Bookkeeping: 'Rising Tide' Performance Week 39

Week 39 performance of the mutual fund

Comments: We closed "our" 3rd quarter with yet another week of hear no evil, see no evil. Any good news was great, and anything bad was "not as bad as expected"; hence by transitive theory - also great. Summary: Everything is great. Or will be in 6 months. I've been stating for a long while that the massive systematic inflation (increasing our money supply of late at a rate of 20%) will cause every finite asset to increase over and above it's true value (including stock certificates), and I believe that factor... along with the large cap, multinational strength (who don't need Americans) can keep this market elevated to a large degree. Offsetting that is the weakness in any company facing the US economy without foreign exposure but in "early cycle" moments like we are now, those are in fact the best performing stocks as the market is "forward looking" and can clearly see the great recovery of September 2008 - so the whole market celebrates at those times. Personally what I envision is a long sideways period with a wide range of maybe 20-30% up or down... but no real progress. Hope and inflated asset values (Fed will be printing hard core well into 2009 in my opinion) will keep us up, and the real economy will keep dragging us down. So a few more years of sideways - I mean what's a few more years between friends when we've already lost the first 8 years of this decade? [March 28 WSJ - Stocks Tarnished by Lost Decade] And they said we'd never turn into Japan (who has been in a rut for 2 decades).... well one decade down, 1 to go and we'll catch up!

Since we are not going to change focus 180 degrees for a 5-8 day "early cycle" party, while we called this sector rotation last week, we simply cut back on long positions (which would be sold off during "early cycle, strong dollar" party time), and bought a few names that would participate in said party. If this party lasts as long as the previous ones, we should be nearing midnight... as with the "bottom is in financials" party... of which the time/date was incorrectly posted by CNBC at least 7 times the past 8 months... the "early cycle" party has now been postponed at least 4 times... so now we are in the 5th time... I am sure the 6th time should arrive about a week before the NEXT Fed meeting when Uncle Ben will fight inflation by holding rates steady and furrowing his brow. This will cause inflation to crumble in the States. And the dollar to rocket. He might also write 2 sentences about inflation in his statement. That would cause inflation to leave Earth and move to Mars.

It is still earnings season which is hard to remember, in all the fuss about the "inflation fighting" mid week, but we've continued to (knock on wood) by and large avoid any earnings blowups (hard to do with 50-55 longs) - we did have an incident with Chicago Bridge & Iron (CBI) but she was promptly shown the door after costing us $4K mid week. We actually had some huge % winners this week but most of those names were very small holdings, mostly in China so the overall fund did not advance much off these winners. We did catch a nice trade in Gafisa (GFA), but for the most part we were expecting this sort of "rotation" week as Uncle Ben "fought inflation" by cutting rates 25 basis points and signaled his utmost concern for inflation by typing 7 words about it. This was enough to set off the bevy of NYC traders into "strong dollar is here, Fed is gonna kill inflation now" mood. As always, it's silly but we must wait patiently for our stocks to get trashed those weeks, until sense comes back to the market and the same winners continue forward to be future winners. We did get some nice rotation into tech this week as well, which has been a huge laggard this year but aside from 4-5 names I cannot find any true secular growth stories in that sector - it has become a very cyclical business living off its old glory days. But that doesn't matter on weeks like this one. Our commodity based stocks took a hit, and 7 of the 8 Ultrashorts we carry took hits (especially the ones betting against "early cycle")... we did get some rally on Friday in the coal names but this was just not a week that benefited our type of holdings by and large, as our financials/homebuilders/tech stocks don't offset the rest...

So from here where do we go? We've had the "strong dollar" rally take place - retailers have ramped huge on the riches coming to them from rebate checks, etc etc. Restaurants are flying... I guess people think that's where the rebate checks go next... homebuilder booming... I mean that's where the rebate check goes next (do you notice how every group is really needing that same $600 check?) I think most of this is already priced in and I expect sooner rather than later (by middle of the month, no later) a reversion back to "weak dollar" plays - I mean just today the Fed signaled its "inflation fighting" by agreeing to send out billions more US Pesos in exchange for bonds loaded with auto loans, credit card debt, and student loans. More "strong dollar" ammo. In essence the whole strong dollar theory is: the US Fed is so awesome that it happily threw its middle and lower class under the bus... unlike those stingy Europeans who are still considering HIKING rates [Apr 22: Euro Hits $1.60 as ECB Hints at Rate Hikes].... therefore we will be the FIRST to get back to a "high growth" (read: building homes) economy, while the Europeans struggle with 1-2% growth with less inflation.

Now why would the Europeans consider raising interest rates in their slowing economy? That's not what banks do - they usually LOWER rates in a slowing economy. But you see - these Europeans live in a parallel universe and have a little problem called inflation - luckily our immigration control keeps inflation out of our country; so we don't have the same issue every other country on the globe has. This allows us to cut rates as much as we want. Well that's not completely true - see sometimes inflation sneaks in and our companies complain about how their input costs are rising through the roof... but we have a magic thing called "government reports" and by the time that little bugger meets "the Eraser" (tm) aka government reports.... well inflation just goes away i.e. deported. Anyhow back to the theory.... Since we are SO far ahead of the curve (i.e. our central bankers are soooo smart) and flooded the world with Pesos, it only stands to reason that those laggard Europeans whose economy will slow in the future must now follow our path of easy money. So when they throw their lower and middle class to the wolves with cuts (causing an outflow from their currency), our mighty dollar will rise since our low rates won't seem "so bad" compared to the Euro's rates! Yippee! The race to the bottom (who has the worst currency) will begin anew! Gooooo TEAM USA! It sounds like I am being sarcastic, but folks -- this is truly the reason why people think the US dollar should go up.

Technically the indexes, buoyed by the news of our no/low inflation, full employment economy took stocks up and up... we finally broke out of a long range and crossed over 1400/1405 on the S&P 500. Next resistance is the 200 day moving average up there in the 1430s. But another week of hear no evil, see no evil should get us there... as long as the cult believes that the 2nd half will be a recovery period than we can continue on up... forever. Until evidence comes in to the contrary. But that won't arrive until October 2008 (Q3 earnings). Or January 2009 (Q4 earnings). And by then the herd will have switched to "yeh we were wrong about the 2nd half recovery but now we have the 1st half 2009 recovery"... see, it never really ends. Now if the herd does get their wish about a stronger dollar, than the only oasis in earnings (international sales, and weak dollars) suddenly goes away.... and we're left to rely on (dramatic music here) the American Consumer. Eek! But we can't be worried about that... it's all about the strong (cough) dollar. Keep in mind when CNBC says strong dollar they are simply upgrading the dollar from "near death" to "we removed the breathing tubes". That's strength nowadays. So we'll get back to the circus next week, and see how the market treats its 200 day resistance (about 1435). As I stated above, we could conceivably rally from here to year 2041 on the "2nd half recovery" theme.... I cannot predict when reality will slap the market in the face - even when it does I expect the downfalls to be cushioned by a flood of US peso so falling below January 2008 lows will be tough to do. Keep in mind that Uncle Ben has created US Pesos at a run rate of 20% annualized since Jan 1, 2008 so we'll have 1 new Peso to balance every 5 we used to have by Dec 31, 2008 - that's one way to make sure the market never falls again! not that that causes inflation or anything... just sayin'. [Apr 4: To the Newbie Economists Out there - a Horde of Helicopters has Moved In]

This week both the S&P 500/Russell 1000 gained 1.1% ; Rising Tide Growth Fund lagged with a -0.8% return, so we have up ground both on a relative (vs indexes) and absolute basis. This was another week where hedging positions with shorts & cash hindered more than helped. With that said, I am loving the top holdings in the fund on a 1 year basis. For the next week? They could all be trashed to the tune of 10% for all I know.

Price of Rising Tide Growth: $11.723
Lifetime Performance to date (vs Aug 3, 2007): +17.23%

Comparable S&P 500: 1,413.9 (-3.50%)
Comparable Russell 1000: 771.0 (-3.16%)

Fund return vs S&P 500: +20.73%
Fund return vs Russell 1000: +20.39%

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

World of Shortages - What's Next? Good ole Dirt.

This has been a theme of mine from day 1. Too many humans. Too many humans who are now not living in abject poverty. Remember, last year was the first that >50% of humans on the globe lived in urban settings... the small self sufficient rural lifestyle is now the minority (by a hair). [Jan 16: Speaking of a World of Shortages] The great irony of our day and age will be the general upswing in living standards for hundreds of millions (maybe a billion) will accelerate shortages, leading to an era of higher prices for all, leading to abject misery for most (but not those at the top). It's sort of circular. [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears]

Recommendation: make sure you get to the top of the food chain. If not at the top of the food chain - pray for a series of back to back to back to back technological breakthroughs that I cannot even fathom at this point.

Folks, rising prices are not due to the dollar or due to speculators. Maybe that causes it around the edges. I do believe the Malthusian era is now upon us. And I hope I'm wrong from a human perspective, but as an investor most of my investing themes revolve around this. Remember, it is not that we will "run out" of some of these natural resources, it is simply the fact that too much money (much of it brought into the world by Western governments out of thin air) is chasing too few supplies of hard assets (those supplies already stressed by the basic supply/demand dynamic), causing prices to go up. Out of the reach of those who can least afford it.

So we have a new shortage to add to our list... pork shortage? iron ore shortage? hops and barley shortage? corn? wheat? soybeans? cotton? potash? power? milk? salt? rice? Is it just me or do you notice a pattern? [Feb 24: Commodity Prices Over the Last Year] This is *all* caused by a weak dollar? and speculators? right? I didn't even throw good ole crude in there. But if the magic man in D.C. holds rates steady (or cuts less than expected and then "talks" about inflation) that will cause global inflation to go away... that's the Wall Street thinking. And these guys run our country's financial system.

What's the next shortage? Soil. Our faming techniques and stress on land (not letting the land rest in between seasons) are causing topsoil to run off at an alarming rate. Now I assume the shortage of dirt is going to affect some more than others... for example, people who have resorted to eating it to survive [Jan 30: Hungry Haitans Resort to Eating Dirt] But let's put more corn into our fuel tanks while we mull the issue.

• The planet is getting skinned. While many worry about the potential consequences of atmospheric warming, a few experts are trying to call attention to another global crisis quietly taking place under our feet. Call it the thin brown line. Dirt. On average, the planet is covered with little more than three feet of topsoil -- the shallow skin of nutrient-rich matter that sustains most of our food and also appears to play a critical role in supporting life on Earth.
• "We're losing more and more of it every day," said David Montgomery, a geologist at the University of Washington. "The estimate is that we are now losing about 1 percent of our topsoil every year to erosion, most of this caused by agriculture."
• "It's just crazy," fumed John Aeschliman, a fifth-generation farmer who grows wheat and other grains on the Palouse near the tiny town of Almota, just west of Pullman. "We're tearing up the soil and watching tons of it wash away every year," Aeschliman said. He's one of a growing number of farmers trying to convince others to adopt "no-till" methods, which involve no tilling of the land between plantings, leaving crop stubble to reduce erosion and planting new seeds between the stubble rows.
• Montgomery describes modern agricultural practices as "soil mining" to emphasize that we are rapidly outstripping the Earth's natural rate of restoring topsoil. "Globally, it's clear we are eroding soils at a rate much faster than they can form," said John Reganold, a soils scientist at Washington State University. "It's hard to get people to pay much attention to this because, frankly, most of us take soil for granted."
• The National Academy of Sciences has determined that cropland in the U.S. is being eroded at least 10 times faster than the time it takes for lost soil to be replaced.
• As such, true living topsoil cannot be made overnight, Montgomery emphasized. Topsoil grows back at a rate of an inch or two over hundreds of years.

So let's hope Monsanto (MON) figures out how to make disease free corn, which needs little water, and can be grown in a substance not called soil. As I said... technological breakthroughs... one after the other... will be critical to get through this coming era. But that is asking a bit much...

But don't worry. Buy stocks.

No position

Bookkeeping: Some "Raise Cash Trades"

I am taking some off the table in 3 positions to raise cash; these are bit larger sales than normal since my cash level is below where I prefer.

1. Intuitive Surgical (ISRG) this is now at a price similar to where I bought it (a bit too early) a few weeks ago - I still think potential downside risk to $260s so I'll buy back this stake there (or on a breakout over say $305 where the chart would improve dramatically). The stock is right below resistance of 50 day moving average of just over $300. ISRG down to 1.6% stake.
   
2. Morgan Stanely (MS) - financials have had a good run this week - so I am cutting back a bit more today, just short on cash and want to have money available on pullbacks in other names. I'd like to add back in $46s (current $50). There is no real technical reason (hence I didn't post a chart) to sell here, just a stock that has run in a sector that is way overbought IMO.... MS down to 1.7% stake
   
3. Foster Wheeler (FWLT) - tough call on this one; the infrastructure space has not been kind of late and earnings approach next week. I think expectations might be low since they "missed" last quarter and could easily see a big jump on even a slight surprise upward on earnings but sticking with my game plan of not being over exposed too much in any 1 name going into earnings I took some off as well. Technically the stock is breaking down below both its 50 and 200 day moving average but the "right results" in earnings could reverse that quickly. I think the weakness is more related to its peer group which has stunk of late. FWLT down to 1.6% exposure.
   

Either/or - I like my cash to be closer to 10%, and it's been in mid single digits as of past few days, so after my purchases yesterday (mostly coal) and this AM I needed to raise some cash. Until my investors send me new cash.... which in a virtual world... is impossible, I need to sell something to buy something else ;)

Long all 3 in fund; no personal positions

Don Coxe on Food Crisis

I can't embed the video but here is a link of Don Coxe on the Food Crisis. First time I've ever "seen him", my brother in intellect. ;) He agrees with me on the "food protectionism" & "social unrest" angles... big time.

Almost every solution Coxe offers (which are legitimate) would require worldwide government cooperation along with bringing down each country's protectionism towards their own farmers (not going to happen)

He also agrees with me on the coming meat inflation [Apr 23: Initiating iPath DJ Livestock ETN (COW)] - I will be early on this one but give me a year.

A worthwhile 8 minutes... I'd urge you to pray for good weather globally during each of those 8 minutes.

On the bright side, as the world devolves into anarchy over food, we (along with Russia) are the Saudia Arabia of food ;) I continue to believe productive global farmland will be among the best returning asset classes for decades.

[Jan 18: One Lonely Voice Agrees with Me on Food Inflation]

Long fertilizers, long COW; long fertilizers in personal account

Bookkeeping: Closing iShares Malaysia (EWM)

I need to raise some cash, and I am worried about global inflation beginning to hit the Asian countries hard. While China will subsidize itself to the nth degree since they are rich, and India is doing the same to a smaller degree - the smaller countries don't have the same horde of reserves. With Western governments continuing to flood the world with currency (something I don't see changing anytime soon), global inflation will only continue to accelerate and the normal everyday people of Asia are going to get blasted. Everyone is cheering the dollar because they think Europe will need to cut rates as their economies slow down, but frankly if they cut that will just flood the world with more euros. So Western currency will be flooding the world - creating even more inflation over and above what the US (mostly) and UK/Canada are helping to create now.

I do still like Malaysia's long term story as a natural resource exporter but this ETF has a lot of domestic service names which, if the story there is anything like the service sector in the US, when its populace gets hit with a large spike in inflation, I can imagine the people will be struggling. And they spend much more as a % of income on food than we do.

I have a nice profit here on a country ETF, iShares Malaysia (EWM) of nearly 10% from where I bought in mid March [March 17: Restarting Stakes in Malaysia and Singapore]. Selling 700 shares in $11.90s (bought in $10.90s 6 weeks ago) - this was a 0.7% stake in the fund.

No position

Bookkeeping: Cutting Ctrip.com (CTRP) to Almost Nothing

Much like Sohu.com (SOHU) [Apr 28: Sohu.com Crushes Estimates - Up 15%] I truly do not have enough Ctrip.com (CTRP) - the Chinese travel giant. What a move. I don't have much, but I am essentially selling almost all I have and just keeping a measly 5 shares. This move has been epic, but the company now trades at well over 60x forward estimates. Too rich for me (that is why I have not had a large position) but it gone from under 50x earnings to well over 60x in a span of 2 weeks.

Long both names mentioned in fund; no personal position

Employment Report and More Fed Actions

Due to the fiction that is the monthly employment report I won't mention it except for 2 things

#1 the economy continues to build jobs almost solely on the backs of healthcare and government. Here are my comments on this (if you are new to blog - this link is critical to read) [Apr 2: The Underemployment Rate is Rising]

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

#2 the Birth Death model is continuing to account for most of job "creation" - this is an utter joke. [Jan 27: Monthly Jobs Report & Birth/Death Model]

In brief the government guesses how many jobs were created by companies too new/too small to be calculated. So they have major leeway in "creating jobs" out of thin air.

This is how many jobs they created out of thin air this month: 267,000 (of which are 45,000 jobs in construction...)

Again folks, this is all fiction to reassure the American people everything is fine; tell me in what world the US is adding 45K construction jobs in the past month? Maybe in Walley World. Without the birth death model our -20K turns into nearly 300K jobs lost. But don't worry - be happy.

EDIT: I walked over to Mish's website and he says you cannot add -267 to -20 and get -287K so I'll take his word for it... he does berate this labor report for about 35 reasons however :) He calls the data from Bizarro World.

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

As for the Federal Reserve... what can I say - they continue to create liquidity any way possible. They have been doing historic things for months now... they even took the steps of taking mortgage backed securities on their books at the last ebb in the crisis. Today's move? They will now be taking bonds backed by auto loans, credit cards, and student loans off the banks books as loans in return for Treasuries. Basically the Federal Reserve balance sheet is now an open flea market.

But again don't worry - EVERYTHING is fine - that is why they are taking these historic steps... I mean these once in a lifetime steps are just part of a normal, orderly (did I mention healthy?) market and it's all good. Just buy stocks.

And again this is how they are "fighting inflation" - creating more paper money to flood the system... if this is fighting inflation I am scared to see what happens when they stop fighting it. There is only 1 quote in this story you need to know, and why inflation is ramping worldwide

• ``The world is awash in liquidity, it just isn't reaching the right financial borrowers,''

Yes it is going into all commodity and assets instead - (including equities) - pumping them higher and higher. You will see this at the grocery store, and gas station in months and months to come. (but hey your Ameritrade account will also be pumped up as speculators can use this money to chase a fixed amount of stock with an apparent unlimited amount of US Peso) Enjoy.

Bookkeeping: Taking more Profits out of Gafisa (GFA)

Gafisa (GFA), right near $50, has now increased 31.5% since my purchase Monday [Bookkeeping: Adding Gafisa]. I won't be a pig and I'm going to cut the rest of my position (@ $49.60) in half, taking Gafisa down to a 0.6% stake. Certainly it could run farther but I never expected this sort of short term move... I'll be buying on pullbacks but with such a strong move the pullback will need to be material.

I took some off the table in the $43s way back... Wednesday [Taking some Gafisa off the Table] at which time I wrote

I will let more go north of $45 if we get there.

Mission Accomplished. (also closing my personal stake)

Long Gafisa in fund; no personal position

Bookkeeping: Restarting Pride International (PDE) as Takeover Bait

I am restarting a position in an old name this AM, Pride International (PDE). This is a company which last year divested it's land drilling to focus on sea drilling [Aug 19: Some Updates on Pride International (PDE)]

Pride is an oil driller which is concentrating its business more and more on the most lucrative market, deep sea drilling. I have concentrated my holdings in this area because its the most insulated from ebb and flow of dayrate fluctuations (vs land drillers, or shallow sea drillers i.e. jackups)

Pride announced a sale of its land drilling assets in South America this week for $1 billion

Also George Soros, one of the most established and respected hedge fund managers (deep pocket investors) announced in a regulatory filing this week that its aquired a 1 million share stake in the company.

This cash infusion makes Pride a more pure play on deep sea ocean drilling, along with allowing it either (a) to develop a larger scale in deep sea drilling and/or (b) making it an even more attractive takeover candidate.

As you see, even then I thought it was a potential takeover candidate; and this was once the 2nd largest position in the fund [Sep 13: Kramer Agrees with me on Pride International... no, not Cramer... Kramer!]. However the stock was not performing and very lazy so by November I exited the position. I have not really been keeping up with the name but in my review of earnings tonight I came upon some interesting items... is that the smell of a potential buyout in the air? Sniff. Sniff.

• Oilfield services group Seadrill wants talks with U.S. driller Pride International (PDE) on a strategic transaction and has no hostile aims towards it, Seadrill said on Wednesday.
• On Tuesday, Houston-based Pride International said Oslo-listed Seadrill had taken a near 10 percent stake in it, and said it disclosed the holding against Seadrill's wishes in the interest of other shareholders.

While this is not a "secret", Seadrill which has a very experienced management team has taken a 9.9% stake in Pride - this spiked the stock from $40ish to mid $40s. Now after tonight's "disappointing earnings" the stock is back down to that gap in the chart... but earnings really are not the point. Commentary from Pride that they are "open to consolidation" set off my radar.

• Oil and gas driller Pride International Inc (PDE) posted a more than 100 percent jump in first-quarter profit that beat market estimates, and said it was open to consolidation in view of speculations about its possible merger with Norway's Seadrill Ltd.
• The company said it recognized the numerous benefits that could be achieved by further consolidation. We believe further consolidation will occur and we are always open to considering opportunities that would be compelling to our shareholders," a company official said in a conference call with analysts.

So unlike the Yahooligans we have a company that sounds very open to being acquired (at the right price - read higher). We might have a relatively easy t