Friday, May 30, 2008

Bookkeeping: 'Rising Tide' Performance Week 43

Week 43 performance of the mutual fund

Comments: Week 43 was all in all quite a boring week as a lot of people seemed to sit on their hands, or go to the Hamptons - or maybe they were sitting on their hands in the Hamptons - they sure were not trading. Volume was light in the markets, but the indexes made up about half the losses from last week. A lot of technical analysis on both the indexes and individual stocks did not work this week (stocks broke key levels, I cut - and then they reversed on a dime the very next day), for whatever reason. Specific to the indexes, we've seen a few very strange things - where rules that have worked for many years ceased to work the past 6-8 months - most prominent in my mind is how the market technically broke a triple bottom on the Monday after the Bear Stearns bailout yet refused to break down... persistent buying by some strange force below key support levels constantly brought the market back from the brink that day - wouldn't have been these guys would it? Nah. I only bring this up, because as we ended last week, the S&P 500 broke a key support level (see chart below, a close below that red line was a red alert), and was "supposed to" (by rules we all know and love) break - but in this new era of managed markets I guess technical rules don't apply. ;) I'm still playing by the old rules, I suppose. So we got the light volume bounce this week, and a bunch of happy bulls. That red line last Friday, with a close below the 50 day moving average "historically" has meant more bad times ahead - but not in this era I guess.

Not much to add here on the fundamental or individual stock point of view - economic news stinks, but it's "better than expected", inflation is tame (don't mind those 20% price increases by producers), the monthly unemployment report next Friday will be "better than expected" no matter what the number is, and the vaunted 2nd half recovery is only a month away now, and away we go. It's all good. Coal stocks continue to make me look like a genius... or a fool everytime I sell part of them off expecting the grim reaper to show up and create a real correction. Every sale has been mocked by the coal gods. Most of the positions that did well this week were minor stakes - i.e. Mastercard (MA) - which was able to rally 10% in 1 day solely by saying "we are going to grow by double digits next year". This is a surprise? The Kool Aid is strong with this one. Love this company, hate this valuation - so we've cut it back quite severely.

We entered the week conservatively positioned, and since I was obeying technical rules I've been using for 10 years (that no longer apply it appears) I had a heavy short exposure and large cash - since the market decided to reverse course led by (ahem) banks, retailers and the like, we dragged along like gum on shoe this week. Since we are now in the middle of a range, south of the 200 day moving average (1430 and falling) and north of the 50 day moving average (1380 and rising), it is sort of no man's land here at S&P 1400. Further, I don't know what to apply new cash to at this moment - stocks that have run up 50% in the past 6 weeks and just continue up and up and up (and up)? Or jewels in the beaten down sectors that CNBC will tout as "must buys" and "the bottom is in, this time we promise" the minute crude drops to $122 since the "consumer is back", and "inflation is defeated". Frankly, I don't want to buy either - lots of risk either way - the good stuff is WAY overdue to correct, and the bad stuff is going up on dreams of fantasy of a 2nd half rebound. I *want* to buy technology because that is an area where I could see the hedge funds throwing boat loads of money to if they sell off commodities, BUT aside from the names I own (which again have had huge runs since the March lows) we'd be trading down to a lot of 2nd and 3rd tier stuff which is now the sexy flavor of the week. Very little with true secular growth so we're out of luck there too. So in summary - hard to find much to buy at prices I want to pay. So we'll continue to lag in the near term if the market works its way up. We did make a few buys here and there but only when a handful of stocks broke to a key support level. I did cut some short exposure later in the week, since we are in this "no man's land" and could go either up or down - it is a very tight trading range for now.

As an aside, since some people have asked about this - I am beginning to track month to month performance (i.e. writing down the NAV at the end of each month). We ended April with a NAV of $11.63, and with today being the last day of May we ended at $12.24 which is a 5.2% gain. That compares to the S&P 500's 1.1% gain. Hopefully this month's performance puts us back as the #1 fund in our category of mid cap growth names (I'm sure many of my peers got whacked last week while we did were stable, since they are 100% long), we'll know in about 10 days when the data updates.

However for the week, it was not as joyous (gum on shoe) - as the Ultrashorts conspired against us again, pushing Rising Tide Growth to a 0.5% loss. The S&P 500 gained 1.8% and the Russell 1000 came through with a gain of 1.9%. Can't win every week.

As always if interested in pledging an investment when fund is ready to launch please attach a comment here, or send me an email (need your state please). I'll have an update on pledges in 2 weeks.

Price of Rising Tide Growth: $12.242
Lifetime Performance to date (vs Aug 3, 2007): +22.42%

Comparable S&P 500: 1,400.4 (-4.42%)
Comparable Russell 1000: 768.3 (-3.51%)

Fund return vs S&P 500: +26.8%
Fund return vs Russell 1000: +25.9%

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

Weekend Homework for Readers - more Dow Chemical CEO

I mentioned how much I admire the Dow Chemical CEO earlier this week - we need our political leaders to have this sort of backbone and straight talk and global vision [May 28: Bravo Dow Chemical CEO] Wednesday he dropped the bombshell about the 20% price increases across the board (and again folks, this all feeds up to the Procter & Gambles, the Kimberly Clark's of the world, which means it will feed to you down the road - diapers, paper towels, etc etc) and today he has a comprehensive 15 minute interview on CNBC (in which he takes a nice swipe at the "underreporting" of inflation) Gosh, I enjoy this human more and more by the day. I type this stuff on the blog every day/week/month but when people with a voice and power say it, it finally will begin to matter (we can hope).

Weekend homework assignment for readers is to take the 5 minutes to listen to the Fox Business interview I referenced in Wednesday's post, and this 15 minute interview - 20 very worthwhile minutes to spend. (or you can just read the blog every day and get the same info from a guy without a mustache or cool accent). Just imagine if we had people like this running for President. I could feel some comfort instead of joining Jim Cramer on the hard linoleum floor every night in fetal position.

I repeat this every week (long time readers will be bored by now) but for new readers - inflation is the most regressive tax there is, and the inflation that is being hidden away in government reports WILL eventually come to bear; first to the producers who then will pass a portion down to consumers. These reports are so flawed I don't even want to dirty my blog with the nonsense they are spewing out (i.e. gas prices went down last month according the government - seasonal adjustment baby!) The market can whistle past the graveyard and we have to respect that as investors, but the effects on the real economy (world wide) are there; since Wall Street takes government reports as gospel and the government reports understate everything, I guess we can whistle past the graveyard indefinitely. As always "it doesn't matter, until it matters." We'll see more and more evidence in the 2nd half of 2008 and into 2009 on the "real economy" (as opposed to the fairy tale economy the pundits talk about). At some point the Street will acknowledge it, grudgingly. Not now though; still happy times - low inflation, low employment. Uncle Sam says, so we believe.

  • In the interview, Liveris said he thinks the U.S. is underestimating the level of inflation in the economy and he expects the rise in energy costs is beginning to destroy demand.
  • "We're in a part of the economy that is very elastic," he said. "So unlike electricity, or unlike transportation, which up until now has been relatively inelastic, we're getting demand-destroyed."
  • Liveris expects the price increases his company made will eventually be passed on to the consumer.

Bookkeeping: Closing Consol Energy (CNX) to Winnow Down Coal Names

I am looking to narrow the names in the fund to constantly stay with a focused strategy; that said, I do buy mini baskets in my favorite sectors; generally 3 names. In coal I currently have 4 (not to mention 2 names that are not primary coal producers but also have exposure). So I am looking to cut 1, and decided on Consol Energy (CNX) which has been one of my top 10 winners in the fund [May 1: Top 10 Winners & Losers] Note in the past month the gain from CNX has gone from $16.9K to $21.4K.

All the coal names are mixtures of metallurgical (going into steel) versus thermal (traditional power source you think of when you think of coal). Both sides of the equation are seeing strong increases, but the metallurgical has really taken off; and those names with more exposure to metallurgical have seen the biggest stock spikes over the past few months. Here is a chart of a bevy of coal names over the past 3 months so you can see even within this rising tide, we have speedboats, sailboats, and rowboats :) This was the reasoning behind by decision to flip out of Peabody Energy (BTU) and into Alpha Natural Resources (ANR) back in early April [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In]

Now in the portfolio we've owned 2 speedboats (which I am keeping due to higher metallurgical coal exposure), and 2 rowboats (nice rowboats by the way - but more of an exposure to thermal coal), so I am applying the exact same thinking as to which of the 2 rowboats to cut out - Arch Coal (ACI) or Consol Energy (CNX); aside from the metallurgical coal to thermal coal mix, I also want to have as much production that is not yet priced (under contract), anticipating higher prices in the future. I'll admit, this is one period of time I wish I had a major investment bank research report showing me all this sector data in 1 spot, since this is a bunch of digging to find it all, across 8 to 10 companies.

But in a general sense, looking at Consol's latest earning report we see the following for 2009/2010

2009 Tons Estimated 70-74 M
2009 Tons Priced 44.6
% Priced (approx) = 62%

2010 Tons Estimated 76.6-80.6 M
2010 Tons Priced 24.2
% Priced (approx) = 31%

Compared to Arch Coal, which in its latest earnings has some data (it's not so clean) but I am estimating something around 140 to 150M in tonnage for 2009 and 2010 (this is my guesswork, could be higher/lower but should be ballpark)

Of that in 2009, 75-85M is unpriced and in 2010, 95-105M

If my estimates on tonnage are accurate this would give % priced of (approx) 43% in 2009, and 33% in 2010. So if completely, accurate the companies have similar 2010 production unpriced, but Arch has more 2009 production unpriced, hence as coal prices continue to rise month by month, they should see more upside in 2009.

Again, I like the whole sector - one can do well with any coal stock I believe, but I am just trying to decide among these 2 horses, as to which should be the Third Musketeer. I might add a 4th Musketeer down the road as there are some other potential targets in this sector, but not until we see a meaningful contraction from this epic move... Alpha Natural Resources is now up 60% in a month for example.

So with that said, I am closing Consol Energy in the $97s, and will concentrate on the other 3 names (I bought a little Arch Coal today to keep some of the exposure to the sector consistent). This has been a very good stock for us (and I continue to like it); we've owned it since September 13th, 2007 before everyone and their mother jumped on the coal bandwagon. [Coal Stocks Quietly in a Bull Market] This is the chart since September (keep in mind we had major market corrections in November 07, January 08, and March 08 so this performance is that much more impressive)

Now that guys like Larry Kudlow are jumping on the bandwagon it makes me near term bearish, as I got when Neil Cavuto uttered the words "Intrepid Potash", which pretty much marked the top within 48 hours for the fertilizers ;) [Apr 22: Cutting More Fertilizer]

Usually a significant event like a new IPO in the sector or a large buyout marks a near term top in a sector - I am not saying this Intrepid Potash (IPI) IPO is the thing, but I have not seen a level of bullishness in a sector as I've seen here, since the solar days of fall 2007. Even Neil Cavuto was talking about the Intrepid IPO last night. That scares me, and when these things reverse I'm going to call it the Cavuto top (granted, he did not know how to pronounce "potash" either).

When these talking heads jump on a group... after a massive run (coal has just had one, just like fertilizer had one from late March to late April), I start shifting to the sideline (as I've now done with coal) from my previous overweight stance. Doesn't mean the stocks are done; but risk/reward starts to turn more towards risk in my book. So we called that fertilizer version the Cavuto top; we'll see if this is the Kudlow top. ;)

Long Arch Coal, Massey Energy, Alpha Natural Resources in fund; no personal positions

German Solar Subsidies to be Cut Less than Feared

Yesterday the solar stocks sold off on an analyst report crying wolf about a huge reduction in German solar subsidies - frankly this speculation has been out there for a long time for anyone who actually keeps up with the sector; in fact we touched on this a week and a half ago [May 21: Who is the World's Largest Merchandise Exporter? Not China. Or the US] But since Wall Street is a spoon fed world, until an analyst brings it up, it is not on their radar (whoa, there could be cuts in subsidies? Sell sell sell!). Frankly, every time similar news regarding potential cuts or lack of progress in this subsidy or that subsidy - whether it be from Spain, Germany or even the US (who is not even a material solar market) - these stocks sell off. Being in these stocks for over a year and half, it is like groundhog day - every 6-8 weeks the "same" news is trotted out, panic selling ensues, the sky is falling crowd comes out, and then the story goes away. Then it's brought out again 2 months later. And the same pattern repeats.

Anyhow, after yesterday's spooky man under the bed was brought out, overnight we saw a reality check - the subsidy cuts (LONG expected) are going to be far tamer than the speculation brought to bear by the analyst community. This is a net positive because it provides us with a road map of what the German market will be for the next few years, and "bad news" (not that this was bad in my book) is always better than uncertainty on Wall Street. Now we can move on to hand wringing about Spain in a few months. The one I have to laugh at is the panic selling over Congress and Presidential lack of action on US subsidies. The market here is so pitiful and most of these names sell nearly nothing to the US market - it's a non issue. But that doesn't stop the stocks from selling off 15-25% each time the U.S. bill "stalls". Farm subsidies? They pass like a knife through warm butter. But a pittance thrown towards solar subsidy? Nah, we are gonna fight that one tooth and nail. You see, there is no powerful solar lobby - so hence no urgency to pass any legislation. Big oil? Big agriculture? Plenty of lobbying power there. That's all that matters in US Government 101.
  • Germany's ruling parties have reached a deal to reduce support for the solar energy sector by 8 percent in 2009 and 2010 (and 9% in 2011), far less than the booming industry had feared.
  • ...the deal came in lower than the 30 percent decrease in 2009 some German conservatives had pushed for.
  • German law requires utilities to pay solar energy producers higher prices for solar power they put into the grid than power from traditional sources. The government says the industry can live with less support and wants to redirect help to other types of renewable energy.
  • The cuts concern support for rooftop solar panels, which supply the lion's share of Germany's solar-produced energy. The decline in support for bigger installations on open fields could be slightly bigger, coalition sources said.
  • "Positive for all solar companies," Cheuvreux said in a note.
    "The cuts as from 2009 will not be as drastic as the proposed cut of up to 30 percent that was proclaimed by the (conservative) CDU/CSU faction," Equinet said.
  • In their talks on Thursday, coalition partners also agreed to raise the support for wind energy and biomass installations, participants at the meeting said. (meanwhile in the US? Sueing OPEC, more support for corn ethanol, etc etc - excellent work D.C.)
Short US Government

Faithfully - Journey w/ Arnel Pineda Chile Concert 2008


A splice of non investing stuff - looks like Journey has a new lead singer. Considering how original the "original" was, this is about as close as you are going to get as a lead singer, without cloning. Considering this is live and not in the studio, these are some amazing pipes. He has a great version of Open Arms on YouTube as well. Nice.

S&P on Homex (HXM)

This Homex (HXM) article was posted a few weeks ago but just had time to really get around to posting it. Since I don't talk much about this position, it is worth posting - it is a relatively comprehensive overview and with the stock doing very nicely of late, we should discuss from time to time some of the lesser known names in the fund.

  • While the U.S. housing market continues to suffer, homebuilding has been thriving just south of the border. The Mexican housing sector, representing 3% of that country's gross domestic product (GDP), delivered impressive growth in the past few years, in our view, pushed by the pressing need for affordable homes, economic stability, and strong government support.
  • We view Mexican homebuilder Desarrolladora Homex (HXM) as a compelling growth company in an emerging market. We think the combination of high market growth potential in the Mexican housing market with its low penetration of home ownership, along with the company's conservative cash management practices, will lead to positive earnings growth and a strong balance sheet.
  • Another factor in our strong buy recommendation is that Mexico and Homex use conservative lending practices compared to the U.S. market (hmm, conservative ... what a concept)
  • Mortgage loan issuers (government agencies and private banks) use fixed interest rates, have up-front fees of up to 3%, provide loans with terms of up to 30 years, require down payments of 10% to 20%, and require unemployment insurance. (outrageous terms - I much prefer 0% down, 120% LTV - buy one home, get one home free - type of deals; much more stable and you can bundle these mortgages into beautiful packages called CDOs that very "sophisticated" investors will buy in bunches because... well they have more money than they know what to do with.... plus they're sophisticated... yep)
  • In addition, Mexico's largest mortgage lender, Infonavit, is offering credits for homes bought with solar water heaters, energy-efficient lightbulbs, and other energy conservation items. (once again, I grit my teeth watching "3rd world countries" so much more progressive than the "sole superpower" - what a sad statement. We must look so backwards to the rest of the world....)
  • Between 2007 and 2012, the Mexican government expects $250 billion will be invested for the construction of infrastructure, and $200 billion to be approved to cover estimated demand for 650,000 new households per year, resulting in the need to build 4 million new homes. This is in addition to about 2.1 million families that require independent housing today.
  • Most homes in Mexico cost less than $40,000. In spite of the advances in Mexico's housing sector, the market shows no signs of a bubble, in our view. Housing prices increased about 40% between January, 2000, and May, 2006, compared to a 107% rise in U.S. prices in the same period.
  • We believe there are additional strengths in the Mexican housing and mortgage market, including fiscal reform that may provide more resources for additional investments; 37% of the population being between 20 and 45 years old; government infrastructure policies ($40 billion average annual investment); government subsidies for housing; and opportunities for growth in vacation and retirement housing.
  • We do see some factors that could slow Mexican housing and mortgage growth. Mexico is highly dependent on the U.S. economy, and in our view, foreclosure procedures are slow. In addition, there is deficient urban planning, insufficient infrastructure, and slow modernization of public property registries, by our analysis.
  • As of Dec. 31, 2007, Homex had 62 developments under construction in 21 Mexican states and 33 cities. Homex is one of the leading homebuilders in Mexico's top four markets—Mexico City, Guadalajara, Monterrey, and Tijuana—and continues to have a leading position in the other 29 cities.
  • Mortgages represent 10.6% of Mexico's GDP compared to about 69% in the U.S., and 58% in Spain, according to BBVA Bancomer, Mexico's largest financial institution.
  • Revenue growth in peso terms has been strong in recent years, in our view, including an increase of almost 27% in 2007, reflecting a higher proportion of middle-income homes, 17% more homes sold, and higher average selling prices per home.
  • Homex is developing a position in the tourism market by building communities for the second-home market in key tourist destinations in Mexico. The first stage of development involves launches in Cancún, Los Cabos, and Puerto Vallarta.
  • We expect stable gross margins between 31% and 33% in 2008 and 2009, and see operating margins in the 20% to 21.5% range, compared to 21.7% in 2007. Our 2008 operating earnings estimate of $3.65 per ADS assumes an exchange rate of 10.47 pesos per $1, the rate as of Apr. 24, 2008. Our 2009 forecast is $4.40 per ADS.
Long Homex in fund; no personal position

2010: The Year Electric Cars Go Mainstream?

A lot of interesting news regarding electric cars, which have gone from "not on the map" to "we're coming in 2010" within a few short years. These are exactly the innovations an energy hungry world is going to need.... and it is even better for the United States because plugging a car into the wall of your house will use coal or natural gas as opposed to petrol - and we have a lot of the former 2 as opposed to begging on our knees for more petrol. Not that we needed any more reasons to be long term bullish on nat gas and coal....

While it will just be a drop in the bucket at first, this could be the first of a large scale paradigm shift in the 2010-2020 period. But economics are the mother of innovation - I expect a long period of this sort of technology breakthrough borne of necessity in our "World of Shortages" scenario. Shortages created, economic pain, lag effect ... then technological breakthrough to help offset shortages.... and keep repeating as we bring another 2.5 Billion humans to bear on the planet, to swim along with the current 6.5 Billion.

We discussed Tesla Motors (and potential IPO) here

Nissan's coming to market by 2010 per NYTimes

The GM Volt concept has been a huge hit at the Detroit Auto show - working hard for model year 2010 (meaning ready for 2011)

And via Wall Street Journal Norway's Think Auto is considering bringing a 110 mile range "city car" to the US by 2009.
  • Norway's Think Global AS, with backing from U.S. venture capital investors, plans to produce and sell a small all-electric car in the U.S. that could go as far as 110 miles when fully charged – fresh evidence that the race to woo American consumers with electric cars is heating up and drawing interest from the same investors that helped build Silicon Valley.
  • Oslo-based electric carmaker, which recently set up a U.S. office in Menlo Park, Calif., is trying to determine what geographical areas to focus its sales activities on, with an aim to launch the car – the Think City – in 2009.
  • Jan-Olaf Willums, Think Global chief executive officer, said Think plans to sell the City, to be priced less than $25,000, in densely populated cities because of the car's limited range. The car is just hitting the market in Norway, Sweden and Denmark where a typical user drives the vehicle for a relatively short commuting distance and plugs it into an electric outlet in his garage to charge it overnight.
  • ....believes Think could eventually sell as many as 30,000 to 50,000 City cars a year in the U.S. once production ramps up and a sales network for the model is fully established.
  • "Because of the dollar's extreme weakness, it doesn't make sense to ship cars across the Atlantic." The Norwegian executive said Think would like to see which state and city could provide the "best deal," referring to investment incentives such as tax breaks.
  • In addition to the City, Think plans to add to its product lineup in late 2010 in Europe a second all-electric vehicle: the Think Ox, a five-seat car-SUV crossover. Using currently available battery technology, the car has a driving range of about 150 miles when the vehicle is fully charged. A U.S. launch is expected to follow shortly after, Mr. Willums said.

Thursday, May 29, 2008

US Rail Network Facing Congestion Calamity

My ears perked up a few weeks ago when I was reading that costs for trucking companies have risen to the point that it is CHEAPER for them to put their trucks ON RAILROAD cars for cross country treks (instead of actually driving the trucks). That's sort of an amazing scenario when you stop and think about it.

Of course we love all sort of shortages here (as investors) because shortages mean profit opportunity. (we don't like shortages so much as consumers though because shortages mean higher prices) But shortages and crisis do create all sort of reactions - such as the increase in the American 4 day work week. Demand destruction 101.
  • When Ohio's Kent State University offered custodial staff the option of working four days a week instead of five to cut commuting costs, most jumped at the chance, part of a U.S. trend aimed at combating soaring gasoline prices. "We offered it to 94 employees and 78 have taken us up on it," said university spokesman Scott Rainone.
  • But the surge in gasoline prices is pushing more private employers as well as local governments to offer a four-day week as a perk that eliminates two commutes a week.
  • In America's struggling auto making heartland, the shorter workweek offers employers a way of rewarding employees when the budget does not allow a salary increase, said Oakland County, Michigan, executive L. Brooks Patterson.
  • Some 44 percent of respondents said they have changed the way they commute -- doing things such as sharing a ride or driving a more fuel-efficient car -- or are working from home or looking for a closer job in order to reduce gasoline costs, according to staffing services company Robert Half International.
  • Some schools, including community colleges in rural areas where commutes are long and public transportation is scarce, already have plans to drop a day of classes, usually Fridays.
Of course, sir Buffet was way ahead of the pack in his investments in the rails but it is right up his alley, limited competition, higher barriers to entry.... but this very interesting story tells of a potential crisis down the road - but perhaps by then we'll have our flying cars/trucks ready to combat the problem ;) News like this continues to build a case, that if we don't find some serious breakthroughs on the energy angle, we could be seeing a retro move back to an era of more localized production as transport costs begin to dominate decision making (thanks to some readers who have emailed me some info on this angle of late). Remember this fall we were reading stories about how it was costing more to SHIP iron ore from Brazil to China, than the iron ore itself cost. For those who are new to this story, the railroads have been BOOMING carrying all the products that dominate our investment thesis - agriculture product, fertilizers, and coal specifically. [Apr 15: CSX Benefiting from Grains, Ethanol, and Export Coal] And most of it is being shipped to 1 particularly hungry customer in Asia.
  • The blotches illustrated areas where, by 2035, traffic jams could be so severe trains would grind to a halt for days with nowhere to go. "For those of you who've ever seen a good rail meltdown, this is what it looks like," Rose, CEO of Burlington Northern Santa Fe Corp., said as the crowded hall shifted uncomfortably in their chairs. "It's literally chaos in the supply chain."
  • The nation's 140,000-mile network of rails devoted to carrying everything from cars to grain by freight is already groaning under the strain of congestion, with trains forced to stand aside for hours because of one-track rail lines.
  • And it's probably going to get worse over the next two decades.... The damage to the U.S. economy could climb into the billions of dollars. Higher shipping costs would raise prices for everything from lumber to grain. One analyst said the rail crunch could add thousands of dollars to the price of a car.
  • Congestion around the country has remained chronic, even as the ailing economy has led to a 3 percent dip in freight train traffic in the first few months of this year compared with last year. And a new U.S. Chamber of Commerce report warns demand for freight trains is expected to double over the next 25 years.
  • "Even if the estimates are half wrong, we can't put even 25 percent more freight in the system right now without serious implications," said Randy Mullett, an analyst for the nonprofit Transportation Research Board.
  • "Even if the estimates are half wrong, we can't put even 25 percent more freight in the system right now without serious implications," said Randy Mullett, an analyst for the nonprofit Transportation Research Board.
  • Other modes of transport can't take up the slack: Trucking faces its own congestion problems, a shortage of drivers and high fuel prices. Ships and barges can't reach large parts of the country. Airplanes couldn't begin to carry the millions of tons of coal, waste, chemicals, grain and cars hauled by trains. And hauling freight by rail remains far more fuel-efficient than trucking.
  • "The amount of money we're investing nationally is pathetic," Rep. Peter DeFazio, D-Ore., said during a recent congressional hearing on congested freight routes. "We're heading toward fourth-world infrastructure." (boy, on this I agree - but when you are a broke, debt laden country spending on entitlement programs you cannot afford, sending warriors across the globe on missions you cannot afford, and sending rebate checks out you cannot afford - you can't really spend money on minor projects like... water infrastructure, roads, bridges, and non essentials like that - not until they begin breaking down in large scale - and then at THAT point we'll start the Congressional investigations on why we allowed things to degrade to this point. Note to Congressmen while searching for the answer - walk to mirror, look at mirror, rinse, repeat.)
  • The Chamber says expanding capacity on the more than 150-year-old U.S. rail system would cost $148 billion over 30 years. Private rail companies would have to pay most of it, with federal and state tax dollars covering much of the rest. ($148 Billion -that sounds like an enormous amount - totally unachievable; who has that sort of money? What's that? We just spent more that $160 billion a few months ago to try to buy votes... err, create a "stimulus plan" so Americans can "shop til they drop" to "support the economy"? Ok, so let's invest in ourselves via infrastructure / create jobs OR send money out to people to buy products at Walmart - which in turn sends that same money to China for those goods - hmm... I know which one sounds logical to invest in. Let's do the other! Yee haw)
Just add this to the list of other things we won't bother spending money on until its crisis situation... we're too busy building that Monarch Butterfly museum or bridge to nowhere. Priorities people. I'll start setting aside some time for the "Congressional Overview Hearings on Predatory Railroad Pricing"; shall we do 2015 or 2016? I'll be open to either year. See you then.

No position

Bookkeeping: Last Layer out of Alpha Natural Resources (ANR)

Ok I've tried to let my winners run as much as possible (always harder to sell than to buy in my opinion) but I can hear them cleaning up the spot behind the woodshed...tiding it up... cleaning up the limbs they took off from the solar group today.... our friend to the right has been waiting impatiently for 2.5 months to have his time with the commodities...

So I am going to cut my top coal position with the last layer out @ $77s range, and sell down Alpha Natural Resources (ANR) down to a 1.0% stake. I've cut most of my other coal names in layers earlier, and this is as low as I'm going to go, while recognizing many stocks could (when the sector corrects) easily drop 20-25%. But I never go to 0% allocations in names/sectors I like... again, I *want* this sector to correct meaningfully; I've been amazed at the relentless move. As the chart shows, this stock can drop 20 points and still be in a primary uptrend. I hope it does :)

As we discussed in the weekly round up, after such a sell off last week it would be typical for the market to make some sort of bounce and some of the most bloodied from last week (financials, retailers) to lead the way. That's the silliness we've seen much of this week. Although there is no rhyme or reason even from this ; they were up Tuesday, sold off yesterday, back up today. It's just a bunch of churning and direction-less right now - a market that does not know what to do with itself or where it should be going... hope or fear. At times like this its worthwhile to have a good cash stake until the market marks a clear trend. We sit with 25% cash. Any market being led by the trash sectors, in the early stages of recession.... err mild slowdown a few weeks away from a 2nd half recovery... is not a market I want to be overexposed to. It's just not a believable group of stocks to hitch your train to for more than a few days trade. Yes I know... as gasoline drops from $4.00 to $3.65 the consumer will come roaring back... don't bother CNBC, I already have the script written.

Long Alpha Natural Resources; no personal position

Bookkeeping: Adding to Tiny Stake in New Oriental Education (EDU)

Nothing special here outside of a technical buy; this has been a very small position for a while, awaiting a pullback. The stock is down 8% out of the blue - could mean there is some news that the big boys have that I don't, or it could just be some random hedge fund blowing up and liquidating. We just never know. (Or maybe Zach's hedge fund is shorting it down today hah)

I'm going to begin a rebuild here as the stock drops to $69s, some support down there in the $67s; if it breaks below that, that probably points to some bad news that "those in the know" have, and are trading off of (not that this ever happens in our very transparent and fair stock market). But since I only have a placeholder type of position (0.1% or less stake), I'll use this opportunity to begin expansion in New Oriental Education (EDU) and take it up to a 1.2% stake. The stock is down 8% today and around 15% in the past week or so.

[April 16: New Oriental Education Beats - Guides Down - but Stock Up]

Long New Oriental Education in fund and personal account (personal position could be liquidated on any substantial bounce in next 48 hours, or a drop below 200 day moving average - not a long term hold i.e. I could be selling by the time you read this :))

Mechel (MTL) Earnings

Let me preface this post by saying, I don't really care too much about the quarterly earning reports for some of the companies I hold, Mechel (MTL) is much like Petrobras (PBR) and Vale (RIO) - while I realize the lemmings in the market will overreact one way or the other as if the world is ending or mermaids and unicorns have arrived based on a few cents here or there every 90 days, I am indifferent. These are very long term plays, and my positioning in them has more to do with technical patterns at any moment; rather than any earnings hit or miss or any 90 day period. To that point, I didn't even realize Mechel reported today until a reader let me know - it will be part of the portfolio for a very long time - in fact when we launch for real it will be one of the first buys. One day when the potential for global recession hits the market's conscience I expect a very large sell-off, and that's going to be one of those times to buy this sort of name in large scale, along with those other handful of "tuck under pillow for half a decade" names - IF you are a believer in a world of shortages and that we are nowhere near the end of a very long uptrend in commodities. While demand for such things might dissipate temporarily (a few quarters to a year and a half) as the world slows, the long term won't change one iota.

With that said, let's look at the numbers just so we have a historic record in the blog when people are talking about Mechel as a great investment on CNBC circa 2009 or 2010 ;) Note this is a full year result (2007) not a quarterly report. Last time around they reported the first 9 months together [Dec 12: Mechel Reports Earnings, Considers Mining IPO], so if you were inclined you'd take this report, and subtract out the numbers from the last report to get "quarterly" results. Since I could care less about a 90 day period, I won't.
  • Net revenue in 2007 rose by 52.0% to $6.7 billion from $4.4 billion in 2006. Operating income rose 92.6% to $1.4 billion, or 20.9% of net revenue in 2007, compared to operating income of $725.7 million, or 16.5% of net revenue in 2006.
  • Mechel reported consolidated net income of $913.1 million, or $2.19 per ADR / diluted share, an increase of 51.4% over consolidated net income of $603.2 million, or $1.48 per ADR / diluted share, in 2006.
Mining Business
  • Mining segment revenue for 2007 totaled $1.8 billion, or 28% of consolidated net revenue, an increase of 41.3% over segment revenue of $1.3 billion, or 30% of consolidated net revenue in the 2006. The increase in revenue reflects production growth at our principal coal producer Southern Kuzbass, production growth at Yakutugol, and the acquisition of the remaining assets of Yakutugol, the largest Russian coking coal producer. These factors resulted in strengthened market position and increased sales of mining products to third parties for the year.
CEO Comments on mining segment
  • "Mechel's mining segment experienced a breakthrough year in 2007. As demand and the pricing environment continued to improve significantly, Mechel increased production, successfully raising coal production by 25% and nickel production by 19%. With the acquisition of strategic assets, such as Yakutugol and Elgaugol, we have strengthened Mechel as global company with significant growth potential. As a result of favorable pricing and increased production, net income for 2007 increased 3 times compared to 2006. Profitability in the mining segment was also positively affected by cost control efforts and successful execution of the technical upgrade program for segment's mining plants technical upgrade program.
Steel Business
  • Revenue from Mechel's steel segment increased by 42.5% in 2007 to $4.3 billion, or 65% of consolidated net revenue, from $3.0 billion, or 69% of consolidated net revenue, in 2006. Operating income in the steel segment increased by 37.3% to $558.2 million.
CEO Comments on Steel Segment
  • "Although we successfully executed our plans to increase production capacity, the pricing environment for metallurgical products especially in the second half of the year remained challenging. With higher transportation costs and steadily growing prices for raw materials, scrap, electric power and gas, our steel products prices were flat to down. Record high nickel prices also affected profitability in Mechel's steels segment, which is Russia's largest stainless flat products producer. In addition, rebar market overstocking led to decreased pricing in the latter half of 2007, which put pressure on our profitability as we have a significant market share for long steel products.
  • As a primary objective for the steel segment, we are continuing to concentrate on increasing output of high value-added products and achieving earnings growth through modernizing production facilities and controlling costs. Despite the ongoing high materials costs, we continue to see an improving economic environment for our products, which makes us optimistic regarding improved financial performance in the steel segment."
The smaller Power business which is newer
  • Revenue in Mechel's power segment from sales to 3rd parties totaled $503.3 million, or 8% of consolidated net revenue, an increase of 917.6% over revenue from sales to the third parties of $49.5 million or 1% of consolidated net revenue in the 2006.
CEO Comments on Power business
  • Mechel began to develop its power business in 2007 and the acquisition of the coal- fired Southern Kuzbass Power Plant and Kuzbass Power Sales Company made Mechel one of the main players in the energy market in the Kemerovo region, Russia's principal coal mining area. In 2007, Mechel also developed its power segment abroad by acquiring a 49% share of Toplofikatsia Rousse JSC, located in Bulgaria to extend its presence into new steam coal markets. Our power assets will require significant efforts to modernize the production facilities and integrate them into the Group's production chain.
  • The segment's profitability in 2007 was primarily affected by interest payments of "in-group" loans obtained to make the strategic acquisitions during the year. Looking forward, we are very optimistic about the prospects for power generating facilities in Russia, where many regions lack energy. We expect that the forthcoming deregulation of the electricity market will drive the development of the Russian power industry and benefit Mechel. Based on these factors, we plan to continue developing Mechel's power segment, which will increase the Group's stability, decrease costs due to the generation of our own electric energy and build value for the shareholders of the company."
There is a lot more in the earnings report as the company spreads its wings into Eastern Europe - Bulgaria, Romania etc etc [Apr 9: Mechel Continues to Acquire Most of Eastern Europe]

If this company were in a "free market", I could see Mittal (MT), or one of the 3 major mining giants buying it... but since it is not, we'll just have to enjoy years of growth ahead, although a global recession will hurt steel prices to some degree - but unless you're a "world will not need steel for the next 30 years" type of person, the story here is still very young. Below is the chart since November 2007 when we began this position; keep in mind its effectively split 3:1.

Long Mechel in fund and personal account

Joy Global (JOYG) - Solid Results but I'm not as Bullish as Everyone Else

Joy Global (JOYG) along with Bucyrus (BUCY) are the 2 main public companies in the US for pure plays on "mining equipment". While I expect demand to be strong, which will help both these companies revenues, I have turned cautious on these names due to rising input costs - essentially the same thesis I have for the agriculture equipment makers i.e. Deere (DE) [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]. Simply put, just as the automotive companies are being destroyed by change in style to small cars AND steel prices (Ford announced yesterday it is cutting more white collar jobs as steel prices ramp, GM doing yet another round of restructuring announced today), the impact of higher input costs is beginning to be felt across the globe by producers. [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects] Now in some industries, such as automotive there are other issues so revenue is flat lining, but even in "great industries" like agriculture or mining equipment that are seeing stellar growth, it is coming at a cost. Lower profit margins. So while the folks on Wall Street ignore this issue because all they rely on are "government figures" on inflation - we are talking about it, and have been talking about for a long while. This will put a serious crimp on profit margins, and thus when the market faces reality - create lower stock prices.

How is it effecting even the most stellar groups? We saw a few weeks ago the story in Deere - as to Joy Global while revenue is surging look at their gross margins - a year ago this quarter they were 33.2%; this quarter? 26.4%. That is a massive reduction in 1 year. So in plain English it takes more revenue just to derive the same income if your margins are dying on the vine. Now again, the demand is SO strong in this industry since mining equipment is at a premium that much of this gross margin destruction is offset by a huge ramp in revenue, but for 95% of the world's industries, demand is nothing like mining equipment.

Again, I've said this many times - inflation is a tax on all things; producers and consumers. Someone has to pay the piper; either in the form of crimped profit margins (producers) or large price increases (consumer). Or both. Wall Street is missing this story because they are relying on the fantasy story of 3% government inflation. 2nd half 2008 and 1st half 2009 profit margins will suffer. The only "saving grace" for corporate America continues to be that MUCH of their cost structure is human beings. Human beings that they are either laying off (if you read the company news, and ignore the government reports) or only allowing minor wage increases for those that remain. But for industries that consume large quantities of raw materials - a major headwind is now here. Those who do NOT have large ramps in revenues to offset this will see profit reduction. And for those who are currently enjoying these large ramps in revenue, if China and other developing nations begin to slow materially, their large revenue growth will stall, and they to will join the vortex downward. So risk increases; and this is reducing our pool of investing avenues by the minute.
  • Joy Global Inc. said Thursday its fiscal second-quarter profit fell 7 percent as higher expenses offset increased sales, but the surface mining equipment maker still beat analyst estimates.
  • Net income for the three months ended May 2 fell to $72.1 million, or 66 cents per share, from $77.6 million, or 70 cents per share, in the year-earlier period. Excluding one-time charges of 13 cents per share for a contract termination and 7 cents per share related to an acquisition in February, Joy Global had adjusted earnings per share of 86 cents.
  • Revenue climbed 34 percent to $843.1 million from $629.2 million. Analysts expected $798.3 million.
  • The company's cost of sales rose to $620.9 million from $420 million, and its product development, selling and administrative expenses rose to $108 million from $89 million.
  • Orders reached a record $1.2 billion -- up 69 percent from the prior-year period on strengthened conditions in the U.S. coal market and continued growing international demand. Original equipment orders grew 102 percent, and aftermarket orders increased 22 percent.
Again let me emphasize that the demand for the products for the mining equipment makers is off the charts - I am not implying that anything will change tomorrow or in a few weeks. In fact I expect revenue to continue to ramp smartly, BUT profit margins will be squeezed. So I'd rather play this trend (rising tide) with other companies (boats). (even those boats have cost pressures, but it's all relative)

The guidance in the Joy Global report has some interesting tidbits, worth posting - we can glean information on many related themes by reading earnings reports of ancillary companies.
  • The Company continues to benefit from unprecedented demand for its underground and surface mining equipment in response to the strong demand for coal, copper, iron ore and oil sands. All of these major commodity markets that the Company serves have extremely thin supply surpluses, or most often, significant supply deficits, as commodity supply increases to date have been unable to match commodity demand growth.
  • In thermal coal markets, stockpiles at power generators remain at extremely low levels, and the rebuilding of inventories will add to the supply deficit. The Company believes the gap between coal demand and supply could reach 60 to 100 million tons this year.
  • Industry forecasters expect steel demand to continue growing at 5% - 6%, led by growth of 10% in China demand. Both metallurgical coal and iron ore remain in significant deficit, and some projections indicate that steel supply could be 20 - 30 million tons less than demand this year due to shortages of raw materials.
  • The U.S has become the swing supplier to the international thermal and metallurgical coal markets, and export demand and prices are redefining the domestic market.
  • Based on the status of existing expansion projects and industry projections, the Company expects that the commodity markets will generally remain in supply deficit for the next three to five years or longer.
No positions

To Laugh or Cry - Spam is Hot

Sigh. The pooring of America has taken a very dark form - the return of Spam.

I somewhat joked about this in a few previous entries, one regarding the measure of inflation by the government (i.e. substitution effect) [Apr 8: Now on to Airline Inflation]

Now the way the government reports inflation they have a cute thing called "substitution" - when something gets too expensive (beef) their measurements assume you move down (substitute) to a lower value item (say... spam) - so hence your inflation is flat or maybe even goes down. That's the magic of government reporting.

And just a few weeks ago in one our earnings roundups I mentioned how we will trade down to Hormel's jewel of a product

Dicks Sporting Goods (DKS) - while this is a Wall Street favorite this is exactly the type of product that a poorer America will have to cut back spending on. So instead of going out and playing golf or sports that actually require exhaling at a fast rate, we will continue to sit on our behinds and play video games from Gamespot (GME). And instead of eating healthy, we'll be eating cheap - such as SPAM from our friends at Hormel (HRL).

So it is here folks; the substitution effect is in full force. This means as Americans have moved from steak (2004, paid for by home equity) to hamburgers (2006, hmm my home went down in value and my wages are not keeping up with gas prices) to... spam (2008, recession? what recession - government reports say everything is rosy!), the government can now say inflation is negative. Because as you move down the (ahem) food chain, they consider that a cost savings to you and hence you are paying LESS for food. And as I've outlined multiple times, the real rise in meat products has YET to come [Update on Corn and Livestock]. Heck, there is even Spam inflation! (7% year over year). No shelter in the storm. Please make sure you eat your breakfast before you move forward to the details below....
  • Sales of Spam — that much maligned meat — are rising as consumers are turning more to lunch meats and other lower-cost foods to extend their already stretched food budgets
  • The price of Spam is up too, with the average 12 oz. can costing about $2.62. That's an increase of 17 cents, or nearly 7 percent, from the same time last year. But it's not stopping sales, as the pork meat in a can seems like a good alternative to consumers.
  • Kimberly Quan, a stay-at-home mom of three who lives just outside San Francisco, has been feeding her family more Spam in the last six months as she tries to make her food budget go further. She cooks meals like Spam fried rice (cringe!) and Spam sandwiches two or three times a month, up from once a month previously.
  • Spam's maker, Hormel Foods Corp., reported last week that it saw strong sales of Spam in the second quarter, helping push up its profits 14 percent.
  • Spam sales were up 10.6 percent in the 12-week period ending May 3, compared to last year. Also helping sales, executives said in an earnings conference call, was the fact that people looking to save money are skipping restaurant meals and eating more at home.
  • Quan just bought a couple more cans of Spam on sale and some ramen, the instant noodle dish long a staple on college campuses. Her food and gas budgets are together, so she's had to cut back on food spending while the cost of gas increases. Her favorite Spam meal? Spam and macaroni and cheese. (cringe!)
  • Other companies are seeing similar boosts in their lunch meats. Kraft Foods Inc. reported last month that subsidiary Oscar Mayer, which makes hot dogs, bacon and cold cuts, saw double-digit revenue growth in the previous quarter in its Deli Fresh cold cuts. The company, based in Madison, Wis., has recently introduced new products including family sized deli-meat packs and deli carved, which offers thicker slices of meat.
The pooring of America continues - and yet another reason to bet against all forms of discretionary spending that focuses on the lower 2/3rds of America, especially [Stuff I've been Negative on Since Last Fall]. Even the bottom portions of the top third are going to be slowly forced away from the Whole Foods Market (WFMI) they hold near and dear [May 14: Whole Food Markets at a Loss of Why Sales are Slowing] They're heading for Spam-a-lot. While sad to see, they still have it a lot better than many in the developing world which would kill for.... Spam.

And just think. We're not even in a technical recession! Gosh, what's going to happen when (if) we ever enter one (not that government reports will show it). Anyhow, onward and upward to that 2nd half recovery - July 1, 2008; only weeks ago. Spam & Kool Aid! Yummy!

Long Spam

Wednesday, May 28, 2008

Ken Heebner: America's Hottest Investor

Ok, in theory I should not be posting about a fellow competitor since I want your money ;) but actually a lot of future investors who have emailed me have mentioned they also own CGM Focus so perhaps a paired trade of long CGM Focus/long Rising Tide Growth (short Kool Aid) will be a nice bedrock for the portfolio ;) Either way, I admire this guy for his focused strategy, going heavy into the names he believes in, and his passion for the work. He doesn't always get it right (flat with peers in 2006 and trailing in 2004), but he is usually 2 steps ahead of the pack. Much like myself, I've heard him say "I'll never retire" because this is just what he loves to do. (there goes my chance to take over CGM Funds once he hit the golf links) Certainly traits I like to share; frankly some of the quotes in the story could be direct links from the blog - a bit staggering. Fortune has a huge writeup so let's see what's going on in Heebner World.
  • His flagship fund, CGM Focus (CGMFX), has already made a killing on energy and agriculture, and Heebner has no patience for the pet theories of this or any other analyst (or economist or strategist). "I want information, not opinions," Heebner will later tell me.
  • Heebner is one of the few fund managers who routinely engages in short-selling.
  • Heebner is multiple steps ahead of everyone these days. At an age when most of his contemporaries have either retired or given up the daily grind of running publicly traded funds, the 67-year-old Heebner is putting up the best numbers of an already exemplary 30-year career. He's Barry Bonds without the steroids. "He's a rock star - he's Bono," quips his Irish-born (and U2-loving) analyst Catherine Columb.
  • Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500.
  • 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500.
  • Launched in late 1997, Focus has had only one money-losing calendar year (2002). (this is even more impressive for someone like me who likes to manage risk)
  • Heebner is a true contrarian, who says he's most confident as an investor "when everyone else thinks I'm nuts." He works long hours trying to identify emerging trends in the economy. When he finds a promising one, he'll go all in, making huge bets on the stocks poised to benefit. Asked how long it takes him to identify those stocks, Heebner answers, "About ten minutes. I've been at this a long time."
This is my favorite part of the story
  • Heebner shorted tech and telecom stocks with gusto from January 2000 to September 2001, profiting mightily from the bursting of the bubble.
  • In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned.
  • Used profits... to load up on oil and coal stocks, positions he'd started to establish in 2004. He even bought coal stocks for the Realty fund - a move that style purists might criticize but for which Heebner makes no apologies. "I did it because it was the best thing for shareholders," he says, noting that Realty's prospectus explicitly defines "companies involved in the real estate industry" to include mining companies, which obviously own a lot of real estate.
  • In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.
  • In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.
  • In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8.
Boo Yah! By the way, I noticed Heebner has begun rebuilding his coal position as of the 3/31 holdings in one of his funds.

  • Not every one of his moves worked out so well, of course. of Heebner's many strengths is knowing when to cut his losses. "A lot of fund managers fall in love with an idea and ride it all the way down," Kemp says. "Ken's quick to admit when he's wrong."
  • Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out.
  • He continued to put up excellent returns until the mid-1990s, when tech stocks started to dominate the market. For Heebner, that was a problem, because he usually shied away from technology. The barriers to entry were too low, and forecasting winners and losers too hard. Focus eked out single-digit gains in both '98 and '99, whereas many rival funds were soaring 40% or 50%.
  • His ideas come faster, his focus is more intense, and his ability to sift through massive quantities of information and zero in on what matters is downright spooky.
  • There's no simple formula that captures his investing principles, and explaining his approach is something even Heebner struggles with - which may be why CGM manages only $13 billion (including private accounts), a relatively modest amount given Heebner's track record. (my note: this is the stupidity of the 'big money' - they want you pegged into a square hole so they can do their asset allocation - funds that switch from large cap growth in 1 year to small cap value 2 years later make them upset - so they'd rather give up gains, to make sure you stay in a certain style box)
  • Basically, he's the last of the gunslingers - a go-anywhere manager who can be investing in left-for-dead U.S. value stocks one day and red-hot Brazilian growth stocks the next. (my note: last? you speak too soon! Generation X coming baby)
  • Heebner is a workaholic who's up at 5:30 a.m. reading stock reports and checking business news and who never leaves the office at night without a stack of articles and research that make up his bedtime reading. (sounds vaguely familiar)
  • CGM is pretty much a one-man show. Heebner's entire investment team consists of two traders - Elise Schaefer and Sue Small - and Columb, the U2 fan. Being an analyst for Heebner is a bit like being a beauty consultant for Halle Berry, so Columb knows better than to try to suggest stocks. She operates more like a sleuth. Heebner will ask her to dig up the latest information on, say, scrap steel prices in China or deep-sea oil rig leases, and within an hour or two her findings are on his desk. (that's what I need - a sleuth)
Now for some scary stuff... some identical quotes from Heebner to what I've been typing
  • These days Heebner is keeping close tabs on the latest economic data out of China, because China is the key to his enormous bet on commodities. As of March, 64% of Focus's assets were invested in commodities-related stocks. His biggest stakes are in steel (ArcelorMittal, Nucor, and United States Steel) and in oil (Apache, Devon Energy, Petrobras, and Schlumberger)
I wrote in this entry [May 18: Bookkeeping - Weekly Fund Changes Week 41]

We've had an enormous moves in the prices of commodities, and almost all themes now relate directly or indirectly to the voracious appetite of China to continue to consume and prop up much of the world. Commodities, China, and inflation hold the keys for our near term.

Ok that is sort of scary.
  • Petrobras, the Brazilian oil company that has announced two giant offshore oil discoveries, is his favorite. "Petrobras could become the biggest stock in the world," he says.
I wrote in this entry [Apr 14: Petrobras Just Went Vertical]

Off the Tupi discovery alone, I believe Petrobras was headed to be the largest company in the world, passing Exxon; before what could be happening today.
  • He also thinks inflation will hit double digits within the next five years
I write... ok every week, I write about the "World of Shortages" and the effects of inflation. I'm starting to feel like a mini me.
  • Yet he is constantly on the lookout for any sign that the economic slowdown in the U.S. may be infecting emerging economies abroad. That would deep-six his whole investment thesis, which hinges on China and other emerging nations using more energy and building more infrastructure. "I'm not waiting for Morgan Stanley to tell me there's something wrong in China," Heebner says. "By then it's too late." (Bingo)
  • One oil expert Heebner has consulted is Matthew Simmons, a Houston-based investment banker who's become the oracle of "peak oil" since his book Twilight in the Desert was published in 2005. Twilight argues that Saudi Arabia is running out of oil faster than we think, and Heebner's own research leads him to the same conclusion.
  • Heebner enjoys his job enormously, which is the key to his longevity. "It's not a business for him, it's a pleasure,"
  • In fact, the line between pleasure and obsession sometimes gets a little blurry. Heebner doesn't take vacations, he insists he'll never retire, he knows less about pop culture than my 8-year-old twins (which, come to think of it, may be a good thing), and other than sailing and politics, he has few interests outside the investing world.
  • For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times.
  • After getting his MBA, Heebner wanted to go to work on Wall Street as an investment banker. Nobody would hire him. "I think my energy level back then was so high that I just made people uneasy," he says.

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