased acreage for wheat and minor crops could also help offset any reduced nitrogen demand from corn planting, he added.

All in all the story continues, some push out of sales from this quarter to the next and the increase in input prices in both natural gas (for nitrogen production) and sulfur (for phosphate production). I still prefer the potash producers but this stock has traded at a very steep discount to that group so its the "value" stock of the group, if you will.

4) Coal name Consol Energy (CNX) reported this AM - yada yada - none of it matters, this is going to be a 2009/2010 story. Much like fertilizer a year ago, no one is realizing the potential margin expansion we will see here next year and the year after - and this is the ultimate weak US Peso play. (yes the US peso will bounce but our structural imbalances will mean years upon years of US Peso - its just a matter of degree) In the near term, this stock will be sold off as money comes out of commodities and moves to 'early cycle' plays if my assessment is correct. So I'll be buying at lower prices, as I have cut back of late (but I added a touch today)

• Coal miner Consol Energy Inc (CNX) posted a lower-than-expected first-quarter profit on Thursday, as higher selling prices were offset in part by lower production resulting from the idling of its Buchanan mine in Virginia following a roof collapse.
• But the company said results would improve later this year as it produces more coal and benefits from sky-high prices for steam coal for power generation and coking, or metallurgical, coal used in steelmaking.
• "World demand and tight supplies of both steam and metallurgical grades of coal have pushed prices to record high levels," said President and Chief Executive Officer Brett Harvey. (sound familiar? CNBC should be talking about coal in about 9-12 months and how "surprising this all is" just like they talk about fertilizer now; we'll smirk again like we smirk now at their surprise at "food crisis" and "fertilizer pricing")
• "Financial results in the second half of this year, but more so in 2009 and 2010, are expected to reflect the positive impact that both the spot and long-term pricing environments are having."
• A ton of eastern U.S. coal that sold for $44.75 last April is now selling for $85.50. Powder River Basin coal from Montana and Wyoming has risen to $15 per ton from $8 in the last 12 months, according to the industry newsletter Coal & Energy Price Report.
• In light of higher prices and demand growth, Consol expects to increase exports by approximately 25 percent this year, Harvey said.
• Consol said that U.S. coal exports for the first two months of 2008 were up 30 percent over the same period last year, while imports during the same time fell nearly 10 percent.

5) Diamond Offshore (DO) is a (mostly) deep sea oil driller which has been moving with its sector of "oil services" - again, this is selling off as the sector rotation happens out of commodities. Another minor position and I'll have to think about if I want to keep this one around; earnings were solid if not spectacular. The one area I have not liked in these companies, the "jack up" rigs (which are those that operate in shallow waters and thus are far cheaper to run) is looking to bounce back now that natural gas is seeing a resurgence. But after being spoiled by the increases in fertilizer, everything else seems sort of ho hum. However, this is real 25-40% growth, the likes of which you cannot find in retail, financial, and the like that the market runs to once every 6 weeks.

• Diamond Offshore Drilling Inc (DO) reported higher quarterly earnings on Thursday on a rise in daily rates for its deepwater rigs, but the profit fell short of Wall Street expectations.
• In a note to clients, investment bank and research firm Simmons & Co Int'l said the offshore contract driller's results were not "disastrous," but they did not stand up to rival Noble Corp's (NE) first-quarter profit, which topped Wall Street by 8 percent.
• Diamond Offshore's shortfall was due to higher than expected operating costs, analysts said. The Houston company reported first quarter net income of $290.6 million, or $2.09 a share, compared with $224.1 million, or $1.64 a share, last year. Revenue rose more than 29 percent to $786.1 million. Analysts on average were expecting earnings of $2.13 a share, on revenue of $794.7 million, according to Reuters Estimates.
• Tight supplies and growing demand from exploration companies have pushed day rates for deepwater drilling higher. For example, newer rigs that drill in the deepest water have seen shorter-term contracts above $600,000 per day.
  
• Average day rates for the company's high-specification floaters were up 15 percent to $323,000, while the average day rates for intermediate semi-submersibles increased 66 percent to $249,000. But average day rates for jack-up rigs, which are used to drill in shallow waters, fell about 9 percent to $102,000.
• "We saw continued improvement in Gulf of Mexico jack-up rates," Dickerson said. "We've seen renewals continue to be at modest rises from well to well."
• Natural gas futures have soared to the highest levels in more than two years, prompting a renewed interest in drilling from exploration and production companies.

6) Massey Energy (MEE), another of our coal producers - same analysis as above for Consol Energy (CNX), although its report was much more clean.

• Coal miner Massey Energy Co. said Thursday its first-quarter profit climbed nearly 29 percent as it earned more on each ton of coal sold.
• Net income for the three months ended March 31 rose to $41.9 million, or 52 cents per share, from $32.6 million, or 40 cents per share, during the same period a year earlier. Analysts expected the company to earn 33 cents per share according to a Thomson Financial survey. (oops, another story the analysts are way behind on)
• Revenue increased to $644.6 million from $607.3 million a year before. Analysts predicted revenue of $617 million.
• Massey said it collected an average of $56.36 per ton, up from $52.26 a year earlier. The company produced a total of 9.6 million tons of coal, down from 9.9 million a year prior.
• For the full year, the company expects to produce 41.5 million to 43 million tons of coal for average revenue of $61 to $63 per ton.

Again with coal, it is much like a deep sea oil driller - as old contracts fall off the books, new ones come on at the prevailing rates which are increasingly higher by the year. So earnings will go up. And up. And up. Until CNBC shows up in 2009 proclaiming "what the hell is going on in coal!? We had no idea!"

Long all names mentioned in fund except Bucryus, Microsoft; long none in personal account

Bookkeeping: Initiating Goldman Sachs (GS)

In light of my last post in regards to sector rotation I am beginning a stake in Goldman Sachs (GS). I've been waiting for a breakout over $185, which was the March high. We have some serious resistance at the 200 day moving average, $197, but if that breaks - the sky is the relative limit.

I am doing this to create a more balanced approach in the fund, sort of a mini barbell effect. I now have 2 homebuilders and 2 investment banks (Morgan Stanley being the other) - while in total they make up 10% or so of the fund, I need to have "something" working when the market turns to it's early cycle play. The last few times money "flowed" from commodities to other areas (however short of time frame) the fund really suffered; so this should help to mitigate some of this suffering if we are about to embark on another rotation.

Another option would be Ultra Financial (UYG) which is double the return of the financial index. I prefer to go with the company with their hands in every piece of our government and economic system ;)

I'm starting Goldman Sachs with a 2.4% stake buying in the $186s...

I've added even more Morgan Stanley (MS) as well, to my earlier purchases today (this one is up nearly 6% today). When/if these 2 companies break above their next level of resistance (200 day moving averages) I'll pile more into these positions... with unfettered access to the Fed's balance sheet, with much lighter regulation than traditional banks - these guys should now be able to run wild with your taxpayer dollars ;)

Merrill Lynch (MER), and Lehman Brothers (LEH) probably have more upside, but I consider more speculative at this time.

Long Goldman Sachs, Morgan Stanley in fund; long Morgan Stanley in personal account

Sector Rotation?

Some interesting charts out there - if I had shorter time frames (i.e. hedge fund), I'd be jumping out of these commodity names (which despite my buying today are still prone for further sell offs) and looking at some of these names for a week or so. It is interesting to watch the sector rotation which in the past has usually lasted for 5-8 days. A whole lot of retailers are peaking their head over key resistance points on this rally... all it takes is hope or a soft weekly job claims number, and people are ready to rush in.

The bigger problem for this market now is, as I've said the past week, I do expect the dollar to rally which would in theory hurt all the groups that have led the market up (leadership groups). Greg Ip, who is a Wall Street Journal reporter who the Federal Reserve seems to use as a mouthpiece is indicating the same thing in today's paper... last rate cut for you people and then we are done.

• The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week -- but then may be ready for a breather.
• But others are concerned a cut could contribute to inflationary pressure with little benefit for growth. That means the option of standing pat will likely also be on the table. If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal-funds rate to 2.25% from 5.25% since last year.

Now this is something I've been saying for a few weeks; and again the spin on TV will be "See, we told you the Fed cares about inflation!" No, if they did care - they would of not of cut rates so severely or be flooding the system with money. They have no easy choice - on one side US deflation of assets by a financial system run amuck by greed, lack of regulation, and ... greed. On the other, inflationary pressure. They have chosen the path that helps those who have their ear - not that they are not an independent body completely immune to politicial pressure ;). So the middle and lower class are sacrificed with the most regressive tax out there (inflation) but we hope to keep inflating the system with paper money. That's how Uncle Alan did it and it created 2 bubbles - so we are just doing the same path. Now we are helping build another bubble (this time global in nature) but as long as the upper 0.5% in the US are saved, it's all good. Deflation hurts the upper 0.5%, whereas inflation hurts the other 99.5%. So you know which path they chose. And why.

So if that reversal in the dollar happens and even if the market goes sideways, money would in the near term flow out of commodities (we can hear about the "commodities are dead" trade again for a few weeks) and then I am scratching my head as to where the money will GO. The obvious candidates are the one that would make no sense from an economic point of view, the "early cycle" plays. But sense never is an impediment to traders who act like robots "dollar down, buy commodities.... dollar up buy retailers, financials, homebuilders". So hence why I am looking through some charts and seeing some stocks already anticipating it. (case in point, Pulte Homes (PHM) reported a complete disaster last night, even by standards of homebuilders, new home sales reported today at 16 year low, and the stock is up 6%. Nice!)

In the past, I did not partake in this nonsense but some of my recent purchases (not a huge part of portfolio) are now geared for this scenario although it would still definitely be a time of underperformance ... aside from Walmart (WMT) here are some charts (below) taking off in the "recovery is coming any moment now, and the dollar strength means we need to find a new home for our trillions of hedge fund money" thinking. Again, if I were a hedge fund with a shorter time frame I'd be front running these folks and do the same thing, but since this is a more conservative, longer term portfolio / nature of the fund, if the above scenario plays out, we'll be taking some near term hits as money flows AWAY from our type of stocks and INTO the "I have a dream. I have a dream that malls will be packed, home construction will boom, and restaurants will be flowing with humans" trade. This is the main reason, that while I lifted up the allocation in my commodity type positions today from the lowest they've been in a long time, this is simply taking me back to where I was a few weeks ago; it is not a true overweight exposure at this time. I won't be making much larger moves into such names because they could work against me shortly - we'll see next Wednesday how the market reacts and if the "rotation" is truly on.

Again, these are the "breakouts", but I see a lot of retailers and even a few restaurants now peaking their head over resistance and looking like they want to "come out and play" in the new bull market.... I expect it to be relatively short lived, but it could last days, or weeks. I see the same in a few financials as well... again, if the Kool Aid is flowing hard enough, *these* are the groups that could be the best performers of the 2nd quarter... which would be ironic. But should surprise no one if that scenario did play out.

I am continuing to bleed off Ultrashort Financial (SKF), Ultrashort Real Estate (SRS), Ultrashort Consumer Services (SCC) - in anticipation of this move

Long the 3 Ultrashorts named in this entry in fund; no personal positions

Bookkeeping: "No Amount of Bad News Can Bring this Market Down" Trades

As long as the S&P 500 holds 1350 there seems no stopping this market. You can throw bad news after bad news and it ignores it. So I am drinking the Kool Aid until/when we technically break down. In fact I can see a scenario now building where restaurants, retailers, and financials are LEADERS of the pack for 2nd quarter, especially if the dollar strengthens - it would be funny, but hey as long as the market is discounting all bad news from here to 2037, we might as well at least understand the psychology. And I keep coming back to the thought that inflation hits every finite asset including stock certificates so if inflation is 15% in all things, then stock prices can remain elevated over true value by 15%.

I am buying more items in my see no evil, hear no evil state

1. Mosaic (MOS) seems to be holding that 20 day moving average. My fair value is $200. It would be wrong to not have this as my #1 position as I've had for months on end - so I bought more here in the mid $120s. Mosaic is now back to its rightful place at the top of the fund with a 5.1% stake. Welcome back home.
2. I've also increased Potash (POT) realizing that the stocks can still correct, but that naked feeling I've had the past 10 days without major fertilizer exposure is not a good one ;) Potash you get all the publicity but your still 2nd in my heart to Mosaic - hence you get half the allocation - 2.5% CF Industries (CF) - well I know you don't have potash in your mix but you deserve to at least be a 1.4% allocation and I'll enjoy reading about the same old, same old in your report tonight - we smacked estimates out of the park, natural gas costs are rising, blah blah.
   
3. Have I told you how wonderful financials are lately? Morgan Stanley (MS) you are now going to a 2.8% stake. I am eyeing Goldman Sachs (GS) to join you because.... everything will be fine in 6 months, the Fed is now in your back pocket, and you guys are also stealth Asian plays as you work your multinational magic. Now that you've shredded the financial system of America it's time to conquer new lands. Until Goldman breaks out I'll add more Blackrock (BLK)
   
4. It would be wrong to have Mechel (MTL) below a 2% stake so I had to buy back even more than what I bought this AM.
5. Since any human on the planet will seem like a greenie compared to the current administration I continue to build up the solar stakes in anticipation of November 2008 - Trina Solar (TSL) is my favorite "value" and Yingli Green Energy (YGE) pulled back to 50 day moving average nicely this morning so I added to both.
6. You can't have solar without coal - they are like Simon and Garfunkel (sp?). More coal with Consol Energy (CNX) and Massey Energy (MEE).
7. You can't have solar, without coal, without natural gas - I am woefully underexposed so I added back to my Cabot Oil & Gas (COG) - it does not matter if Americans cannot heat their homes - as long as Indians are buying chicken nuggets and Chinese are buying Blackberries, the world of multinationals (and thus stock market) continues in bliss
   
8. I'm adding to my Indian copper play Sterlite Industries (SLT) which seems very undervalued with nearly $4 copper, and sitting in a country of 1 billion people who are going to be dominating the world in 30 years.
9. More iPath DJ Livestock ETN (COW) on this pullback to support - listen to the Tyson Foods (TSN) CEO on CNBC this morning - he said prices are going up MATERIALLY. Yes, go to that link and listen - I dare you. You laugh at me when I tell you, you are going to need a mortgage to BBQ this Labor Day. We'll see! More moolah for investors; more pain for consumers - but WHO cares about regular Americans. If they don't invest in the stock market, the powers that be could care less. More ethanol subsidies please?
   
10. Crude at $120? No problem. Food prices off the chart? Who cares. American consumers don't matter to multinationals. I'm buying retailer.... KIDDING! KIDDING! While I do expect retailers to put a 150-250% rise here since bad news doesn't matter, I refuse to buy them ;) But if I had to you know which 2 - Walmart (WMT) and Costco (COST) - the pooring of America continues but the stock market is not Main Street - it is full of multinationals that could care less if you could afford to live... they have Asians, and Latin Americans, and Europeans, and Middle Easterners to line their pockets with riches. And Congressman to help on the other side (taxes) Nirvana!

Because I believe in the American dream I have cut back on my Ultrashorts in Retail, Financial, and Real Estate (commercial) because as long as we all close our eyes, sing Kumbaya - and BELIEVE it will be fine in 6 months... it can be. Or at least the stock market can keep staying up... it worked in September/October 2007 - we can do it again! Just believe.

Summary: You don't matter you puny American. You are 5% of the world population. With the other 95% of the world's population and especially the most important 40% in Chindia, our multinationals are going to rock the world. Yes they might cut jobs here and source them overseas but they are still good people, and make good profits. I don't care if you have to drain your 401ks just to pay for food, that's your problem... I have some Brazilians to worry about on how I am going to sell them some product.

And if you did matter (which you don't), let me just assure you everything will be fine in 6 months so go buy a house, get into the malls, and go eat out at Chipotle's. What's that? No, I don't want to hear that - no excuses. If you have to ....go borrow some money. It's worked like a charm so far!

Enjoy! And buy stocks! They're going up as the Indians, Chinese, Middle Easterners, Brazilians, Russians, transfer wealth by the day from your pockets. But that's your problem you silly American.


Long all names mentioned ex-Walmart, Costco in fund; long Mosaic, Potash, Mechel, Trina Solar, Yingli Green Energy in personal account

Housing Rebound Imminent...

Rebound coming any minute now... any second... Bueller?

New Home Sales Plunge to Lowest Level in 16 Years

• Sales of new homes plunged in March to the lowest level in 16 1/2 years as housing slumped further at the start of the spring sales season. The median price of a new home in March compared to a year ago fell by the largest amount in nearly four decades.
• The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.
• The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.
• The dismal news on new home sales followed earlier reports showing that sales of existing homes fell by 2 percent in March. Housing, which boomed for five years, has been in a prolonged slump for the past two years with sales and home prices falling at especially sharp rates in formerly boom areas of the country.
• For March, sales were down in all regions of the country, dropping the most in the Northeast, a decline of 19.4 percent. Sales fell by 12.9 percent in the Midwest, 12.5 percent in the Midwest and 4.6 percent in the South.

Remember everyone told us, just wait until the spring season! Housing will be back! Thats when the rebound begins (they were telling us this 6 months ago - notice how they don't come back to say - oops we were wrong - they just keep saying "wait 6 more months") Because as we all know, 5-6 year bubbles always get fixed in 12-14 months. Or so the pundits tell us.

I am surprised the housing stocks are not up 50% on this news. I mean, this clearly signals the worst is behind us and it's all upside from here (right? Bueller?). Maybe the homebuilders need to start doing writeoffs to the tune of $10 Billion or so. That seems to get financial stocks to run up 20% on "not as bad as we expected and everything will be fine in 6 months".

Again, the quicker home prices fall, the better it is for the economy - people don't realize that, but that's just the reality. The less, as a % of income, people need to spend to put a roof over their head, the more they can spend on luxuries... like say... rice. And the more we spend on luxuries like... wheat... the quicker we can get this consumption culture, that is 70% reliant on people spending more than they have... going again.

On the dark side, while I believe we are now in the 3rd or 4th inning (not 9th inning like the talking heads keep telling you) of the correction - the more I see the total disregard for inflation by the powers that be (oh yes they will talk a good game next Wednesday just like they talked a good game about how they care about inflation while cutting rates 300 basis points the past 6 months) - the more I believe housing prices will fall farther than I first anticipated. [What Should Median House Prices Be Today?] People are getting poorer in real terms. And less people will be able to come up with the money for down payments... the reality is wages have not kept up with inflation this entire decade.. and that was with inflation at far lower rates than we've seen the past 18 months. So more and more people are losing buying power at a faster rate. But keep the spin going ... let's talk about how inflation is nearly nonexistant and this is a short shallow slowdown that we will be out of "in 6 months".

Just stare at the chart on this link for 30 seconds every time your cortex tells you to believe the pundits and the "housing recovery is imminent" [Unintended Consequences of the Coming Socialization of the Housing Market]

** Note if you live in Texas, the Western Plains States, or in a farming community - ignore everything above - times are good! :)

Short spin

Bookkeeping: Replacing Some Positions I've Scaled Out of

I am buying back some positions I've really cut to the bone of late today on pullbacks to their 20 day moving averages

1. Mechel (MTL) in $147s
   
2. Alpha Natural Resources (ANR) in $48.00s
3. Arch Coal (ACI) in $55.60s
   
4. CVRD i.e. Vale (RIO) in $37.60s
   
5. Yingli Green Energy (YGE) in $21.60s
6. CF Industries (CF) in $135s
   

Once again, not going hog wild and these are relatively small purchases of the $4-$6K variety as I scale back in things I sold off the past week (ex Yingli which is a brand new position from earlier this week)... this could be day 1 of a much longer move down in commodities, but my long exposure is very low. All these charts look almost identical so if you look at one, you see the same pullback in them all. Right now we are back to the red line, the 20 day moving - I'd love to see a pullback to the 50 day line (green). Since we cannot predict the future, I am simply rebuying stakes here and if this is the "bottom" (which I doubt) at least I have more exposure. If it weakens further, I buy more lower. Then I starting selling off lotsl when everyone tells me why the heck are you selling the hottest sector(s). Keep repeating for a few years and you make your investors a lot of money ;)



I have my shopping list ready and trigger alerts set, as other names are approaching similar chart support levels.

On the other side of this trade I am lightening up my "insurance" (hedge) against commodities, Ultrashort Basic Material (SMN) down from a near 5% stake to 4%.

Long all names mentioned in fund; long Mechel, Alpha Natural Resources in personal account

Bookkeeping: Replacing my Fertilizer Sales from Tuesday

Tuesday, I cut my last batch of fertilizer and took my holdings to the bone [Apr 22: Cutting More Fertilizer] - I got a lot of criticism for selling ;) I wrote

I know I said I wouldn't cut more, but I am going to cull more Mosaic (MOS) and Potash (POT) as they are relentless in their upswing and at this point nowhere near any support levels. Usually a significant event like a new IPO in the sector or a large buyout marks a near term top in a sector - I am not saying this Intrepid Potash (IPI) IPO is the thing, but I have not seen a level of bullishness in a sector as I've seen here, since the solar days of fall 2007. Even Neil Cavuto was talking about the Intrepid IPO last night. That scares me, and when these things reverse I'm going to call it the Cavuto top (granted, he did not know how to pronounce "potash" either).

I am going to cut more Mosaic here @ $140, and Potash @ $212. Granted, every sale the past 2 weeks has been a "mistake", but it's just way too bullish around here, and while I expect a blowout number from Potash on its earning reports, so does everyone else - and the natural inclination is a sell off sooner rather than later. I'll look to rebuy both lower - Potash maybe in $180s and Mosaic maybe $120s. I'm taking both positions sub 1%. (gasp)

Well, now we are getting those prices, Mosaic in $122s, and Potash in $188s. So I am simply replacing what I sold 48 hours ago, plus some extra for Mosaic. I am not going hog wild yet, more downside could be coming but I was at dramatic lows in terms of fertilizer exposure anticipating a "sell the news" reaction which we got this morning. I am hoping for more downside, and anticipating a lot of people who jumped in recently will perhaps begin to panic, 1 of the 4 potential near term downsides I outlined yesterday [Potash hits $1000 on Spot Market] In this case I was able to lock in gains, and buy back my shares for 13% lower in Mosaic and 11% lower in Potash - thats where the Trader part of TraderMark comes in handy ;)

Technically, both now have fallen nicely to their 20 day moving averages. Just for kicks the 50 day moving average is $114 for Mosaic and $170 for Potash; if we get there I'll be going to 6%+ type of allocations. As always, I scale IN and OUT - I never hit the top nor the bottom. Some of the purchases today might be money losers in the next week or month, but they will be winners in 6 months.

For now Potash is 1.2% of fund; Mosaic 2.9% of fund - I still prefer the valuation in the latter. And I anticipate a lot of people late to the game who piled in the past week, and who don't understand the long term story, might be panicking and I get better prices in due time. If not, I'll pay up - my mental fair value has been MOS $200 and POT $250 by end of year.

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

Three Agriculture Stock Earning Reports this AM - POT, CNH, BG

We have 5 major agriculture names reporting today - POT, CF, BG, TNH, CNH - all components of the agriculture ETF Market Vectors Agribusiness (MOO) [Sep 17: This MOO For You? An ETF to Play the Global Agriculture Boom]

I'll touch on 3 of the 4 that reported this morning; due to some intracompany relationship issues with TRA I don't bother with TNH (Terra Nitrogen). CF Industries (CF) reports after the bell.

First, there are no surprises here in Potash (POT) - we expected a huge quarter with increased guidance. We got it. The question is what is already built into the stock. Everyone already expected this; the stocks need to take a break sooner rather than later after a huge run. I have my lowest allocation to this group since day 1 of the fund but I will be adding materially on dips (which I believe to be imminent). A lot of people have piled into the train of late, but I wrote back in October how low (i.e. wrong) the analysts expectations were [Oct 23: Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash Ahead of Earnings] - and even now I believe they are low... but finally they seem to be getting the picture. Ironically, I follow about 200 stocks and 8-9 sectors closely. These analysts follow 5-8 stocks and 1 sector. Yet they could not see what was plainly obvious to some of us long ago. From that entry....

How wrong have analysts been on 2008 estimates? Let's look at the gurus analysis!

1. Mosaic 08 estimates 90 days ago $2.04. 30 days ago $2.94. Now? $3.61 - only wrong by 77% 90 days ago and wrong by 23% 30 days ago. Oops.
2. CF Industries has yet to report but 08 estimates 90 days ago $3.27. 30 days ago $4.19. Now? $4.93. Only wrong by 51% (and we are still awaiting the new estimates post earnings) from 90 days ago, and wrong by 18% (so far) from 30 days ago. Oops.
3. Potash 08 estimates 90 days ago $3.51. 30 days ago $4.02. Now? $4.30. This one the analysts got 'somewhat right' - "ONLY" off 23% from 90 days ago and 7% from 30 days ago. But again they have yet to report so I expect the 08 number to be pushed up yet again post earnings.

Now half a year later, those numbers look like fantasy - they've all been blown out of the water. As will 2009s. On to the Potash report

• Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced record first-quarter results with earnings of $1.74 per share(1) ($566.0 million), a 181 percent increase over the $0.62 per share ($198.0 million) recorded in last year's first quarter and 50 percent higher than the previous record of $1.16 per share set in the fourth quarter of 2007.
• The pressure to increase global food production continued to drive demand for potash, phosphate and nitrogen and pushed prices for all three nutrients to new heights. As a result, each segment contributed record gross margin and raised total gross margin for the quarter to $856.0 million, up from $369.7 million in last year's first quarter.

These fertilizer companies write long, detailed and instructive earnings reports with some macro themes behind them so I enjoy reading them. It's a worthwhile investment of time to read through them for anyone new to the group. For example

• The ongoing growth in global food demand has brought issues of food security and food inflation to the forefront around the world. In contrast to the slowdown in the US economy, China, India and other Asian countries are continuing to experience significant, long-term population and economic growth. Because of this growth, people in these countries require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains.
• "The global need to increase food production is real and immediate, and it will be a part of our world for the foreseeable future," said Doyle. "It took nearly a decade to empty the global grain cupboard and we can't refill it overnight. The good news is that the world is more than capable of producing enough food, but improved farming and fertilization practices will be required. With our unique ability to incrementally raise our potash production to meet world demand over the next several years, we look forward to helping farmers increase food production as we deliver continued growth for our shareholders."

This is only about 10% of what is in the report. Bottom line, they beat, will beat, and will continue to beat earnings expectations... while raising guidance.

Next we go to Bunge (BG) which frankly is a name I have not been following too closely but the magnitude of today's beat was impressive. But again, all this good news is priced into these stocks near term... setting up classic buy the rumor, sell the news reactions...

• Bunge Ltd (BG) shares on Thursday rose 7.7 percent in premarket trading after the fertilizer producer and oilseed processor said it earned nearly twice as much in the first quarter as Wall Street had expected due to soaring world demand for food and fertilizer.
• Bunge raised its full-year earnings forecast to $7.10 to $7.40 per share, up from previous guidance of $6.01 to $6.30.
• Corn, soybeans, rice and wheat prices have hit record highs this year amid rising global demand for food and smaller crops from some key exporters. Surging prices have prompted farmers in the United States and South America to plant more acres, which helped Bunge post a record profit in its fertilizer business.
• Fertilizer profit could climb even higher because price increases in March and April were not fully reflected in the first-quarter earnings, J.P. Morgan analyst Pablo Zuanic said in a research note on Thursday. Bunge is the largest fertilizer producer and supplier in South America.
• "We believe there may be much greater upside to guidance if fertilizer price conditions remain where they are and grain markets remain high, favoring economics for the agribusiness unit," he said.
• White Plains, New York-based Bunge said earnings rose to $289 million, or $2.10 per share, compared with $14 million, or 5 cents per share, a year earlier when the company had trading losses. Analysts had expected Bunge to earn $1.06 per share, according to Reuters Estimates.
• Revenue rose 70 percent to $12.47 billion, fueled by higher fertilizer prices and record prices for many agricultural commodities. The average forecast from analysts polled by Reuters was $12.82 billion. Volume, a measure that excludes currency and price fluctuations, rose 7 percent to 31.8 million tonnes.
• Agribusiness, Bunge's largest segment, earned $251 million, compared with a loss of $13 million a year earlier. Bunge said its global assets allowed it to continue doing business amid a three-week farmer strike in Argentina that paralyzed exports.
• Fertilizer earnings surged 269 percent to $133 million, driven by farmers planting more soybeans amid record prices.
• Edible oils posted a gain of 183 percent, with income rising to $51 million, as results improved primarily in Europe due to price increases.
• The only segment to see lower income was milling products, which posted a 36 percent decline to $7 million due to increased competition and higher costs.

Last we have a former fund holding, agriculture equipment maker CNH Global (CNH). I sold my agriculture equipment makers to focus on fertilizer back in January 2008 [Jan 23: Closing Last of CNH Global]. Just easier to play the same trend in a more focused manner with the fertilizer. Input costs are rising for the equipment makers with costs of their raw goods rising, and specific to CNH Global it resides in Europe hence does not have the benefit of cheap US pesos. So if I were to stay in this space I'd focus on Deere (DE) or Agco (AG) instead. I wrote in January. Last CNH Global is 1/3 construction and 2/3 agriculture so it's not a pure play.

Fund holding CNH Global (CNH) - this is an agricultural equipment name who I've dropped the exposure to quite a bit. Based on what I see on this earnings call, I will make a decision whether to keep holding or not. Going for it is the exposure to big ticket agriculture equipment - think Deere (DE). On the negative side it has a construction business and it is based on Europe; with a strong Euro I am worried about some degradation of exports. This is one benefit Deere (DE) has - with the Fed trashing our dollar to bail out the banking system Deere's products only get cheaper by the month. So this is one I am keeping a close eye on.

CNH is suffering this morning....I have to dig in a bit more when I have time to see exactly why, but again, for reasons listed above, I just think fertilizer is the easiest way to go with the least risk; especially the potash makers which have been my focus since day 1.

• Farm equipment maker CNH Global NV (CNH) on Thursday posted weaker-than-expected quarterly profit despite a global commodity boom that's driving up sales of machinery like tractors and combines.
• The company reported quarterly net profit rose 18 percent $112 million, or 47 cents a share, compared with $95 million, or 40 cents a share, a year earlier. Earnings excluding restructuring charges were 53 cents per share, below Wall Street estimates of 65 cents per share.
• "Sloppy operating performance persisted this quarter," Bear Stearns analyst Ann Duignan said in a research note. "Margins were weak in a strong ag environment, highlighting our concerns about the New Holland brand in particular."
• Agricultural sales jumped 38 percent, doubling in Latin America and up by double digits in other regions of the world.
• "The industrial issues which negatively impacted margins in the fourth quarter of 2007 continued into the first quarter of this year, as strong demand for our agricultural products pressured both our manufacturing operations and our supplier ranks," Chief Executive Harold Boyanovsky said in a statement.

Long Potash, CF Industries in fund; no personal position

Consumers Fleeing Starbucks (SBUX); Still Love Chipotle (CMG)

First, I have to say I am impressed with the Chipotle Mexican Grill (CMG) team; despite a very tough macro economic environment they continue to deliver. I thought they'd be felled by now by commodity inflation and slower consumer!

• Chipotle Mexican Grill Inc (CMG) reported higher quarterly profit on Wednesday, topping Wall Street estimates, as new restaurant openings fueled higher sales at the fast-growing chain.
• The Mexican-themed, fast-food chain known for serving naturally raised meat also boosted its 2008 forecast for comparable-restaurant sales to an increase in the mid-single digits from the low- to mid-single digits in percentage terms.

Starbucks? Not so much.

• Starbucks announced it will miss Wall Street's expectations for its second fiscal quarter and it lowered its outlook for the year, citing "the sharp weakening in the U.S. consumer environment."
• The current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers," Starbucks chief executive Howard Schultz said in a statement.
• Same store sales for the quarter, which compare revenues year-over-year for individual stores, are expected to decline by a rate in the mid-single digits.

Shocker... unless you read the blog. I guess $5 coffee is a luxury many can do without as they worry about splurging for things like... rice.. or bread. (by the way folks, remember that run on rice @ Costco - it's spreading to BJ Warehouse now) Never in America right? We're too powerful and all that.

Remember January 8th? [Jan 8: Is Starbucks a Buy?] The hype was here, Starbucks (SBUX) rallied hard because the CEO was back! The CEO was back !!(small detail - he never left, he just was moved up to Chairman). The lemmings and CNBC shouted, time to buy!!! Time to buy!!! The stock was up 9% early morning, at roughly $20, when I wrote my blog entry:

Upshot - if you missed this move (i.e. you didn't own the stock yesterday at 3:59 PM) you most likely missed at least 2/3rd of the move up. Once the hype wears off, and the reality hits the stock will resume its "dead money" persona.

It peaked at $21...

In fact this was a great short as I outlined in that entry where I called Starbucks just another Coach...where is the stock now? Down below $16 in after hours. From $20 that's a nice 20% gain on a short. Summary: Don't by the hype. Think for yourself.

My conclusion (after ignoring CNBC) was...

One of the stocks hardest hit by the consumer slowdown has been Starbucks (SBUX). After all, when people are faced with choices in their budgets, one of the first things to cut back on is $5 lattes. This is the "common man's" version of Coach (COH), with all its stock struggles of late. Last night, after a relentless sell off, news came out that the original founder Howard Schultz was returning to the helm as CEO. The stock gapped up in after hours and is printing up nearly 9% in premarket this morning.

Should a person buy now that the founder is back? I say no.

1. Schultz has been the Chairman all along; it is not like he left the company and was not involved in the strategic decision
2. The saturated market in the USA for coffee shop chains did not change last night
3. In fact, McDonalds (MCD) which has hurt Starbucks with their low cost coffee made an announcement yesterday afternoon that they are expanding their coffee initiative - in fact they are hiring their own baristas in a show of how serious they are.
4. $5 coffee is a luxury not a necessity, especially when the most visited food chain in the nation is rolling out similar offering for far lower costs.
5. Milk costs, and coffee bean costs are rising as with every commodity in this world as we continue into a 'World of Shortages'
6. One need only look almost a year ago to this date at Dell Computer (DELL) - CEO Michael Dell returned like a white knight... overnight the stock jumped from $25 to $28, and then it promptly fell to $22 within a few months... a year later? $21.26.

Starbucks has been on my radar as a commodity inflation play as far back as September [Sept 5: Starbucks Warns on Higher Commodity - this Time Dairy] Funny... I sounded the same alarms then as now... only now when inflation is so in your face you cannot ignore it, are people taking notice.

That said, don't worry about all this hand wringing, CPI is only 2%.... why don't baristas understand that?

It was apparent back then, just the same - we only choose to ignore it and hide it under the rug... well the hiding under rug part we are still doing. Only now the "common folk" are not buying it anymore. Stock price in September? $28. Or 43% away from after hours print.

Just with everything people will DENY the facts on the ground until they are overwhelming. Just like they denied a recession, denied a slump in housing, denied a credit crisis (remember, stock market at ALL time highs in October 2007 AFTER we saw the first shoes falling all around us - "the Fed will save us" thinking was enough to drive the market up 2000 points). Now they deny any recession that could possibly be anything but short, shallow, and done in 6 months. It will take a few more months for the facts to overwhelm the folks in their ivory tower - these people still use government reports, printed on Kool Aid. But it will happen. Until then let's all go to Chipotle and watch this market laugh off all the problems, and cling to 'everything will be fine in 6 months'. Because if we all close our eyes, ignore reality, and hit buy buy buy button, we can together, make this market go up. It's worked so far.

No position other than admiration of Chipotle and sneering at 'the economy is fine' thinking.

Apple (AAPL) Nice Solid Result

Better than the result, is the "not crazy" reaction like a bunch of rabid coyotes, either up or down in after hours. As expected Mac sales were simply ridiculous and the iPod and iPhone were good enough so people do not cry and sell the stock off 20%. Guidance was set low (AGAIN) but this is the Apple game. Whatever they say for guidance, they beat by 20-25 cents of late. Case in point, I wrote 3 months ago when they gave $0.94 EPS as their guidance

Again, people may obsess over this, but this is the Wall Street game - under promise, over deliver. They say $0.94... which means $1.10 or so in dog years. So the stock will tank. We'll look back in 3 months and see they squashed the $0.94 estimate just like they squashed their $1.42 estimate 3 months ago. But none of that matters now of course as in a nervous market, people will find any excuse to call for End of Days.

And what did they report? $1.16. So much for my $1.10... Yet the stock dropped 30-40% due to this "guidance" last time around (we took a big hit). Again, this shows you, you can be intellectually correct, nail a call, but still get destroyed short term by owning a stock and having the herd run over you.

So now they have guided for $1.00 next quarter - in Apple speak that means $1.22 or so. At least the lemmings are taking it better this time around, since this "guidance" is below analysts estimates of $1.10.

I liked everything about this report except for the gross margin degradation, down from both last quarter's 34.7% and last year's 35.1%% - no specific reason given in the earnings report so we'll have to listen to the conference call to find out. Everything else was quite spectacular for a company of this size. Whatever the spin is today, tomorrow or the next day (or where the stock goes) - this company is becoming the de fact entertainment company (slash) fashion accessory for the next generation. They are 2 steps ahead of everyone else. Period.

• The Company posted revenue of $7.51 billion and net quarterly profit of $1.05 billion, or $1.16 per diluted share. These results compare to revenue of $5.26 billion and net quarterly profit of $770 million, or $.87 per diluted share, in the year-ago quarter.
• Gross margin was 32.9 percent, down from 35.1 percent in the year-ago quarter.
• Apple shipped 2,289,000 Macintosh® computers during the quarter, representing 51 percent unit growth and 54 percent revenue growth over the year-ago quarter (that's just ridiculous, up from 44%/47% respectively last quarter - amazing)
• The Company sold 10,644,000 iPods during the quarter, representing one percent unit growth and eight percent revenue growth over the year-ago quarter. Quarterly iPhone(TM) sales were 1,703,000.
• International sales accounted for 44 percent of the quarter's revenue.

Remember, iPod at this point is a cash cow, not a growth driver. It did it's job - reinvent the company and drive a new generation of people to the Mac and make it the "cool company" that people will pay a premium for, for it's products. With the 3G iPhone and lower prices, this is set to move into the mainstream in the next generation...

... and I continue to believe Mac will be taking more and more share from PCs as this generation of preteens, teens, and 20 year old set moves up in age. And yes, there will be stress from the US consumer but things like this and video games will be the last to go.

This is simply one of the few areas in the much overhyped tech area that has real secular growth >15%. Now we wait 3 months and await the same dog and pony show next quarter, as short sighted investors miss the forest for the trees and overreact to every line item in a multi year story. This is the type of stock I don't even go to Yahoo Finance to read any daily news about, except for maybe once a month - I am that confidant of the "long term" (i.e. in this era long term being more than 48 hours) prospects. We'll keep buying this on the inevitable dips; still pricey at 30x this year's estimates but the scarcity value of this type of growth deserves some premium.

Long Apple in fund; no personal position

Bookkeeping: Initiating iPath DJ Livestock ETN (COW) - Make Up Your Own Farm Animal Headline

I've mentioned this name, iPath DJ Livestock ETN (COW) recently as a play on the twin tower effects of (a) governmental ineptitude (ethanol boondoggle) and (b) Fed induced grand larceny against savers and lower/middle class (inflation). While I could see grains having a short term setback if the dollar strengthens, I do believe meat inflation is going to be the next shoe to fall, as producers cut back, creating the next shortage.

The weighting is currently 60% cattle, 40% hogs. Either way, get your freezer stocked up, by Labor Day those BBQs are going to cost a pretty penny. Inflation will eventually push up the value of all finite resources... including stocks! (always a bright side)

I'm starting a new stake with 500 shares @ $43.50s, or a 1.9% stake.

As I've said before I am unclear how useful technical analysis is with commodities but if it has use, this is a nice chart breakout formation I've been waiting for... back over the 50 day moving average and making a heck of a move off a recent bottom. 52 week high is up there around $50.

Long iPath DJ Livestock ETN in fund; no personal position

Barry Ritholtz on Disappearing Economic Indicators

Barry, over at The Big Picture, has one of my favorite blogs because it's an interesting mix of economic and market commentary instead of one or the other like most blogs. Since my cloning techniques are failing and I am still stuck with just one of me (and I fired the hamsters after that Manpower situation), I am unable to keep up with all my favorite reading spots, so I just found this today. It truly is appalling and shows sometimes facts are worse than fiction; with all the wasted fat and pork barrel projects they somehow now "cannot find the money" to continue to fund these economic reports that move trillions of dollars in stock markets? Cmon now, this was the same excuse they used for dropping the M3 (money supply) [Sep 19: What is M3 and Why Do you Care?] before it exploded higher in the past few years, and especially this quarter. [Apr 4: To the Newbie Economists Out There - A Horde of Helicopters has Moved In] Again, I rarely talk about these reports other than to mention the herd's reaction to their inaccurate data... every report is now so corrupted it has become useless.

Read on but truly that this type of stuff goes on, should really be broadcast loudly to the American people... who are still living in a 5.1% unemployment, 2.4% inflation world... according to government statistics.

• Sometimes, when the data is (how shall we say this) less than delightful, politicians pressure bureaucracies to modify their models.
• Yesterday, we discussed the unprecedented seasonal changes to CPI (Pre-Revision CPI: 9%) that managed to all but eliminate inflation reporting. And the absurdity that is the birth death adjustment has all but completely bastardized the Non-Farm Payroll (NFP) data series. Of course, the cowardly scam that was the Boskin Commission was the most outrageous change in modeling over recent decades.
  
• More brazen politicos don't even bother gunking up the models -- they simply press to stop reporting the data. The most egregious example of this in the recent past was M3 reporting. We noted as it happened that once the Fed decided to save a few pennies stopping M3 reporting, you knew that M3 was going to skyrocket. And so it has.
• Recently, there was an attempt to close Economicindicators.gov; That was a warning the economy was about to worsen. Thanks to readers and NY Senator Schumer, it was successfully beat back. (imagine that, closing down an entire website full of information - budget shortfall I am sure)
• The latest such attempt at reducing economic information is brought to our attention by the WSJ's Real Time Economics. They note that:

"A statement from the chair of the NABE’s statistics committee, Haver Analytics President Maurine Haver, asserted that “just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.”

Ms. Haver catalogs the casualties of budgetary tightening, writing that “the Bureau of Labor Statistics (BLS) has been forced to terminate all hours and earnings data reported for local areas as well as payroll employment for 65 small metro areas. The BLS International Price Program has also eliminated a number of series including prices of transportation services such as passenger air fares, air freight, and crude oil tanker freight. The Census Bureau will discontinue its Survey of Alterations and Repairs in May. The Bureau of Economic Analysis will reduce the level of industry detail in its county data and will eliminate the benchmark capital flow tables that provide baseline data on industry-by-industry investment by type of investment. This may only be the beginning.”

Hmm, what a convenient time to eliminate the prices of TRANSPORTATION services with crude in the $110s+. And with the elimination of 65 smaller metro areas we can rely more and more on the birth/death model [Jan 27: Monthly Jobs Report and Birth/Death Model] which LAST month the government found a way for their "guesswork" to show GAINS in financial and construction jobs. Of course that is in the Twilight Zone.

So as Barry writes in conclusion "Now comes the attempt to reduce the reporting of hours and earnings data. Gee, can you guess what coincidence is about to happen?" And he references this story which is a lot like my "The Underemployment Rate is Rising".

Again, as I wrote back in August - this is the negative multiplier effect of a SERVICE economy; as each 10 people loses his/her job one less nail technician, dog groomer, accountant, car wash guy, lawn service guy is needed. Again, I urge people new to the blog to follow all the links and read what is really going on behind the scenes - I was not a conspiracy theory type of guy until I began this blog, but the more you read - the more you see a lot of very shady things behind the surface. Anyhow, let's check back with Main Street and his/her 5.1% unemployment rate; and as one reads this continue to think the effect on profit margins as INPUT costs rise (through inflation) and demand drops off rapidly from a rapidly emancipated US consumer.

• “We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”
• Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.
• The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.
• While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.
• Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn.
• And on Wednesday, the government reported that average earnings slipped in March after accounting for the rising costs of food and fuel — the sixth consecutive month that pay failed to keep pace with inflation. (I mentioned this in the blog, people were too busy to notice while pushing the stock market up)
• As people bring home paychecks that do not go as far, they are forced to economize, eliminating demand for goods and services that once captured their dollars, spreading pain to providers like auto dealers and lawn care providers. They, too, must trim their outlays on pay, shrinking working hours more and furthering the slowdown
• “Everybody’s getting tighter,” he said — himself included. With his income cut in half, Mr. Garcia, a single father, no longer takes his two young daughters out for fast food, he said. For clothing, he now goes to secondhand stores instead of the mall. For amusement, he visits the park instead of the museum.
• In Los Angeles, William Righi, a musician, bemoans the sudden difficulty of getting jazz and blues gigs at restaurants and parties. He gives fewer private singing lessons to high school students. “Their parents don’t want to pay,” Mr. Righi sighed. “They don’t have the money to burn. In the last month, it’s really dropped off.”

This is your "service economy" where we don't produce much outside of a few sectors (15% of GDP) that the rest of the world wants... and when it shrinks the multiplier effect is / will be ugly. And where the government, citing that its too expensive, is trying to hide the numbers from you - while spending like a drunken sailor in just about every other part of society.

My own piece on this subject, as always, I was early before anyone was talking about the "truth" - now, like the food crisis. it's hitting the mainstream [Do the Bottom 80% of Americans Stand a Chance?] And we're just starting, not "exiting" or at the "trough" as the pundits tell you. The same pundits mind you, who denied recession was even a remote possibility until it was upon us in Dec 2007, and who assured us that home prices would never fall on a nationwide basis.

Egad.

Ambak (ABK), MBIA (MBI) Back to their Old Ways

I wrote in last evenings earnings preview

Ambak (ABK) - strange how all the "issues" with these simply dropped off the radar - did all their problems get sweeped away? Literally it is as if these 2 bond insurers no longer exist. They were the focus of the market every day for a month and the "resolution" offered the names didn't seem to really fix the problem. Strange.

After causing so much fuss [Jan 19: Bond Insurers Becoming More Troublesome] CNBC trotted out Charlie Gasparino once every other week announcing potential "bailouts" for these companies, to prop up the market, and then suddenly the issue disappeared off into the night... until someone picked up the old rug and decided to look under it this AM.. oops. I am really wondering if one or both of these companies will be a going concern in the future ... if they cannot attract new business it is going to be a difficult road to hoe. Especially with Sir W. Buffet and Sir W. Ross hot on their tails

Again, in the stock market it "does not matter" until "it matters". With the Fed backstop everything was fine and dandy in financials for a month there. But we still have billions upon billions insured by these very undercapitalized bond insurers. Ambak down 40% and MBIA down 30% today.

• Ambac Financial Group Inc (NYSE:ABK - News), a bond insurer that struggled to raise capital earlier this year, posted a surprisingly wide first-quarter loss on Wednesday after setting aside $1 billion to cover future payouts on mortgage bonds.
• Ambac reiterated that it is writing "very little new business," and that the weak quarter wiped out 40 percent of the company's net worth.
• Ambac lost money in 2007 after insuring repackaged mortgage debt and other risky securities that were walloped by the credit crunch. Fears the bond insurer would lose its top credit ratings, forcing investors to sell billions of dollars of securities and further depressing bond markets, sent global financial markets into a tailspin earlier this year.
• The quarterly loss was $1.66 billion, or $11.69 a share, compared with year-earlier net income of $213.3 million, or $2.02 a share. Excluding items, Ambac's loss was $6.93 per share, far more than analysts' average forecast for a loss of $1.82 a share and a sharp reversal from year-earlier earnings of $2 a share. (hey once you exlclude items they only lost $7, not $12! Why is the stock not up 50%?? That's how it works in financials I thought?)
• In a statement, Ambac Chief Executive Michael Callen said, "While we realize these are disappointing credit results, we continue to believe that the capital raise and strategic business actions taken during the quarter will enable us to get beyond this credit market." (of course, just trust me - this is back to back quarters of implosive losses - just give us "6 months" when nirvana returns to Earth)

No positions (of course)

Potash Hits $1000 on Spot Market

And the hits keep on going... note, I continue to love the fertilizer story long term but we have multiple risks - in increasing order of probability

1. All the stocks are overextended as heck on charts
2. A lot of newbie investors who jumped in of late, who have very little conviction and will sell at first drop of -7% in their trading account
3. If, as I expect, Federal Reserve finally says something about inflation and signals they are done with cutting rates after next week, the dollar finally bounces - at least a little - this will hurt commodities
   
4. If Western governments have any moral backbone they will at least jawbone pulling biofuel subsidies... this would cause backlash reaction in fertilizer even though biofuels are just a small piece of the puzzle. (again this is a minor risk at this point, especially with US elections coming but maybe Europe will react first?) While the biofuel situation is not the major driving factor of agflation that does not matter - perception is everything and go back to point (b) a lot of new investors to a hot sector who know little about the long term situation and just are going by sound bites "rice riots" "fertilizer is hot" "Neil Cavuto even likes fertilizer" - they will panic.
   

It reminds me of solar in fall 2007 when all the hot money flew in and destroyed all those late to the game within weeks of when the "new crowd" joined the party.

And as a cherry on top there is always a neat little signal that its getting frenzied - I wrote about this in November [Nov 10: Chinese Big Caps Struggling Since Petrochina Shanghai Debut] Wouldn't the Intrepid Potash (IPI) IPO just fit perfectly with all these other short term tops I listed below? I got bearish on all those groups once we saw those "events" and within days in some cases we began quite savage selloffs. It almost seems ... too convenient...

Sometimes, in retrospect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from

1. The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]
2. The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]
3. The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]
4. And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]

The fundamentals remain tremendous in agriculture, but nothing straight up; the reaction tomorrow to Potash's (POT) blowout earnings will be very interesting - everyone knows the numbers will be tremendous but how will the stock react - once EVERYONE knows something there is very little "surprise"... or maybe these are just ramblings of an investor "wishing" the fertilizer stocks would fall 30% so I can load up (again). :)

But here are more fundamentals to whet your appetite

• Russian potash miner Uralkali (URKA.MM) has said it will charge about 50 percent more for spot sales of the mineral fertiliser to Asia from July 1, citing tight supply as global demand rises.
• Uralkali (URKAq.L) said its export trader, Belarusian Potash Co (BPC), would raise its spot price to Asian markets to $1,000 per tonne on a cost and freight basis.
• Prices to Brazil from July 1 would rise to $1,000-1,010 per tonne, an increase of 65-66 percent on the current quarter.
• Moscow-based brokerage Troika Dialog said the Chinese and Indian contracts had absorbed a substantial proportion of world supply, meaning less would be available for spot sales to Brazil and Southeast Asia. "There is a supply-side deficit prevailing on the global potash market as the two largest consumers, India and China, have both recently concluded yearly agreements for supplies of potash (at conditions almost certainly dictated by producers)," Troika said in a note.

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

Freeport-McMoran Copper & Gold (FCX) Earnings Report

I continue to be cautious on all commodities as all these charts are very overextended and calling for a pullback. Freeport-McMoran Copper & Gold (FCX) (the name is deceiving, this is a 80% copper stock) continues to show us that (a) we are in a global war for resources something I called a "World of Shortages" last August (b) America means less and less each year to many multinationals and (c) media, politicians, and investing pundits don't understand either point a or b. Even our Fed officials do not seem to understand this. We do not live in a vacuum and our 1960s thinking is quite sad to watch. Narcissism and arrogance - I continue to believe are America's Achilles Heel. And don't worry about the multinationals - they will continue to thrive with or without us.

• Freeport-McMoRan Copper & Gold Inc. said Wednesday its first-quarter profit more than doubled as prices for those two metals surged. Phoenix-based Freeport said profit rose to $1.12 billion, or $2.64 per share, for the three-month period that ended March 31, compared with $476 million, or $2.02 per share, in the year-earlier period. Sales were $5.67 billion, up from $2.25 billion.
• Analysts polled by Thomson Financial expected a profit of $2.12 per share on $4.69 billion in sales.
• Freeport acquired Phelps Dodge Corp. last year for $26 billion, becoming the largest publicly traded copper company. In addition to Phelps Dodge mines, Freeport operates the Grasberg mine, one of the world's largest sources of precious metals in Pampua, Indonesia.
• Copper remains in high demand despite the faltering U.S. housing market because China and India continue to press for more resources. A strike by mine workers in Chile, the world's primary copper-producing nation, also is boosting copper prices.
• "The U.S. is a relatively small factor in the marketplace," Adkerson said in the conference call. "The market continues to be very tight globally."
• In the second quarter, Freeport expects its mines to sell 930 million pounds of copper, 225,000 ounces of gold and 18 million pounds of molybdenum. For the year, Freeport expects to sell about 4.2 billion pounds of copper, 1.4 million ounces of gold and 75 million pounds of molybdenum.
• "As we crossed the one-year anniversary of our combination with Phelps Dodge in March, we are established as a financially strong global metals producer with significant current production capacity and reserves, exciting current growth projects and promising opportunities for future growth in major minerals districts around the world," the company said.

This is a former holding for the fund; while I like all commodities, I prefer the price stability (long term contracts) found in iron ore, so I'm weighted in other names.

No position

What to Do with Apple (AAPL)...

This one is a tough call... earnings are tonight and it is one of the most widely watched stocks nowadays. Last quarter, the fund took a hit when the lemmings did their normal overreaction to conservative guidance. The thing is, Apple ALWAYS is conservative - but some quarters people don't care, and others they panic flee. Just hard to game the reaction; and last time around an overweight stake did not do the body good. [Jan 22: Apple Beats by $0.14, Issues Typical Conservative Guidance]

I do have a 2.5% stake and am just going to sit through this round. Normally, I'd cut back and last quarter's experience should make me cut back as well, but I think the iPod "weakness" is now something that is better understood and the Mac power is going to overwhelm everything else [Mar 20: Apple Mac Sales up 60% in February]. I fully expect a nice beat BUT again, people love to find one minor line item to get antsy about. Again, people focus on the bells and whistles (iPod, iPhone) when the true strength is the computers. The migration from PC world to Apple world is on, big time. Also, I've been doing a lot of reading about this new iChat feature which is instant messenger with video - basically what every preteen, teen, and 20 year old lives to do all day, chat on the computer. Yet another quiet homerun for Apple.

The other bonus, Apple is a stealth international play (45% of sales) - weak dollar baby. I do expect another lowball guidance as they always do but we'll see how the lemmings react. Ignore all the noise and watch the growth in the computer lines... that's the true strength here...

Long Apple in fund; no personal position (might change later in the day)

Two Healthcare Stock Reports

Illumina (ILMN) is rocketing up again +11% early today on a very good earnings report; this is one of those conundrum stocks - very expensive but seemingly destined to remain so. And as they keep raising guidance, they get a bit less expensive, I suppose. Still at 50x forward estimates! I continue to wait for a meaningful pullback that never really seems to happen. My position is woefully underweight. But I do love stocks like this that perform under the radar of the hordes of momentum traders and ambulance chasers. This is how fertilizer used to be 8-10 months ago ;)

• Illumina Inc (ILMN), a maker of products used in genetic research, posted first-quarter results and provided 2008 outlook that beat market expectations significantly
• Excluding items, Illumina earned 37 cents a share this quarter compared with 22 cents a share a year ago. Revenue rose 69 percent to $121.9 million.
• Analysts on average had expected earnings of 24 cents a share, before special items, on revenue of $115.3 million, according to Reuters Estimates.
• The San Diego-based company expects 2008 earnings of $1.55 to $1.68 a share, excluding items, on revenue of $515 million to $535 million. Analysts were expecting a profit of $1.18 a share, before special items, on revenue of $519.9 million.

Pharmaceutical Product Development (PPDI) is the first of a slew of the contract research outsource firms to report - they put out a solid number, nothing spectacular, but looking at the charts it seemed people were braced for the worst [Contract Research Organizatiosn Weak Again]- so hearing nothing of the sort was enough to push this stock up 7% this AM. Peer Parexel International (PRXL) reports after the bell and appears to be up 7% in sympathy. This is not a sexy group, but solid growers.

• Contract research company Pharmaceutical Product Development Inc. said Tuesday its first-quarter profit fell 4 percent on a series of investment charges and writeoffs related to the failed drug candidate SinuNase.
• The company earned $40.1 million, or 33 cents per share, compared with profit of $42 million, or 35 cents per share, during the same period a year prior. Excluding charges, the company said it earned 44 cents per share. Analysts polled by Thomson Financial expected profit of 43 cents per share.
• Revenue rose 19 percent to $396.2 million from $332.3 million. Analysts expected revenue to reach $396.3 million.

I continue to favor these types of names over drug companies with FDA risk, or even healthcare organizations - "safe" stocks like UnitedHealth Group (UNH) are down 40% YTD. A lot of investors must be cursing the "safety" of this group.

Long Illumina in fund; no personal position

'Rising Tide Growth' vs Mid Cap Growth Mutual Fund Peers

I am going to start posting monthly results versus my peer group of mutual funds, now that the fund is approaching 9 months old. Obviously shorter term time frames could be attributed to luck, randomness, or other things... hence why I want to look at a minimum of 1 year time frame, and when I assess mutual funds myself I tend to look at 3 year time frames.

To review, my goal is to beat the indexes I track by 15% a year, so if the indexes do 0%, I want to do 15%... if the indexes do 15%, I want to do 30%... if the indexes do -15%, I want to hit 0%. That would put me in elite company. The indexes I track are the S&P 500 and Russell 1000 as the median market capitalization of my holdings has been in the range ($7-$9 Billion) in between those 2 indexes. When I checked last fall, the S&P 500 median market cap was $13.1 Billion and Russell 1000 $5.8 Billion. I post my results versus indexes weekly, and thus far have been able to surpass my 15% goal in just under 9 months.

That is my index comparison; now of course I want to be consistently near the top of the heap versus my real competition - so we need to compare this fund versus similar ilk out there in mutual fund world. The 2 main categories of funds are the "size" of their holdings and the "style" of their holdings. From that you get put into one of 9 broad categories - see the illustration. According to Morningstar and Lipper, the 2 main ratings agencies for mutual funds, in size I'd fall into the mid cap designation (this would be the size of the typical holdings I own). Large caps are more of the GEs, Exxons, Microsofts of the the world - and small caps are generally names smaller than I hold. Further, mutual funds are broken into 3 broad categories depending on the type of stocks they own - value, growth, or "blend" (a mix of value and growth). Obviously I am targeting growth, although an arguement could be made I'd fall into a range between growth and "blend". According to Lipper, there are 1871 mutual funds as my competition in this category.

This is important because I am not a China fund, a natural resources fund, a real estate fund, a gold fund, etc - every year some niche category outperforms and you cannot compare a broad based equity fund that invests in multiple sector with those groups. For example, tech mutual funds were all the rage in 99, real estate mutual funds were all the rage in 03-04, Chinese mutual funds were all the rage in 06, natural resource funds were all the rage in 07. Etc. So we'll never top the heap of that niche group, but those are specialized funds who usually have a good shorter term run, before imploding a few years later. (ask any tech fund investor in 2001, any real estate fund investor in 2007, or Chinese fund investor the past 6 months)

So at this time I have nearly a 9 month record, and not a full 1 year record. I am going to use the Kiplinger's rankings found here. Unfortunately, unlike stocks - most of the free screeners for mutual funds are quite useless, so this is the best I can find; the one on Morningstar does not screen out multiple versions of the same fund. I will begin keeping track of my NAV (price for the mutual fund) at the end of every month and will, within a quarter, have a good apples to apples comparison. Right now since my return is through yesterday, and only 9 months old, and the Kiplinger table is through March 31, 2008, and 12 months old it is not apples to apples. But if current trends continue I should be near the top of the peer group of 1871 funds.

Rising Tide Growth is currently printing a 17.7% return; this would compare favorably to peer group if the pace continues, and place it as the #1 fund in the category. (again it is not apples to apples since I have not yet reached a year time frame and won't until July 31, 2008 - also I am using yesterday's price not Mar 31st since I don't have exact historical data available to me in Marketocracy.com)

The current top 5
Janus Orion 15.0%
American Century Giftrust 14.2%
Prasad Growth 14.2%
American Century Heritage 14.1%
ING Mid Cap Opportunities 9.8%

To put it in perspective further, the 25th best fund returned 5.1% over the past year, and the average for the entire group of 1871 funds was -3.5%

This is the first time I have looked at this, and I'll start updating this on a monthly basis

EDIT: My results do not account for any annual expenses or taxes; hence "real returns" will be lower. I cannot tell if the peers I am comparing against account for them either, from the way the data is presented. The idea here is to show directionally the performance, the exact placement is subject to debate, but a top 25 ranking should be assured either way if trend continues.

Earnings Preview Wed and some After Hours Reports Tonight

Looks like Illumina (ILMN) did another great quarter tonight - I was hoping it would not so I could buy at a much lower price off of a "miss". No such luck. Former fund holding VMWare (VMW) made $2 million more profit this year than last - which is quite pathetic for what was supposed to be the next great tech stock; but expectations were so low that the stock is bursting higher in after hours. Former fund holding Broadcom (BRCM) also looks decent and expectations are so low, it is enough to get people excited. The bar appears still to be very low right now. Again, this earnings season is a time of wonderment and amazement and you just can never figure out the reaction to the news.

Names I'm watching for in a VERY busy day tomorrow and why...

Wednesday
Amazon.com (AMZN) - a sentiment name for the NASDAQ

Ambak (ABK) - strange how all the "issues" with these simply dropped off the radar - did all their problems get sweeped away? Literally it is as if these 2 bond insurers no longer exist. They were the focus of the market every day for a month and the "resolution" offered the names didn't seem to really fix the problem. Strange.

Fund holding Apple (AAPL) - even more of a sentiment name for the whole market - I expect great news and conservative guidance. Some quarters the market laughs off conservative guidance some they sell off the stock heavily... all on the same guidance. You just never know. Either way, whatever they say tomorrow, they will crush in 3 months at the next earnings report. And keep repeating the game.

Chipotle Mexican Grill (CMG) - a "story" stock in restaurants; great management, great brand, super high valuation.

Fund holding Core Laboratories (CLB) - oil services have been amazing of late.

Fund holding Homex (HXM) - Mexican homebuilder which has shown some nice strength of late

EMC (EMC) - not quite the bellweather it once was for tech

Foundation Coal (FCL) - coal. Need I say more.

Former fund holding Freeport-McMoran Copper & Gold (FCX) - enjoying the non stop move in commodities

PF Chang's (PFCB) - more "upscale" Chinese restaurant

Philip Morris International (PM) - after its recent spin off, this IPO has done very little. Will be curious about their first public quarter.

Parexel (PRXL) - another contract research outfit; PPDI reported tonight and looked very solid; another name where the chart was looking awful (PPDI) but the report was good

Pulte Homes (PHM), Ryland Group (RYL) - whatever they say, it's great because the world will be fine in 6 months; I like Ryland of the main homebuilders...

Range Resources (RRC) - this is one of the natural gas names I was considering adding to the fund and really like.

Former fund holding Schering-Plough (SGP) - this drug market was a disappointment

The Boeing Company (BA) - mmmm much like The Ohio State University; funny how Yahoo finance has it's name. I actually like this name down here and if I were running a mega/large cap fund with buy and hold philosophy I'd be building a stake now. Huge backlog, little competition, etc.

United Parcel Service (UPS) - this would matter but no one cares about the economy anymore. Just close eyes, and believe everything will be fine in 6 months... so earnings from names like this don't matter. Remember, like Intel they already lowered guidance so when they "beat" tomorrow and CNBC heralds the return of the economy, just keep in mind it is off a number they just lowered a short while ago. The spin will be fun to watch and maybe the market can rise 1000 points.

XTO Energy (XTO) - see Range Resources; simply an amazing run

Euro Hits $1.60 as ECB Hints at Rate HIKES

Unlike the central bankers here whose main job is to bail out banks at the cost of rampant inflation which is the most regressive tax there is, the bankers in Europe are considering rate hikes... while we are about to cut yet again in a week. Now the hope was the poor Europeans would take pity on us and cut rates to bail us out (notice we go around the world with hat in hand?) - by cutting their rates it would make our currency/bonds slightly more attractive. That's the idea - the problem is most every country in this world realizes inflation is a beast. This was easily recognized long ago and I was saying this would be the outcome; even Greenspan said we were entering a new era in his book. [Dec 17: Greenspan Jumping on my Stagflation Thesis] But our financial system is so broken and levered, that capital is disappearing everywhere - all these writeoffs are just not accounting maneuvers - this is $200 Billion lost in the system and each of those billions is levered 3:1, 5:1, 10:1 even up to 30:1 if you are Bear Stearns. And Ben and his merry band of economists cling to the 1960s view that America is in a little vacuum and when the US slows, the whole world will slow and inflation (what little there is) will disappear. I said then this view is dangerous and the fact the guy who is the 2nd most powerful man in the US is clinging to this mythology should scare people. Thankfully a few of his minions are finally waking up to the fact that on July 1, 2008 inflation won't suddenly go away (what little there is), and that we are actually part of an ecosystem called "Earth" and don't exist in a vacuum. If they only read the blog....

A few other nations have followed us into the abyss - Canada is joining us in the cut parade due to proximity to US (more flooding of the world with paper currency), as is the UK (our subprime brother in arms). Meanwhile just about every other country in the world is raising rates to fight off inflation. As I've said since last summer thank god we have no inflation here and our government reports are so magical that they can somehow counteract the reality on the ground. Somehow inflation cannot cross oceans nor the Canadian or Mexican border or else our lower and middle class would have some serious problems. (2 months ago our CPI inflation was 0.0% - that's amazing magic) Again, I pray for the day the economic reports show negative inflation (deflation!) and the CNBC talking heads look into the camera and say -0.1% inflation today - woo hoo! Meanwhile crude is @ $120 and every food product is now up 30%+ year over year. It is such a circus that it would be funny, if not for the fact so many people who could least afford it are getting pummeled.

And I'd say we can stop blaming oil prices on the weak dollar; if true gold would of been ramping hard the past 2 weeks instead of being comatose. Supply/demand imbalances seem to be the main culprit. And stop blaming oil companies - people need to read up and see the policies of government and Federal Reserve are helping to cause the suffering - not "greedy oil executives" - but most are financially illiterate about what is really happening, so they cling on to the villain the politicians present to them. Run huge deficits, create paper money out of thin air, allow bubbles to keep repeating every 5-6 years now, kill off regulation because it "stops financial innovation and America's competitiveness", etc.

Oh well, bring the helicopters Ben... flood the system with more money so we can elevate all assets, including the stock market (banks are not passing this money out to customers - so I assume they are making nice trading gains with all the new shiny Treasuries the Fed is printing out like mad and exchanging for toxic waste mortgage paper). I continue to say, enjoy your stock gains but remember 8% gains in a 14% inflationary environment means you lost 6% this year in real terms. And your salary went backwards. And your cost of living went up (stock up on food stuffs now, they will only continue to go up with this flooding of the world with fiat currencies). But people continue to cheer on Wall Street. And the CEOs of banks are laughing to the... well... bank. The Fed has their back at least!

Anyhow, off to those silly Europeans who actually think inflation is a problem... funny guys...

• The euro surpassed $1.60 for the first time as European Central Bank officials said they'll increase interest rates if inflation doesn't slow.
• The dollar weakened for a second straight day as oil surged above $119 a barrel and Federal Reserve Bank of Dallas President Richard Fisher said inflation is starting to grip U.S. consumers. South Africa's rand appreciated against all of the major currencies on bets rising consumer prices will force the central bank to increase its target lending rate.
• The 15-nation currency strengthened against the dollar as ECB governing council member Christian Noyer said policy makers will act to restrain consumer prices if inflation doesn't slow. ``Our big problem is to make sure that inflation falls back below 2 percent next year,'' Noyer said today in an interview on RTL radio. ``We'll do what it takes for that,'' he said, adding, ``If needed, we'll move rates.''
• His colleague, Nicholas Garganas, said at a press conference in Athens that inflation will ``remain high'' in the coming months and isn't expected to fall at a ``rapid pace'' in the second half.
• The Dallas Fed's Fisher said yesterday in a Fox Business Network interview airing today that inflation from rising food and energy prices has been so persistent that it's starting to affect consumers' expectations for future prices. ``I'm concerned that we might be on a path of higher inflation than we would otherwise have had,'' he said.
• Fisher voted against interest-rate cuts at the Jan. 30 and March 18 meetings, and was joined in dissent by Philadelphia Fed President Charles Plosser at the March meeting.

Should be interesting to see how many dissents we get if they cut another 25 points next week. 2 is considered rare - 3 dissents would be outright revolt.

Thankfully there are no ill effects from the Fed policies - not according to government reports anyhow. When do we start hearing stories of people quitting work because its too expensive to get to their low paying "service job" that politicians say are "great for America" as we gut the production capability over the past 2 decades. Can't be too far off now.

• Cabbies here complain their take-home pay is thinner than it used to be. Trucking companies across the country are making drivers slow down to conserve fuel.
  
• And the rest of us? With gas prices now averaging $3.50 a gallon nationwide, according to AAA and the Oil Price Information Service, more and more Americans who have to drive are weighing the need for each and every trip.
• "To get to the doctors and all that, it's an awful lot of money," said Carol Licata, a 75-year-old retiree from Arnold, Pa., who said a larger portion of her fixed income is now going toward gas. "I don't drive that often, but have to take necessary trips ... and (gas) takes a big chunk out of our budget."
• In Los Angeles, for example, fiction writer Brian Edwards sold his gas-guzzling Ford truck and now relies on his skateboard or the bus to get around. (see this is the funny part of the wealth transfer or reverse colonization as I like to call it - the Asian nations have consumers buying up their first car - whereas the poorer Americans are giving up cars for... skateboards. Nice! Give it 20 more years and we'll be in exact role reversal - at that point the factories should start being built here to take advantage of the low cost labor of those working poor 3rd world Americans) Sharon Cooper of Chicago, meanwhile, said she is planning to buy a bicycle to use on her 2 1/2-mile commute to work.
• "The farther you get from the wellhead, the greater the misery," said Tom Kloza of the Oil Price Information Service in Wall, N.J. "There's a lot of stations across the country that are literally on the brink of bankruptcy." Samer Katib, the manager of a Marathon station in Chicago, said business has fallen at least 30 percent this year because customers are cutting back on driving and only using their cars when absolutely necessary. "It's just go to your work and go home," he said of people's driving habits these days, adding that customers no longer stop in for profit-fattening drinks like they used to. "They need all their money for gas," he said.
• "It's a mess here," Goldstone said. "People just are not shopping and everyone's trying to figure out a way to get people back in their cars."

Again, I continue to laugh at every rally in 'early cycle' retail, restaurant, homebuilder (which I own because of course everything will be fine in 6 months). When the 'strategists' are making hundreds of thousands or millions and they direct policy for investments, things like this just don't connect with their brain. We'll check back at $4 gas later in the summer. I'm sure that will spur the recovery.... "in 6 months". I keep saying this is the first consumer led recession since late 70s/early 80s. People just do not get it and are conditioned to "2 light quarters of recession and we are out so buy now or you miss the huge stock market move". I eagerly await the first muttering of "1st half 2009 recovery" on CNBC, pushing out the now popular "2nd half 2008" that every guest brings to the table.

And for you eager real estate investors? Here is a trend I'm giving you first... smaller homes... in inner ring suburbs. With heating costs and A/C costs killing people on top of gasoline prices - those outer suburb McMansions are going to be ghost towns left for the truly well off. The middle class will be moving closer to work, in homes they can afford to pay the utilities. Start scouting those type of homes - thats where the next real estate boom will be (2011). Or buy a farm.

Don Coxe Offers Coxe Commodity Strategy Fund

A reader turned me on to Don Coxe with a story he emailed me back in January [Jan 18: One Lonely Voice Agrees with me on Food Inflation] - after doing some googling (is that a word?), I read up on some of this thoughts and it appears we are almost lockstep in our thought process. Much like Ken Heebner of CGM Funds I try to search for news about once a month on these guys to see their updated thoughts and cross reference them against mine. Specific to Coxe our thought process has been almost identical since I started pulling up news articles about him; Heebner meanwhile has been far more bullish/sanguine on the US economy....

For Canadian readers I believe this new "fund" Coxe is bringing out will apply to you, so I thought I'd highlight it... I mean since you cannot have me, you at least can have Coxe ;) But on a serious note, he approaches things identical to me with big macro economic thoughts/views and makes his investing decisions off of that... parallel to my "rising tide lifts all boats" strategy. He is also a huge believer in the long term in commodities as is Jim Rogers, and I [A Long Term View on Commodities] It is a strange methodology for a fund; it seems to be a "unit" with a warrant attached.

• Don Coxe, one of the living legends of the world of big-picture investing, is set to have his name in lights, or at least on a public company.
• Coxe, who has been in the investment world for three dozen years -- with a career ranging from an analyst at Gordon Capital to his current role as the global portfolio strategist at BMO Financial Group -- now has the Coxe Commodity Strategy Fund named after himself.
• "The fund has been created to provide investors with long-term capital growth by executing the commodity investment strategies of Donald Coxe," said the recently filed prospectus.
• Coxe, who is based in Chicago, and Sprott share a common investment thesis: both believe in a continuing strong demand for commodities.
• "The demand for commodities can be expected to be driven by the needs of this bourgeoning middle class, as they acquire dwellings with both basic and modern amenities, automobiles and consume higher protein diet," said the prospectus, noting that Coxe will advise the fund on its commodity sector weightings and the selection of securities. The initial allocation runs this way: agriculture (28%); metals and steel (18%); energy (29%); and precious metals (25%).
• Coxe's fund is offering $10 units with each unit consisting of a unit and a warrant. The warrant runs for three years and allows the holder to buy another unit at $11.25. The fund doesn't have a fixed term to maturity.
• Of course there is a contrarian view about commodities. Victoria-based John di Tomasso, the CTA manager of the year according to U.S.-based Lipper, is basically bullish on the commodities though he is short the base metals, a group that includes nickel, lead copper, zinc and tin. The reason: "They have gotten wildly over-priced. The commodity thesis is well known but speculation has driven prices to wild heights."

Long Don Coxe

McDonalds (MCD), DuPont (DD) Continue the Trend - Overseas Strength Mitigates Weakness at Home

This storyline is becoming old quickly [Apr 19: Dollar's Plunge Becomes Lynchpin for Q1 Earnings]... again, I've been using the Ultrashort of the the Russell 2000 instead of the S&P 500 or Dow 30 for this reason since August... large companies will win in this environment and small companies (who rely on subprime nation) will lose. I am using Ultrashort Russell 2000 (TWM). We are quickly running out of Dow 30 stocks reporting by next week, and then S&P 500 stocks (which are smaller than the Dow 30 but larger than most components in the Russell 2000) will be finishing off in the next week or two as well. Then we will be left with the stuff on the bottom of our shoes - companies that rely on Americans.

The more I read about these multinationals and how many now have 55-70% sales outside the US, the more I realize the US can go into a multi decade tail spin and the multinationals won't care one bit... sort of ironic.

McDonald's (MCD) first; they beat by 11 cents but 5 of that was currency - still its a 6 cent beat... I continue to believe this is a trade down play along with Walmart (WMT) BUT they still are going to be hit with commodity costs (I can't believe I can get a McChicken for $1!), and if the economic fallout is truly bad down the road, even they won't be immune. But so far so good. (Note I own Ultrashort Consumer Services (SCC) which holds McDonald's and Walmart as its top 2 positions, but that is out of necessity as I cannot short individual names - I'd prefer to short individual retailers and restaurants and avoid the "big 2" which should be relative winners in the coming/current recession)

• McDonald's Corp. said Tuesday that its first-quarter profit rose 24 percent as the fast food company benefited from the weak U.S. dollar and strong global sales. For the January-March period, the suburban Chicago company earned $946.1 million, or 81 cents per share. That's up from $762.4 million, or 62 cents per share, during the same period last year.
• The world's largest restaurant chain said European revenue climbed 23 percent to nearly $2.4 billion, while quarterly revenues in Asia, the Middle East and Africa grew 24 percent to about $1 billion. Both geographic regions posted double-digit profit growth.
• In the U.S., same-store sales grew 2.9 percent during the quarter, but the company disclosed its comparable U.S. sales fell in March. That 0.8 percent decline was the first negative same-store sale figure in five years, analysts said. (uh oh)

Next, Dupont (DD) which is becoming a stealth agriculture play... but the weakness in the US overwhelmed that. Volumes down, but weak dollar comes in like Captain America to save the day. Or maybe it's Captain U.S. Peso.

• Chemicals company DuPont said Tuesday that profits increased 26 percent in the first quarter, boosted in part by higher selling prices and the weak dollar.
• Sales for the quarter grew 9 percent to $8.6 billion, thanks largely to higher local selling prices and the weak dollar, as overall volume was down 1 percent. Revenue totaled $8.77 billion, up from $8.16 billion.
• The company's performance continues to be driven by growth outside the United States, with overseas sales accounting for almost two-thirds of total sales for the quarter. Volume in the U.S. was down 5 percent, while volume increased 4 percent in Europe and 6 percent in the Asia-Pacific region, the company said.
• During the quarter, sales in emerging markets grew 25 percent, led by Brazil, China, India and Eastern Europe. Local selling prices increased 6 percent overall, more than offsetting higher ingredient costs.
• Sales in the agriculture and nutrition unit increased 18 percent to $2.9 billion, reflecting strong global demand for DuPont's seed technology and crop protection products.

I don't know about you but when I read about all of this strength in other countries it sort of saddens me even further about our plight. We are like the old veteran ballplayer who is past his prime. Oh well, everything will be fine in 6 months everyone assures me... Viagra on the way!

Long Ultrashort Consumer Services, Russell 2000 in fund and personal account

Bookkeeping: Off with Some Mechel (MTL)

Everything I just said for the fertilizers, repeat for Mechel (MTL) - one of my top 5 ideas, but way too hot in here. (Now if Cavuto mentions Mechel tonight I'll probably have to sell the whole damn stake off!)

Nowhere near any support. Will buy back lower. No change in long term prospects. Cutting from 2.1% of fund to 1.3%, with a sale near $159. I'll let someone else take the risk from here... if the mania continues the next sell will be $175.

Long Mechel in fund and personal account

Bookkeeping: Cutting More Fertilizer

I know I said I wouldn't cut more, but I am going to cull more Mosaic (MOS) and Potash (POT) as they are relentless in their upswing and at this point nowhere near any support levels. Usually a significant event like a new IPO in the sector or a large buyout marks a near term top in a sector - I am not saying this Intrepid Potash (IPI) IPO is the thing, but I have not seen a level of bullishness in a sector as I've seen here, since the solar days of fall 2007. Even Neil Cavuto was talking about the Intrepid IPO last night. That scares me, and when these things reverse I'm going to call it the Cavuto top (granted, he did not know how to pronounce "potash" either).

I am going to cut more Mosaic here @ $140, and Potash @ $212. Granted, every sale the past 2 weeks has been a "mistake", but it's just way too bullish around here, and while I expect a blowout number from Potash on its earning reports, so does everyone else - and the natural inclination is a sell off sooner rather than later. I'll look to rebuy both lower - Potash maybe in $180s and Mosaic maybe $120s. I'm taking both positions sub 1%. (gasp)

I am that antsy about the bullishness, than even in my personal account where I've held Mosaic for a long time I am taking it down to "miniscule" level. ;) As I do with every sale of these names, I want to reiterate my long term bullishness. But this is getting ridiculous; the risk/reward is now firmly in the "risk" camp.

EDIT (Noon): Due to the voracious commentary and defense of the fertilizer stocks and why anyone would be so nutty to sell them, I am adding even more to Ultrashort Basic Materials (SMN) which is a bet against this space - I am also long in my personal account. I am a contrarian at heart and when everyone is on 1 side of the trade I just can't help but to be on the other side. So far I have gotten my socks knocked off in a bad way with this trade but with so much fervor I am getting more bullish by the minute to bet against the fever! :)

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

Intrepid Potash (IPI) Prices at $32, Trading in upper $40s

Well as I stated in my post late last week [Apr 18: You Thought VISA (V) was the Hottest IPO of 2008? Wrong] if the fund was up and running I'd of been asking for tons of shares of Intrepid Potash (IPI)... after initially planning to issue 24M shares @ $24-$26, that got moved up to 30M @ $27-29 late last week, and then overnight that got moved up yet again to $32. At $32, I'd be willing to put 6-8% of my fund in this name, knowing it would trade to $40+ on hype alone (I facetiously said $60 but heck I was a lot closer at $60 than $32!). But it's gotten even further than that... in early trading the shares are trading in the $46-$54 range. And just like that, as an institution you can look "smart" by making 50%+ for 10 minutes of work... (shares bought at $32, trading in upper $40s) Another major advantage the big guy has over the small guy.

However, I am obviously not in that situation now, so I just am watching. I see Cramer pumped it yesterday as well, and judging from the # of hits to my blog last night, that caught the people's attention.

• Intrepid Potash Inc, a producer of crop nutrients, on Monday raised $960 million with an initial public offering of shares that priced above expectations.
• The 30 million-share offering sold for $32 per share, according to an underwriter. At $32, the IPO price was $3 above the top of the $27 to $29 forecast range. The offering had already been raised earlier from 24 million shares and an estimated price of $24 to $26 per share.

Coach (COH) with Interesting Report

Coach (COH) is a name I always like to watch as a "tell" on the upper middle income US consumer in our conspicuous consumption culture - it is sort of in the same pan as Harley Davidson, speedboats, and Whole Foods (WFMI) - luxuries we don't need but we love our toys/excesses. I went negative on it last summer [Aug 15: Sold Small Position in Coach], and it fallen a long way since and I was curious how the market would react to its earnings today. I wrote last August:

I decided to sell it today after thinking about the situation further. While the stock has been a favorite of mine over the past year, I think the coming housing troubles will hurt even their spectrum of customer. While the VERY high end (north of Tiffany's and Coach, think Hamptons) is doing incredibly well, and to now the next level of US population has been doing well, much of the target audience of Coach in the US could certainly be affected by this slowing in housing.

Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged. So it's a risk.

I expanded on this later in the month [Aug 28: Coach as the True Retail Tell]

So in fact I think this is a lot better tell on the economy than Walmart. The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.

You can see it has been pretty much been downhill since then...the stock is back down to $30 after a 7% fall this AM



So today, despite a beat on earnings and solid guidance the stock is weak on what appears to be margin concerns (probably needing to discount merchandise to keep it moving) But unlike the banks and homebuilders who have been going up no matter what bad news they report, it is interesting to note this name falling on what I would consider not so bad news.

• Coach Inc., the largest U.S. luxury leather goods seller, said Tuesday its quarterly profit rose 8.3%, helped by strength both in the U.S. and abroad.
• Net income for the fiscal third quarter rose to $162.4 million, or 46 cents a share, from $150 million, or 40 cents, a year earlier. Sales rose 19% to $744.5 million.
  
• Profit met the average estimate of analysts, while sales exceeded their average forecast of $730.9 million, according to FactSet.
• Gross margins, however, missed some analysts' estimates. Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 75% from 77.8%, affected mostly by the sharp rise of the yen over the period and by the continued promotional environment and channel mix, Coach said.
• Coach said it's "prudent" to wait until its fourth quarter to give guidance for the coming year because of uncertainty in the economic backdrop. Coach is conducting a review of ways in which its brand relates to the consumer to help lessen the impact of a slowing economy.

Again it is more about the reaction to the news, than the news itself. The reaction is a bit troubling; frankly I am surprised in this "see no evil, hear no evil" market of late that the stock is being punished like this - I thought "bad news is great news!" was the current mantra. This is a quality company but it is operating in a tough neighborhood. Without as many of the "aspirational" American housewives able to pay for it's bags and/or fleeing to its outlet centers instead of mainline stores, the company will continue to struggle. As I have predicted, many retailers will begin to pull back from all forecasting for the year as the true economy shows in their numbers, as opposed to the multinationals whose foreign sales are masking domestic weakness. All their current 2008 guidance is fiction, and this will be proven true by December 2008. So they are not "cheap", despite what CNBC says. That does not mean they won't rally from time to time, especially when those rebate checks hit, Q3 GDP is artificially boosted, and the seals across financial media will clap their hands in glee. Then we'll go back to normal and/or wait for the next round of rebate checks to be sent to keep America spending over and above their means.

Coach remains a great tell on the American consumer who has been spending well over and above their means and now is being battered by reality, inflation, and lack of access to house ATM. Oh well. They still have China to conquer... no need to cater to Americans in about 5-10 years as wealth creation moves overseas....

No position

Two Good Earnings Reports - Jacobs Engineering (JEC) and Millicom International Cellular (MICC)

Two very solid reports this mornings, one from a name in the portfolio, and one we recently sold out of due to a poor chart.

***********

Jacobs Engineering (JEC) posted 45% growth in earnings, up to $0.80 (vs expectation of $0.77) on revenue growth of 27% which was in line with expectations. Backlog, one of my favorite measures in this sector, increased another $5.5 Billion or 51% year over year, to a $16.2 Billion level. This equates to over a year and a half of business. Guidance was increased a bit from $2.95-$3.25 to $3.00-$3.30, compared to analysts $3.16. This is not the cheapest of the infrastructure stocks, but a very reliable company.

***********

Millicom International Cellular (MICC) also posted very good results and the stock is up 7% in premarket. I had sold the last of this position a few weeks ago [Apr 8: Bookkeeping: Closing Million International Cellular], since like Google, it was acting badly in a recovering market - but like Google the chart was a bad tell. On the bright side it indicates the fundamental work on this name was good, when even stocks we sell off are performing well.

• Emerging markets telecom firm Millicom International (MICC) posted first-quarter core earnings in line with expectations on Tuesday and added 2.8 million new subscribers in the period, boosting its shares.
• "Millicom recorded the second best quarter in its history in terms of net subscriber additions, adding 2.8 million in the quarter, following the exceptional final quarter of 2007," its Chief Executive Marc Beuls said in a statement.
• The company added 3.4 million subscribers in the fourth quarter of 2007 and the increase in the first three months of the year brought the total number of subscribers to 26.2 million at the end of March, up 59 percent from a year earlier.
  
• "Subscriber growth is really impressive and sales in Africa have picked up speed," said Bengt Molleryd, analyst at Handelsbanken.
  
• The biggest growth in subscribers in the first quarter came in Honduras, Ghana and Tanzania, Millicom said.
• The company, which operates in 16 countries in Latin America, Africa and Asia, plans to invest over $1a billion this year.
• Millicom said, however, it would see a gradual decline in average revenues per user (ARPU) as it continues to target customers with lower disposable income. ARPU was $12.7 in the first quarter against $13.9 in the preceding three months.
• "ARPU is a bit worrying, but it is a natural process that it will fall and I think that they can compensate for it as they continue to grow," said Urban Ekelund, analyst at Redeye. Millicom said that although ARPU would fall, higher volumes will bring economies of scale, helping EBITDA margins.

Long Jacobs Engineering in fund and personal account

Articles of Interest from Around the Net

In the interest of time/efficiency I'll probably be going to some blog entries in the following format with some headlines with a short blurb and then interested readers can click on the link to read the full story. I need to spend more time reading and less time typing so while I'll continue full story summaries on most items, I'll put together some packages like this for those interested in reading further.

If you (reader) find anything of interest feel free to post a comment to this entry with a link but please use tinyurl.com to post the link.

Recent stories catching my interest:

The Economist: The New Face of Hunger (topic: food crisis and impact on world poor, something we predicted long ago and now hitting mainstream)

• “World agriculture has entered a new, unsustainable and politically risky period,” says Joachim von Braun, the head of the International Food Policy Research Institute (IFPRI) in Washington, DC. To prove it, food riots have erupted in countries all along the equator. In Haiti, protesters chanting “We're hungry” forced the prime minister to resign; 24 people were killed in riots in Cameroon; Egypt's president ordered the army to start baking bread; the Philippines made hoarding rice punishable by life imprisonment. “It's an explosive situation and threatens political stability,” worries Jean-Louis Billon, president of Côte d'Ivoire's chamber of commerce.

Asia Times: China caught in Potash Crunch (great summary of the main players in the fertilizer business and why I favor the potash companies in the long run - mini monopolies - talk of spot potash to $700 by this summer and $800 - or more - by fall; you know the names by now - Mosaic (MOS), Potash (POT), Agrium (AGU) and our new friend Intrepid Potash (IPI))

• The magnitude and growth rate of demand from China still drives global commodity prices. But in the fertilizer sector, where China this month has had to agree to a price for potash more than double what it paid last year, the inflexibility of Chinese demand for food has made it difficult for the country's negotiators to hang on to the commercial advantages they are accustomed to enjoying from being the world's largest consumer.

Paul Krugman of NYTimes Says We are Running Out of Planet to Exploit - as an aside I saw a show on National Geographic that says if the other 95% of humans on this planet consumed and wasted like Americans did, we'd need 4 Earth's. That's a scary thought. This planet is simply not equipped to handle billions of "middle class" people - it needs most to live in abject poverty to support the number of people that live on it, which was the status quo for decades upon decades - but has changed with the rise of Chindia. [WSJ: New Limits to Growth Revive Malthusian Fears] We need major technological breakthroughs to reduce resource dependence over the next 5-10 years or it could create some very ugly situations. I've said since day 1 of blog, future wars will be over fresh water instead of oil.

• It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

NYTimes: Sticker Shock in Organic Aisles - this goes along with my idea that when prices get high enough people, aside from the truly upper middle class and lower upper class, will be fleeing Whole Foods Market (WFMI) - economics over health - I continue to like that stock as a short on the "pooring of America" theme.

• Shoppers have long been willing to pay a premium for organic food. But how much is too much? Rising prices for organic groceries are prompting some consumers to question their devotion to food produced without pesticides, chemical fertilizers or antibiotics. In some parts of the country, a loaf of organic bread can cost $4.50, a pound of pasta has hit $3, and organic milk is closing in on $7 a gallon. “The prices have gotten ridiculous,” said Brenda Czarnik, who was shopping recently at a food cooperative in St. Paul.

NYTimes: In Lean Times, Biotech Grains are Less Taboo - again, when push comes to shove economics wins over everything else - health, morals, taboos - the names here are Monsanto (MON), Syngenta (SYT), and a little Dupont (DD)

• Soaring food prices and global grain shortages are bringing new pressures on governments, food companies and consumers to relax their longstanding resistance to genetically engineered crops. In Japan and South Korea, some manufacturers for the first time have begun buying genetically engineered corn for use in soft drinks, snacks and other foods. Until now, to avoid consumer backlash, the companies have paid extra to buy conventionally grown corn. But with prices having tripled in two years, it has become too expensive to be so finicky. “We cannot afford it,” said a corn buyer at Kato Kagaku, a Japanese maker of corn starch and corn syrup.

WSJ: Global Growth Creates Market Winners - well this story pretty much sums up my blog, but about 6-9 months too late - mentioning steel, agriculture, coal, energy :) Go global, find customers with deep pockets, and avoid subprime nation. (and it's sister, subprime UK)

• Stocks are down so far this year, the U.S. economy could be in the midst of a recession, and the housing market's troubles could linger for many months. But a handful of stocks and sectors are soaring in 2008, believe it or not. Some of them, such as some companies in the steel and agricultural businesses, could continue to generate strong gains, analysts say, though others, such as some coal and energy companies, look like riskier prospects.

NYSun: Food Rationing in America? Sounds Outlandish? It's Already Happening

• Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.
• At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy. "Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

CBSMarketwatch: Pilgrim's Pride (PPC) a major chicken producer is cutting production. We know what that means down the road... higher chicken prices. This is a theme I've been mentioning since last fall as yet another unintended consequence of the ethanol boondoggle... it will have lag effect and no one is talking about it now - check back by the fall or next winter. This will allow the food producers to increase prices but still to be determined if they will be able to increase them enough to offset the rising input prices to feed their animals. A lot of macro economic events happening here, and it's a matter of degree of what rises more, inputs or end food prices. I continue to watch iPath DJ Livestock ETN (COW) which plays on this theme from the cattle/hogs angle.

• Pilgrim's Pride said Monday it plans to cut weekly chicken processing at its plants and may shutter another production facility to offset exorbitant costs for corn and soybean meal. Pilgrim's Pride, the largest U.S. chicken producer, said it will reduce weekly processing by 5% compared to last year's levels.

WSJ: Smaller Banks Begin to Pay Price for their Boomtime Expansion - this should be the next leg of the credit crisis... while the Federal Reserve and Treasury Department will bring all hands on deck to save the NYC based banks, the many smaller regional banks are going to get hit with effects of the consumer led recession. Unfortunately, Ultrashort Financial (SKF) focuses mostly on the large banks that the government is now backstopping so there is no easy way to get at these names without individually shorting.

• Now, two years after its expansion push, Sovereign has quit making auto loans outside the Northeast because too many borrowers fell behind on their bills. Losses on the bank's loans ballooned. In January, to conserve cash as it wrote off more bad loans, Sovereign eliminated dividend payments. On Tuesday, the bank is expected to announce a 40% drop in first-quarter earnings.
• Similar troubles are echoing through small and midsize banks across the U.S. In a bid to expand during the recent boom, many set up operations in unfamiliar markets or started pitching new products. Others, aiming to stave off encroachment by huge U.S. financial institutions, boosted their lending by offering easy terms or lower rates. Now the slowing economy is exposing bad timing and blunders.

NYTimes: A New Threat to Farmers: The Market Hedge - we discussed this a while back, how Hedge Funds were now piling into the commodities market and causing major disruption [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!] - what was traditionally used as a hedge by farmers to protect themselves is now a plaything for the locusts... I continue to believe as hedge funds control more and more of the world's capital there comes a time when their sheer scale and size must fall under some sort of higher level of regulation as they literally, en masse, can move markets. Perhaps only when a disaster strikes caused by hedge funds, will anyone care to broach this subject - give it 5 to 10 years. As more wealth is concentrated in fewer and fewer hands (sovereign wealth funds and hedge funds), we will have the same things we always have - out sized risk leading to terrible effect. And then the politicians will say "how did everyone miss this and why was there no regulation?" Blah blah.

• But Mr. Grieder’s days on the farm in Carlock, Ill., are getting even longer. He now has to keep a closer eye on the derivatives markets in Chicago, trying to hedge his risks so that he knows how much he will be paid in the future for crops he is planting now. And the financial tools he uses to make such bets are getting more expensive and less reliable.
• In what little free time he has, Mr. Grieder attends Illinois Farm Bureau meetings to join other frustrated farmers who are lobbying officials in Chicago and Washington to fix a system that was designed half a century ago to reduce uncertainty for food producers but is now increasing it.
• But today’s crop prices are not just much higher, they also are much more volatile. For example, a widely used measure of volatility showed that traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that month and the highest level since at least 1980. The price swing expected in March for soybeans was three times its monthly average, and the expected volatility in corn prices was twice its monthly average.

Summary: We have a major disconnect between Wall Street and Main Street, as the stories above show. And the inflation being created by central banks across the globe, I continue to believe is helping to inflate all assets, including equity prices, over and above where they'd be in a normalized supply/demand equation. Good for stock investors, bad for all consumers and the world's poor and middle class. US stock market watchers continue to live in a world of "the US is all that matters" and cling to the "as US slows, inflation will disappear" - I've argued this is wrong since day 1 of blog and Ben Bernanke has taken the other side of this trade. I think Ben will be wrong; unfortunately many on this globe will be hurt by this incorrect prediction by Uncle Ben and his merry band. As further insult to injury, we will continue to use fabricated government reports which says inflation is contained and not really an issue to continue our path of dollar destruction and inflation embellishment. Main Street will continue to get pummeled.

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

Bookkeeping: Taking some Jacobs Engineering (JEC) Off Ahead of Earnings

Very good strength from this infrastructure name today, so I am going to take a bit off the top - not much because the chart is shaping up so well, but with Jacobs Engineering (JEC) reporting ahead of the bell tomorrow and a quite large stake I am going to reduce some risk with a share sell here in the low $89s. This reduces the stake from 3.3% to 2.8% of the fund. Still quite a large position walking into a potential trap that every earnings report brings... but I continue to marvel that this stock is trading right about where it was 2-3 quarters ago.

Today has been an excellent day; always like days where you can outperform the market with only 60% of your portfolio long, and 1/3 safely tucked in cash. Many of our top holdings continue to run...I continue to believe we have a ton of extended charts prone for pullback but I'm sitting with large cash stake, and letting the remaining longs run however long this can go...

Long Jacobs Engineering in fund and personal account

Manpower (MAN) as a Weak Dollar Play? Who Knew.

There is only so much time in the day and only so many companies/sectors one can keep track of. My team of 10 analysts (read: 10 hamsters) did not realize that Manpower (MAN) was in fact an overseas, weak dollar play. As portfolio manager I made them run the wheel extra hard this weekend for not notifying me of this fact before hand. I wrote last week

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

So my team of analysts made me look bad, and when I saw the big move in MAN on this week's top returner list I had to go investigate... and I discovered a completely different company than I anticipated. France is their #1 country of business?

• Manpower chairman and CEO Jeffrey Joerres noted that some of the company's European operations -- namely Elan, Germany and Italy -- reported revenue increases of 43 percent, 22 percent and 15 percent, respectively. Manpower's largest country of business, France, posted a 16 percent increase in revenue, to $1.7 billion.

Weak dollar play?

• Employment services company Manpower Inc (MAN) posted much-higher-than-expected quarterly profit on Friday, reflecting strength in its international operations and the weakness of the U.S. dollar, and said second-quarter profit will be above Wall Street estimates.
• Milwaukee-based Manpower, which generates the bulk of its sales and earnings outside the United States, said operating profit in its U.S. operations fell 37.6 percent, but were sharply higher in France, Italy and other international markets.
• Investments in international markets, including Asia and the Middle East are paying off at a time when some large economies -- notably the United States -- are slowing, Chief Executive Jeff Joerres told Reuters in an interview.
• "There was a lot of thinking, from the sell-side and the buy-side, that the gig is up and what we're seeing is that there are places that are slowing down, but the portfolio is kicking through," he added.
• Revenue soared 19.0% in dollar terms to $5.4 billion, helped greatly by the weakness of the greenback. Excluding the positive impact of foreign-exchange transactions, revenue increased nearly 8%. (so 11% due to currency only!)
  

Potential Chindia play?

• Marcon also said emerging markets tend to have higher gross margin than more mature markets. Developing countries like China and India have big labor markets and represent a significant long-term opportunity, Marcon said.

Moving more to permanent placement with higher margins?

• “Manpower plans to increase its percentage of revenue derived from high-margin permanent placement to 15% of total gross profit, up from the current 8% level,” Baird analyst Mark Marcon said.

People always comment or email me, how do I find ideas or develop thesis. Simple. I read, read, read, read, read. When the other hamsters sleep, I read. Hard work, but I have a big goal so I have to outwork the fat cats. Or hamsters. Or lemmings. Or Kool Aid drinkers.

Am I going to be buying Manpower tomorrow? No, and I think Europe is set to slow down so I don't know the company well enough to know the impact - but the name just got a lot more interesting and officially on my radar. If you read the points above and I didn't tell you what the sector or name of the company was you'd think I was talking about Deere (DE) or some other major multinational.

No position

Bookkeeping: Powershares DB Agriculture Fund (DBA) Starting to Look Toppy - Cutting Back

The Powershares DB Agriculture Fund (DBA) is quite the imperfect instrument; it holds sugar, corn, wheat, soybeans. The problem is when some things go up, others go down... and this is one of those times. While corn is going up [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop], wheat and to some extent soybeans are going down. So net net, you are stuck with a mish mash. For much of the last year, corn was doing ok but the wheat/soybeans combo was driving this ETF. In the US we don't have single commodity ETFs but strangely in London it is available - even though the US is the breadbasket of the world. Why we don't have them available for individual investors is beyond me. Either way, we are stuck with a blunt instrument instead of being able to pick and choose.

While I believe all crops will go up over time, since the crop report [Mar 31: USDA Crop Report] we've seen divergence among the names (which I outlined above). So the ETF has been stalled. While I am unclear on the usefulness of technical moving averages on an ETF made up of 4 commodities (as opposed to an individual stock), I am clear that many speculators have entered the crop market of late and they come from the world of stocks. So they could be using technical indicators... as their influence increases in the commodity market, I'll give more credence to the fact that technical indicators might be of use. And if that is true, this is a chart that has weakened the past few days, and broke below a key support level this AM. So I'll play it safe and I'm cutting 75% of my position, down from 850 shares to 200 shares, selling in the low $38s. This takes the name from a 2.8% stake to 0.7% stake.

The ETF has been hanging around its 50 day moving average most of the past month, creating a lot of headfakes on both the up and downside. Every time it looks ready to make a substantial move, it sells off. We could just be basing for the next leg up, but that base could take months to build for all I know. For those who think this is the beginning of a larger move downward we now have the Agriculture Double Short ETN (AGA) [Apr 17: Four New Agriculture ETNs]

Again, I want to stress, I do not know how effective technical analysis is, on this ETF but for now I am going to treat it as a stock and take my position down. If we see any prolonged weakness in crop prices that could be the catalyst to cause fear and selloff in the fertilizer stocks... we shall see.

Long Powershares DB Agriculture Fund in fund; no personal position

92 Stocks Returning 11%+ Last Week

So many good returns this past week that I had to put my cutoff up to 11% and still got 92 names. What caught my eye this week were the meat producers, Smithfield Foods (SFD) and Tyson Foods (TSN) coming out of nowhere to make huge surges this past week. I highlighted this group last fall, due to inflation concerns, and their weakness due to rising input costs. But eventually the worm will turn - they are taking out capacity (slaughtering) and this will cause meat prices to increase in the future - the stocks might be telling us this. Stock up your freezer.

Indian outsourcing was hot this week off some better than expected results. Everything else on the list looks very familiar; tons of energy names...frankly some of these names have been hitting our weekly list so many weeks in a row, I don't know how much longer they can continue going before - a selloff would healthy at this point

1. Market cap >$2 Billion
2. Ave volume >100K
3. Stock price >$10
4. Return this week 11%+

Green we own; blue we owned in the past or discuss in the blog

Symbol	Company Name	% Price 1 Week
CSE	CapitalSource Inc	27.0
JASO	JA Solar Holdings Co Ltd	20.8
AGU	AGRIUM INC	20.7
INFY	Infosys Technologies Ltd	20.3
YGE	Yingli Green Energy Holding Co Ltd	20.2
SCHW	Charles Schwab Corp	18.4
ASML	ASML Holding NY Reg ADR	17.9
GOOG	Google Inc	17.9
DRQ	Dril-Quip, Inc	17.6
DOX	Amdocs Ord Shs	17.5
MAN	Manpower Inc	17.0
CTSH	Cognizant Technology Solutions Corp	16.7
EAC	Encore Acquisition Co	16.4
BJS	BJ Services Co	16.3
CCK	Crown Holdings Inc	15.8
BUCY	Bucyrus International Inc	15.6
DRYS	DryShips Inc	15.5
SAY	Satyam Computer Services	15.5
SON	Sonoco Products Co	15.3
CLF	Cleveland Cliffs Ord Shs	15.2
FRE	Freddie Mac Ord Shs	15.2
BOKF	BOK Financial Corp	15.1
ELN	Elan Depository Receipt	15.1
WFSL	Washington Federal Inc	14.8
SOHU	Sohu.com Inc	14.8
ETN	Eaton Corp	14.8
SFD	Smithfield Foods Inc	14.6
CMI	Cummins Inc	14.6
WFT	Weatherford International Ltd	14.6
CIT	CIT Group Ord Shs	14.5
SFI	iStar Financial Ord Shs	14.2
LEH	Lehman Brothers Holdings Ord Shs	14.1
SINA	SINA Corp	14.0
CNX	CONSOL Energy Inc	14.0
CAT	Caterpillar Ord Shs	14.0
NFX	Newfield Exploration Co	13.8
MEE	Massey Energy Co	13.7
KMX	Carmax Inc	13.7
ANSS	Ansys Inc	13.5
SII	Smith International Inc	13.5
HES	Hess Corp	13.5
FTI	FMC Technologies Inc	13.3
BG	Bunge Ord Shs	13.3
TDW	Tidewater Inc	12.9
TSN	Tyson Foods Class A Ord Shs	12.9
OII	Oceaneering International Inc	12.8
SCGLY	Societe Gen Spon Depository Receipt	12.8
VSEA	Varian Semiconductor Equipment	12.7
FDS	Factset Research Systems Inc	12.7
WIT	Wipro Ltd	12.7
POT	Potash Corp	12.6
WHQ	W-H Energy Services Inc	12.5
BHI	Baker Hughes Inc	12.5
BLL	Ball Corp	12.4
SLB	SCHLUMBERGER	12.4
CEO	CNOOC ADR	12.3
NUAN	Nuance Communications Ord Shs	12.2
NSC	Norfolk Southern Corp	12.1
ALEX	Alexander & Baldwin Inc	12.0
ATW	Atwood Oceanics Inc	11.9
BGC	General Cable Ord Shs	11.9
ACI	Arch Coal Ord Shs	11.9
REP	Repsol YPF Depository Receipt	11.9
LEG	Leggett & Platt Inc	11.8
FRO	Frontline Ord Shs	11.8
MCRS	Micros Systems Inc	11.7
EV	Eaton Vance Corp	11.7
JOYG	Joy Global Inc	11.7
CTV	CommScope Inc	11.6
BCS	Barclays ADR	11.6
PNR	Pentair Inc	11.5
CHKP	Check Point Software Technologies Ltd	11.5
VMI	Valmont Industries Inc	11.4
PDS	Precision Drilling Trust	11.4
VMW	VMware Inc	11.4
REPYF	Repsol YPF Ord Shs	11.4
IT	Gartner Inc	11.3
AG	AGCO Corp	11.3
FWLT	Foster Wheeler Ord Shs	11.3
AMZN	Amazon.com Inc	11.3
LEA	Lear Corp	11.2
SM	St Mary Land & Exploration Co	11.2
ATR	AptarGroup Inc	11.2
CF	CF Industries Holdings Inc	11.2
RRI	Reliant Energy Inc	11.2
DO	Diamond Offshore Drilling Inc	11.2
MOS	Mosaic Co	11.2
ITU	Banco Itau Holding Financeira	11.2
PBR	Petroleo Brasileiro ADR Reptg 2 Ord Shs	11.2
ANR	Alpha Natural Resources Inc	11.1
URS	URS Corp	11.0
JBHT	JB Hunt Transport Services Inc	11.0

Bookkeeping: Starting Stake in Yingli Green Energy (YGE)

I am reintroducting Yingli Green Energy (YGE) to the fund; a name I held last fall. This is yet another Chinese solar stock, and my basis for purchase is a chart that looks in the early stage of a breakout - a nice 2 week base, from which new highs are being made ... plus the stock just cleared its 200 day moving average Friday. The stock peaked at $25.50s or so in mid February - if it can show strength to clear past that, I'll add more.

Most of my watch list of solar stocks show names much more extended so I feel a bit more safe buying this one at this stage in the game. While not as cheap as some of my other solar names, it has a much better technical set up... I'm kicking myself for not executing a trade in JA Solar (JASO) three weeks ago at $18+ that I was mulling (now at $26). Either way, this makes my basket of solar stocks back up to 3 names.

I'm also adding a layer to Trina Solar (TSL) but am waiting for a move north of $45 to make a big purchase.

I bought 1200 shares of Yingli Green Energy, or a 2.5% stake, in the $24.60s

Long Trina Solar, Yingli Green Energy in fund; long Yingli Green Energy in personal account

Arch Coal (ACI) Home Run

Funny, just 2 weeks ago Arch Coal (ACI) reiterated guidance but it was taken as a "warning" by the skittish herd on Wall Street [Apr 7: Arch Coal "Warns"], the stock dropped to $47 where I added to my stake (some of which I sold the next day up $4). Now the stock is in the $62s after this morning's strong earnings report. I continue to be a huge bull on this space which I outlined last fall as the forgotten commodity [Sept 13: Crude at $80? What to Buy]

If you are new to coal a series of posts here [Dec 6: Coal Stocks Quietly in a Bull Market] - while this group will be subject to a selloff when the masses hit commodity stocks sooner or later, this remains one of my long term bull themes. Aside from the world's energy needs, this was one of my "weak dollar" plays before "weak dollar" plays became sexy. I continue to believe we are in the early innings of a multi year move in this sector, and just like the fertilizers a year ago, analysts expectations for future years are way off base.

• Arch Coal Inc (ACI) posted a sharp jump in first-quarter profit on Monday on strong demand and higher prices for the fuel, and raised its full-year forecast.
• Net earnings were $81.1 million, or 56 cents per share, compared with $28.7 million, or 20 cents per share, in the same quarter of 2007, the St. Louis-based company said. Revenue jumped 22 percent to $699.4 million.
• The earnings easily topped analysts' average forecast of 47 cents per share on revenues of $674 million. Arch increased its full year forecast to $2.40 to $2.80 per share from its earlier view of $2.00 to $2.50 per share. (very strange considering they reiterated the $2.00 to $2.50 on April 7th!)
• Arch said it sold 34.3 million tons of coal in the first quarter, up from 31.4 million tons a year earlier, while its operating margin rose to $3.32 per ton from $2.11.
• Prices have almost doubled in the past year. A ton of eastern U.S. coal that sold for $44.75 last April, is now selling for $85.50. Powder River Basin coal from Wyoming and Montana has risen from $8 per ton to $15 in the last 12 months, according to the industry newsletter Coal & Energy Price Report.

Long Arch Coal in fund; no personal position

Bank of England Moving to Socialize More Losses; Bank of America (BAC) Miss? No problem!

We've been talking for a long while about how the "historic" steps of the Federal Reserve are an incremental move to socialize risks away from Wall Street (esp banks) and onto the backs of taxpayers. I do believe there is a great chance that eventually mortgages will be directly bought as more and more people go underwater... months after I floated that idea... back when "everything was fine and this is only a subprime issue, nothing to worry about" the first hints of smoke in this direction surfaced [Mar 22: Bank of England, Federal Reserve Deny Mortgage Security Buyout Plan]

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

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

Now, today we have news of the next best thing - what I call literally the same thing... letting banks shovel these toxic instruments onto the balance sheet of the Bank of England for a YEAR, in return for government bonds. And what happens in a year? They will simply roll over this arrangement, again. And again ... and again - until the credit problem is fixed. So is this "actual" purchasing? No - but its the best workaround - an infinite loan. The US is going down the same path [Mar 22: A Historic 9 Days for the Federal Reserve] - in the "old days" loans to banks by Fed were overnight, they expired the next day - than as the credit noose tightened it went up to 3 days... and in the most recent quarter as we were headed off the precipice it went up to 28 days. Free market capitalists cry Justice! They are not buying the junk! But not only have they expanded what they let banks borrow against from the safest products to just about anything, but they now have 28 day windows that (drumroll) roll over ... and over... and over. So it's really no different from the Bank of England plan except the BOE is saying, let's not even keep up this farce every 28 days - lets just go 365. So here in the US the banks have to go through the dog and pony show every 28 days, but they will simply roll over this junk and keep shoveling back into the Federal Reserve every 28 days like clockwork... until "whenever". It could be years. So effectively it's almost an identical effect as purchasing - Treasuries are created, given to banks, and in return the Fed (tax payers) gets to hold junk.

Do you notice how that Bear Stearns moment, in which the last of these systems were set up by the Fed, along with an implicit promise that no large bank will be allowed to go under marked the bottom of this cycle? This is why I call it a socialized system. Losses are backstopped by your tax dollars - so the risk takers who got us into this mess can continue to speculate on whim - knowing your money is backing them up - because we cannot allow them to fail... since they are so interconnected to each other and if one domino falls, the whole system collapses. What does that say about the system? Not much. But as I was saying, when risk is taken away from the risk takers and put onto the taxpayers, the market can do nothing but cheer that. Off to England we go... where ironically all I read sounds like a direct parallel to the US - indebted consumer to eyeballs, housing bust just becoming, financial "innovation" throughout London, and a credit based, finance service economy. Our little brother in arms. p.s. $100 Billion is just the beginning, I predict this gets MUCH larger as we move into the year...

• The Bank of England offered to swap government bonds for mortgage securities to kick-start bank lending, with Governor Mervyn King pledging to meet demand even if it exceeds an estimate of 50 billion pounds ($100 billion.)
• ``There is no arbitrary limit on this so it could well go higher,'' King told reporters in London today.
• The measures, backed by Prime Minister Gordon Brown's government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets.
• The banks will retain responsibility for losses from the assets they loan to the Bank of England. The swaps will be for a period of one year, renewable for up to three years.
  
• ``The collateral swap arrangement is an innovative and unique policy response,'' the British Bankers' Association said in a statement today. (not that they are biased - read: banks win again!)
• The banks will be able to enter into a swap at any time over the next six months. Assets that can be used must have the top AAA ratings. They will include mortgage debt and credit card debt. ``Raw mortgages'' and derivatives are excluded. (and we all know how effective a triple A rating is nowadays - plus now we can throw in credit card debt too! Woo hoo!)
• The bank said the public is exposed to a loss only if a lender participating in the program defaults and the assets they have placed with the central bank are insufficient to cover the value of the Treasury bills in the swap. That's why the bank is asking for collateral of greater value than the bills it lends.
• `The sense yet again from the Bank of England is that it will provide an absolute backstop to the financial system, but won't make any effort to ease the market's liquidity.''
• House prices dropped 2.5 percent in March from a month earlier, the biggest drop since 1992

On to Bank of America (BAC) which I only mention because it's a top 5 bank - it missed the quarter - ho hum. It said bad things about the consumer and the future - ho hum. It's up premarket.

• "We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices," CEO Ken Lewis said in a press release Monday morning. (but other than that, things are going fine!!)
• The quarter also saw net charge-offs of $2.72 billion, as consumers became further stressed by rising unemployment and tougher borrowing conditions.
• In addition, the bank said it had increased its loan-loss provisions to $14.89 billion as of March 31, compared to $8.73 billion a year earlier, a function of tightening credit markets and a sluggish housing market.

Bookkeeping: Weekly Changes to Fund Positions Week 37

Week 37 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: 31.3% (vs 35.9% last week)
56 long bias: 61.4% (vs43.7% last week)
8 short bias: 7.3% (vs 20.4% last week)

64 positions (vs 61 last week)
Additions: Morgan Stanley (MS), Intuitive Surgical (ISRG), Cummins Engine (CMI)
Removals: N/A

Top 10 positions = 27.3% of fund (vs 25.7% last week)
26 of the 64 positions are at least 1% of the fund's overall holdings (41%)

Major changes and weekly thoughts
I'm pressed for time this weekend so I will summarize the week's action as hopeful and ignoring any bad news while clutching onto the spirit of the US multinationals. I entered the week very conservative with my lowest long exposure since inception and obviously in such a strong week that held fund performance back. But as I mentioned I'd be ok with lagging the market for a bit as we go through the very volatile earnings season, where the "reaction" to the news is quite dramatic and many times unpredictable (Google was case in point this week). So we made less than the market this week, but we still made money, which is the important thing, and retain a large advantage over the indexes we measure against. It would be a tough chore for the market to continue to put 3-4% moves back to back, and as always we lag the indexes when they make huge moves in short periods due to our hedged exposure (holding cash, and short positions). I'm going into this week assuming there is nothing dramatically scary in the earnings reports early next week, and the market can continue to if nothing else hold up, and/or make a run to S&P 1430s, if it can break through the resistance near 1400. It's tough to find what exactly to hedge right now - even the retailers are rallying... so until Kool Aid wears off I have a quite low short exposure after the pasting I took in these names Tue-Fri. I still am keeping a sizeable weighting in Ultrashort Basic Materials (SMN) because that group is far and away the most overextended, and when it does turn it will be a dramatic sell I believe. While I could see the market continuing its rampage since bad news simply does not matter, I have the lowest % of stocks with at least a 1% stake since inception of the fund (41%) since so many stocks I own are overextended and prone to pullback. So as always, this remains a tricky environment. I continue to keep protection of earlier profits as job #1 with the offset of knowing this is giving up potential returns in the short run.

The natural instinct now is to start feeling "left behind" and begin to pay up for merchandise - especially as I see positions I held at 4-5-6% weightings a few weeks ago continue to levitate; I'm going to continue to resist that siren call and focus my purchases on areas that have yet to really take off. Most of my top positions (fertilizer, coal, metals, oils) over the past few quarters have simply gone parabolic and when they *DO* pullback, I expect a severe and dramatic correction... however for all I know it could be up 20-30-40% higher from here. Or it could start next week. With so many stocks running up before their earnings this sets us up for a lot of "sell the news" reactions when the good news is already baked into the stock, so if the market continues to move up with total ignorance of any bad news, than I expect we'll continue to trail the indexes for the time being. While the technical pattern in the indexes have improved, especially Friday, we are now at the top of a long range we've been in for 3+ months, so we'll see how the market reacts from here. As for "early cycle" plays I am curious to see just how much farther financials can go up because they "only" wrote off $8 billion instead of $6.5 billion. This is still a lot of capial destruction. And with gas >$3.50 in many parts of the country I just cannot get on this retail or restaurant bandwagon...

Strategically, I am thinking of implications of a stronger dollar (at least some technical bounce) on both commodities and US multinationals as the Fed signals it is just about done with the blunt instrument of interest rate cuts April 30th. I'm thinking of the implications of food riots, and starvation on the conscience of Western governments (vs buying farmers votes), and I'm thinking about coming meat price increases that I've been anticipating will be here sooner or later as an unintended consequence of jacking up the costs of all feed ingredients to hogs, cattle, chicken... and if the strength in iPath DJ Livestock ETN (COW) the past 2 weeks is a sign it's about to hit (and time for me to buy). And last I'm wondering if Marketocracy.com will have Intrepid Potash (IPI) ready for me to buy on the open as it IPOs this week, and if I will be able to get it under $40.

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. It must of been a long week because this seems like a different eon... but Monday Trina Solar (TSL) renounced their plans to build a polysilicon plant - something I questioned the long term sense in, and cheered as it was announced Monday. So did the marketplace, driving this long suffering stock up - I bought more of this name, made this position a large weighting, and then after it's pop made it back into a more normal sized stake Tuesday. I continue to believe this is a very undervalued stock and once the market comes to my view I'll be creating a much larger stake in the name. Until then, the stock is still stuck under some major resistance at $45. That was pretty much it in terms of action Monday.
   
2. Tuesday, I did some sales in my energy baskets of natural gas, oil services, and deep sea oil drillers. As with just about every sale this week, it was premature as things just continued to rally the back half of the week, and specific to this group, exploded up Friday in parabolic fashion. And that pretty much was it for Tuesday...
   
3. Wednesday, I took some more profits on my fertilizer stakes - but see the line item above - selling anything this week after the downturn Monday was smirked at by the market. My fertilizer weight is now the smallest its been since I started the fund, so I won't sell anymore and I'm awaiting that "pullback" :) maybe after Potash (POT) earnings we'll get a sell the news reaction (CF Industries also reports that day) - I expect stellar reports but at this point so does the whole world so I am not sure what these guys can say to surprise anyone. Also, about 20-25% of the Google hits to my blog are not some offshoot of agriculture, whether it be "agriculture", "fertilizer", ""wheat", "rice" - so obviously it's getting hot and heavy and web hits could be a useful contrary indicator. I remember getting lot of solar hits last fall before they imploded (that said, the agriculture story is a lot more weighted in safe fundamentals than the solar story is, in the near term) Again, this is my favorite story - the most secular and dynamic growth I can find. I've been a bull for over a year now. But nothing straight up (or down) - each % higher these names go, the more potential risk and less potential reward. And that does not mean they cannot go up 30% from here, but the odds become less in our favor each day.
   
4. Again, it was a quiet week by our standards with not a lot of transactions - at heart I love growth at value levels - which is why I am always wrong on which solar stocks I pick. The herd loves the ones trading at recent highs, without any respect to valuation. My strategy of buying those with just as good prospects but trading at discounts to the group seems to work in every group but solar. So I continued this "bad" strategy with more scaling in, into LDK Solar (LDK) on Thursday. The stock now unfortunately has convertible debt which it placed this week, which is generally a red flag to me and almost always a dead weight to the common stock (institutions buy the debt and short the common shares). So this name could continue to have an anchor around it's neck for a while but the valuation is simply too compelling. Frankly, the solars have had a huge run here and are prone for a pullback. When they do, its fast and furious as we saw late Thursday afternoon for any of you in the group.
5. Google (GOOG) was acting poorly all week as the market rallied, which is normally a big red warning flag - but again - nothing works 100% in the market - heck most things do not work 75% of the time. But you need to stick to a system, so when I see a flailing stock ahead of earnings, over the years that "many times" signals those "in the know" are getting out. But I would never short off that information either because taking any heavy position ahead of earnings, either way (long or short) is simply riverboat gambling to me. And Google showed us that as a whole bevy of shorts got creamed this week. Either way, I reduced some of my 2 internet related names, Baidu.com (BIDU) and Mercadolibre (MELI) on Thursday ahead of Google earnings in case there was collateral damage. Instead they of course popped even more Friday, where I took even more of the positions off the table and now have them as 0.5% type of stakes so I'll be holding these 2 stakes here, and just waiting for a pullback to add more.
6. Ironically in a bit of good timing I was complaining Thursday how the infrastructure stocks were simply not understood or appreciated - multinational after multinational were saying how great the infrastructure business was yet the pure play stocks were not moving. Well that finally changed Friday as some key names took off, and as their charts finally improved I began layering into stakes. Most notably larger stakes in Foster Wheeler (FWLT) and Jacobs Engineering (JEC). Now I did notice JEC has earnings next Tuesday so there is some risk there, and if the stock pops ahead of earnings I'll probably reduce that stake a bit just so I follow my conservative policy of not being too overexposed to anything oing into earnings. I still find this whole group cheap, but the overreactions by investors to their 3 month quarters, in a business that is based on 2-3-4-5 year contracts can handcuff us.
7. I started 2 new stakes Friday, one in a (hold my nose) financial, investment bank Morgan Stanley (MS) and one in medical equipment maker Intuitive Surgical (ISRG). The former is simply the best looking chart of the 4 investment banks, and along with Goldman Sachs (GS) the only 2 I feel have performed halfway decent through this investment bank implosion. Frankly, they now have the Federal Reserve behind them so the risk of these 4 names is far less than in a "free market"... socialism rules like that. As for Intuitive Surgical, frankly it highlights everything I say about being conservative going into earnings - its the yin to Google's yang this week. Everything they reported looked fine to me, but because forward expectations were a TAD bit under what the horde wanted the stock got creamed. I was buying in the $295-$305 range but frankly ths one looks like it has a good chance for $265, where I'll buy more. There is one huge risk here and that is, if credit markets continue to falter that hospitals might have difficulty funding the purchases of this >$1 million robot. But I love the business model (razor/blades). This is a stock I owned at $40 3 or so years ago, and one of those you wish you just held and never sold :)
8. Along with those names, I did add to my 2 homebuilders, Lennar (LEN) and DR Horton (DHI) - again I think the "rebound is coming in 6 months" idea is trash but I have very little exposure to stocks that benefit when that is the market credo so this is why I hold those 2 positions, and now Morgan Stanley. Not some great belief that the turn is here.
9. Since I had so much cash I had to find some more long exposure so to replace the internet names I had sold down of late, I added to my Apple (AAPL) stake - but again this one has earnings next week so I am hoping for a pre-earnings run which I can sell into. Last, I added a little to Blackrock (BLK) although the chart looks weak and I could see some material selloff in this name... it's still a minor stake for us.
10. With all the momentum from the multinationals, I added back an old position to the fund Cummins Engine (CMI) - this co is a power player in India and China but the stock has been weak for a long time... I had to buy 8% up but it rallied even further in the day. I haven't looked at this name for a while, but upon reviewing it's earnings estimates, it looks very cheap. I also considered another old name of similar ilk (multinational, weak dollar play) General Cable (BGC) but did *NOT* pull the trigger when it was only up 1-2% early in the day - it went on to a stellar day but sometimes you just miss opportunities.

Even with all these purchases Friday, it was offset by some sales in my Ultrashorts so my cash position still is nearly a third of the fund.