Carrie Underwood - Sweet Child of Mine

Some fun on the weekend for any of you fellow children of the 80s (or early 90s). Never thought this song could be pulled off by a female or in fact anyone not named Axl but this is quite the performance. Especially considering this is live and not in studio. For those who don't know Carrie Underwood won American Idol a few years ago. Band sounds pretty good too.

Finally Some Mainstream Reporters are Figuring Out the "Spin" from Government

It is encouraging to finally see the first reports coming out where people are not just taking the government numbers in spoon fed style and insisting everything is just dandy - although this AP reporter specializes in economics so obviously she is an outlier of high intelligence (as all those with economics backgrounds are) *cough*

Next week, we have our lovely government inflation statistics and I am now praying for these numbers to begin showing deflation, in the face of $125 oil and food prices off the chart, so we can show what a joke they have become. I am mulling creating a section of the blog just devoted to the putrid reports just so I don't have to repeat myself every 30 days when these same reports come out and I need to explain to the new readers why these are so darn wrong. Only when these reports so outrageously differ from reality will people finally acknowledge how the "fine tuning" over the years has created an entire tapestry of ... well... deceit. Sorry to say it. If you keep telling the sheep everything is ok, the sheep will continue for years believing it I suppose. [May 1: Is it an Official Recession? NY Post Says it Should Be] Remember, if the government agency that created Gross Domestic Product used the 4% inflation rate that another government agency creates - we would of had negative GDP. But instead they came up with their own number....2.6% inflation so *POOF* we have positive growth last quarter. Of course 4% is a hoax in itself, but 2.6% is a super hoax - but it makes the numbers work and keeps us out of recession... so its the "plug and play" number.

I seriously am at the point where I hope as more workers simply give up (and hence are no longer counted as unemployed) our unemployment rate drops to 3%, our inflation numbers start showing negative returns (indicating deflation) and our "retail" sales take off, indicating inflation booming which we can spin as "the consumer is back". And we can hear the political spin of "why is everyone feeling so insecure when the numbers clearly indicate the economy is booming". Only when it reaches that extreme, will anyone in power really be questioned on the constant modifications to data over the years, to make the numbers always look better than they should.

• The unemployment rate drops. Productivity grows. The trade deficit shrinks. Sounds great, right? Not so fast. Some seemingly good economic numbers can be something of a mirage masking weaknesses in the national economy.
• Let's take the unemployment rate, which dipped to 5 percent in April, from 5.1 percent in March. A closer look reveals that the decline in unemployment is not as good as it looks at first blush. The drop came as the number of people holding part-time jobs for economic reasons swelled to 5.2 million in April, up sharply from 4.4 million a year earlier.
• The dip in the unemployment rate also occurred as employers cut jobs for the fourth month in a row, pushing up total losses beyond the quarter-million mark -- to 260,000. Wages barely grew and workers' hours were trimmed.

My take on the "unemployment" and "underemployment" rates are here [Apr 2: The Underemployment Rate is Rising] in which I outline the "reality". If the government were keeping statistics now as they used to the pure unemployment rate would be around 13% (great chart that shows this in that blog entry). And that does not count all the people who are underemployed - working part time because they cannot find full time work. Yet we are told 5% (and dropping for god sakes). Last our 2 centers of job creation are simply our government continuing to build jobs constantly (and who pays for that?) and the already obese healthcare system (and who pays for that?) This is the bain of a service economy when most sectors that produce goods that the rest of the world would like have been stripped from the country.

• U.S. productivity -- an important ingredient to the country's long-term vitality -- grew solidly in the first three months of this year. That efficiency gain, however, came at the expense of workers. "Productivity gains were due primarily to declines in hours worked," the Labor Department's Bureau of Labor Statistics explained. Those hours fell at a 1.8 percent pace, the biggest drop in five years. Employers also shed workers in the first quarter. Thus, companies were able to produce more with fewer workers, and that boosted productivity, the amount an employee produces for every hour of work.
• "American workers, you just got to love them," said Joel Naroff, president of Naroff Economic Advisers. "They just seem to produce more and more and more. That was the case in the first quarter of the year as fewer workers working fewer hours managed to produce more," he said.

I didn't write about this in the blog, because frankly I am just tired of the spin each time one of these economic reports comes out - I will agree though this is GREAT for corporations and Wall Street. Terrible for Main Street. It is essentially what the auto industry has been going through for over half a decade. Cut jobs, push the work from the cut jobs onto the remaining workers and boom "increasing productivity"... surely there was (and is) fat across corporate America and the first low hanging fruit are probably viable cuts, but when you do this for years on end - you cut into the bone. And a workforce that cannot complain or fight back because they know finding a new job without taking a steep cut is difficult, and there are plenty of unemployed out there waiting to take your place. But I digress, 7 people today are doing the work of 10 people four years ago - productivity is up - rejoice.

• Let's take a closer look at the nation's trade deficit. It shrank to $58.2 billion in March as the United States' appetite for imports fell faster than foreign demand for U.S. exports. However, demand for foreign-made autos, furniture, toys, clothing and other goods also waned, underscoring the strains faced by U.S. consumers.
• In the first quarter of this year, consumer spending increased at the slowest pace -- a mere 1 percent growth rate -- since the last recession in 2001. Consumer spending accounts for the single-biggest chunk of U.S. economic activity.
• When exports and business' inventories are removed and imports are added in, economic activity actually contracted at a 0.4 percent pace in the first quarter.

Now in a healthy economy, I (and many) would rejoice in a dwindling trade deficit - meaning we are exporting more (and bringing in money) and importing less (and sending out less money). But we don't want to see this happening due to destruction of US consumer consumption. And that's what happened this time around, as we discussed here [May 9: March Trade Deficit Reflects 2 Bad Trends]

• In another anomaly, consumer borrowing rose in March at the fastest clip in four months. It sounded like people were back in a buying groove, with credit card charges especially heavy. But building up the credit charge balances is another form of debt.
• Economists said people don't have a choice because their paychecks aren't going as far and they can't tap into their homes, as they did during the housing boom, for ready sources of cash.

We discussed this almost verbatim in this entry [May 7: Roundup for the Day]

• When you look closely, "you do see some dark economic clouds in the silver linings," said Mark Zandi, chief economist at Moody's Economy.com. "The darkness is much greater than any sunshine."

The spin will continue; the sheep will continue to be led astray. We'll keep reporting the reality, if for nothing else other than educational purposes. Hopefully more news organizations figure it out - it seems the press might be the only check on the spin-meisters. In a predominantly financially illiterate society, the press might be the best weapon we have (and if that is the case - pray for us...yikes)

Bookkeeping: 'Rising Tide' Performance Week 40

Week 40 performance of the mutual fund

Comments: We began "our" 4th quarter in rip roaring fashion. While the market stagnated in a quiet week, most of our positions did quite well - and unlike the past 2 weeks when the "early cycle recovery" stocks jumped upward on an "imminent recovery, strong dollar" thesis, thereby hurting our short positions, we actually made money on that side of the ledger this week. Topped off by a very good run in coal to begin the week and a lot of smaller names finishing off huge 5-6 week runs, we were able to make some serious hay this week.

As for the market, technically - the indexes did not really go anywhere but we just continue our sector rotation, back to the themes that have been working for much of the past year. We remain range bound between roughly S&P level 1430 on the top, and 1370 on the bottom. We've been here now for over 3 weeks, so until we make a climatic move either up or down through one of these levels we are turning to a more neutral stance. The news flow continues to be awful but until the market acknowledges the reality on the ground, we can't turn into full bore bears. Where we are now is just what I call a "white noise" area - neither here nor there. Maybe $140 oil might make this market care about the reality on the ground - I don't know.



I spent most of this week raising cash after entering the week with a 3.3% position; and selling off a portion of a host of our winners. In a non mutual fund environment I'd probably be in a much higher cash position as I believe risks remain high here. Again it's very reminiscent to September/October 2007 when we rallied off the first Fed discount rate cut (parallel to Bear Stearns bailout) where we rallied hard for 5-6 weeks and then began to tail off ... almost identical set up right now. We'll see what happens; predicting the future of the overall market is a fool's game so we'll take it day by day. But just about every position I favor has made a huge run in the past month and a half, and the risk/reward no longer is in our favor in terms of adding new monies to these positions. Digestion of superior gains is now needed. We made a lot of transactions early in the week (mostly sales) as we cashed in winners, and built up cash reserves. The rest of the week was relatively quiet.

The S&P 500 lost 1.8% this week, and the Russell 1000 lost 1.5% ; Rising Tide Growth Fund generated a +3.1% return, so we had a very positive week, creating positive return on both absolute and relative basis. I expect to give some of this back next week since the gap versus the indexes was so huge.

I'll have an update next week on our progress towards fund pledges - we've had a huge month thus far - thank you!

Price of Rising Tide Growth: $12.084
Lifetime Performance to date (vs Aug 3, 2007): +20.84%

Comparable S&P 500: 1,388.3 (-5.25%)
Comparable Russell 1000: 759.2 (-4.65%)

Fund return vs S&P 500: +26.09%
Fund return vs Russell 1000: +25.49%

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

It Pays to be a Firefighter in Vallejo, CA

First let me preface this entire entry by saying, I don't bemoan the type of work firefighters or police officers do - along with coal miners these are among the toughest jobs in America. That said, I wrote a piece on the bankruptcy in Vallejo [May 7: Vallejo California Votes for Bankruptcy]; Mish over at Mish's Global Economic Trend blog followed up Thursday with a look at the salaries of public workers in the city. He took a look at all the workers who made more than $100K - there were 292 city workers (I don't know out of how many) - but this is only a town of 100K people. Not New York City.

Below are charts of the $200-$299K and $180-$199K ranges. Dominated by firefighters (and some policemen). Again, I have no bones with these people being compensated for tough work but when private industry is being battered by falling wages, and low(er) paying jobs - how can our tax dollars continue to pay such wages? As I wrote in my earlier piece

What I've been amazed to watch locally is how local governments (in a 1 state recession we've had for about 4 years now) won't cut jobs or benefits (for themselves) while private enterprise is cutting jobs, benefits, wages left and right. I guess they will hold on - until they go BK. But we need to either see very sizeable tax increases and/or job cuts/services lost to pay for our excesses of the housing bubble.

Unfortunately this has to change in a downwardly mobile country such as ours; a country full of new Walmart shoppers. [Dec 26: Target Shoppers Turning into Walmart Shoppers] It is not fair for the private sector to take such hits, while public sector employees make wages completely out of whack with where they would be in "free markets"; and subsidized by those working in the private market. It sounds cruel but this is our reality - "shared sacrifice" is a necessity.

Friday Stories Part II

We discussed this on the natural gas side Wednesday [May 7: Roundup for the Day]

And don't look now, but in a World of Shortages even natural gas could be causing us some issues NEXT winter says Goldman Sachs. (remember, global competition for resources - if we won't pay, someone else i.e. a government with cash - will)

But don't look now, it's going to hit whether your utility uses coal or natural gas... this is sort of like investing in oil stocks 3-4 years ago - to offset the prices your paying in real life, you need to make money on the stocks in your investments... I think there is going to be serious sticker shock next winter; and if you think this next winter will be bad just wait for the one after that - the increased costs will take time to filter through the system. As I say almost daily - the real inflation hitting this country is going to shock people - especially those who dictate our national policies on fictional government reports. We are going to see some major upheavel as people become very angry as things they consider necessities begin to get out of reach for those on the lower end and consume a much larger % of income on the middle end USAToday: Coal Price Hikes Boost Electric Rates, More Pain Coming

• Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year.
• There is an abundance of coal in the United States, but like other commodities its price is increasingly dependent on events elsewhere in the world. Snowstorms this winter cut coal production in China and heavy rain flooded mines in Australia — the world's largest coal exporter. Meanwhile, demand for coal to generate electricity and make steel is rising almost everywhere, especially in fast-growing China and India.
• Central Appalachian coal, a benchmark grade that's widely used by power plants, has jumped from around $40 a ton in early 2007 to almost $90 a ton now. Coal from the Powder River Basin in Wyoming and Montana, which has about three-quarters the heat content of Central Appalachian coal, jumped from less than $10 a ton to almost $15 a ton over the same time period. Utilities must burn more Powder River Basin coal to generate an equivalent amount of energy, and it must travel east by rail, which adds significantly to its final cost. Utilities such as American Electric Power, for instance, mostly burn Appalachian coal in their eastern plants, but rely on cheaper Powder River Basin coal in the west.
• American Electric is able to limit its rate increase in West Virginia to 15% — even though coal prices have doubled recently — because, like most other utilities, it buys coal via a portfolio of hundreds of contracts that let it lock in prices. But as contracts expire, they must then be re-negotiated at rising rates. (so unless we have a dramatic drop in coal prices, we are only passing along a fraction of the coal price increases at this time - let's see how government steps into the "free market" and tells utilities they cannot raise prices to 'market levels' - I'm sure that will come in "free market" America)
  
• That's bad news for consumers like Rodrigo Goines, 36, a disabled Lexington, Ky., resident whose government assistance checks barely cover his meager living expenses now. "I'm not going to be able to afford it," Goines said. "If they keep raising these rates, I'm gonna be in trouble." (this will be a growing refrain)

USAToday: Gas Prices Rattle Americans

• Record high gas prices are prompting Americans to drive less for the first time in nearly three decades, squeezing family budgets and causing major shifts in driving habits, federal data and a USA TODAY/Gallup Poll show.
• ...most Americans say they are cutting back on other household spending, seriously considering buying more fuel-efficient cars and consolidating their daily errands to save fuel.
• February was the fourth consecutive month in which miles driven in the USA fell, an analysis of Federal Highway Administration data show. There hasn't been a similar decline since 1979, when shortages created long lines at pumps. (this is "demand destruction") The decline, while small, is significant because the U.S. population and number of households, drivers and vehicles grow by 1% to 2% a year.
• Half of households with incomes below $20,000 say they face severe hardships because of soaring gas prices. Three-fourths of households making $75,000 or more also are changing how they use their cars.
• Dawn Morris, a consultant in Dover, Del., is blunt about how gas prices are affecting her family. "It's killing us," she says. She and her husband often stay home on weekends, and when she balances her checkbook, "every third line it says gas: $20, $30, $50."

It's so bad, Americans are even abandoning SUVs! Perish the thought!

• High fuel prices are causing the value of used SUVs to plummet, often below what's listed in the buying guides many shoppers use to negotiate with dealers.

Ok enough about energy inflation... let's move on to food inflation... woo-hoo. NYTimes: High Prices for Staple Foods Dip, but Volatile Markets Remain. Again, keep in mind as we think of people in many developing countries ... food makes up 60-70% of their expenditures - so think of your mortgage/rent... double its cost to you each month and that is what % they spend on food. Now assume your rent/mortgage has doubled in the past 12-18 months. Now panic. That's the equivalent to what is happening to the world's poor...

• After months of startling increases, the prices of rice, wheat, soybeans and several other foods have come down recently, a development that could ease some of the panic in global food markets.
• Prices remain volatile and remarkably high by historical standards, and few agricultural experts expect the days of inexpensive food to return soon. There is no sign of a drop steep enough to make food affordable again for the hundreds of millions of people in poor countries who are struggling to maintain adequate diets.
• The spot price of rice from Thailand has dropped by close to 20 percent in the last two weeks after nearly tripling in the first four months of this year.
• Many retailers and wholesalers around the world had not yet passed the full extent of this spring’s price increases along to consumers.
• Rice is perhaps the world’s most politically fragile crop. Nearly half the world’s population depends on it as a staple food. An even higher proportion of the world’s poor people depend on it, as imported rice has displaced local crops in cities across Africa and the Caribbean over the last decade, even as the crop retained its primacy in Asia.
• The spot price of a heavily traded good grade of rice exported by Thailand peaked at $1,100 a ton in late April, with a few purchases at even higher prices by buyers demanding huge quantities. But traders said Thursday that the going price was $880 to $920 a ton, although buyers of large quantities could still expect to pay more. The latest rice prices are still far above the price of $385 a ton prevailing in mid-January. (again, imagine the impact of your mortgage/rent x 2 - going up by this amount from January to today; we only spent 10%ish of our income on food here in the States)
  

Last, let's move on to some interesting stories in the the world of real estate

First, in the residential real estate market my chain event prediction from last summer of "subprime to Alt A to prime" is now appearing to be hitting the prime mortgage borrowers. Remember, everyone was placing the blame on those "darn subprime borrowers" and once we fixed them - all the housing problems would go away. It sounds ludicrous now but that was the "wisdom" spoken to us last summer. (by the same folks saying "no recession folks, just move along - booming in 6 months") Instead I was saying subprime is the symptom of a larger disease - just the tip of the iceberg. [Feb 14: NYTimes: Mortgage Crisis Spreads Past Subprime Loans] Here is the beginning of what is underneath the water's surface: USAToday: Mortgage Crisis Seeps to Prime Loans

• The first concrete evidence that delinquencies on mortgage bills have spread well beyond those with subpar credit shows that even prime borrowers have increasingly fallen behind on their house payments. The figures remain relatively small so far. But if they rise further, delinquencies on prime loans — given only to those with good credit — could prolong the housing crisis.
• About 2.3% of prime loans were 60 days' past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That's up from 1.4% a year ago.
• "We're seeing the prime area coming under pressure, with delinquencies moving up," Bethune says. "We're in uncharted territory, and it's definitely been affecting the prime market, although it's still not anywhere as severe as in the subprime market."

3 Stories that may or may not interest you but I found a bit fascinating

1. I'm always amazed at how people who take outsized risks in finance get 2nd and 3rd chances to squander their investors money. I guess it's cool to do in real estate as well in NYC - the WSJ has a story about a big time real estate developer who went bust 16 years ago; and now he is repeating his act in Vegas. Maybe he'll get another chance in a few years - because he can chalk it up to a "once in a lifetime dislocation in markets" - just like failed hedge fund managers do (after pocketing millions of money of course) Here is an exact quote from the story that sums up all the "dumb money" in this country chasing the same people who keep getting this money for some reason In an interview earlier this year, Mr. Eichner said he was a victim of the credit crisis, and that banks eventually would lend to him again. "It's probably pretty safe to say that somewhere in 2009 or 2010, Bruce Eichner will surface with another one, something," he says. "There's zero that will stick to my shoes." - and that folks pretty much sums up the world of the rich and infamous.
2. All 3 major candidates rode the real estate boom, along with you - curious to see all the real estate these 3 folks own? The WSJ has an overview (hint, the McCains own at least 7 properties - I really need to marry a beer distributor - if any are reading please email me) And we wonder why Huckabee was the only Republican who was talking about the tough economy in the primary.
3. You thought private equity guys were out there doing deals with corporations? building, fixing, and then selling businesses? Nah...that's so 1990s. This new era of private equity guys goes and buys rent controlled NY apartments, harasses the current tenants to the point they leave, at which point the private equity firm can jack up the rent to the new market price and BINGO - cash flow spigot flows. See, who said private equity was dead?
   

• Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.
• Nevertheless, tenants must answer the notices in court, but many have responded by moving out, court documents indicate. When they vacate the apartments, the owners can increase the rents substantially.

You just have to love how big money works in this country :) The little guy continues to get smashed. If it's not gas prices, or food prices, its ornery private equity guys using questionable/illlegal (I assume sending false notices of rent bills is not kosher?) to try to make some quick bucks so they can join the McCains and buy that 6th house. BooYah! (tm) Did I mention the 15% tax rates these guys get for such work? Nice!

March Trade Deficit Reflects 2 Bad Trends

The one saving grace of this economy has been exports - the "weak dollar" friends love to point to exports even though they make up a minority of our economy nowadays (versus say the 1970s). Today's Trade Deficit numbers reflect 2 troubling trends - one expected (lower imports) and one not so much (lower exports).

We can understand the lower imports - as the dollar weakens it makes our goods cheaper for the rest of the world but it makes goods more expensive for our own citizenry. Combine that with all the ills facing the populace and you can see demand destruction (price points reaching levels where demand drops) happening. On the other hand, the reduction in exports strikes me as troubling - I am not sure what to pin it on... my first thought is weakness is now finally spreading globally, especially Western Europe. To be fair, the exports are coming of an all time high last month. We'll see next month if this is a new trend, or a blip. Now Wall Street might not care about the consumers here in the US, but if our exporters start having trouble - then they are going to have to take notice of that (some day).

Conclusion: Thankfully this shall all pass in (say it with me) "6 months" and things will be booming by year end. The recession that never happened, will be over. Even though it never started. Book it Dan-o.

• The U.S. trade deficit narrowed sharply in March as demand for imports fell by the largest amount since the last recession was ending.
• The smaller deficit reflected spreading weakness in the U.S. economy, which cut demand for imports by 2.9 percent, the largest one-month decline since December 2001, one month after the last recession ended.
• The decline, which pushed imports down to $206.7 billion, was led by a 5.9 percent decrease in America's foreign oil bill. The amount of petroleum fell as the average price for crude oil jumped to an all-time high. Imports of autos and a wide variety of other consumer goods from furniture to toys and clothing also fell, reflecting the hard economic times facing U.S. consumers.
• Exports, which have been one of the few strong points in this period of weakness, suffered a setback in March, falling to $148.5 billion, still the second highest level on record but down 1.7 percent from the all-time high set in February. Sales of commercial airliners, cars, computers and machinery were all down.
• The politically sensitive deficit with China dropped by 12.4 percent to $16.1 billion, the smallest level in two years, as U.S. exports to China climbed to the second highest level on record, led by sales of medical testing equipment and computer chips. At the same time, imports of Chinese products dropped sharply, reflecting lower demand for cloths, textiles and toys.

LDK Solar (LDK) Founder Starts Thin Film Company - Competition for First Solar (FSLR)?

Intriguing news! Details still appear sketchy but this young gun CEO seems like one of those guys you really want to hitch your wagon too based on where he has been, so early in life. I'd like to see details of the technology before commenting further.. and I'd like to note this news has nothing to do with LDK Solar itself... it's just the same founder. Just in case Best Solar IPOs in the US I better start watching it; it will be interesting to hear how far along they are and what First Solar (FSLR) management thinks of this (they do have a huge head start)...

That said, all these huge initiatives plays into my thesis that we are going to have a major industry shakeout and (shorter term) gluts somewhere in the 2010-2012 time frame. [Jan 3: The Long Term in Solar] Anytime Abu Dhabi jumps on the train with their unlimited pocketbook...

• The LDK Investor Group says Best Solar, a thin-film startup founded by LDK CEO Xiaofeng Peng, placed the $1.9 billion order that Applied Materials reported to the U.S. Securities and Exchange Commission in March.
• Rumors about Applied Materials’ (NSDQ: AMAT) mystery customer have been flying ever since the company reported a $1.9 billion sales agreement “with a privately held corporation based outside the United States” in March.
• Some industry insiders thought the purchaser was Masdar, Abu Dhabi’s alternative-energy company, which later that month announced it would build $1.2 billion worth of concentrating solar projects in the south of Spain. Others guessed it was Moser Baer, which in February had said it would pump $1.5 billion into thin-film solar, and still others thought it was Chinese solar-wafer manufacturer LDK Solar (NYSE: LDK).
• Best Solar is an independent company that is unrelated to LDK -- other than sharing a founder -- and that aims to become the world’s largest supplier of thin-film solar panels, according to the report. “I’m sure this is correct,” said Telenius, who wouldn’t disclose his source but said it was “a direct source” and that the information was confirmed by “lots” of other unnamed sources.
• Jesse Pichel, an analyst at Piper Jaffray, said he believes the report is correct, based on his own information. The theory also fits in with LDK’s annual report, which states that Peng and his family members “are considering and may invest or otherwise participate in his personal capacity in several alternative-energy projects, including projects involving thin-film solar technology, solar-thermal, wind energy and biofuels.”
• “If true, it means the CEO’s personal business is directly competing with LDK shareholders,” Pichel said. “It’s a competing technology – one’s thin-film and one’s polycrystalline. And given that Peng’s the driver of the company, his attention may be diluted now that he’s having to run a big private company. He’s ramping a 1.5-gigawatt poly plant, a 1.5-gigawatt wafer plant and a gigawatt of thin film all at the same time.” (very good points)
• In the report, Telenius wrote that distraction is a concern, but also found some silver lining: Peng “is reinforcing the impression we have of his ability to strike bold deals and launch large companies – a true entrepreneur – and that he is committed to building a strong solar industry in China.”
• Applied Materials’ technology is still a risky proposition, said Brian Yerger, a research analyst with Jesup & Lamont. “There’s a lot of promise and a lot of hype and market capacity built into their solar division, and they’re going to be spending a lot of money and [capital] to ramp it up, but in reality they don’t have any modules that generate power yet,” he said. “It’s unusual for someone so large with such a long history spending so much to take a large shot at solar. There’s always some risk that a startup could come up and find a game-changing technology that could make Applied Materials obsolete.”

Again, this is still too new to process without more detail but it is fascinating. We should also be hearing the drumbeat of how Applied Materials (AMAT) much like Energy Conversion Devices (ENER) is now a "solar company" - of course AMAT is much bigger than ENER...

Solar is going to be a very interesting space for many years to come - but the competition is going to be brutal.

Long LDK Solar in fund; no personal position

Friday Stories Part I

Most of these can be categorized under "it doesn't matter, until it does" and "go where the real money in the world is" (it's not here)

I'm on record last year saying 2008 will be the worst auto sales year in 2 decades... even Toyota is not immune (what is surprising is people are "surprised"?) As every good multinational is doing (even Japanese types), they are pushing to diversify away from the good ole U.S. - and quickly.

• Toyota Motor said Thursday that the slowdown in the United States economy would probably cause its first annual profit drop in nine years, accelerating a shift by it and other Asian car manufacturers into emerging markets like China, Latin America and the Middle East.
• The shifting emphasis toward emerging markets is part of a broader trend in the industry, and underscores the declining stature of the United States in the global economy. “Our profit structure has become more geographically balanced, with growing contributions from resource-rich countries and emerging countries,” Toyota’s president, Katsuaki Watanabe, said in a statement.
• Last month, Honda Motor projected an 18 percent drop in net profit this fiscal year, citing similar reasons.

Speaking of the Middle East, Citibank is sending one its most senior investment bankers to Dubai - permanently. I assume for more than just taking a hand in hat to constantly ask for capital infusions. Again... who has the money? [Feb 2: $2 Trillion of Petrodollars Need a Home this Year] Invest in companies those countries need. They will slow, they are not immune to global inflation but it's all relative....

• Citigroup announced late Wednesday that it was moving one of its most senior investment bankers to the Middle East, hoping to establish a stronger foothold in the oil-rich region.
• Mr. Verme will continue to oversee Citigroup’s investment banking division alongside Raymond J. McGuire, his co-head based in New York. But he will also take a big hands-on role in the region, helping develop relationships with new clients and build Citigroup’s presence in the Middle East.
• With a surge in petrodollars and rapidly-rising infrastructure needs, the Middle East has become a crucial area for all global banks. Investors in the region spent more than $64 billion on deals abroad by last September, more than double what they spent in all of 2006.

Moving back to the United States of Subprime, sure same store sales were "better than expected" (while generally being awful) but at what cost to profits? We are only seeing the top line (sales) - we'll soon see the bottom line (profits)

• "More retailers discount more heavily than in the past," said Sherif Mityas, a partner at consultant A.T. Kearney. "What they are picking up in sales they are giving back in margins. This is not a fundamental shift that we've hit bottom and now all is rosy."
• Better-than-expected sales bolstered by increased discounts and promotions most likely will translate into a lower bottom line, analysts said. Saks said Thursday increased promotions and clearance will have "a meaningful negative impact" on its first-quarter gross margin rate.

Back to my favorite topic - the global food crisis....
At the Chicago Board of Trade, they could see the potential for the commodity crunch well over a year ago. But let's not blame "speculators" for it all (a convenient excuse which was used in the late 70s as well)

• Casey explained that the traders and other followers of agricultural commodities began to notice about a year and a half ago that several factors were coming into play that would cause a squeeze in supply of rice and other agricultural futures at a time when demand was rising in places like China and India.
• "It became apparent we were going to become incredibly tight," he said. "Then at the beginning of the year we started noticing millions of dollars of hedge fund money sloshing around" all agricultural commodities.
• David Lehman, director of commodity research and product development at the CME Group, said that hedge funds, or other speculative money, have certainly added to the fever around these commodities lately. But he added that the so-called hot money is not what is driving the market, as some have claimed in the oil and gold markets. The latest report from the Commodity Futures Traders Commission about outstanding rice contracts shows that only about 19% of them are held by non-commercial investors, or companies that might be speculating as opposed to actually hedging against price moves.
• The food crisis is likely the first of many we'll see over the years as vital commodities suddenly appear scarce: oil, food, energy, even water. It's a warning sign not just for markets and investors, but for the entire prospect of a global economy. (I've been saying this since day 1 of the blog - the globe enters a new era - the "World of Shortages" scenario - one day wars will be waged over fresh water like they are today for oil - err I mean weapons of mass destruction)

Well if we cannot blame speculators... let's blame... I don't know... those pesky consumers! How dare they eat. Let's blame everyone instead of thinking about the root causes, ok? We tagged the rice issue before it hit the mainstream [Feb 13: As Asia Food Prices Bite, Analysts Warn of Worse to Come], because we actually follow news outside the US. Until the Costco news came out, it didn't register a blip to the national media. In January [Jan 21: Food, Food, Food] I wondered if CNBC would get around to this story by this summer... but they nailed it by late spring. I also said we need to pray for perfect weather globally this year; so far... not so good.

• (Rice) Prices have eased about $4 from the record level in April of around $25 per hundred pounds on the Chicago Board of Trade, but the situation isn't likely to improve much following last week's devastating cyclone in Myanmar that left as many as 10,000 people dead and a million homeless.
• Myanmar was the seventh largest producer of paddy rice in 2005, producing an estimated 24.5 million metric tons that year, according to unofficial figures from the Food and Agricultural Organization of the United Nations.
• "Basmati rice can only grow in a couple of places and with Myanmar out of growing this year, it's devastating," he said. "Rice only grows once a year, so there are no do-overs." Before the cyclone, there was more panic than shortage, "but panic is good enough and rice prices may now have much further to go," he said. "To lose Myanmar rice is a real loss of supply, not hoarding."

Scary thought of the day - as I outlined a long while back our crop shortages will rotate from 1 product to the next... by diverting corn into our trucks, we caused a shortage in wheat, soybeans et al in 2007. Then the following season (this season) we are going to see a big surge in wheat, soybeans plantings to take advantage of the high prices there (dropping prices temporarily)... which is going to lead to a shortage of... yet again... corn (next year). It's simply going to keep rotating crop after crop after crop as the market forces respond by farmers planting whatever was the most profitable crop the year before. [Feb 12: What is Being Ruined by ... What Else ... Hedge Funds and Speculators] I wrote then

Remember as they plant more wheat, that makes a shortage somewhere else - creating higher prices, and then next year that crop with high prices will be planted, creating a shortage somewhere else (corn ?) and so on and so forth. So all this new planting of wheat is just trying to get us back to where we were before the "corn ethanol" boom, pushed farmers into corn (creating shortages in everything else). And on and on we go... rotating from 1 shortage to another.

Now what do we have coming next year?

• The USDA is expected to report corn stocks for the year ending Aug. 31, 2009, to fall to 685 million bushels, according to analysts surveyed by Thomson Reuters, down 47% from 1.283 billion bushels in 2008. (that's frightful)
  
• On Thursday, corn futures for July delivery ended up 17.25 cents, or 2.8%, to a new historic high of $6.3025 a bushel on Chicago Board of Trade. Corn futures have gained nearly 40% this year
• The report will likely be neutral for corn prices as "the grain markets have already priced in reasonably tight corn supplies," he said in a research note. (hmm... "it's all priced in" yet again... I didn't realize a 50% drop in stockpiles was 'reasonable') :) Check back in a year, I think corn will be $8+).
• Still, at 3.1 billion bushels, corn for ethanol use accounts for nearly 30% of the nation's domestic corn consumption.

As I wrote in early April [Apr 3: Corn Jumps to $6 - Start Stockpiling Soda Pop]

And so it's already happening. What people miss in the wheat vs soybean v corn vs whatever debate is, we don't have enough acres period. Yields are too low despite all of Monsanto's (MON) best efforts. Corn's high prices 2 years ago led to a massive overplanting of corn, drawing down from wheat/soybeans/others. Wheat/soybean prices surged this year, because of the ethanol corn initiative. Now as wheat/soybean prices rise spectacularly, farmers turn this year to overplant those 2 - causing a shortage in corn in the coming months/year. Do you see how this is circular? And on top of all that is an ever increasing global demand picture for all things food.

It's all starting to come together. Agflation (food inflation) is going to continue to hit... looks like corn products which are scattered in nearly every part of the US food supply are going to see a huge rise next year... and politicians will still be arguing over taxing the oil companies instead of looking in the mirror at the terror they are helping create. Slow motion train wreck. Sad.

Again as I wrote then

If I had access to a narrow corn ETF I'd of loaded up on that before the crop report came out because this was a very predictable situation. (they trade in London but not here in the US - go figure). But instead we are left with Powershares DB Agriculture Fund (DBA) which cuts both ways - the rise in corn is offset by falls in wheat/soybeans.

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

Our "keep our fingers crossed" policy continues. Expect much global suffering to be coming in the months and quarters ahead. But hey, at least the stock market is up. Thank Ben (keep printing, I mean that only helps to drive speculation and create liquidity to chase commodities ever higher).
Long Powershares DB Agriculture Fund in fund; no personal position

'Rising Tide Growth' Performance vs Peers April Update

I started last month to track the fund performance versus peers, which at this point are the "mid cap growth" mutual funds out there. [Apr 23: 'Rising Tide Growth' vs Mid Cap Growth Mutual Fund Peers] While this won't be an apples to apples comparison until the July 2008 reporting period (which I'll report on in early August) since I don't have a 1 year track record yet, we are starting to get into the general ballpark as each month passes. The link above has some details and background of the comparisons so you can click there to get an in depth commentary.

My general goal would be aside from besting the S&P 500 by 15% a year, is to finish in the top 10% of my peer group each year... currently there are 1870+ funds in my category, so if I finished in the top 200 or so, I'd be in the top 10 percentile. Obviously some years that won't happen but that's the long long term goal.

While it is not apples to apples my NAV (Net Asset Value i.e. Price) as of April 30, 2008 was $11.63, so the fund returned 16.30% since inception in very early August 2007. Once again, that is only a 9 month return and I am comparing against funds that have a 12 month return but that gap will narrow each month we do this. As always my results are kept by third party, which I link to in the left margin of the blog.

Here is the table for April 30, 2008 - as it currently set I'd be in the top 10 of the entire category, although funds #1 and #2 are the same fund (one with a load, one without) and funds #3 and #5 are essentially the same fund as well, so I am right around 5th place, out of 1870 funds.

RTG Return: +16.30%
Top 25 peer range: +20.15% (1st) to +8.78% (25th)
Average of all peers: -3.55%

2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)

First, AIG - the huge insurer just blew a massive tire, announcing a $8 billion writeoff - and another capital raise, which again dilutes current shareholders and means earnings PER share is going to be punished for years to come. But really it's all good - whats $8 billion among friends - and it's all priced in (oops, not so much, down 8% after hours, but maybe by tomorrow morning after CNBC announces it's a good thing it will be up). What I want you to do now is close your eyes and imagine Uncle Ben B as a short order cook. He is now ringing that bell over his head and shouting over to the other minion cooks - "got a fresh order, let's get up some more billions of US pesos pronto, print 'er up!" More paper currency coming folks! Faaaaantastic.

• (AIG) reported after Thursday's closing bell that it lost $7.81 billion in its first quarter due to heavy writedowns on credit-default swaps and mortgage-related investments.
• The insurance giant became the latest in a long string of major U.S. financial institutions to shore up its financial position by raising about $12.5 billion fresh capital through a common stock offering and an equity-linked offering.
• AIG said it lost $3.09 a share, compared with earnings of $1.58 a share, or $4.13 billion, during the year-ago period. The results disappointed Wall Street, where analysts, on average, had expected a loss of 76 cents a share (oh analysts... well I guess AIG is not looking quite so "cheap" on 2008 and 2009 estimates as it did 3 hours ago; well time to upgrade consumer discretionary!)
• AIG already took an $11.5 billion writedown in the value of its derivatives portfolio last year shortly after it assured investors that it had "little to no exposure" to asset-backed commercial paper, structured investment vehicles or collateralized debt obligations tied to residential mortgage-backed securities. (I hate when that happens... we were off by just a tad on what we told the market.... no worries. It's not like the CEO is flying blind or anything p.s. did we give this CEO a bonus for the hard work they have been doing in these difficult times? Sure hope so; they deserve it.)
  

I read an excellent blurb of what is going on in our "innovative, most stable" financial system in the world. I am going to copy it word for word, because it is in fact the reality... while we point our fingers at those "evil oil men" which is a good distraction from what is helping to accelerate all our inflation.

The strategy employed by these banks seems - to slowly release controlled amounts of write-offs each quarter while creatively managing (and hiding) their true losses by borrowing and repaying, borrowing and repaying, borrowing and repaying using the Fed's made up money. This will slowly bleed them all down to correct levels of value and liquidity and avoid panic. Meanwhile, stockholders and taxpayers bear the load until we can get through this... maybe in a few years, yes?

Bingo... could not of summarized it better myself. But on to other items; I have to admit this Priceline (PCLN) has intrigued me for a few quarters but I can never pull the trigger. I mean who does not love William Shatner? They just continue to hit home run after home run. (Booooyah (tm)! beat by $0.16) My thinking has been as the pooring of America continues, Priceline has a bit of unique niche with their model and could sort of be the Walmart of travel booking... they sure seem to be feeling no ill effects from the economy, so this may be what is happening.

• Online travel company Priceline.com Inc. said Thursday it swung to a first-quarter profit, as gross travel bookings and international revenue surged.
• Adjusted net income, which excludes one-time gains and charges, rose to $37.3 million, or 76 cents per share, from $17.4 million, or 43 cents per share, in the year-ago period. Total revenue rose 34 percent to $403.2 million from $301.4 million in the 2007 quarter.
• The results beat Wall Street predictions. Analysts polled by Thomson Financial expected a profit of 60 cents per share on $377.2 million in revenue.
• Gross travel bookings, which refers to the total dollar value including taxes and fees of all travel services purchased by consumers, rose 76 percent to $1.76 billion. International revenue more than doubled to $104.2 million. (international still a tiny part of business so a lot of potential growth opportunity there)
  

Guidance

• Priceline.com said it expects to post a 2008 pro forma profit of $5.25 to $5.65 per share, while analysts polled by Thomson Financial expect a profit of $5.11 per share.
• Priceline.com added that it expects to generate about $7.5 billion to $7.9 billion in gross travel bookings for the year.

Definitely secular growth here, and definitely not related to commodities so it would be a nice complement to our typical holdings... not cheap though - it's going to be trading at just under 30x forward earnings when it opens tomorrow.

No positions; long Shatner

Atwood Oceanics (ATW) Short & Sweet Beat

I continue to knock on every piece of wood, artificial or otherwise, as we continue to stake through this earnings period without a major blowup. With so many positions this is a bit uncanny - and my assumption will be this only means next earnings period we'll be taking some body blows as what the market gives, she takes away soon enough. But for now we enjoy.

Deep sea oil driller Atwood Oceanics (ATW) reports a serious beat on the bottom line and a solid beat on the top line tonight. This continues the pattern in the sector and it only gets better from here as old contracts disappear and new contracts get signed at much higher rates. Analysts have estimated $6.71 for 2008 profits and $10.49 for 2009... I continue to believe this entire group is sadly undervalued as it's been treated as a CYCLICAL play as opposed to a SECULAR play... the latter should derive much higher valuations but as you know, crude is going back to $50 anyday now as the "dollar strengthens" and we stuff a few hundred million Indian, Chinese, and Brazilians back to the countryside and tell them "no progress for you!" So hence, these drillers are valued as if dayrates are going to plummet any quarter now...

The press release for the earnings report is short & sweet...

• Atwood Oceanics, Inc., (ATW), Houston-based International Drilling Contractor, announced today that the Company earned net income of $41,755,000 or $1.30 per diluted share, on revenues of $113,530,000 for the quarter ended March 31, 2008 compared to net income of $31,757,000 or $1.01 per diluted share, on revenues of $94,262,000 for the quarter ended March 31, 2007. For the six months ended March 31, 2008, the Company earned net income of $80,304,000 or $2.49 per diluted share, on revenues of $224,578,000 compared to net income of $52,842,000 or $1.67 per diluted share, on revenues of $183,062,000 for the six months ended March 31, 2007.

And that folks, was the press release aside from some tables for us numbers nerds to salivate over. Essentially they beat the revenue line by a few million and earnings by $0.15. And away Atwood will go, quietly executing in some dark corner of the market, until we revisit her in 3 months. I still think this group is overextended and prone to pullback, but by assessing these fundamentals in earning reports we can make our buying lists for the next pullback and where we want to reallocate our cash.

p.s. someone left a comment a few days ago about National Oilwell Varco (NOV) and why it was not moving.... my comment was, it was strange to me as well considering the move in crude - well we got her moving today with a 9% spike. Finally. (I took some off a bit too early in the day however)

Long both names mentioned in fund; no personal position

NYTimes: BlackRock is Fix it Firm to Manage Risky Assets of Others in Distress

Blackrock (BLK) has been one of 2 financials I've held through thick and thin, even in the worst of it for the sector - Mastercard (MA) being the other. You can see from the chart, you would not even realize it's a financial based on it's stock behavior - many of its peers are down in the 40-60% range over similar period.

(I'll post the chart later, it's not loading right now) :)

This is a nice overview story on the NYTimes, led by one of my favorite managers Larry Fink [Mar 18: Larry Fink from Blackrock Getting more Bullish]. It has been interesting to see when other companies, or even states get into trouble [Dec 7: Blackrock Swoops in to Help Florida] that Blackrock is on the other side of the Bat Phone. In fact, when the Federal Reserve needed some help - they turned to JPMorgan (JPM) (who got all the press) AND Blackrock [Mar 24: Blackrock Continues to be Interesting]

This company is now the biggest asset manager in America, has a burgeoning international business, and is led by one of the best in the business - I consider it a core holding for a very long time - and hope their CEO is not whisked away to run some trouble child [Nov 5: Merrill Offers Job to Blackrock CEO Fink] Most CEOs do not carry their weight, but this is one of the few that deserves every penny.

• One Saturday morning in March, Laurence D. Fink got some urgent news: Wall Street needed his help. Mr. Fink runs BlackRock, a money management company whose name probably rings few bells outside financial circles. But on that March weekend the Federal Reserve, moving to defuse a crisis threatening the American financial system, began turning to BlackRock to play a critical role in the government-brokered rescue of Bear Stearns, the faltering investment bank.
• Now, under the aegis of the Fed, BlackRock is managing $30 billion of hard-to-sell assets from Bear Stearns, part of the central bank’s unprecedented deal with JPMorgan Chase under which JPMorgan took control of the investment bank.
• In Washington, some question the arrangement, saying it puts taxpayers’ money at too much risk. But on Wall Street, Mr. Fink’s job for the Fed, along with other high-profile work, is quickly earning him a reputation as the Mr. Fix-It in the troubled credit markets. And for BlackRock, that means business — lots of it.
• There is no shortage of drama these days in the credit markets, which happen to be Mr. Fink’s specialty. Back in the 1980s, at First Boston, he helped pioneer mortgage securities, the kind of investments that are causing so much of the trouble now.
• Just this week, BlackRock agreed to manage risky subprime assets with a face value of $22 billion from UBS, the ailing Swiss bank.
• During the last year, as the shares of many larger, wealthier financial companies have plummeted, BlackRock’s share price has soared 43 percent, closing at $212.15 on Wednesday.
• Mr. Fink has transformed his firm from a small bond shop into the largest publicly traded asset management company in the country. Along the way, the firm has focused ruthlessly on managing the risks it takes in the markets, BlackRock executives said. That conservative approach appears to have paid off.

I do believe that this displays a very important fact that can apply to individual investors as well - the first rule of making money is not losing it. Cut losses quick, avoid rampant speculation, and try to push the odds in your favor as often as possible. This is why I always cut back ahead of earnings even when it costs potential upside - the risks are too great in most cases as we have a binary outcome (could be up 25% in minutes or down 25% in minutes) in which we have no control over. I guess when you first come to the market that is "fun", because I see so many people do it, but in the long run you might as well go to Vegas and place chips on black or red. Myself, I'd always prefer to give up potential gains than give up capital.

Long Blackrock in fund; no personal position

Bookkeeping: Ringing the Register

I don't have anything earth shattering to report on these sales, I just want to build more cash and lock in more profits in my layer in, layer out approach. These are names I have not taken any profits on of late, so I am going to begin now. Mechel (MTL) always seems to lag the other domestic names in iron/coal etc by a few days, so its finally making its move, so I am taking a bit off here; same with Cleveland Cliffs (CLF) which despite an "ok" quarter jumped post earnings - it seems people are willing to excuse any bad results in anything in the steel (or related) sectors at this point, and a bit off National Oilwell Varco (NOV).

I reversed this week's earlier buys of Potash (POT) and Mosaic (MOS) for small losses (yes I'm a flip flopper - the charts looked ready for a breakout but now are looking more iffy). I still see that gap at $110 on the Mosaic chart and thing we're going there. The ag charts just act tired as if they need a "cleansing" sell off - I could be wrong, just a gut feel. They still have the best fundamentals bar none - but the hedge funds want to sell them now, so you have to respect it. We'll be buying in scale on significant pullbacks.

I remain bullish on all these names, but we haven't had a "scary" type of selloff in a long time in the commodities area so I think that could remain a possibility. I'm also looking for a broader correction in the general market, at least to S&P 1370, or upper 1360s. We have now run out of multinationals earnings to cheer about and unfortunately are stuck with a bunch of companies that rely on Americans. Boo. Hiss.

As for retailers... well you know the story we have been advancing since last fall - the pooring of America continued - Walmart (WMT) BJ Wholesale (BJ), Costco (COST), Big Lots (BIG) win - most everything else loses. Either the deepest discounters or the warehouse clubs remain the main winners. Again let me stress same store sales or any retail figure does NOT take into account inflation. So if a store reports 3% same store sales and most of their products are going up by 5-10% (read: food) that means unit sales are falling. So by nature of inflation alone same store sales especially in food (or gasoline) must rise just to stay flat. Walmart is now turning into a de facto grocery store as are the warehouse clubs. The middle and lower class continue to get beaten over the head with a club. Don't buy the hype of "better than expected store sales" spin. These Q3 and Q4 estimates for most in this group are so off the mark (way too high) it's going to bring some serious pain later in the year when reality is faced.

Interesting fact 1: (on how wrong analysts are in their Kool Aid) Perkins estimates earnings for the industry will decline by 14.9 percent, compared to a projection in January of 5.3 percent profit growth (for you Get Smart fans... "Only missed it by that much") Just imagine how wrong they are on the back half of the year. ("it's all priced in though")

Interesting fact 2: (we touched on this a month or so ago - retailers are now seeing sales surge around payday and then tail off around the end of the next pay period as people literally run out of money) In a statement Thursday, Eduardo Castro-Wright, Wal-Mart Stores U.S. president and CEO, said the "economy continues to get tougher" and that customers increasingly are unable to stretch their dollars to the next pay day. "As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past," he said.

Long all names but the retailers in fund; long Mosaic, Mechel in personal account

Energy Conversion Devices (ENER) - Is the Turnaround Finally Here?

Energy Conversion Devices (ENER) is an interesting tale - this has been for many many years a "hope" stock i.e. more promise than execution - I remember the hoopla surrounding it at the turn of the century ... the last time people were all hyped up about alternative energies (at the time the big fuss was about new wave car batteries and the like). This company has morphed over the years with a confusing array of business lines (trying to decide what it wanted to "be"), but recently has added a newer and more business savvy executive team, and while they still have a few business lines .... the excitement is their solar business, which has turned into the dominant line at the company. Much like First Solar (FSLR), ENER has a thin film process so by staying away from the polysilicon shortage issue they have some potential to sidestep some issues currently facing the rest of the industry. The company is out with earnings today and put in a surprising act, instead of a 6 cent loss, we have a 17 cent gain. So perhaps the long awaited and promised turnaround is finally here. We'd like to see another quarter or so of this to call this a confirmed turnaround but speculators could care less about that... the stock is up 26% in premarket. This is a name I've been keeping 1 eye on, but with results like this it's time to put both eyes here.... another quarter like this and you'll get Cramer talking about how this is the next First Solar.

Revenue growth in solar was fantastic and gross margin exploded 11% higher... that's a heck of an achievement. As one of the great philosopher's of our time would say... "That's hot." I have to do some homework with the guidance but on first glance the 2008 full year loss estimate and 2009 profit look like they vastly understate profit potential; which is my favorite type of story. We'll be interested on a pullback, although the hype on a name like this could carry this one very far in a quick time.

• Total consolidated revenues for the quarter were $70 million, up 24 percent from second quarter revenues of $56.4 million, and 155 percent higher than third quarter fiscal 2007 revenues of $27.4 million. Solar product sales were $64.9 million, a 31 percent sequential increase and a 193 percent increase over the prior-year quarter.
• Net income for the third quarter was $7.0 million, or $0.17 per share, compared to a net loss of $5.4 million, or $0.14 per share, in the second quarter of fiscal 2008, and a net loss of $6.9 million, or $0.17 per share, in the year-ago period. Third quarter results include preproduction costs of approximately $751,000 and restructuring charges of $2.4 million, representing $0.08 per share in the aggregate.
• Gross margin on product sales in the solar business was 30.7 percent in the third quarter, compared with 19.2 percent in the second quarter. The gross margin improvement was driven by better factory utilization and yield, and favorable customer/product mix.
• United Solar Ovonic produced 21.6 MWs in the third quarter and 47.4 MWs for the first nine months of the fiscal year. The company confirmed its plans to expand and add 120MWs of additional nameplate capacity to its existing Greenville facilities. ECD will be able to internally fund this expansion through available funds and cash flow from operations. This previously announced expansion will increase the company's nameplate capacity to approximately 300MWs by the end of fiscal year 2010.

Guidance

• Total consolidated revenues are expected to be between $73 and $78 million for the fiscal fourth quarter ending June 30, 2008 and between $246 and $251 million for fiscal 2008. Solar product sales for the fourth quarter are expected to be $68 to $73 million, and $222 to $227 million for fiscal 2008. For the fourth quarter, ECD expects it will maintain the 30 to 31 percent gross margin it achieved in the third quarter. Restructuring costs are expected to be between $2 to $3 million for the fourth quarter and $10 to $11 million for fiscal 2008. Preproduction costs are expected to be approximately $1.5 to $2 million for the fourth quarter and between $7 and $8 million for fiscal 2008.

No position

Roundup for the Day

1 word comes to mind of late - complacency. Today's medium sized sell off had me thinking of the last time the market sold off in a meaningful way. The fact I could not remember is a case in point. It looks like we had 1 day back there on April 11th but other than that since the quarter turned on April 1, it's been all good. Despite almost all bad on the economic front. No wonder everyone berates us with "it's all priced in", and "all up from here".

If you review this week's postings you see 1 theme - selling and building cash. I'm back to nearly 20% in cash, and about 18% short exposure which is a very hedged exposure. I still am aghast this market does not treat $120+ crude more seriously - as I wrote earlier today the real effects on corporate profits (which the market does care about) and the Main Street economy (which the market apparently could care less about) are pervasive. Even a sustained stay over $100 is a big net negative except for very narrow parts of our market. Anyhow the beat goes on... remember, one of my favorite saying "it doesn't matter until it does" - that applies to reality and the markets acknowledgement of it. We've sold off a bit here, but in theory we could drop all the way to S&P 500 level of uppers 1360s and still be above key support.



Some key news stories... another Uncle Paulson comment about everything is relatively fine and soon enough (a few more rough patches) we'll be back to old form. My comment: watch what they do, not what they say. Due to the Federal Reserve backstop and implicit guarantee to bail out anyone of size in trouble, yes things are "better", but off a terrible base. Credit contraction only continues in the macro theme. But they can't say such things - they have to reassure the peasants everything is fine...

• In an interview with The Associated Press, Paulson said that the turmoil that has gripped Wall Street and took a turn for the worse again in March has eased somewhat. "There's progress," he said. "I think we're closer to the end of this than the beginning."
• "We will get some help from the stimulus," Paulson said in the interview. "Later this year, I expect growth will pick up." Still, he acknowledged that the country was facing "tough times" as people struggle with soaring gasoline prices, higher medical costs and a weak jobs market. (in 6 months I am sure)
• Paulson rejected for now the notion of a second stimulus bill, including such things as extending unemployment benefits being pushed by Democrats in Congress. He said it would be unprecedented to extend unemployment benefits from the current 26 weeks with unemployment at the relatively low level of 5 percent as it is now. (that's because the unemployment rate is a fiction... but I do expect a 2nd stimulus plan coming - don't you worry, more debt for the grandkids to worry about)

Finally CNBC says "whoa, maybe this high oil thing is a negative?" Could it be? Heck even NASCAR is getting his by high gas!

• The continued surge in oil prices is starting to cut into economic growth--and with it, the slowly recovering stock market.
• So far, the economy and stocks have taken the unprecedented rise in energy costs in stride. But that's beginning to change. Higher oil costs already are curbing some discretionary spending by consumers, which could slow the economic recovery. The stock market, in turn, could see its recent rally stall on worries about oil's impact on inflation and economic growth. (shocker! It only took them 6 months to connect the dots)
• Cohn and others are somewhat baffled in particular at the disconnect between the dollar and oil. Traditionally a stronger dollar means weaker oil and vice versa. But as the dollar has picked up 2 percent against the euro since last week's Federal Reserve Rate cut, oil prices have jumped about 10 percent. (hello, read my blog since last August and all the answers shall be revealed - again folks, these people live in 1960s thinking where the world revolves around good old United States of Subprime. Sadly our Federal Reserve is also off in this world of Ward & June Cleaver)
• The strength in stocks comes from a number of sources and has occurred, some analyst say, in spite of oil rather than because of it. Many believe the worst for Wall Street came during the Bear Stearns bailout. Yet others see the housing collapse at or near its end. And still more see the massive banking writedowns from the subprime mortgage fallout as yet another reason to believe the market has nowhere to go but up. (how about the Fed printing currency at the rate of 1 to 5, and instead of that money being lent out it's going to shore up banks balance sheets and being used for stock market speculation? Try that one for size)

And don't look now, but in a World of Shortages even natural gas could be causing us some issues NEXT winter says Goldman Sachs. (remember, global competition for resources - if we won't pay, someone else i.e. a government with cash - will) No inflation there... no hit to the consumer - it won't be in the inflation numbers because people will stop heating their homes next winter or everyone will move to Arizona I suppose. Don't worry, buy stocks.

• U.S. natural gas inventories could be at seriously low levels at the start of winter this year, if current rates of liquefied natural gas (LNG) imports remain at record lows, a Goldman Sachs report said Wednesday.
• The year is already two months into the summer re-fill season when producers traditionally stock up on cheap gas volumes to sell on more profitably in winter, but so far storage facilities have gone unused as prices remain high.
• More so, ongoing weakness in US natural gas prices compared with prices in the rest of the world is providing no incentive for LNG cargoes to be directed to the US, leaving imports at record-low levels.

Meanwhile, the first story where Wall Street notices there is a little part of the world called "Main Street" out there - that might actually affect them in their ivory tower existence. The horror of the peasants affecting their riches. Egad.

• Wall Street seems to have concluded that the worst of the credit crisis is over and investors are looking to better economic times ahead, but Main Street is sending the opposite signal.
• The U.S. Federal Reserve's quarterly survey of senior loan officers, released this week, showed widespread tightening of credit. The percentage of banks reporting tougher lending standards was close to, or above, historical highs for nearly all loan categories in the survey. (huh? Paulson just told me 2 stories ago we are all good... darnit all - oh yes watch what he does, not what he says - got it) Banks clamped down on loans to companies large and small, to prime and subprime mortgage holders, and on credit cards, home equity lines and other consumer credit. (did we leave anyone out? what about student loans? Oh wait, that area has nearly completely died a few months ago)
  
• Stock markets are forward-looking by nature, so it is not surprising that investors would think about how the economy might look in the coming months. To say that Wall Street is expecting a second-half recovery would be an understatement. According to Thomson Reuters research, analysts are expecting fourth-quarter earnings growth of 62 percent for the S&P 500. (sounds VERY plausible to me - buy stocks) Granted, that is a comparison with a disastrous fourth quarter of 2007, when earnings were down some 25 percent.
• Not only is the market anticipating a swift recovery, but the earnings forecasts suggest that they think it will be lasting. For next year, analysts think earnings will be up 18 percent, twice the growth they are predicting for 2008. (very plausible as the economy roars back, malls get packed, the consumer maxxes out all his credit lines, and housing prices boom)
• They see particularly strong growth for consumer discretionary companies, beginning with the next quarter. Earnings for that sector are expected to jump by 41 percent in the fourth quarter, and 24 percent next year. (oh my favorite sector, consumer discretionary - you mean stuff people could do without as inflation terrorizes the rest of their budget? 41% growth by Q4 and 24% next year. Hold on while I chuckle..... ok nevermind, I won't stop chuckling... let's move on)
• The head of Walmart (WMT) U.S. stores division said in late April that consumers appeared to be "topped out" and unable to obtain any more credit. (more credit... need more credit... feed me... feed me... must have credit)

So the above should show you the fantasy between what Wall Street "thinks" is going to happen and what *I* think is going to happen and why there is such a huge disconnect between Main Street and Wall Street. I mean 62% earnings growth by end of this year and then another 18% next year... led by consumer discretionary at 41% (Q4 08) and 24% (2009). Let's raise a toast to "hope". I mean signs like this where consumers borrowing is surging is a great thing right! Right? Right? Umm... that's the spin I am sure - I see it as a desperate consumer going to the next lines of defense (credit) since they cannot pay for things with cash anymore, and house ATM and 401k ATMs are now getting tapped. I expect to see more such "surges" into latter 2008 and 2009 ... before the wave of personal bankruptcies.

• Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month. The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
• The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans.
• Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.

Surely we can spin this in a positive fashion? Let me work on this tonight and try to think of the bull case... or can I just wait until the pundits tell us tonight. Speaking of the coming wave of personal bankruptcies (remember, that won't hit until the credit cards get maxxed, and then 6 months of evading those late night phone calls), don't forget the coming wave of business bankruptcies.

• There's one pot of gold for the battered financial services industry: Firms that offer corporate restructuring and bankruptcy advice are adding staff and seeing profits climb as the slowing U.S. economy yanks the rug out from under struggling companies.
• Los Angeles restructuring firm Scouler has increased its staff by more than 40 percent since the beginning of the year. It's been busy and it's going to get busier," said Dan Scouler, Scouler founder and managing principal. "I think the downturn will be pretty bad. We haven't seen the end of the housing problems -- that's a slow-motion train wreck. And consumer spending is coming down. Consumers are tapped out." (see, this guy lives in that far off place called the "real world"; a very distant galaxy from Wall Street - he actually has to make money in the "real economy" as opposed to trading paper on fantasy earnings forecasts and dreams of nirvana in 6 months)
• Goldin Associates, which offers turnaround consulting and restructuring services, has struggled to keep up with requests for information. "The number of calls we have received in the past eight weeks is almost four times the number of calls we received in the preceding six months," said David Pauker, Goldin Associates managing director and national practice leader. (real world... fantasy world... real world...fantasy world)
• When companies are hit with higher costs, many can't immediately raise prices to compensate. That can cut drastically into working capital. When commodity prices rise yet further, companies take more hits, sometimes causing them to have trouble paying vendors and creditors. (hmm, so high commodity prices have a real effect in the real world... fascinating--- we need to send a news alert to NYC traders about this nasty situation)
• "I think there's going to be a growth period where we have at least two to three years of more activity and more work for advisers," Henkin said. (that doesn't jive with my 6 month recovery thesis - please no more talking - you will spook the stock buyers)

Conclusion: Don't worry about all this. This is stuff we leave to people we call "realists". We are stock market investors - stand strong, proud, and buy stocks. Ignore all the mainstream media doomsday stuff - what do they know? They don't make 6 or 7 or 8 figures... they don't understand the "real world" of "high finance" I bet they are so low brow they buy they own groceries or something like that... haha... peons. Did I mention buy stocks? Please?

On the docket tomorrow we have fund holding Atwood Oceanics (ATW) - while I expect good things it will be a prisoner to if tomorrow is a good or bad day for energy stocks. A couple of interesting names like Toyota Motors (TM) - let me guess flagging US sales, good international... stop me there... and Priceline.com (PCLN)

Vallejo, California Votes for Bankruptcy

Expect this to be the first of many [Apr 25: Shoes Beginning to Fall in the States]... unlike the federal government, local/state cannot print money out of thin air to address shortfalls. We've discussed countless times this will be the "lag effect" outcome... while everyone assures us everything is fine - these are the type of shoes we'll be seeing down the road. I was discussing this last December [Dec 13: A 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.

But don't worry, as "they" assure us... housing is only 4.5% of GDP... nothing to worry about. Governments spend out the wazoo - don't save for a rainy day - and now their tax receipts are going to fall through the floor since their budgets were set on "bubble" incomes based off real estate of 2005-2006. But keep buying stocks... it's all good. Unless you live in Vallejo, CA (which looks to be a good sized San Fran suburb of moderate middle income - median wages in upper $40s, lower $50s) What I've been amazed to watch locally is how local governments (in a 1 state recession we've had for about 4 years now) won't cut jobs or benefits (for themselves) while private enterprise is cutting jobs, benefits, wages left and right. I guess they will hold on - until they go BK. But we need to either see very sizeable tax increases and/or job cuts/services lost to pay for our excesses of the housing bubble. Expect governments to tread water this year and then a lot of filings in 2009. Or wait, maybe they can go to the Federal Government for handouts/bailouts - no wait, that's only for those with lobbyist firms.

That's for cities; a few states are in dire straights already [Dec 16: California in a State of Fiscal Emergency - Coming to a Theater Near You]

Again, if you live in Texas, Oklahoma, Iowa, or Wyoming, ignore this... this will be a great dichotomy of regional recession... sharp in some areas, moderate in others, and boom times in export/agriculture/energy areas. If you live in those states, send your thank you's to Dubai, New Dehli, and Shanghai.

• Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.
• The city council's unanimous decision makes the San Francisco suburb the largest city in California to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.
• The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.
• ``Nobody wants bankruptcy but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''
• City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions. (it's just a necessity - welcome to the pooring of America, labor unions - we cannot afford you anymore; come sink with those unlucky souls in the private sector)
• The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. U.S. state sales-tax collections fell in the first quarter for the first time in six years
• California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year
• Police and firefighting salaries, pension and overtime consume almost 80 percent of Vallejo's $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.
• Home prices in Solano County, where the town resides, dropped 19 percent in January from the year before - so what happens to all these cities states with the same drop? [Apr 29: Housing Stocks Continue to Ignore the News]

Stay tuned... as with most of the real economic impact we are just beginning the recession, not about to come out of it (remember the folks calling for the end of a recession or no recession at all are the same ones who were saying "subprime is contained")

Bookkeeping: Cutting Most of 3 Positions on Huge Runs

Much like I did with Ctrip.com (CTRP) last week [May 2: Cutting Ctrip.com to Almost Nothing] I am going to cut these 3 positions to almost nil; they are small positions at this time as I cut them at lower prices, but the gains (% wise) have been huge, and the stocks are not near any major support. Fundamentals remain strong in all the stocks so there is no change in that area. Further, this does not mean the stocks need to pullback anytime soon but consistent with my strategy, I am simply going to take the last of these gains off the table and wait for meaningful pullbacks, after some staggering moves. These positions are in the 0.5-0.7% range of the portfolio, so I am essentially dropping them to what I call "holding positions" aka tiny positions (0.1% or 0.2%), but not selling them out of the portfolio.

Technical traders who like buying "strength" would do the complete opposite of what I am doing, and in fact be buying these charts (I guess every trade needs a buyer and a seller)... I cannot argue with that strategy; I am just more conservative and when I see charts this extended, while I respect the stocks can continue up indefinitely I am going to take my marbles and go home, willing to leave some on the table. Frankly the first 2 names, I have no way to value at these prices since the P/E ratios, P/S ratios and the like are off the charts... so I simply go off technicals...

I am continuing to build cash reserves...back up to 17.5%. Adding some incremental short exposure here as well, to begin balancing out the fund a bit more.

Mercadolibre (MELI) @ $56s (up 35% in 5 weeks)



Baidu.com (BIDU) @ $377s (up 36% in 5 weeks)



Dryships (DRYS) @ $95.80 (up 40% in 5 weeks)



Long all names mentioned in fund; no personal positions

More Energy Sector Earnings - Devon Energy (DVN) and Transocean (RIG)

I don't own these 2 names directly but do own peers, and these are bellweathers for their sectors so I thought I'd post them. One thing to note today - despite great numbers, the stocks are not reacting. Hence, we could be prone for a pullback shortly in these names. When stocks do not react to great news, that is a potential change in character, just like when stocks shake off bad news and go up. The charts in "commodities" despite some pullback, are still quite overextended and yesterday's call of Goldman $150-$200 oil [Goldman Sachs: Gasoline Not Driving Oil Price - Oil Going to $150-$200] would be the perfect catalyst to mark a near term top...

Despite my Kool Aid infusion I am still quite bearish and I view this period akin to Sep/Oct 2007 when we partook in the foolishness to make money but realizing there were more shoes to drop. I am sort of laughing at how the market goes up on $110, $115, $120, $125? oil ... as if it won't have any effect on profits or people across the globe. It is essentially a world tax on all productivity and profit. But oh well, it won't matter until it matters. If we cannot break through this 200 day moving average I would not be surprised to see a meaningful move downward - we have ignored the facts for about 6 weeks now since the "Fed put" was brought underneath the market via Bear Stearns. At some point ignorance must turn back to reality...

On to the earnings reports.

Deep sea oil driller Transocean (RIG) reports a doubling of profits

• Transocean Inc (RIG), the world's largest oil and gas drilling contractor, said on Wednesday quarterly profit more than doubled, beating Wall Street expectations, on higher rates for its deepwater rigs and lower-than-expected expenses.
• Record high crude oil prices have created a boom in demand for floating rigs and drill ships that operate in the deepest waters. Drilling contractors have benefited as tight supplies have pushed daily rig rates above $600,000 in some cases.
• First-quarter profit jumped to $1.19 billion, or $3.71 per share, from $553 million, or $2.62 per share, a year earlier. Excluding one-time items, the company earned $3.80 a share. Analysts, on average, had expected $3.32, according to Reuters Estimates.
• "The beat was mainly due to lower operating expenses," Mark Urness, oilfield service analyst at Calyon Securities, said. "It's probably deferred maintenance, so it will come back later in the year. Still it's still a good quarter."
• Average daily rental rates, or dayrates, for the Houston company's total fleet rose 15.6 percent to $229,000. The increase in average dayrate was seen in all categories, primarily due to rigs starting new contracts at the higher dayrates, Transocean said.
• Costs for the first quarter of 2008 benefited from the postponement of several shipyard and major maintenance projects to later in the year, according to the company.

Devon Energy (DVN) beats by $0.41

• Devon Energy Corp., the largest U.S.-based independent oil and natural gas exploration and production company, said Wednesday its first-quarter profit rose 15 percent as higher prices and production offset one-time charges and increased expenses.
• Excluding one-time charges -- including a $780 million loss on derivatives instruments due to rising natural gas prices -- the company posted earnings per share of $2.74.
• Analysts polled by Thomson Financial expected, on average, earnings per share of $2.33.
• Production rose 9 percent over the year-earlier quarter to 640,000 barrels of oil equivalent per day. The company's average price of natural gas rose to $8.03 per thousand cubic feet, from $6.77 per thousand cubic feet, and the average price of crude oil rose to $97.67 per 42-gallon barrel, from $58.33 per barrel.
• Combined, the company's average oil, gas and natural-gas liquids production from continuing operations was 640,000 oil-equivalent barrels a day, up 9%. The production growth was concentrated in onshore fields within the United States and Canada.
• Devon's net production from the Barnett Shale field in northern Texas averaged a record 995 million cubic feet of gas equivalent a day in the first quarter, up 36%. We can grow that for a long time to come. That's what's exciting," Devon CEO Larry Nichols said in a CNBC interview.

Main thing we want to see for exploration companies is a good replacement rate - that is, they can replace old production by either new finds or expanding current locations, and push production at a higher rate going forward. The inability to do this is a problem some of the larger players, i.e. Exxon (XOM) are now facing. And potentially an issue with some of the world's large state owned producers are facing (which would lend credence to the high energy prices being a permanent fixture in society)

No positions

2 Solid Earnings Reports - Foster Wheeler (FWLT) and FTI Consulting (FCN)

Knock on wood but we continue a strange streak of no major earnings blowouts from the myriad fund holdings. I had reduced both positions going into earnings to reduce risk, but looks like both came through quite well.

As opposed to Huron Consulting (HURN) which we sold out of yesterday, peer FTI Consulting (FCN) just continues to execute quarter after quarter; beat estimates and raise guidance - par for the course for these guys. All the drivers that should be driving HURN are in fact driving FCN. All this earnings growth even with a large share count increase (nearly a quarter) - even more impressive.

• Business advisory firm FTI Consulting Inc. said Wednesday its first-quarter profit more than doubled, surpassing Wall Street's expectations, as fallout from the subprime mortgage mess spurred strong revenue growth across all business segments.
• For the three months ended March 31, the company reported income of $31.3 million, or 59 cents per share, compared with $15.3 million, or 36 cents per share, in the year-ago period.
• The per-share results reflect a 24 percent increase in the number of shares outstanding in the 2008 quarter, to 52.7 million, from 42.5 million in the 2007 quarter.
• Revenue jumped 35 percent to $307.1 million, from $227.7 million in the first quarter of 2007.
• Analysts polled by Thomson Financial, on average, estimated earnings of 47 cents per share on revenue of $287.1 million.
• Revenue from the company's technology segment grew 71 percent, to $56.5 million, while sales from its corporate finance and restructuring division increased 28 percent, to $79.3 million. Revenue in this segment was driven by increasing demand from sectors affected by the housing downturn, such as building materials, retail, consumer durables and insurers, FTI said. There was also strong demand from the health care sector for both consulting and restructuring services.
• Strategic communications revenue grew 43 percent and economic consulting revenue gained 41 percent due to credit and liquidity issues and strategic merger-and-acquisition assignments.
• "The global credit crisis in its various forms continued to be a significant driver of work across all of our business segments," said Jack Dunn, president and chief executive, in a statement. "Subprime issues remained unresolved and the housing market continued to erode, undermining consumer net worth and confidence."
• The company closed seven acquisitions in the first quarter, and two additional acquisitions in the first week of April, adding more than 400 employees. Going forward, the company said it has a full acquisition pipeline and will continue to "aggressively" pursue acquisitions throughout 2008.
• FCN raised its full-year guidance above Wall Street's estimates, based on strong first-quarter results and current activity levels. The company now forecasts earnings for the year between $2.50 and $2.63 per share, on revenue of $1.3 billion to $1.38 billion. FTI previously said it expected a profit of between $2.40 and $2.50 per share on sales of $1.28 billion to $1.32 billion. Analysts polled by Thomson Financial, on average, estimate full-year earnings of $2.46 per share, on sales of $1.29 billion.
• TI said it is working to grow annual revenue to $2.5 billion by 2012, and generate 30 percent to 35 percent of its revenue internationally.

Over in the infrastructure group I am not that concerned on the quarter to quarter results since the projects are so long term in nature, but Wall Street is full of angst over every 90 day period so we need to be aware... Foster Wheeler (FWLT) seemed to have made the market gods happy for today at least. One very interesting comment I highlighted in purple below; North America "strikes again" - just cannot avoid the weakness.

• Engineering and construction company Foster Wheeler Ltd. said Wednesday its first-quarter profit rose 20 percent on a sharply improved performance by its power plant segment.
  
• Excluding a one-time asbestos-related gain of $14.2 million, Foster Wheeler earned $123.9 million, or 85 cents per share. Analysts polled by Thomson Financial expected, on average, earnings per share of 73 cents.
• Revenue climbed 56 percent to $1.8 billion, more than the $1.48 billion analysts were expecting.
• However, the company did note that lately it has noticed a change in the tone of the solid-fuel boiler market, primarily in North America. Solid-fuel boilers are used primarily by companies that produce electricity from coal, petroleum coke, biomass and other such fuels. "We are beginning to see instances of delays in certain projects that we view as prospects," said Chief Executive Raymond Milchovich, in a statement. The company's power group, which contributes about 30 percent of its annual revenue, produces these boilers that are used primarily by utilities.
• Milchovich said environmental considerations, along with cost inflation and slower economic growth in the North American market are some of the reasons for the delays. North America accounts for about 13 percent of the company's order backlog.

So once again, the United States of Subprime hits - even with companies with low exposure to North America. I prefer FWLT to some of the other names in the space due to a focus on international markets, but even their small exposure looks like will slow them down to some degree.

Both stocks are up 5-6% in early action; due to the "gap ups" in the chart (opening today at prices above anywhere the day before, creating a gap in the chart) I am going to take some money off the table in both in the $6-$8K range. FCN near $66, FWLT near $70.

Long FTI Consulting and Foster Wheeler in fund; no personal position

Some Things I'm Reading

Most of these items can be filed under the heading of "things the market doesn't care about as it races upward, trusting everything will be fine in 6 months" :) Myself, I am fascinated with the dichotomy between the real economy and the stock market economy; I believe in the coming decade the divergence could grow even larger as more money is concentrated in the upper classes of society and less profits are due to the US as each year passes. But to see it so early, is interesting and I think has to do more with the printing fest at the Fed.

We'll end this post with a bright spot... if you live in Forth Worth, TX

Real economy issues that don't matter to Wall Streeters

Credit Crunch Issue #1: GE to Stop Financing Boats, and Motor Homes (ironically 2 things I think are excellent shorts) I went on record last year saying 2008 would be the worst year in auto sales in 2 decades - you can toss boats and RVs right in there. Talk about discretionary big ticket items (with terrible mileage to boot) GE is just 1 company but a large company; keep in mind many of these large US companies have huge finance arms (the auto companies are another example) As credit dies off, so does much of the lifeblood of US "expansion".

• The company told boat and recreational-vehicle dealers that it would cease taking applications by July and underwriting new loans Aug. 1
• "We just really looked at a lot of different alternatives and are facing a challenging environment and ultimately came to the decision that we needed to invest our resources and capital in areas where we could see good return," Williams said.
• The decision was a blow to the already hard-hit recreational products sector. Makers of boats and motor homes have had a rough year as rising gas prices, a tough housing market and fears of a U.S. recession caused many consumers to scrap plans to buy big-ticket recreational items.
• The shares of Brunswick Corp., the world's largest maker of recreational boats, No. 1 motor home maker Winnebago Industries Inc. and leading U.S. boat retailer MarineMax Inc. are all down this year.
• "The decision is another in a string of developments -- diminishing home values, higher gas prices, weaker consumer confidence -- that has 2008 on pace to be the worst year since 1992" for RV and boat makers, Robert W. Baird analyst Craig Kennison wrote in a note to clients.

Credit Crunch Issue #2: Countrywide, still the country's largest private lenders says no more home equity loans.... for almost any human living in Las Vegas. Should see this sort of thing extend to more mortgage companies and to more states (CA and FL next?). Just another step on the path to destruction for indebted Americans - after the credit cards are maxxed, and the 401ks emptied - then the real bankruptcies will happen - should see that wave circa 2009.

• Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business. ``I hope this doesn't break me,'' the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. ``It's going to hurt more than I thought.''
• Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.
• John Simon, 42, borrowed $35,000 on low-interest credit cards in 2007 to pay down his $63,000 credit line and save on the 11.75 percent interest he says Countrywide charged. He expected to be able to access the credit line later. When Countrywide froze the line, he wasn't able to get money needed to pay his bills.

Speaking of Vegas, the NYTimes says their are signs of trouble on the Strip, something we've predicted for a long time. After all a city that relies on Subprime nation really can't be that resilient when the bills start coming due... in a highly inflationary environment. Give it a year; this is just the beginning of this saga.

• For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation.
• Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights. Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived.
• Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.
• But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.
• The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar (do we repeat this on a daily basis? thank god for foreigners who actually have money?) But representing only 13 percent of visitors, foreigners can take up only so much slack. (Import those Italians, French, Saudis, Chinese direct into Vegas, charter planes - we can do this Vegas! Be creative!) Gil Colon, sales manager at the Villa Reale antique and furnishings shop, said his business was off a bit, and would be down more except for revenue from foreigners, whose purchases have jumped from 30 percent of his sales two years ago to 50 percent today.
• To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot. (That campaign worked wonders for mortgages in 2005-2006, eh?)
• But executives here worry this recession could be different from the last two — in 1990-1 and 2001 — when consumer spending was propped up by easy credit. Now credit is drying up. And high gas and food prices, declining home values and rising unemployment are keeping many Americans closer to home. (finally... finally... some mainstream publications are understanding.... better late than never)
• More important, over the last two decades Las Vegas has shifted from a destination dominated by gambling to one with more appeal to middle-class shoppers, diners, golfers and others who can afford brief splurges. Whereas gambling represented 58 percent of revenue for Las Vegas Strip resorts in 1990, it represented only 41 percent of revenue in 2007, according to a Deutsche Bank report.

28 Million Americans are on food stamps, thats almost 10%, and it's rising - but with food prices going up so much; they are falling even further behind (no worries, buy stocks) I remember when I was a child, mother used to say, you better eat that, don't you realize that some hungry kid in China would jump at the chance? So in 10 years, can you imagine the Chinese mother saying... you better eat that, don't you realize that some hungry kid in America would jump at the chance? Nah, could never happen... nah.

• For those on food stamps, higher prices for milk, eggs, bread and other staples often mean tough choices and empty bellies. Many are forced to forgo fresh vegetables and meat, while loading up on pasta and potatoes. Others are turning to churches, food banks and other charities, which are already strained by the increased demand.
• One in 11 Americans receive food stamps, according to federal statistics. As the economy weakens, more and more people are turning to this support system (the world's "richest" country - if you exclude debt of course... )

Two stories on Fannie Mae and Freddie Mac - the gist is as we've been saying for months - the more the situation worsens in the mortgage market - the more these 2 entities are being ask to lever up. If they implode - your tax dollars will be hard at work doing bailing out.

WSJ: Are Fannie and Freddie Good as Gold?
NYTimes: New Price Drop Could Imperil Mortgage Agencies

• Since March 10, the cost of insuring against a debt default by the government-sponsored mortgage companies has plunged by more than 60%. Fannie's stock has jumped 44%, and Freddie's 49%, though both are still near decade lows. In March, investors worried Fannie and Freddie would fall into the abyss, despite Uncle Sam's implicit backing. When J.P. Morgan Chase agreed to scoop up Bear Stearns in a government-officiated shotgun wedding, investors decided that government backing was as good as gold.
• Washington officials are encouraging the GSEs to take on more mortgages to keep the housing market moving along. That could mean faster growth, and higher fees mean more income. Still, it's tough to swallow a bull case for Fannie or Freddie. Some 2.3% of prime loans were 60 days past due in February. That was the highest in at least a decade and up from 1.4% a year ago
• The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.
• Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments. (now that's leverage baby!)
• “We’ve taken tremendous risks by loosening these companies’ purse strings,” said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. “They could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.” (don't worry, "it's all priced in!"
• Moreover, the companies are using their newfound clout to push Congress and their regulator to roll back the limits that were imposed after recent scandals over accounting and executive pay, according to participants in those conversations. (nice... )
• “It’s not irrational to be thinking about a bailout,” said that person, who requested anonymity, fearing dismissal.
• A report released earlier this month by Mr. Lockhart, the regulator, noted that although Freddie and Fannie had a combined $19.9 billion of “unrealized losses” on mortgage-related investments, neither company had reduced its earnings to reflect those declines. That is because they judged the losses to be temporary — in essence wagering that the mortgage market would recover before those assets were sold. Such a wager is permitted by the rules but difficult for outsiders to analyze. (oh haven't we heard this song and dance before in our banking system?)
  
• Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss. (when bad news hits, change the rules - it works for our government reports - is it any surprise it happens in our accounting?)
• But the biggest risk, analysts say, is that both companies are betting that the housing market will rebound by 2010. If the housing malaise lasts longer, unexpected losses could overwhelm their reserves, starting a chain of events that could result in a federal bailout.

Get your wallet out for 2010. This should be at least $4-$10K for every man, woman and child no? Get your kids out there mowing lawns - we need his taxes... or better yet, could you please send him overseas to people who have real money? Because transfer of wealth from 1 American to another for services is not really any level of growth (although 70% of our economy is based on such farce).... we need those tax dollars folks...2010 is fast approaching.

Last, at least we have Fort Worth Texas - there is always a silver lining to all the other negative line items we always hear about (darn negative media, always trying to paint a dark picture to get ratings) Everything is fine in "new oil... err... natural gas" country! (p.s. this is also happening in parts of Pennsylvania - so we are creating some millionaires one way or the other at least) :)

• "If you don't have a gas well, GET ONE!" implores the billboard on the interstate through Fort Worth, Texas. And in this amiable community (where, as it happens, I make my home), many neighborhoods are getting a gas well - whether they like it or not.
• Welcome to Texas's newest boomtown, a city of 686,000 that just happens to sit on top of a giant natural gas field known as the Barnett Shale. With demand for natural gas rising (due in large part to demand from utilities) and the price spiking (it's doubled in the U.S. since last summer), exploration companies have kicked off a drilling frenzy in Fort Worth.
• The upside is palpable around town. Once-struggling oilmen and big landowners are suddenly flush with gas money, while thousands of average homeowners are now collecting modest monthly royalty checks. According to an industry-funded study, an estimated 84,000 jobs have been created throughout the region by the drilling boom. "It's created a new wealth in our city," declares Fort Worth Mayor Mike Moncrief. "It's inoculated our economy. We find ourselves being an island in a sea of recession around us." (what recession?? - there is no RECESSION - source: Government) [May 1: Is it an Official Recession? NYPost Says it Should Be] Unfortunately - 80% of Americans have now been hoodwinked to believe it's a recession, ignoring how wonderful their situation are... damn media.

Conclusion: Buy stocks. Everything is priced in. Enjoy.

Earnings Today and Tomorrow

I am not going to review the earnings for fund holding, homebuilder DR Horton (DHI) because they stink, we all know they stink, and we all know they will stink. But the stock goes up no matter what bad news. :) "everything is priced in"

Fannie Mae (FNM) - as I wrote in the preview yesterday they will be horrid (check!), but as long as it's "not as bad as expected" the stock could go up. Check! Up almost 10%.

MGM Mirage (MGM) - bad earnings, decreasing revenue but "not as bad as expected", the stock was up 6%. Check! Let's look at this one a bit closer since it's one of my favorite industries to watch - now the thesis is foreigners will come to Vegas since it's so cheap for them with our weak currency (true), but I don't think it will offset the slowdown from those darn Americans (also true). As airline prices only increase, and inflation continues to ramp (assured by the Federal Reserve policies of easy money printing) - this will only be the beginning of the slowdown in "recession proof" Vegas. Unless we start importing Asians and Middle Easterners whole sale into the city to spend their riches.

• MGM Mirage posted low single-digit percentage decreases in both gaming and non-gaming revenues -- a sign that the slowdown has taken hold in Sin City. Revenue per available room, a key industry metric, on the Strip was down 4%, falling from $162 to $155. Total casino revenue decreased 3% as the result of lower table game volume, even as the hold percentage was at the high end of the normal range.
• Room revenue fell 6%, with a 4% drop on the Las Vegas Strip. Average room rates were down 2%, while average occupancy levels were 93%, down from 96%.
• "The results in gaming markets throughout the country this year have cracked the long-held belief that this industry is recession-resistant," said Joe Weinert, vice president at consultancy Spectrum Gaming. "Casinos and racinos are feeling the pinch as players keep a firmer grip on their discretionary dollars."

Cisco (CSCO) tonight, is showing year over year decreases in profit but that's ok - its "not as bad as expected"- stock is up in after hours. Of course what CEO Chambers says on conference call always moves this stock.

Disney (DIS) - too many moving parts (TV, movies, amusement parks) but it looks good on first glance - unlike local theme park operators, a lot of foreigners will fly due to the cheap US peso, have a good time, and fly back out to their home country... meanwhile fewer Americans will be able to afford the flight/hotels/tickets - but that's ok - we don't need no stinkin' Americans - we're a multinational.

So you'll notice a pattern here outside of Disney - degradation of profits year over year, but since expectations were so low - and the belief so high that things will improve soon - the stocks go up. That's the only reason I own these 2 homebuilders; because I anticipate this illusionary belief and we can make some money in the meantime. Now my open question is how much should stocks be valued that show year over year decreases in profits? Not very highly. But since the current euphoria is everything will be fine in 6 months - these stocks retain their old multiples (or in fact their multiples EXPAND as earnings DECLINE) because of the belief in a few quarters we'll be back to normal. It's all about timeline folks - as long as the belief is a rebound is within sight we can keep pushing these stock valuations higher and higher; even on a retraction of profits. And this is why shorting anything is very tricky - not only do you need to be correct in thesis, you need to place your bets when reality overtakes hope. We are currently in hope phase, an area we revisit from time to time.

I mentioned James River Coal (JRCC) as a potential lottery ticket for earnings yesterday - cha ching.

So off we go to tomorrow, of note...

Devon Energy (DVN) - yet another major natural gas player

Fund holding Foster Wheeler (FWLT) - I expect expectations to be low and the stock has been weak since last quarter's "miss", so the stock could potentially have a very nice reaction if they can come through - this business is very lumpy from one quarter to another so there is no way to really model the earnings. Either way I had reduced my exposure last week, realizing that in return for less risk we could be giving up some gains on this one; still my favorite name in the space.

Refiner Frontier Oil (FTO) - the best house in a terrible neighborhood

Fund holding FTI Consulting (FCN) - we just talked about this one today - I didn't realize earnings were today but I reduced for other reasons (technical action in the chart) - very pricey stock so that carries a lot of risk, but it always seems to make its numbers

Transocean (RIG) - deep sea driller; I mentioned when I sold Diamond Offshore (DO) in this space I would probably buy Noble (NE) to take it's space on a pullback - instead I went with Pride International (PDE) as a buyout candidate - Noble has been flying since as I grit my teeth watching. Either way, this group is going to prosper for years to come or at least until Uncle Ben and his merry band of "paper money pushers" (take some more, it's good for you) is able to get crude to fall back to $50 (cough). RIG is the big fish of the space.

Goldman Sachs: Gasoline Not Driving Oil Price - Oil Going to $150-$200

Normally, I don't care for predictions but considering this was the fellow who in 2005 said their could be a "super spike" in crude, let's see what he has to say (I am on record as saying a "World of Shortages" theme combined with Western governments flooding the world with fiat paper can only combine to ultimately create higher prices). These are the first people (along with Cramer - have to give him kudos) who finally are realizing that the world does not revolve around the United States of Subprime; a position I've been advocating for a long while. The quicker we move away from our country-centric views, the better.

• U.S. gasoline is no longer the leading fundamental driving oil markets, according to a report penned by Arjun Murti of Goldman Sachs Tuesday. Murti who famously predicted the dawn of the “super spike” back in March 2005, says this dramatic shift could have meaningful implications for the energy markets.
• As the world’s thirstiest oil market, the health of the U.S. gasoline consumer has traditionally always led oil markets up or down. But Murti’s team, which Tuesday raised oil price targets to between $150-$200 from a $120 for the next 6-24 months, now believes the relationship could be becoming unstuck.
• “Gasoline, at least in the short-run, has traded more like an annoying by-product of crude than as its core fundamental driver,” Goldman’s report said. “Weakness in U.S. gasoline margins is not the surprise… the surprise is that the weakness not only has not mattered to crude oil markets, but if anything, is helping to keep oil supply/demand in balance.”
• Meanwhile Murti says demand for middle distillates, like diesel, gasoil, heating oil and jet fuel and kerosene is racing up.
• Murti attributes that strength to resilient non-OECD demand growth as well as numerous global power problems, all of which have led to increased usage of diesel and gasoil-fired generators. Underpinning that pressure is a lack of adequate supply growth resulting in needed demand rationing in OECD areas and in particular the United States.
• But other oil traders agree with Murti’s analysis. It’s tightness in the so-called middle part of the barrel that is sending oil prices higher. U.S. gasoline consumption patterns are no longer relevant.
• “High crude oil prices despite weak U.S. gasoline cracks is sending the signal that global oil markets do not need or perhaps want the U.S. gasoline consumer to recover,” Goldman’s report writes.
• The soaring price of middle distillates meanwhile picture paints a bleak outlook for the airline industry. [Apr 8: Now on to Airline Inflation]
  

I say this almost every week - we are in a global competition for resources. Our leadership is too busy pointing fingers along political lines or coming up with "gas holidays" instead of treating the root cause. This is par for the course for leadership the past few decades... come up with short term "kick the can" ideas instead of meaningful solutions. It did not hurt so much in earlier eras when we were the sole superpower; but we have a lot of nations moving up in the world who care very little about our backwards policies. We will rot in our own stew if we don't start figuring these things out... read Fareed [Weekend Reading]

As your dollar becomes more worthless, buy those meats now and freeze them, and get those airline tickets bought now before fares really take off, etc etc etc - inflation is not a problem... unless you live and breathe. This is one way to get the US consumer spending again - realizing his peso will be more worthless by the hour.

Bookkeeping: Cutting Back on Cummins (CMI) as my $70 Target is Near

I am doing about 2 weeks worth of transactions in 1 day... exhausting.

Just to avoid being a pig I am taking down my Cummins Engine (CMI) by 1/3rd. I restarted this position April 18 as a weak dollar, undervalued US multinational [Apr 18: Restarting Cummins Engine as the Rest of the World Moves on Without USA] in the $53s.

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

Since then, on April 30th it reported excellent earnings [Apr 30: Cummins Engine Excellent Report on Strong International Sales] at which point I sold 200 of my 500 shares in the $63s. I wrote

Again, I'd like to add this stake back on a pullback. So if I am wrong and there is no pullback then I still have 60% of my position to ride the wave.

Well the wave has continued and now it's just getting piggish as we approach $69; this has been a homerun in my book considering this is a sleepy industrial name, not something sexy like coal or fertilizer (and if I told you fertilizer or coal would be sexy 3 years ago, you'd laugh). I'm going to take another 100 shares off, and go down to 200 shares, selling in the $68.60s. I still find the valuation compelling but the stock is now nowhere near any technical support, and I'd like to see some digestion of this huge move.

Between Apr 18 and Apr 30 we made 19% on the 200 shares we sold; on this last batch (between Apr 18 and May 6) we made just under 30%. I'll take my gains and scurry off to the corner; we'll bring Cummins down to a 1.1% stake and look for a future pullback to rebuild this back north of 2%.

I was very low on cash a few days ago, but with all the transactions and profit taking the past 2 sessions, we are back to a more normal 14.5%. The fund NAV is also (as of 1 PM) back above $12.00 (we started at $10.00 so thats 20% gain) - it's been a long time sister since we've seen you .... haven't seen north of $12 since 17 weeks ago. So we're having a good week, I'm able to raise cash and protect more versus any potential downside (not that the market is allowed to go down in a socialized environment), and the Kool Aid is running. My virtual investors are making a mint; Ken Heebner here I come. ;)

Long Cummins Engine in fund; no personal position

Bookkeeping: Closing Huron Consulting (HURN); Cutting some FTI Consulting (FCN)

As I perused what positions to close this weekend, Huron Consulting (HURN) looked like a good candidate but I wanted to give these guys 1 more chance with earnings out this week. I consider Huron Consulting to be the Goofus of the sector [Mar 27: Adding to Huron Consulting on Earnings Warning] but enough is enough - it's warnings have gone from mildly amusing to annoying. They "beat" but that's because they warned in March... so it's not a real beat in my book; it's a "Wall Street" beat.

• Huron Consulting Group Inc (HURN) posted a quarterly profit above market estimates, helped by a 32 percent rise in revenue from its health and education consulting segment, but slashed its 2008 outlook.
• The weak outlook comes at a time when the credit crisis in the United States is widely being seen as a boon for consulting companies. (that's what I thought) The consulting business is expected to flourish as the ongoing downturn in the economy has increased the probability of investigations, litigations and bankruptcies.
• At the end of the fourth quarter, the financial services consulting company had forecast a very upbeat 2008 as it sought to gain from worsening credit and housing markets. (credibility... lack of)
• For 2008, the company now expects earnings of $2.57 to $2.88 a share, on revenue of $590 million to $620 million. Earlier, it had expected earnings of $3.10 to $3.28 a share on revenue of $640 million to $670 million.
• Huron had slashed its first-quarter earnings estimates in late March, citing weak financial consulting business.

When management cannot perform to expectation, it's time to cut bait. I originally bought this name and one of it's peers (Gallant) FTI Consulting (FCN) as plays on litigation and restructurings coming in the US economy [Nov 27: 2 New Recession Plays: Huron Consulting and FTI Consulting], but I've only been 1 for 2 in this sector. I wrote:

I am not buying much here, but looking for some long positions that will zig while the rest of the portfolio zags. Two stocks I have been eyeing for a long while are and Huron Consulting (HURN) & FTI Consulting (FCN). I will call both companies plays on a slowing economy and future bankruptcies of 2008/2009. FTI Consulting is the best of class, and Huron is the rebound kid which has faltered of late - so I am buying both to create a mini "consulting" basket. They are also becoming plays on globalization as they expand their presence worldwide. These won't be companies that rocket 30% in a month, but should hold up in a slowing US economy and most importantly are very different type of companies from what I currently have in the fund, so provide some diversification.

So much for the "rebound kid" thesis. If I add another name in this sector it will probably be the 3rd main player Navigant Consulting (NCI) but at the time I added these 2 names I was trying to find some ways to diversify away from commodities, and since then I've added other types of stocks that do that - so it might not be necessary.

Now a case could be made, that like the homebuilders, financials, retailers etc that there is nowhere to but up since all the bad news is out - but this is the 3rd warning since November, so it shows me a management who cannot drive the car straight. If this is indeed the bottom (the stock is UP today on this newest miss) I'll let someone else benefit. Despite the stock being "cheap", without management credibility, you don't have much. So this is strike 3 - they're out.

Looking at this chart, makes yet another case for trading around positions - last November I was buying in the $60s when I first started the position, now it's had a 50% haircut. But by adept trading and having low exposure going into earnings, and buying on dips (i.e. I bought on the last warning around $40) I've "only" lost $1700, which if you look at the horror show below is a small miracle. I'll take that and thank my lucky stars - the stock was as low as the $40.60s today but I am exiting my 0.7% stake on the rebound to $45.60s (what an intraday swing). I've held this position in the portfolio since November 2007.

I also cut back my FTI Consulting (FCN) position as it just broke below its 50 day moving average - in the perverse market, the stronger player is down on the weaker player's earnings. That's the market for ya. I've cut FCN down to a 0.8% stake from 1.5%; chopping in the $62.60s.

Down to 54 long positions.

Long FTI Consulting in fund; no personal position

Bookkeeping: Cutting Solar Exposure

Very busy day today! I am cutting all 3 solar positions today but with a caveat - all 3 are under a resistance level; if the stocks show enough strength to break above this resistance, I'll buy back. They have been mostly range bound (strangely) with energy prices ballooning but there is a lot of strength today as the speculators run from 1 sector to another in their rotation. Looks like today is solar's turn.

Let me explain each one

Yingli Green Energy (YGE) is in the $22.70s. If it breaks north of $23 (200 day moving average) than it's in far better technical condition and I'd buy back my stake I sold... right now it's still range bound but at the top end of the range



Trina Solar (TSL) is in the $43.10s; it could still work all the way up to the $45s and it would hit resistance (200 day moving average) just under $46. North of there I would add more; this still remains my favorite "value" play in the sector. Chart below shows $42.60s for the 200 day but this disagrees with my normal charting program, hence the difference.



LDK Solar (LDK) is in the $36.10s; very nice chart over the past few days with no major resistance until $39 (200 day moving average). Chart below shows $37.20s but I am using $39 in my normal charting program.



So we have a similar set up in all 3 charts, just at different stages - YGE is the closest into turning into a buy over resistance. What I try to do on these set ups is lighten up the closer it gets to resistance (hence I cut YGE the sharpest today), and then reverse course 180 degrees if need be if the stock does not falter (which they usually do when they approach resistance from below), and in fact continue upward. So for example, I might be buying YGE back in a few hours if it breaks through that $23+ level. If they do falter, I'll buy back what I sold later at a lower price. Keep repeating this for a few years, and you too can have a mutual fund.

Again, this is a sector basket allocation for me, and before my sells this was a "5.8% solar stake"; it is now down to 3.5%.

While I am drinking Kool Aid in an overall market sense, I still am going to take profits when given to me, and lock into cash unless/until charts turn more positive.

Long all names mentioned in fund; none in personal account

Bookkeeping: Adding to Fertilizers & Mulling the "Market as a Commodity"

Looks like the "fertilizer correction" is over. Adding to all 3 of my names on their bounces off support; actually like the Potash (POT) chart the best here, but they all move together.

I love this market. Uncle Ben has apparently created so much money, but none of it goes to people who need it out on Main Street. Instead it is flooding Wall Street pushing up equities (along with commodities) :) Kind of perverted but we all thank Uncle Ben as investors, as we curse him at the grocery aisle. $122 oil? No problem. That only affects US consumers - stocks are independent of the "little people".

(X amount of stock) versus (Y amount of money supply x 20% annual growth rate) = prices go up. Economics 101.

Equities are simply another commodity at this point, it appears. Every other commodity is going ballistic so they must all go up as well; as the printing presses work overtime. I guess the current strategy is to simply move money from 1 commodity group to another - after one runs, take profits out, and go to the next one... repeat. Send Ben thank you letter for destroying currency. Rinse. Wash. Repeat. Watch seniors on Main Street with fixed income crumble. Rinse. Wash. Repeat. Watch stock market speculators giggle with glee. Rinse. Wash. Repeat.

We'll continue to drink Kool Aid until the market shows any signs of recognizing reality. Or perhaps reality in a 20% inflationary environment no longer matters. As I said, with the 20% annual monetary growth rate we have embarked upon, it is going to be very hard to ever see a sustained downturn in the stock market. I mean if stocks were to go down 20% naturally, with 20% more money floating around it will still be flat net net. Just make sure to ask your boss for a 20% raise so that you can "break even" with the money supply.

Socialized markets are so fascinating - I'll get the hang of it sooner or later.

Long Potash, CF Industries, Mosaic in fund and personal account

Natural Gas Producers Surging Again; Fannie is a Disaster

If you overlay the natural gas stocks over the coal stocks, it's the identical pattern since last Thursday, only with about half the gains... still some very nice moves for 3 days of work. Since my natural gas stake (3 positions, about 6%) is smaller than coal I am not taking any profits here, but once again just remember this the next time the 'early cycle', 'it will all be fine' folks start clucking.

Let's compare Fannie Mae (FNM) to Cimarex Energy (XEC)

Now, in the most recent period people were so fearful of financials that any news saying they won't be bankrupt was CHEERED - huge writeoffs? Better than expected! Take the stock up!... equity dilution? At least it's not out of business! Take the stock up! - but at some point the longer this goes (and it won't reverse in a quarter or two like many would have you believe) the writing will be on the wall that all these new shares that are flooding the market in financials are going to impair earnings PER share growth for years to come. And as more losses come - not just from housing, but credit cards, auto loans, student loans, personal loans - the more capital that will need to be raised - leading to even more earnings PER share impairment for years to come. The lemmings have not figured that out yet. So multiples on these stocks should degrade - for a very long time. On whatever earnings they do eventually have (because they sure aren't profitable today).

Fannie/Freddie were once about 40% of the entire mortgage origination market, but things have degraded so much in our "transparent, efficient" financial system - they are now accounting for 80% of all mortgages. That should scare you - we are the "most innovative" and "awesome" financial arena in the world - yet the only one source of mortgages people are turning to are the 2 companies with implicit government promises (read: your tax dollars) backing it up in case they implode. Nice. So much for "private enterprise". This is your "tradeoff" for completely ignoring any basic, sensible regulation in the mortgage market for years and letting the "free market" fix things - if not for those 2 agencies that are essentially government entities we'd have no mortgage market right now. And even as these 2 companies report terrible numbers we've had their regulators increase their leverage (another excellent idea by short sighted politicians and cronies) so they can take on more and more and more of the risk [Mar 19: Fannie and Freddie Layered with MORE Risk] - but since the whole mortgage market is frozen, we are forced to do that. Read on for the horror show (but don't worry, it will all be better "in 6 months") I continue to say that our "bright minds" in NYC do not understand the housing situation - so many people are going upside down (more by the month, week, day)... this will not be fixed "in 6 months"; and it's not a "subprime" issue - its everyone. But I've been saying that since August.

• Fannie Mae (FNM) on Tuesday cut its dividend and set plans to raise $6 billion in fresh funds to weather the severe U.S. housing market slump, driving its shares and the broader U.S. stock market lower.
• The company, the largest provider of U.S. home financing, also posted a deeper-than-expected quarterly loss, its third in a row, and said it expected more trouble ahead.
• House prices, by some measures already 15 percent below their peak in mid-2006, likely will drop as much as another 9 percent this year and related credit losses will keep rising into 2009.
• Home price declines and rising foreclosures that started in the subprime market have spread to higher-quality loans that make up the bulk of business at Fannie Mae and its sister company, Freddie Mac. Freddie Mac, too, is expected to post a big loss when it reports its first-quarter results next week.
• The loss was greater than even the most pessimistic forecast and came on the heels of a record $3.6 billion loss in the fourth quarter of 2007.
• The company also plans to raise $6 billion in new capital through common and preferred stock offerings, it said. To initiate that fund-raising, Fannie Mae said starting Tuesday it will offer two issues totaling $4 billion of common stock and noncumulative mandatory convertible preferred shares. (more shares, more dilution)
• Fannie Mae on Tuesday said it expects home prices to fall another 7 percent to 9 percent on a national basis this year. (sounds accurate to me)

So again, this is going to be a long drawn out process.... all these bright eyed, bushy tailed folks in their 20s, 30s, 40s have been conditioned to everything being fixed by the Nanny State (aka Federal Reserve) with flooding of money and for all problems, slowdowns, etc to go away within 2 quarters; so that is why they keep sounding the "6 months and done" alarm (it's already been 8 months they have been saying that). They will keep saying it. I'll be typing the same garbage in December of this year when they continue to say it. This is a historic bubble... its epic in size, and it won't be fixed in 6 months. Or 9. Or 12. Or 15. Housing might bottom in mid to latter 2009 but it's going to then go into a long sideways, before any real meaningful rebound. And that's assuming inflation does not take off or the recession itself is mild. And until people get that reality - they will continue to cluck about their "6 months".

So I've been told by CNBC for months on end I should be buying these "bargain" financials... so I can get results like that above. Because the stock market is a discount mechanism and "all the bad news is priced in". No, the only thing priced in is what people's perception of the bad news is; not the real version of the bad news coming. That has YET to be priced in. And because the commodity bubble is dead, I should be buying retailers and restaurants, and avoiding the companies like Cimarex Energy (XEC) who report results like this. They tell me look ahead young man! Everything will be fine in 6 months! Ok ok... keep talking. Just remember, every time they say 6 months, multiply that number by 3 - and avoid JCPenney (JCP).

• Natural-gas and oil producer Cimarex Energy Co. said its first-quarter profit more than doubled, topping Wall Street forecasts, on increased production and higher commodity prices. Net income for the first three months of the year rose to $149.8 million, or $1.76 per share, compared with $64.6 million, or 77 cents per share, during the same period a year earlier.
• Revenue increased to $477.1 million from $306.9 million a year earlier. Analysts predicted revenue of $462 million, according to Thomson.
• Cimarex said average gas prices rose 25 percent to $8.38 per thousand cubic feet, while oil prices surged 71 percent to $94.38 per barrel.
• Total daily oil and gas production rose 8 percent over the same period a year earlier. Gas output was up 5 percent to an average of 339.7 million cubic feet per day, while oil production climbed 16 percent to an average of 22,757 barrels per day.

No positions

Bookkeeping: Taking my Thursday Coal Buys back OFF the Table

The individual names do not matter at this point so I am going to just consider this mini basket to be "1 position". Last Thursday as the chickens were running around with their heads cut off about the "strong dollar", I was incrementally adding to my coal stakes [May 1: Incrementally Beginning to Add to Coal] so today I am simply reversing those purchases plus taking out some Alpha Natural Resources (ANR).

Let's look at them as a group since that is how I look at these 4 names - I had a 10% weighting going into day with Arch Coal (ACI), Massey Energy (MEE), ANR, and Consol Energy (CNX)

They have come a long way in just a few days
ACI from $53s to $62s (+17%)
MEE from $48s to $57s (+19%)
ANR from $46s to $58s (+26%)
CNX from $75s to $89s (+19%)

Please note I did not buy at the lows Thursday, I am simply showing how far they have come in since Thursday.

Is this the top? I have no idea. That doesn't matter to me. I am taking profits out, and if they continue to run, I still have a good allocation. If they reverse and go back, I will reapply my cash at a lower price. Same thing I always do - never catching the top nor bottom, but catching the middle often.

My new allocation for this group is 6.2%. If the stock prices go higher, I'll continue to sell down. If they go lower, I'll add back. I will continue to have my goal to be, on commodity dips, to have this stake as one of the top stakes in the fund. I continue to hold my Russian allocation as well, which the market is completely missing... per usual.

Long all names mentioned in fund; no personal position

Bookkeeping: Adding Back Gafisa (GFA) in Scale

Gafisa (GFA) is trading back down almost text book post earnings; could not ask for a better trade than what we just enjoyed here.

We doubled (0.9% stake to 1.8% stake) the position last Monday near $38
We took out a smaller portion at $43 Wednesday
We took out (down to 0.6% stake) a big position Friday AM at $49.60

We added (back up to 0.9% stake) a small bit yesterday below $45
We added a much larger piece back at $42 this AM

Downside remains first to upper $39s (near $40) - first support - and then at $38 (stronger support) but my largest sell was at $49.60 (Friday) and largest buyback was $42 (today) so we cleared 15% on that transaction in a 2 session period. I'll take that all day, every day.

I'll buy more on a pullback to $38, but for now Gafisa is back to a 2.4% stake. The above trading shows my trading methodology; only in this case it happened in a very short period of time. Layer in; layer out.

Here are the results but they are not in US Pesos, but in the Brazilian Real... so I'll have to convert them later and add some flavor. But unlike most of today's day and age of investor these results don't matter much to me - just like I could care less what the most recent quarterly results are in the coal industry - I am looking forward. The key points to me are the big picture, not the actual numbers from 1 quarter to another - the mortgage market is just beginning in Latin America; the country actually has savers unlike debtors that populate our country; this is the best economy in Latin America; the end. (and yes there is a risk because Brazil actually has inflation unlike our magic country which has no inflation, so their central bank raises rates, unlike ours)

• Our land bank has reached R$11.1 billion and represents almost 59,000 units. Pre- sales, a strong indicator of Gafisa's ability to meet consumer demand, grew nearly 100% over the prior year's quarter, while launches increased 91% compared to the same quarter in 2007."
• "Looking ahead, we believe that the outlook for continued growth in the Brazilian residential housing industry remains strong. We remain confident that the banking system will not change course and will continue to accelerate the rate of access to mortgages, thus continuing to fuel our industry. There are several reasons that support this perspective: savings account balances are expected to continue to grow and regulation requires that 65% of those balances be used toward financing mortgages; even with potential increases in rates, the improved terms and tenors of loans will continue to make monthly payments affordable; and, the Selic rate does not necessarily have a direct correlation to the consumer's mortgage rate. In fact, mortgages funded from savings accounts increased by 88% in this quarter compared to the previous year.
  
• Finally, the Central Bank's decision to control inflation, resulting from stronger-than-anticipated economic activity, and the overall health of the economy will have a long-term positive impact on all consumers and their ability to continue to afford new housing."

Long Gafisa in fund and personal account

Commodity Poll Results

I know we have a lot of readers who subscribe only by email and hence do not come to the website itself, but just as an fyi sometimes we run polls and/or there are comments made by readers that you are missing out on ;)

Anyhow in this week's poll we asked 'What is Your Long term View on Commodities?'

With 97 respondents
16% responded that this is just the latest in a series of bubbles
84% responded that in 5 years we are going to wish we could buy at these prices

Now, I assume there is sampling error because I fall more in the latter camp so most blog readers who were less biased probably are leaning to the latter answer after reading the blog or as most humans do, prefer to read sources that agree with their own viewpoints - hence we attract more people who already came to the blog with that viewpoint.

However, if in 5 years, the other 16% are correct I'll be the first to congratulate them! Of course at that time we'll be the 2nd most visited site on the internet so I won't have time to actually talk to readers, but just sayin'.

Earnings Preview

We have 2 late filers tonight in Brazilian homebuilder Gafisa (GFA) and American iron ore producer Cleveland Cliffs (CLF). It looks like they will be reporting later in the evening, but I expect positive things from both - but wish to hear something negative to lead to selloffs in both to build up positions. I really doubt anything of that nature could happen in CLF simply due to its long term iron ore contracts but maybe in GFA.

Andarko Petroleum (APC) which is a natural gas/oil hybrid is out late this evening and continues the drumbeat for successful outcomes in that space. Frankly, the dichotomy in this market is very easy to spot. You can either buy (a) trash that has bad earnings, and unclear prospects on hopes you are catching the "bottom", the "strong dollar" will last more than a week and a half, "the 2nd half recovery" is imminent and the stocks are "cheap based on full year 2008 estimates" (which will be slashed within 6 months, and thus turn from cheap to expensive) and hope enough of your fellow bulls buy the company line and take your stock up or (b) you can buy stocks with massive global underpinnings, explosive earnings growth, and go from "somewhat pricey" to "cheap" everytime they report a great quarter and raise guidance. Myself, I'm more of a (b) guy but in the past week we've seen the (a) guys show their faces - which they do every so often. I have a few (a) stocks sprinkled into the portfolio so that in weeks like last we don't get decimated but frankly the sight of DR Horton (DHI) next to a fertilizer or coal stock is a bit amusing. Again, if I am completely wrong and our economy will return to full or near full growth rates by the 2nd half, the (a)'s are a huge bargain here. But you can have them; I don't see a reason to keep grasping for hope when we have fantastic stories playing in front of our eyes outside the United States of Subprime. Now again, the foreign markets are not risk free as global inflation will be impacting their populaces - but some of these countries have foreign governments loaded with surplus, either through petrodollars (thanks USA!) or trade surplus (thanks USA!) so they can subsidize growth in a way we could only hope to (with our money).

Off we go to a very busy day tomorrow....

Bellweather types...
Cisco Systems (CSCO), Fannie Mae (FNM) <--- should be a disaster on results but as long as it's "better than expected" the stock can rally, Teva Pharma (TEVA), UBS (UBS), Walt Disney (DIS)

Of interest...
Brazilian bank Banco Itau (ITU),
Natural gas player Cimarex Energy (XEC),
Clayton Williams Energy (CWEI) <-- what a chart, Brazilian steelmarket Companhia Siderurgica Nacional (SID),
James River Coal Company (JRCC) - this is an unprofitable coal company but has a lot of unbooked production so could be a good lottery ticket,
Kinross Gold (KGC) - we just sold this today; one issue with miners is they are going to start seeing their costs go up as fuel, steel (for machines), rubber, etc all starts to skyrocket (darn that inflation that doesn't exist),
MGM Mirage (MGM) - this is a name on upticks, will appear to be a great short since the # of Europeans and Asians coming to Vegas should not offset the fleeing Americans over the next year or so. They don't have Macau (China) exposure to provide hope to bulls either. [Stocks/Sectors I'm STILL Bearish On] Speaking of which, small casino operator Tropicana just filed for bankruptcy; again folks I cannot stress enough to avoid almost anything tied to the US consumer (that the Federal Reserve won't try to prop up); outside of a trade it's not worth it.
Papa Johns (PZZA) - inflation (that does not exist) here, inflation (that does not exist) there,
Playboy (PLA) - hey I like to look at the annual report, sue me,
Ruth Chris' Steakhouse (RUTH) - high end restaurant,
Tesoro (TSO) - I keep reading that these refiners need to rally any day now... unfortunately I've been reading that for 3 months now,

Our holdings...
DR Horton (DHI) - we'll see bad news, but these stocks seem to ignore bad news the past 4-5 months because... well... "it cannot get worse"

Huron Consulting (HURN) - this consulting company has warned twice since I've owned it, and expectations should be low after the most recent go around.

Bookkeeping: Closing India Fund (IFN) for Overlap Reasons

In my continued quest to streamline, I've decided to close out a long held position in the India Fund (IFN) which is a closed end fund that has along with 1 peer had been the only way to buy a collection of India stocks for most of the past half decade+; some new instruments have been introduced the past 12 months. [Mar 6: 2 New ETFs for "India Bugs"]

Still love India over the next few decades but as I chart India Fund vs some of the Indian banks I show, I see very similar patterns so it's sort of a moot point to own both. Below is a 6 month chart of the index ETF versus the 2 Indian banks I own, and then below that is a 12 month chart. The 3 month chart is similar (but now shown).






Further, I follow the banks and their stocks much more than the ETF which sort of sits at the bottom of the portfolio as a 0.5-1.0% type of position most of the time. So as I move to remove redundancy I've decided to sell this, even as the chart is actually looking quite positive in the near term. I sold out at $51.80s.

Even though the 6 month return is negative 20%, I've had some very good timing with my buys of India [Oct 26: India Up, China Down? Changing my Indian Focus] so despite a small stake and never overweighting this position I've been able to get a +$4000 return by selling when it was up, and buying on pullbacks. This has been a position (since the fund began) where the only way to make money is trading. That said Indian stocks have had a great rise if you go back a few years... I just started the fund at the inopportune time for "buy and hold".

This position was started on day 1 of the fund... I'll focus on the banks for now and continue to wish that India, like Brazil, offers more companies direct to American investors.

I am now back to my preferred 55 long positions (63 total)

Long Indian banks in fund; no personal position

Senators Call for EPA to Reconsider Ethanol Output Mandate

Before we get to the story let me refresh my thoughts... first I said this was a potential threat a few times, most recently in [Apr 23: Potash hits $1000 on Spot Market] I wrote

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.

Now I should alter that slightly. I forgot how self serving we are... if people in 3rd world countries with names we cannot pronounce die from starvation - well that's not a big deal. However, if Joe Schmoe voter in local Congressional district has to pay 24% more for eggs, than it's a national disaster. So while I thought before 3rd world governments falling and/or seeing scores of deaths overseas might be the root cause for change, let's just simplify it to how things really work. People with funny names in countries 90% of Americans could not locate a map, be damned - but when voters who are the cause of a Congress person getting elected start raising a fuss, that's what really will make the difference.

As I wrote above, my thesis is when this day comes, and I truly believe it will come because my "World of Shortages" thesis dictates ever rising prices over the long run; as the global supply/demand dynamic for food is pure crisis mode - the fertilizer stocks will sell off. Not rooted mostly in reality... but on perception. But when you are down 25% overnight in a stock will you care why? So I am saying it now, as I said it a few weeks ago, as I said it a few weeks before that. That is a systematic risk - when the day comes - to anyone investing in fertilizer. People (including me) will take a hit. As whining people toss their stocks into the fire, saying "well this was all because of ethanol so I am out - fertilizer stocks suck", I'll be buying. And prospering in the years to come as ethanol is but a small part of the global food crisis. But the market lemmings don't have a timeline of over a week (they are already berating these stocks because they have dared to not go up for a full 7 days now!), and panic will hit all these newfound "fertilizer bulls, long and strong" blah blah. They'll be gone within hours of that announcement.

I have written countless times (you can search the site for term "boondoggle") that I believe this ethanol push has been as big of a boondoggle as Iraq. If not worse. It's a complete disaster with global implications and causing global suffering. It takes up more energy than it provides. If we converted our entire corn crop to ethanol it would provide a fraction of our energy needs. But instead of being forward thinking or progressive and subsidizing say solar farms, or geothermal, nuclear, or wind... we take the simple, and easy path that garner the most votes. This is symbolic of all the things wrong with our leadership aka "gas tax holiday for 3 months!" No long term solutions, only knee jerk reactions without considering unintended consequences.

Franklin, Jefferson, Hamilton must be rolling in their graves watching this unfold. Now we can watch the infighting play out until the next President ascends to the throne ...

• Senate Republicans on Monday asked environmental regulators to use their power to halt the country's ethanol output expansion plans amid rising food prices. Twenty-four Republican senators, including presidential candidate Sen. John McCain of Arizona, sent a letter to the Environmental Protection Agency suggesting it waive, or restructure, rules that require a five-fold increase in ethanol production over the next 15 years.
• Congress passed a law last year mandating a ramp-up to 15 billion gallons of corn ethanol by 2015 and 36 billion by 2022. But McCain and other Republicans said those rules should be waived to put more corn back into the food supply for livestock, and to encourage farmers to plant other crops.
• "This subsidized (ethanol) program -- paid for by taxpayer dollars -- has contributed to pain at the cash register, at the dining room table, and a devastating food crisis throughout the world," said McCain, in a statement.
• Despite tough rhetoric from lawmakers, analysts say Congress is unlikely to roll back such a popular program during an election year.
• Friedman, Billings, Ramsey & Co. analyst Kevin Book argued in a recent note to clients that Congress will not "turn on the corn belt" because of the significant number of votes held by ethanol-producing states. Ethanol subsidies could face greater risks, however, in 2009 and going forward, according to Book.
• Republican Sen. Charles Grassley of Iowa said Monday "ethanol is unfairly taking the brunt of the criticism" for escalating food prices. Grassley's home state is expected to produce a quarter of all U.S. ethanol this year.
• The EPA has the power to waive or restructure the requirements if they cause unintended harm to consumers or the environment.
• "We don't think it's the right move to make," said Liz Friedlander, a spokeswoman for the National Farmers Union. (why am I shocked by that statement, certainly an unbiased source?) The group has defended corn-based production of the alternative fuel, saying its impact on the rising food prices has been relatively small. Instead, it says food price inflation is mainly due to higher fuel prices, poor weather conditions and dwindling stockpiles of wheat and other crops. (all true... but those are not easily reversed, unlike the ethanol subsidy)
• The ethanol industry said Monday altering the biofuels mandate "would drive the price of oil and gasoline through the roof," according to Matt Hartwig, a spokesman for the Renewable Fuels Association. (as opposed to the rock bottom prices of today, for example?)
  
• Ethanol is "one of the only solutions for holding down the price of oil in the long-term," according to Jeff Broin, president and chief executive of Sioux Falls, S.D.-based Poet, the nation's largest ethanol producer. (the "only" solution.... got it... another unbiased source)
• The ethanol industry says ethanol and other biofuels account for just 4 percent of the price surge, while the Department of Agriculture says the figure is closer to 20 percent. (I don't know myself, but I am guessing somewhere in between. But Uncle Ben could probably be the cause of 20-30% ... why not ban Uncle Ben?)

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

Resistance is (for now) Support

After clearing the bogey at S&P 1405 at last in the previous week, the index has now pulled back to that level and for now bounced off it... hence old "resistance" now becomes new "support". It will be interesting to see if this holds but I expect it to do so for now.

Some other thoughts

1. As I've said in the weekly round up, the "strong dollar" fantasies have usually lasted 5-10 days or so... it was nearing midnight. With crude north of $120 and the dollar returning to its rightful place as the junk of the world, we might be done already. This happens like clockwork now almost every 6-8 weeks. As I wrote in detail last week, the fundamental issues facing our country do not allow for a stronger dollar... we continue massive deficit spending and we print money like mad to solve our problems. This is not a recipe for good, and Warren B agrees. All dollar rallies, while some might last days, some weeks, and some months - will be temporary. We are on a long term course of pathetic... and our only "hope" is Europe joins us in purgatory and starts cutting rate. But that's not exactly a bullish call on the US
   
2. Apple (AAPL) got 2 upgrades today - its a slow day and I don't normally report the upgrades/downgrades because they are relatively meaningless to me... but if you are interested here is some meat (this is one great chart by the way, looks like its headed to $200 if the market does not sell off) - Apple shares rose modestly Monday after an American Technology Research analyst raised his rating to "Buy" and an RBC Capital Markets analyst increased his price target for the computer and gadget maker's stock. In his Monday note, Wu said he still sees a "potential product vacuum and drawdown in inventory in the June quarter" but thinks this is fairly known and that investors will be more focused on products launching in the second half of the year. "We see upside potential to iPhone estimates following changes, in our opinion, Apple may make to its iPhone business model, expected to accelerate momentum and expand its global addressable market," he said.
3. Speaking of Apple, the cover story of BusinessWeek is a theme I've been promoting since the blog began [BW: The Mac in the Gray Flannel Suit] ... as an entire generation of kids, teenagers, and 20somethings enter the workforce, we could see a seismic shift to Macs in our corporate environment. This won't happen easy (the incumbent gorilla won't give up) and it won't happen overnight but would be the type of thing that would simply be enormous. Even if 15-20% of enterprises switch over to Apple, it will give us years upon years upon years of earnings expansion. Remember, this is an "entertainment company" combined with a hardware company - they are hitting on all cylinders on both sides of the business. I cannot stress how far ahead this company is thinking; it is like a master chess champion - while some of it's investor base are playing checkers - they only care about the most recent earnings report and sell the stock off as if the end of days is coming if guidance is not "correct"; those are all opportunities on what I consider a decade long investing opportunity. I truly think this company will be at the heart of the living room, and potentially office - at the same time, and is probably the only tech stock I'd feel comfortable leaving for a fishing trip for 5 years and holding in my portfolio.
   
4. Tomorrow we have an avalanche of earnings, both inside the fund (our holdings) and out. Tonight we have Gafisa (GFA) and Cleveland Cliffs (CLF) report after the bell today. I did add a bit back to my Gafisa position since I sold a lot right below $50 Friday and we have a pullback below $45 (so I got those shares back at a 10% discount) but I am hoping for some sort of disappointment and get a sell off to $40 (or below). I doubt it, but I can hope - I did not add a ton. Same for CLF but with locked in iron ore prices it is going to be hard to disappoint - fingers crossed ;) (I know, it sounds strange to be hoping for misses and disappointments from stocks I own, but I am looking long term and when I am underweight positions I'd rather take short term hits so I can acquire better prices for longer term stakes)
   
5. Since I highlighted Walter Industries (WLT) Thursday evening its up from $66 to $81. Nice. (no position though) I hope someone made money off that call since it was the entry with the most hits the last 96 hours [Walter Industries - the Most Interesting Company] Looks like they received 3 analyst upgrades to boot (err, up to $83 now)
   
6. Pilgrims Pride (PPC) joins Tyson Foods (TSN) and all the major food producers in telling us what a disaster ethanol is. Their input costs continue to go up, and we continue to lose jobs in our heartland as they close plants. But hey, we won farmers votes. I continue to stress to you to stock up on meats. They will be going up in price meaningfully in a few quarters. Of course it won't show up in any government inflation report, but I am talking "reality" versus the "fantasy" of government statistics. I do think now that it won't be people dying in 3rd world countries but a very peeved American electorate that will cause ethanol subsidies to be reduced - but not until after this election. "While we continue to pass along price increases to our customers, the simple fact is that to date, we have not been able to raise prices fast enough to match the extreme price volatility in the grain markets," Pilgrim's Chief Executive Clint Rivers said in a statement. Rivers also warned that consumers will be paying more for food as these higher costs are passed on. "American consumers are only just beginning to feel the impact of sharply higher food prices," he said. "The operating environment for chicken producers today is the most difficult I have seen during my 27 years in the business," Rivers said.
7. I really should be charging for this level of insight ;)

Bookkeeping: Closing Precious Metals Positions

This move has nothing to do with the fundamentals of gold or silver. Simply put I want to run a concentrated portfolio and my # of holdings is getting too large. With the Federal Reserve backstopping the entire US financial system, the risk of "calamity" is lessened (in return for inflationary pressure and dollar destruction)... but this is more along the lines of, I see no reason to hold gold/silver when I have coal/fertilizer. I already know where the prices of those are a year out - whereas gold is speculative, subject to the whims of the market, and a lot of people believing in a fantasy called "2nd half recovery". So I just don't see the need anymore to hold something that is sort of replicated in other ways in the fund; yet carries more risk. I'd rather simply be more concentrated into my top holdings with this money.

People often email me "wouldn't it be better just to buy and hold, since your stock picks are solid, and they just usually go up over time?" I have to remind them, that they are focusing on the winners and not the losers. (of which I have more than my share) Kinross Gold (KGC) is a great example where trading around a core position and taking out profits when offered saved me. (one of many examples). So yes, I sometimes leave money on the table on the "big winners" but I remain consistent in approach and this approach has locked in profits(or much smaller losses) on my "losers", for example, I have a small profit in KGC despite the chart below. So I am closing my 1.1% stake in Kinross Gold (KGC) with just under a $1000 profit, selling at $19.75



Not so fortunate with my silver holding, Silver Wheaton (SLW) which despite some trading and profit taking I still exited with a $1200 loss. Considering the chart, that's a small miracle. I am selling the last of my Silver Wheaton (0.3% stake) in the $13.70s. Net net, these 2 positions essentially cancelled each other out.



Again, I want to reiterate these are not typical sales - i.e. specific to the stocks. (I actually like the KGC chart in fact) This is more of a strategy call. I am simply at the point where I want to become more concentrated and narrow the # of holdings, as it is starting to get bloated and if I'm going to focus on commodity exposure, I am going to stick with subsectors which I have pricing visibility - so why take the tougher road, when the easier road is offered? When the dollar is "strong" all of these sectors sell off (incorrectly) but when "weak", I know which ones will rally based on what I foresee a year out - I can't say the same for gold / silver (although I do believe the flooding of world with Western currencies will continue to help these precious metals as well).

I am looking for other things to sell as well, to continue to narrow my focus.

No positions

Alpha Natural Resources (ANR) Booming Earnings - Just the Start

As I keep saying, metallurgical coal is about where fertilizer was 15 months ago - we have a long wave of earnings estimates upwards coming in the year+ ahead, with the biggest pushes up in earnings coming in about a year. Alpha Natural Resources (ANR) is up about 7% premarket as I check off a fabulous earnings report.... just getting started in a long and winding road up over the next year I believe. I wrote a piece on fertilizer in October 2007 about just how wrong these analysts (who are supposed to be industry experts and just follow one sector) were... when a no name like me could see the coming earnings explosion [Oct 23: Analysts Still Doubting the Fertilizer Stocks] - since then estimates for many of these companies have gone up 2-3x in the out years. Replace the word fertilizer with metallurgical coal and check back in 15 months; once again analysts are so... so... so... wrong. And this creates opportunities for us, before CNBC jumps on the bandwagon next Valentine's Day proclaiming the bubble that is coal.

Remember, I switched to this name about a month ago due to it's unhedged metallurgical production [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In] but just about every coal company does have metallurgical coal exposure, it's just a matter of degree (and thermal coal ain't too shabby either). While the rest of the world obsesses with the fate of Yahoo (YHOO) [editor note: what were they thinking?] the rest of the world (once again) moves on.

• Alpha Natural Resources, Inc. (NYSE: ANR - News), a leading supplier of high-quality Appalachian coal, reported a 17 percent improvement in revenues from coal sales in the first quarter of 2008 over the first quarter of 2007 as the company achieved the highest quarterly price realization in its history due to rising metallurgical coal exports and price levels.
• For the three months ended March 31, 2008, Alpha recorded coal sales revenues of $445.7 million compared with $380.2 million in the same period of 2007. Net income for the most recent quarter was $25.5 million ($0.39 per diluted share), compared with net income of $8.3 million ($0.13 per diluted share) in the first quarter of 2007. (Analysts expected $0.17)
  
• Global supplies of hard coking coals for making steel have tightened considerably due to production and logistics issues in Eastern Europe and Australia. With world steel output climbing an estimated 5 percent in the first two months of the year, prices for metallurgical coal have risen quickly as has international demand. Alpha, the largest exporter of metallurgical coal out of the U.S., experienced a surge of 430,000 tons in its first-quarter exports, year-over-year, which boosted metallurgical coal sales to 42 percent of the company's total sales volumes for the quarter.
• "Coal has joined the energy commodity boom and tight supplies are having a meaningful impact on prices, for both prompt deliveries and forward commitments," said Michael Quillen, Chairman and CEO.
• Quillen said that after the close of the first quarter, the company secured commitments for 2008 delivery on three-quarters of a million tons of planned metallurgical production, at price levels consistent with recently announced settlements with Japanese steelmakers. "Those prices ranged from $295 to $305 per metric tonne at the port, which correlates to a realized price for Alpha of approximately $240-250 per short ton at the mine," Quillen said.
• "In addition to improving our price deck for the current year, we've now established a firm benchmark on price discussions for our 2009 metallurgical sales, where we still had considerable planned production -- more than 10 million tons -- left to commit and price as of mid-April," added Kevin Crutchfield, Alpha's president. "We're convinced that supply and demand conditions in both the domestic and international steel markets will underpin a strong price environment going forward."

When you read these numbers, again keep in mind they are selling met coal at $85 this quarter... we are talking $200s (potentially breaching $300) into 2009.

Outlook

• Coal supply continues to tighten around the world. While traditional coal exporting nations such as Australia, Poland, Indonesia and South Africa have been subject to supply disruptions or voluntary cutbacks, U.S. exports of both thermal and metallurgical coal have shown sustained strength, up 30 percent on a combined basis in the first two months of 2008 after last year's 19 percent gain.
• Rising natural gas prices and the U.S. dollar's weakness are adding fuel to thermal coal demand both domestically and overseas, while high steel prices have mills searching the world for reliable supplies of metallurgical coal. U.S. steel mills, in particular, finished 2007 with coking coal inventories 34 percent lower than in 2006, at a time when production is needed to restock service center inventories and take advantage of record high steel prices.
• On the thermal side, the company contracted substantially all of its remaining uncommitted but planned 2008 production (approximately 340,000 tons) at an average realization of approximately $87 per ton. Commitments were reached on approximately five million tons of planned thermal production for 2009, at an average realization of approximately $79 per ton.
• Altogether, as of mid-April, Alpha had more than 37 million tons of planned coal production uncommitted and unpriced for 2009 and 2010, including more than 21 million tons of metallurgical coal and 16 million tons of thermal coal. In total, 57 percent of 2009 planned production was uncommitted and unpriced as of April 15, while 87 percent of planned 2010 production was uncommitted and unpriced.

If you want to see a company who is confidant in their long run, and desperate to retain workers in the coming boom, read about the retention packages that came out late last week. (and these guys deserve everything they get, talk about one of the most dangerous, hardest jobs on Earth)

• Alpha Natural Resources, Inc. (NYSE: ANR - News), the nation's leading supplier of metallurgical coal, introduced an unprecedented, multi-year package of rewards and incentives Thursday to the company's more than 3,600 employees.
• The package was presented at Alpha's 58 mining sites in four states. Employees were given ownership in the company in the form of a grant of 25 shares of company stock. Employees were also informed they no longer have to contribute to health, dental and vision insurance premiums. Additional incentives include semi-annual bonuses for operating personnel based on continued service to the company, and rewards for mine rescuers and trainers, including cash payments for participating on the all-volunteer teams and vacation money to use in their time off with families.
• Alpha also unveiled an energy relief/fuel assistance program to help employees cope with higher commuting expenses due to high gas prices.
• Costing more than $13 million in the first year alone, the package is worth more than $3 per hour to the average employee.

This is what you can do when you see years of boom ahead; sort of sounds like General Motors (GM) circa 1950s.

[Dec 6: Coal Stocks Quietly in a Bull Market]

Long Alpha Natural Resources in fund and personal account

Weekend Reading

Here is a list of some interesting stories

I am putting the first group together first because they are by my favorite journalist, Fareed Zakaria. He has a new book out called "The Post-American World". I have yet to work through the entire body of the articles as they are immense (20-30 minute reads!) but from what I have read so far he is summarizing in a much more polished manner many of the ideas I have been proposing; ideas I believe an inward looking America is not accepting. I look forward to completing the texts and if you are not reading this gentleman (his homebase is Newsweek but you can sometime catch him on TV - he even makes The Daily Show seem more brilliant), you should.



I have a lot of solutions but most involve the absolute eradication of Washington D.C. :) He offers a few as well, and has a still bright outlook on the future. I think these articles are so important to understand, I'd rather you read them than anything in this blog... this week. (make sure you come back next week) ;)

First of 2 long summaries - The Future of American Power; How America Can Survive the Rise of the Rest
Summary: Despite some eerie parallels between the position of the United States today and that of the British Empire a century ago, there are key differences. Britain's decline was driven by bad economics. The United States, in contrast, has the strength and dynamism to continue shaping the world -- but only if it can overcome its political dysfunction and reorient U.S. policy for a world defined by the rise of other powers.

Newsweek: The Rise of the Rest
It's true China is booming, Russia is growing more assertive, terrorism is a threat. But if America is losing the ability to dictate to this new world, it has not lost the ability to lead. American anxiety springs from something much deeper, a sense that large and disruptive forces are coursing through the world. In almost every industry, in every aspect of life, it feels like the patterns of the past are being scrambled.

Or for a Cliff's Notes - here is a quick audio from NPR

*********
WSJ: Credit Crunch Sends More Consumers to the Sidelines

• As hundreds of companies reported earnings during the past two weeks, their chief executives had a common refrain: consumers are worried and are cutting back on everything from premium coffee to motorcycles.
• "We've really seen, in the U.S., a slowdown across all products, all vintages, all geographies," American Express Co. Chief Financial Officer Dan Henry said in his company's earnings call last month.

WSJ: Economic May Face Prolonged Pain, History Suggests

• The worst of the financial pain may have passed, but the economic pain could be just starting. But history suggests celebration may be premature. It's common in a crisis for markets to hit bottom long before the economy does.

NYTimes: Auction Rate Security Market is Frozen. Investors Trapped. But Wall Street Still Finding a Way to Make Money... off of the Crisis, in fact. (Summary: the individuals in this country are taken for fools; and Wall Street always wins in the end - hence go long Goldman Sachs)

• It is Day 79 in the hostage crisis otherwise known as the auction-rate securities market. Some $300 billion worth of investors’ funds — advertised as being easy as pie to cash in — are still locked up. And the brokerage firms that got investors into this mess are doing little to help.
• But investors trapped in these securities are not the only victims of this debacle; taxpayers are, too. That’s because municipal issuers of auction-rate notes — towns, school districts, hospitals, highway authorities and others — are being asked to pay up to redeem and restructure the debt.
• Even as investors and taxpayers are hurt by this frozen market, Wall Street is making money from it. In fact, the auction-rate securities mess is another illustration of damaging conflicts of interest at the nation’s big brokerage firms.
• Naturally, investment bankers who agreed to operate these auctions were paid for their services: 0.25 percent of the security’s total issue for each year of its life. Unnaturally, big firms still earn these fees even though 70 percent of the weekly auctions of these securities are failing.

NYTimes: Economist (Democrat) and former VP of Federal Reserve Alan Blinder on the case for a "Newer" Deal

• PART of the New Deal was a new financial deal. The shameful shenanigans leading up to the 1929 stock market crash and the frightening wave of bank failures during the Depression led directly to the creation of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation.
• As we emerge from this, the worst financial crisis since the 1930s, a New Financial Deal may follow. If so, what should some of the reforms be? A warning to laissez-faire-minded readers: The following is mostly about the dreaded “R” word — regulation. But I’m afraid that we need more of that, starting in the mortgage market.

NYTimes: Even the Insured Feel the Strain of Health Insurance

• The economic slowdown has swelled the ranks of people without health insurance. But now it is also threatening millions of people who have insurance but find that the coverage is too limited or that they cannot afford their own share of medical costs.
• Many of the 158 million people covered by employer health insurance are struggling to meet medical expenses that are much higher than they used to be — often because of some combination of higher premiums, less extensive coverage, and bigger out-of-pocket deductibles and co-payments.

NYTimes: The Rebates Might Not go to the Mall

• Everyone is counting on these rebates to push up restaurants, retailers, homebuilders - anything and everything discretionary. What's the reality? Well polls are polls so take them at face value but this chart shows, all these hopeful bulls awaiting these rebate checks to save their "early (economic) cycle" stocks might be disappointed. Oh well, that's a worry for another day - now we rally on the hope that none of the below is true (12% spent on discretionary items).

Slate.com has some interesting stories

1. How the Mortgage Industry Nurtured Deceit - a touching piece on the "liar's loan" or "stated income" loan
2. How Bad Could it Get? - Will the Recession (what recession, no recession here folks!) be more like 1990-1991, or the Great Depression?
3. Is India More Equal than the United States - we know income inequality is far less pronounced in "the socialist" Scandinavian countries, but even India has less divergence? Hmm... perhaps we need to rethink how we measure?
4. John McCain and his Money - What the Candidate's Investing Strategy Says About his Character

NYTimes: Thomas Friedman asks "Who Will Tell the People?" - We are not who we think we are - we are living on borrowed time and borrowed dimes.

• Traveling the country these past five months while writing a book, I’ve had my own opportunity to take the pulse, far from the campaign crowds. My own totally unscientific polling has left me feeling that if there is one overwhelming hunger in our country today it’s this: People want to do nation-building. They really do. But they want to do nation-building in America.
• We are a great power. How could we be borrowing money from Singapore? Maybe it’s because Singapore is investing billions of dollars, from its own savings, into infrastructure and scientific research to attract the world’s best talent — including Americans.
• And us? Harvard’s president, Drew Faust, just told a Senate hearing that cutbacks in government research funds were resulting in “downsized labs, layoffs of post docs, slipping morale and more conservative science that shies away from the big research questions.” Today, she added, “China, India, Singapore ... have adopted biomedical research and the building of biotechnology clusters as national goals. Suddenly, those who train in America have significant options elsewhere.”

We continue to live in some of the most amazing times with some of the biggest shifts in history. Until we stop fighting and start acting, much of it is going to simply pass us by. Read Zakaria.

Moral Hazard Now Run Amock

Fascinating story on Bloomberg this weekend; remember the little discussed action Friday? [May 2: Employment Report and more Fed Actions] How the Federal Reserve is now willing to take bonds backed by auto loans, student loans and credit cards? (Folks, a year ago discussion of such actions would of been laughed off, now they go on without even any consternation)... well it appears the backstory is very interesting. The precedent was set with Bear Stearns and we have written , the rest of the private and public sectors will now be expecting handouts left and right - some have even gone out and said so [Mar 25: Wells Fargo Indicates it would Love to be Forced into a Shotgun Marriage] We have a complete and utter nanny state now - where risk can be ignored (any wonder the stock market rockets off this stuff?), and continued priming of the monetary system is going to lead to help lead (along with actions of the Congressional branch) the complete whipping of the US dollar. Fascinating stuff, and items you won't find discussed almost anywhere (sadly)

• A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress. There is ``a potential crisis in the student-loan market'' requiring ``similar bold action,'' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.
• Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke's actions in saving Bear Stearns will expose the central bank to continuing pressure to use its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians. The Fed satisfied Dodd's request today, expanding the swaps to include securities backed by student debt.
• ``It is appalling where we are right now,'' former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced ``a backstop for the entire financial system.'' Critics argue that the result will be to foster greater risk-taking among investors emboldened by the belief that the government will bail them out of bad decisions.
• There are already indications that investors perceive the safety net to be widening as a result of the actions by Bernanke, 54, and New York Fed President Timothy Geithner. ``The market understood that this is the method by which Fannie Mae and Freddie Mac could be bailed out if necessary,'' Poole said.
• ``There is no way to put the genie back in the bottle,'' Minneapolis Fed President Gary Stern said in an interview with Fox Business Network on April 18. ``What worries me most about where we wind up is that we will have an expansion of the safety net without adequate incentives to contain it.''
• The risk to the Fed is that it is routinely asked to step in and support insolvent companies whose creditors are on the run, economists say. Whatever regulations and incentives the Fed tries to put in place now would be evaded by the market's innovation of new types of products, Goodfriend said in an interview. Investors would nonetheless still count on the safety net, he added.
• ``That's the consequence of crossing a line that had been well established for three- quarters of a century.''

Again, realize the historic steps being taken so that you, my dear friend, can return an extra 8% in your Etrade account. Billions upon billions of new compensation for industry insiders... an extra 8% for you (along with inflation stoking) and an inherent promise that everything is now backstopped by your tax dollars.

The most innovate, stable, transparent financial system on Earth. What a crock.

Some Thoughts from Warren Buffet

Always interesting to hear what Warren has to say; this weekend was Buffet-alooza so let's check in. Here are some key thoughts, with my comments in purple

1. Warren Buffett, chief executive officer of Berkshire Hathaway Inc., said the global credit crunch has eased for bankers, and the Federal Reserve probably averted more failures by helping to rescue Bear Stearns Cos. (I agree, socialization of risk and Federal Reserve backstop means at the cost of runaway inflation and tax payers taking on potential risk, the banks are "saved"... just remember that all you young investment banking types - the next time you create a dysfunctional product, just sell as much as you can and get rich - then when the bleep hits the bleep - our government will be there to save the system - it's a beautiful system; for you.)
2. ``In terms of people with individual mortgages, there's a lot of pain left to come.'' (err... the little people... don't worry about them)
3. ``The worry was that there would be contagion; it was a very real worry,'' Buffett said. ``If Bear Stearns had gone, the next day, somebody else would have gone. It could've been a very, very, very chaotic situation.'' (agree - Lehman looked set to go next, and Merrill not far behind - what does that say about the "most stable, 1st world financial system" on the globe? That much of it is a house of cards - an opaque, lightly regulated system full of dominoes - thankfully we have a Federal Reserve willing to print paper money at all costs to keep the juggling act going - the only cost from that is destroying the lives of middle and lower class people and causing global inflation for the world's poor - not a PROBLEM)
4. Buffett, 77, said he was contacted in March before JPMorgan, the third-biggest U.S. bank by assets, agreed to buy Bear Stearns. The person calling him, whom he wouldn't identify, was ``someone responsible'' and wasn't from the Federal Reserve or the Treasury. The call lasted about half an hour, Buffett said. (meanwhile "they" assured us everything was fine ... so public face says one thing, and private face says another - shocker eh?)
5. ``Over time we'd like to develop more international earnings,'' Buffett said. ``If it's a $2 billion deal, fine; if it's a $20 billion dollar deal, fine.'' (haha, even Buffet sees the light - we don't need no stinkin' Americans - it's a secular shift folks - a huge one) Buffett said during the meeting he'd like to buy businesses in India and China, and that he wanted to acquire one or two non- U.S. companies in the next three years. (East continues to take global share away from West - demographic is destiny yet again?)
6. The U.S. dollar will keep weakening and Buffett feels ``no need to hedge'' against currency risk when buying large companies outside the U.S., he said. (what? the strong dollar era is not here? We can't ignore a US federal budget that is shaming? A national savings rate of... negative? Oh darn) "Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies.... I feel no need to hedge purchases of companies that earn profits in other currencies."
7. After a lunch break, Buffett finally got in some licks at the regulator of Fannie Mae (FNM) and Freddie Mac (FRE)--Office of Federal Housing Enterprise Oversight--for allowing accounting irregularities to go on for some time. Buffett, who describes himself as "the chief risk officer" of Berkshire, also slammed the large commercial and investment banks as both too big to manage and too big to fail, according to the government. Hardly anyone caught Buffett's words when he muttered that "to some extent it's an evil culture." The evil culture he was talking about was Wall Street, the commercial and investment banks who had no idea that their risk models were utterly useless. "They didn't have the faintest idea what risks were involved," he said. He said the culture of investment banks is in some ways "evil" and counterproductive to the financial health of the U.S. (go Warren, but it will never change since they line the pockets of politicians for campaigns) Traders in such firms are often eager to make overly risky investments, a practice which is difficult for the heads of brokerages to stop, he said. This in turn puts too much risk on the financial system as a whole, he said. "It may not be in the interest of a 62-year-old executive, who will be around for the next three years, to worry about that," he said. (Bingo - become CEO, take outsized risk to goose returns to achieve generational wealth for you, your kids, your grandkids and their grandkids, and leave the potential smoking hulk for the US taxpayer via bailout or inflation to worry about - this is the nexus of our financial system)
   
8. But he scoffed at the way both Clinton and Obama "ask for an excess profits tax on Exxon"--but not on the farmers getting rich off the boom in commodity prices. (agree, as I wrote last week, if you replace "farmers" with "big oil" you'd have outrage in the streets at what is going on)
9. His politically incorrect partner Munger declared that "in the 1930s [when oil was first discovered in the Middle East] we should have taken the oil out of the Middle East and put it in the ground" in the U.S. "Eventually," Munger predicted, "we'll have to use the sun for our power." (go solar?)
10. In the Q&A session Saturday morning at Berkshire Hathaway's annual meeting, CEO Warren Buffett and vice chairman Charlie Munger repeatedly warned investors to lower their expectations. When a shareholder asked whether Buffett's recent purchases of publicly traded stocks were likely to generate returns greater than 7% to 10% over time, Buffett promptly said no.
11. While Buffett and his investors are doing well now, the future is uncertain for everyone. Two years ago the sage compared America with “an incredibly rich family” that was “consuming more than we bring in. So we sell off a piece of the farm, or mortgage it. We can’t see what is being sold. We trade away a bit of the farm every day and the rest of the world is happy to buy it. That can go on for a long time but our children will be paying for it one way or another.” (Excellent way to word it)
12. Munger was more blunt. He said America had reached the apex of western civilisation and that today society reminded him of Sodom and Gomorrah. “The last 60 years have been the best years for western civilisation. My generation has been very favoured. It is unlikely that the next 60 years will be so favour-able,” said Munger. (an even better way to word it)
    

Sources: Bloomberg, Forbes, MoneyCNN, UKTimes,

Bookkeeping: Weekly Changes to Fund Positions Week 39

Week 38 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: 3.3% (vs 13.0% last week)
56 long bias: 77.7% (vs 76.4% last week)
8 short bias: 19.0% (vs 10.6% last week)

66 positions (vs 66 last week)
Additions: XTO Energy (XTO), Pride International (PDE)
Removals: Chicago Bridge & Iron (CBI), iShares Malaysia (EWM)

Top 10 positions = 31.3% of fund (vs 31.3% last week)
39 of the 66 positions are at least 1% of the fund's overall holdings (59%)

Major changes and weekly thoughts
I did a comprehensive review of thoughts in this week's performance review so I won't rehash it here. In summary, we approach an interesting time; closing in on some key long term resistance areas. The "on the ground" numbers continue to degrade but the belief system that is "everything will be ok in 6 months" continues to grow. So the question is does belief continue to trump reality? Again, there is a whole generation of NYC traders who have never lived through a recession (as adults) that lasted more than 2 quarters, and was never anything but short and sweet (early 90s, early 00s). This is what they are conditioned to, not anything of duration like the late 70s or early 80s. So they will continue to go to their playbook that "everything will be ok in about 6 months because that's how it always turns out" Only when enough evidence comes to the contrary will they change their views - and again we won't have "evidence" until October 2008 (Q3 earnings reports) or January 2009 (Q4 earnings reports). And at that point I expect the discussion to switch to "everything will be fine in 6 months" yet again :)

The reality is something has to give in a rising price environment - either corporate profits (if producers do not pass along all the higher prices to consumers) or consumers (if they are forced to eat higher prices) - the former won't be good for profits for obvious reasons - the latter will at first look good for profits at first because higher prices means profits can sustain themselves but eventually it will lead to demand destruction (consumers cannot afford such items anymore or in such quantity as before) - which means volume of sales falls. And that will hit corporate profits, in due time. This is what is happening in gasoline right now - we have finally hit a price where it is creating destruction of demand - it did not at $2, it did not at $2.50, it did not at $3.00 but it is now at $3.50. For every company which is reliant on US consumers (which are the companies rallying the hardest the past week and a half) this is their fate UNLESS inflation ebbs severely. Right now those $600 checks are being counted on to prop up everything from retailers, to restaurants, to homebuilders... so many people are relying on those checks you'd think they were $3500 not $600.

Again, reality does not matter in the stock market in the near term - only perception of reality. If perception is everything will be ok, than the market can levitate. Remember, we were at all time highs on the S&P 500 in September - October 2007. Was everything fine behind the scenes? No, things were degrading. But perception was the Federal Reserve would solve all the problems and that there would be no recession coming... so the market hopped, skipped and jumped to new highs making bears look foolish. Until a November correction and an even worse January correction. Just keep in mind, S&P 500 estimates for Q4 2008 are estimating 60% year over year growth over Q4 2007 ... that's how stocks are being priced... on full year estimates. So if you believe the corporate profit picture this fall/early winter will be 60% than last fall/early winter - this market is a steal. I'm not in that camp.

For the fund, the higher we go the more I am expanding short exposure - realizing it is hurting performance in the near term. While I do believe a "change in character" is about, and in fact the "early cycle" names are being bought on dips, instead of assuming they will fall off a cliff - they are now at quite extended levels so I do expect some pullbacks in relatively short order. But again, if we break through the 200 day moving averages on the major indexes, one must toss away all reason (as we did last Sep-Oct) and climb on the back of the stampeding bulls as they ride into the night cheering about the nirvana we approach "in 6 months". Until they get speared... and then we go back to the dark side.

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

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

1. Monday we did very little except admire the gap up in Cummins Engine (CMI) (apparently a good mention in last week's Barron's), and the crushing earnings report in Sohu.com (SOHU)... we did double our position in Gafisa (GFA) as the stock bounced off its 50 day moving average and I wrote "the chart is starting to look more promising"
2. Tuesday, Mastercard (MA) put out yet another (starting to get old hat) impressive earnings; since the stock gapped up, I did take a larger part of my position off, realizing the stock could jump to $300 or so ... but willing to leave some on the table.
3. After the "strong dollar" thesis had played out for nearly a week, I began a position in natural gas giant XTO Energy (XTO) - while I have no idea how the "strong dollar" hocus pocus belief will last, the balance sheet of the US is dysfunctional and any rallies will not be systematic in my opinion. And they are not really a good reason to sell natural gas anyhow, but that's what the hedge fund playbook says - so I am going to be on the other side of that trade and acquire more as these commodities fall as our "World of Shortage" story is only in the top of the first inning.
4. Wednesday, I closed out a position in infrastructure name Chicago Bridge & Iron (CBI) as the chart has now degraded. I still like this name for the long run, but I have enough infrastructure names as it is, and this miss was so large it indicates management is missing something. I'm sure in a few quarters this name will rebound, and we'll revisit it at a later date. In the meantime I expect somewhat dead money although I could be wrong.
5. Cummins Engine (CMI) came out with an, as expected, very good quarter on (drum roll), great international sales and weak dollar. Since I still find this name cheap, I did take some off the table but still kept a meaningful position.
6. I did sell some Mosaic (MOS) in a very short term move in the $122s, and added it back later in the week in the mid $110s. While this stock can fall on the strong dollar nonsense, the fundamentals of this group are simply ridiculous so I don't want to be on the outside looking in during the next leg up... we might consolidate for a few days, weeks, or a quarter - but I expect another huge leg up in time. Barring politicians getting a conscience and killing off corn ethanol subsidies.... but i doubt they'll come to senses before November 2008.
7. National Oilwell Varco (NOV) had a very good quarter, yet again, but since oil is $113 instead of $120 the stock sold off - because as you know all their business drops off as crude drops 3-4%. That's the theory by hedge funds anyhow; again I'm on the other side of that trade and (slowly) adding.
8. After the gods on Mount Olympus granted the peons another 25 basis point cut, I did add more short exposure in a meaningful way - while it did work out Wednesday as the stock market sold off, the minions came to their senses by the next morning and realized the Gods would make everything ok "within 6 months" so they bought up everything in site Thursday. Sometimes the faith in the Federal Reserve as all powerful is akin to a religious revival.
   
9. Wednesday, I took the 2.1% position in Gafisa (GFA) down to 1.5% with some sales in the $43s (I saw Brazilian stocks jumping but was unaware of the S&P upgrade); I noted I'd sell more north of $45 considering my cost basis is in the low, mid and upper $30s. Friday, I took another 1% stake out right below $50. I'd like to add these shares back in the lower $40s sometime in the next few weeks/months.
10. Thursday, I began incrementally adding to my coal exposure as many of my favorite names had pulled back to their 20 or 50 day moving averages. That doesn't mean they were bottoming, but it's a good place to layer back in - this move was rewarded in the short term as by Friday almost the entire sector was up 4-8%. Again, unless the dollar strengthens by a factor of 400-600% most of the commodity stories (ex gold) really don't change, but the flood of money in sector rotation doesn't care about facts like that.
11. Unlike in the past when I held no homebuilder or financials (ex Blackrock or Mastercard) I did actually buy some of this during the past few weeks/month in anticipation of a "strong dollar, early cycle" nonsense rally happening sooner or later. So I began dispensing with some of those positions into the week+ long rally, cutting back on Morgan Stanley (MS), and Lennar (LEN). In the past these cyclical rallies have lasted 5-14 days so we are at about day 8-9... closer to the end than the beginning. One of these times the early cycle rebound will turn into a full blown rebound, but I'd assume it would be closer to a true economic rebound, not a "rebate check goosed hope" one. I also cut Apple (AAPL) but simply to lock in some profits, still like this one to $200+.
12. Friday, I restarted an old position deep sea driller Pride International (PDE) as a takeover bait play. When I sold Diamond Offshore Drilling (DO) late last week I opined I'd replace it with Noble (NE) on a dip - since then NE dropped from $59s to $54s... so I had considered adding both positions since I like NE more as a company... but I am trying to avoid "portfolio bloat" so with 56 long positions already in place, I just went with PDE. Of course NE rebounded nearly 5% Friday :)
13. After a sizeable rally, I cut Ctrip.com (CTRP) to almost nothing. Now the "consensus" was Chinese stocks would not sell off and it was safe to hold them to the Olympics... of course Shanghai has dropped 50% since that "consensus"... but with that correction out of the way I could now see a shorter term rally into the Olympics so I'd like to buy back some of the Chinese inventory I've sold off of late, on pullbacks.
14. Friday, I cut iShares Malaysia (EWM) - chart has been facing some resistance, I have some profits in the name, I fear inflation in the emerging markets, and I am trying to keep my portfolio from getting too large - since I added 2 names this week, I am looking for more candidates to cull out. Due to my shortage of cash this was one I chose.
15. Due to low cash position I took out some long exposure in Intuitive Surgical (ISRG), Morgan Stanely (MS) and Foster Wheeler (FWLT) to close out the week. My cash is still very low, but this is because I've increased my short exposure to have more of a hedged exposure as we now move into key technical (resistance) areas on the charts.

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

83 Stocks Returning 9%+ this Week

Looking over this week's list we see a Brazilian flare... with the S&P upgrade of the country's rating, it was Samba time for the entire country. Some of our holdings filled the top rankings (we had 2 of the top 3, and 4 of the top 11), but most were not large weightings so while the % gains were excellent, most did not do a lot for the overall fund action. This illustrates why, unlike most mutual funds, I do not own 200-300 positions. Because if position # 187 gains 30% in a week, and it's a 0.3% weighting, it really does not do much for your return. Further, the gains we did have were offset by the hedging positions (Ultrashorts) this week - what we gained in 1 spot, were offset by losses in another.

As always the criteria are

1. Stock price $10+
2. Market capitalization $2.0B+ (I will probably move this down a bit in future weeks to try to find some smaller companies to round out the fund's larger holdings)
3. Average trading volume 100K+
4. Return this week of 9%+
   

Green we own; blue we have owned or have discussed. As an aside if you want to see the pooring of America in action take a 3 month chart of Walmart... admire it. Then take a 3 month chart of Big Lots (BIG) and admire it more. The American consumer continues to move downstream as his real wage (adjusted for inflation) continues to go negative. Last, I believe quite a few names on this list ("early cycle" recovery baby) are going to make for great shorts in a relatively short amount of time... but not until the "2nd half is nirvana" brainwash is over.

Symbol	Company Name	% Price 1 Week
GA	Giant Interactive Group Inc	26.9
GFA	Gafisa ADR Representing 2 Ord Shs	26.4
SOHU	Sohu.com Inc	25.6
MORN	Morningstar Inc	24.1
SLM	SLM Ord Shs	22.2
WWY	WM Wrigley Jr Ord Shs	21.7
TXI	Texas Industries Inc	20.8
MA	MasterCard Inc	20.1
MV	Metavante Technologies Inc	19.9
CIT	CIT Group Ord Shs	19.8
CMI	Cummins Inc	19.8
AMKR	Amkor Technology Inc	19.1
CTV	CommScope Inc	17.8
LEA	Lear Corp	17.7
UBB	Unibanco Depository Receipt	17.7
MC	Matsushita Electric Industrial ADR	17.6
XL	XL Capital Class A Ord Shs	17.0
HNP	Huaneng Power International ADR	16.5
PVH	Phillips-Van Heusen Corp	16.2
MBI	MBIA Ord Shs	16.1
ODP	Office Depot Inc	15.9
CBY	Cadbury ADR Reptg Four Ord Shs	15.2
RYAAY	Ryanair Hldgs ADR	15.0
TRN	Trinity Industries Inc	14.9
GOL	Gol Linhas Aereas Inteligentes SA	14.4
NTES	Netease.com Inc	14.2
ITU	Banco Itau Holding Financeira ADR	14.1
NMR	Nomura Holdings ADR Reptg One Ord Shs	13.9
CNO	Conseco Ord Shs	13.8
IVZ	Invesco Ord Shs	13.4
DLB	Dolby Laboratories Inc	13.0
GGB	Gerdau SA Depository Receipt	12.6
CMCSA	Comcast Class A Ord Shs	12.5
TRW	TRW Automotive Holdings Corp	12.3
SFI	iStar Financial Ord Shs	12.3
SYY	Sysco Corp	12.3
CTL	CenturyTel Inc	12.2
EV	Eaton Vance Corp	12.2
WFMI	Whole Foods Market Inc	12.2
JEF	Jefferies Group Inc	12.0
BAM	Brookfield Asset Management Ord Shs	12.0
MXB	MSCI Inc	11.9
CTRP	Ctrip.com	11.8
EQ	Embarq Corp	11.8
OZM	Och Ziff Capital Management Group	11.8
APOL	Apollo Group Inc	11.8
NVDA	NVIDIA Corp	11.8
VMED	Virgin Media Ord Shs	11.6
TKR	Timken Co	11.4
WYN	Wyndham Worldwide Corp	11.3
SYMC	Symantec Corp	11.3
CETV	Central European Media Enterprises Ltd	11.2
BBD	Banco Bradesco ADR	11.1
STMEF	STMicroelectron Ord Shs	11.0
IDTI	Integrated Device Technology Inc	10.7
CBD	Companhia Brasileira de Distribuicao ADR	10.6
FIG	Fortress Investment Group LLC	10.5
TWC	Time Warner Cable Inc	10.5
SAY	Satyam Computer Services ADR	10.4
BPOP	Popular Ord Shs	10.2
V	Visa Ord Shs Class A	10.2
UTIW	UTi Worldwide Inc	10.0
AMG	Affiliated Managers Group Inc	10.0
FLS	Flowserve Corp	10.0
MFG	Mizuho Financial Group ADR	10.0
BIG	Big Lots Inc	9.9
HSY	Hershey Ord Shs	9.9
LBTYA	Liberty Global Class A Ord Shs	9.9
RIMM	RESEARCH IN MOTION LIMITED	9.9
ESI	ITT Educational Services Inc	9.7
PENN	Penn National Gaming Inc	9.7
NBG	National Bank of Greece ADR	9.7
SNDA	Shanda Interactive Entertainment Ltd	9.6
DISCA	Discovery Holding Series A Ord Shs	9.6
ADBE	Adobe Systems Inc	9.5
MRO	Marathon Oil Ord Shs	9.5
FL	Foot Locker Inc	9.4
CBS	CBS Class B Ord Shs	9.4
ICLR	ICON Plc Depository Receipt	9.2
MNST	Monster Worldwide Inc	9.2
JNS	Janus Capital Group Inc	9.2
CMA	Comerica Inc	9.1
ABI	Applied Biosystems Inc	9.0