WSJ: Fast Rising Steel Prices Set Back Big Projects

Inflation is a tax on all people, companies, and countries. This is exactly the type of thing that we are beginning to see in the corporate world [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] and what I believe is the largest threat to the 'global growth' story. The 'World of Shortages' thesis I've been talking about since day 1, continues to devour everything in its path. At some price point it no longer makes sense to build things, even for China (although they are forced to, to swallow up the masses of populace moving from the countryside to the cities). I have to say I've been amazed that the steel companies can continue to pass along all costs to their end customers but at some point this stops. The point seems to be closing in.

Unfortunately as investors this races some serious questions; much of the current investing themes are based on global growth. If that takes a sharp downswing, we face the potential of (a) global recession and (b) not much to invest in - I guess we'd have to flee back into US banks and retailers? Yikes. And if you think global recession seems far fetched keep in mind, in 2006 (I don't have the exact figures) but something like 156 of 157 nations showed GDP expansion. So the opposite is not out of line. Oil at $175-$200 and raw material costs at levels that simply make it not worth to build (for most countries) and/or makes producing products unprofitable for many companies would cause serious hardship. Not saying this is the road we will travel, but simply outlining one potential path. At some point these high prices go from being "cute" and "great for companies that product these things" to major threat to global growth.

• Relentless increases in the price of steel are halting or slowing major construction projects world-wide and investments in shipbuilding and oil-and-gas exploration, setting the stage for a potential backlash against steelmakers.
• In Turkey, a construction association said this week it will begin a 15-day strike in eight cities Thursday to press steelmakers to cut their prices, which have more than doubled locally since late last year.
• In New Delhi, India, an ambitious bridge project has been put on hold because of steel-related cost overruns, and contractors are postponing or reining in construction of much-needed housing for the poor, prompting the Indian government to freeze steel prices for the next three months.
• Venezuela, aiming to control prices, renationalized its largest steelmaker and is limiting exports. Oil executives in the U.S., meanwhile, say costly steel is threatening their energy exploration efforts.
• Globally, steel prices are up 40% to 50% since December, and industry executives say they haven't hit their peak. Also the cost of alternatives, such as aluminum and certain plastics, is increasing.
• Iron-ore prices have risen 71% this year. Two other crucial steelmaking ingredients, coking coal and scrap steel, have doubled in price.
• While still in a position of pricing power, steelmakers are concerned that over time, their high prices will affect sales. "There will be impact on demand, and that is not a good development for the steel industry," said Aditya Mittal, chief financial officer of ArcelorMittal, on a separate conference call.
• As a result, steelmakers are taking steps to cut their costs. To shield themselves from higher raw-material prices, more of them are acquiring their own iron-ore and coal mines or deposits, as well as producers of scrap steel.
• Some nations, meanwhile, are hoarding steel by erecting export barriers. Last week, India imposed a 15% duty on exported steel. Countries that don't make enough of the metal are slashing import taxes in an effort to attract more. Last month, Iran announced it was lowering its import tax on rebar steel, used in new buildings and roads, to 9% from 20%. (sound familiar? we were typing the same things about agriculture products a few months ago - the World of Shortages will lead to major international strife - this is only the beginning stages of a multi decade issue)
• The impact of high steel prices is rippling through industries from shipbuilding to energy exploration.

Bookkeeping: 'Rising Tide' Performance Week 41

Week 41 performance of the mutual fund

Comments: The equity market continues its 2 month run of happiness and joy, discounting "everything" from here to 2010. Good news is great, and bad news is even better. Because "it's all priced in". Much of what we've seen lately makes about as much sense as some office workers we all know in our lives, but we can't dismiss them completely. The animal spirits are here, and it is what it is. Commodities remain on fire, and the inflation they create on both consumer and producer is completely ignored and/or "priced in". (more on that this weekend) Godzilla just attacked Tokyo - but it's "priced in". Etc. We now approach the highs of the year and although certain bloggers who clearly don't understand how great everything will be in "6 months" express caution [Risk is High], the market can only laugh off such simple mindedness. In fact, the investment bank's... err, the people's champion, Uncle Paulson has come out today to assure the minions that the economy will be rebounding by the 2nd half of 2008. Judging that this is coming from the man who runs Treasury and is the great seer of all things financial in America and was able to discern in April 2007 "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained", I feel ever confidant in his most current analysis. Conclusion: Buy stocks.

Again, as I say every week if you believe commodities are overpriced in any manner due to the Federal Reserve (and every government in the world tied to the US dollar who must also print their currency like mad to remain pegged), than you must believe equities are also overpriced to some degree as this flood of paper currency flows into all things of limited supply, of which equities are one. I opined back in the late summer/early fall that the Fed would create a new bubble to get us out of the swamp from the old bubble (i.e. the solution for a bubble brought on by low rates, is to create a new bubble with low rates).... I thought it would either happen in emerging markets or commodities - it is looking more and more like commodities will be the winner of that contest; and this is coming from an avowed commodities bull. :) So I suppose crude can get to $150 and it will have no effect and/or it is all "priced in". Perhaps we return to an equity bubble like the turn of the century... as earnings fall in sector after sector, stock prices go up, creating 50+ P/E ratios. Only now it won't just be NASDAQ stocks; and people will keep buying because what else are they going to do with all that newfound cash? Everything else has negative real returns with inflation at 12-15%... err... 3%. Conclusion: Buy stocks.

For the fund, after a ridiculous display last week, trouncing the markets by nearly 5%, I had written " I expect to give some of this back next week since the gap versus the indexes was so huge." And so it came to be true. Our hedged policy just does not work that effectively in weeks like this where you must throw a dart and be long anything and everything. So much of our gains on the long side were eliminated by the quite sizeable short exposure. Unfortunately, we cannot short individual names and the index shorts are proving less effective in a "sideways" market than they were in last fall's/early winter market. So we suffer a bit on weeks like this; thankfully what we do have long was in general working very well so it helped offset the damage done by the short exposure, and high cash (15-20% all week). Coal continues to work very well, solar had a boffo week, oil services nice, and the metals stock (what little we own) were simply unstoppable.

I've cut back these "winning" sector weightings as far as I wish, so I really am hoping for a fallback to rebuild positions (the day it does come I do expect it to be severe) I continue to try to find new buys, or increase exposure outside of commodities in positions that I believe in for more than just a 3 day or 7 day trade (i.e. retail). But if you look at fundamentals (which apparently only I and three old men in Wichita seem to do anymore), the pickings are slim. If however you discount everything from here to 2019, pretty much every stock is a steal. And that seems to be the current market mindset. Conclusion: Buy stocks.

Going forward we will remain in a defensive posture, but if the markets break out to new yearly highs and over the 200 day moving average, we have to rethink things. Because at that point, every technical trader on Wall Street (and their computers) will have signals to jump into the market. So we'll cross that bridge when we get there; but if we under perform the market for a bit here until we see if that technical breakout is indeed the next step, we'll go down that path... and hope our long positions can make up for the 40% of the portfolio either sitting in cash or betting against the beast that is this Bull. Conclusion: Why the heck am I not buying stocks?

The S&P 500 & Russell 1000 both laughed all the way to the bank, gaining 2.7% and 2.8% respectively this week. Rising Tide Growth Fund sniffled along with a 1.6% gain (the Ultrashorts mock us this week) . So on the plus side with only about 60% long exposure (and 20% betting against the market) we still made some good return this week, and in fact did not give back as much (versus the market) as I anticipated after last week's large beat.

Price of Rising Tide Growth: $12.277
Lifetime Performance to date (vs Aug 3, 2007): +22.77%

Comparable S&P 500: 1,425.4 (-2.72%)
Comparable Russell 1000: 780.5 (-1.98%)

Fund return vs S&P 500: +25.49%
Fund return vs Russell 1000: +24.75%

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

Friday Readings

Some items of interest

Americans seem to be finally educating themselves and want Paulson to do "something, anything" about the dollar, and the fact its stoking inflation. Inflation they see, feel, touch - but the government reports do not. Unfortunately the real culprits to the weak dollar require "solutions" that most Americans are not ready to face, such as actually living within our means as a nation and cutting back entitlements.

• Americans want Treasury Secretary Henry Paulson to act to stop the dollar's decline, which has stoked the inflation eroding their household incomes.
• A Bloomberg/Los Angeles Times poll found that 76 percent of Americans think the government should do something to halt the falling dollar. Among those with incomes of $100,000 or more, seven in 10 favored aiding the currency, putting pressure on Paulson, who's charged with setting the policy, to match his ``strong dollar'' rhetoric with action.
• The U.S. currency has slumped 41 percent against the euro since 2002 and 13 percent in the past 12 months alone.
• ``The long-term fundamentals of the U.S. economy will be reflected in our currency,'' Paulson said in Kansas City, Missouri, last week, responding to a question from the audience. (sadly that's the truth, and the market has spoken)

Let's see, countries who allowed the financiers of the globe to introduce their magic of "financial innovation" and stupid human tricks aka toxic mortgages are suffering across the globe - United States, England, Ireland, Spain.... while countries who stuck to traditional methodology aka "you want a house? No no no... you cannot have it for no money down and 1% interest rate for 2 years", seem to be doing fine - Germany, France, even with a terribly strong currency that is hurting their exports plus their worker friendly "socialist" backdrop. Ironic. Keep in mind, those tight fisted French and Germans still require crazy things like 20% down to buy a home. Nuts, I tell you.

• Surprising even the most optimistic forecasters, the German economy grew 1.5 percent in the first quarter of this year, delivering its best performance in over a decade despite the global financial crisis and recessionary fears enveloping the United States.
• The euro zone, where Germany accounts for a third of economic output among 15 members, grew 0.7 percent during the period, the statistics agency Eurostat reported Thursday. The region’s numbers, which represent quarter-on-quarter growth, also got a surprising lift from France, where the economy grew 0.6 percent in the first quarter.
• However, economists said the numbers obscure severe slowdowns in Ireland and Spain, which have been battered by the global housing decline, and a probable recession in Italy. Growth in Spain and Ireland, which profited immensely from the global housing boom, was near zero in the first quarter, Eurostat said, reflecting stagnant or falling housing prices.
• Still, the statistics appeared to validate the path of the European Central Bank, which has resisted cutting interest rates as the Federal Reserve has done in the United States. The European bank has repeatedly emphasized that inflation remains a threat while playing down the risks to growth posed by financial market distress since August.

But... but.... but... we NEED them to cut rates. Otherwise how will our dollar ever regain its stature above US Peso? Please cut your rates and subject your citizens to more inflation - please... we beg you.

Speaking of those damn socialists who have that silly thing called "regulation" that slows down greedy humans from feasting on the remains of their fellow man, the International Herald Tribune reports that EU Finance regulators want to (gasp) curb executive pay. The horror - I must avert my eyes. I mean if a CEO of a major US company was paid $3 million instead of $38 million (plus $22 million in restricted stock options, plus a relocation, plus corporate jet, plus taxes paid by corporation, plus cars, plus ....ok I digress) we all know what would happen. Every person in his organization would no longer function, and the company would be bankrupt within weeks! We must have more compensation because these few select men and women are the ONLY ones on the planet with the talent to run these companies!!! No person in middle management could do this job! Please write your Congressman and/or I urge a boycott of all European products so that we, together as Americans, can show our support for our embattled executives. Please will you help save a CEO's 14th home? I'll start rounding up the rock stars and R&B singers so we can do our version of Live Aid... you know "CEO Aid"....

• Condemning excessive executive pay as "scandalous" and a "social scourge," European finance ministers pledged to keep boardroom remuneration in check by enhancing shareholder power or changing the tax laws.
• "The excesses of captains of industry we have seen in several countries and sectors in the euro area are really scandalous and we continue to examine how something can be done in terms of professional ethics and taxation to combat these excesses," said Jean-Claude Juncker, the Eurogroup chairman.
• Pay for chief executives in Europe is significantly lower than for their counterparts in the United States. (that's because Americans are clearly the only ones who can run a company well!! Sheesh, how obvious do I need to make it! The higher you are paid the smarter you are!! Right Bear Stearns? Merrill? Enron? Worldcom? Citigroup? Cmon readers, I urge you to fire yourselves so your company can shovel more money into the top 3 slots [your salary is a weight to the company that has better purposes, such as more CEO compensation]- that will show those Europeans and their silly egalitarian ways)
  

One of my favorite subjects, and something I've written about in the past - how there is almost never a "sell" rating on Wall Street, and the reasons behind it (you'd never want to peeve off a company another arm of your bank could do investment banking with i.e. more fees!), but the NYTimes has an interesting piece of how Merrill Lynch is going to require its analysts to say something bad about 1 out of every 5 stocks they cover. Hilarious. Want to know what % of all stocks are now rated sell? 5%. Yee haw! That means 95% are in great shape! Or you should at least hold them! No wonder Wall Street is such a happy place. Oh and after the last disaster of the late 90s when analysts used to issue BUY ratings than email their friends inside the bank what a disaster the company was (damn email trail), and new regulation came on due to that ridiculous situation... well 5% is an improvement. Back in "those good ole days" only 2% of stocks got a 'sell' rating. Again folks, Wall Street is really a used car sales lot with better suits and better college degrees. But in the end, its just a big sales job. Keep sending them your money....

But I do want to point out some interesting quotes from the story - how Wall Street has turned, even institutionally, to an environment that ONLY cares about short term results. And this is why "long term investing" is going the way of the do do bird - most high level compensation is based on 1 year time frames. So nothing else matters.... read on

• Some analysts say the market does not value investment research about stocks as much as it used to because hedge funds and other investors are more focused on short-term results than they used to be.
• “There’s much more short-term orientation and more emphasis on quarterly earnings reports today,
• “The real reason I got out of the business was the market doesn’t care about the future anymore,” he said. “If something isn’t going to occur in this calendar year when institutional investors get paid, it might as well be happening on Pluto.”

Speaking of which, the legend, the man, Ken Griffin from Citadel says many of our problems are caused by the youth - all these 20something traders who have little experience and whose idea of long term is a few minutes. Go Ken, tell 'em (of course Ken is 40, but at least he is a genius) as opposed to all those salesmen... err, very well versed traders who make 6-8 figures for selling the worst products to unsuspecting fools worldwide under the guise of "it's safe, just trust us". One day I'll be like Ken, talking to newspapers about how idiotic my brethren are; until then I blog in obscurity! Mad respect to a man who is inside the industry who actually speaks unpopular things.

• Kenneth Griffin, who runs one of the biggest and most successful hedge fund firms, has a blunt assessment: "We, as an industry, dropped the ball."
• The breakdown happened, Griffin contends, when big investment banks gambled away money and jobs during the late great credit boom. The bosses let all those young gung-ho traders take far too many risks and now everyone is paying the price.
• But the answer is simple, in his view. The entire industry needs to overhaul its thinking and, believe it or not, perhaps even accept greater regulation. (the horror! Ken! Free markets solve everything!! Darn is everyone turning socialistic in this country!)
• He is upset that the investment bank Bear Stearns ran aground. He is annoyed at the big-name chief executives who took too much risk and then watched as billions of dollars of value vanished from balance sheets. And he is particularly galled with regulators in Washington who have overseen what he calls "the great depression on Wall Street."
• A problem, he says, is youth and inexperience - and that's coming from a former child prodigy. "Walk across any of the trading floors - they are full of 29-year-old kids," he said. "The capital markets of America are controlled by a bunch of right-out-of-business-school young guys who haven't really seen that much. You have a real lack of wisdom." (Bravo. Bravo. Bravo.)
• The problem is compounded further by weak government oversight, he said. "The unwillingness of the Federal Reserve and the SEC to require working capital" limits, he said, only exacerbates the risk-taking environment because the banks are playing the equivalent of no-limit poker. (Bravo. Bravo. Bravo.)
  

And to finish off on a fun note, I love Thin Mints but this is ridiculous! Impressive feat!

Bookkeeping: Adding to Intuitive Surgical (ISRG)

This is purely a technical trade but I am adding to Intuitive Surgical (ISRG) north of $300, as the stock has broken back above the 50 day moving average, after building a month long base. Volume is also picking up. That's about as smart as I get on the technical analysis side. I'll completely reverse this trade *if* the stock breaks back below the 50 day moving average - this is a nice low risk entry point to me. If this is the beginning of a move, we are good. If it is not, we take a small loss (about 2%) and hunker back down awaiting this puppy to get jiggy with it. In this market, at this stage of mania, I am keeping a tight leash on new buys... if they start misbehaving they go away quickly.

This moves Intuitive up from 1.2% of portfolio to 2.0%, and if we see more strength, I'll add more from here. Purchases made around $302; I'll exit this buy if it falls back to $295 or so...

[Apr 18: 2 New Positions - Intuitive Surgical and Morgan Stanley]

Long Intuitive Surgical in fund and personal account

Brazil is Sexy...

... and not just for obvious reasons (don't you dare click to enlarge photo). While I've been a long time Brazilian bull, we are starting to see it more and more in the popular press. Which is beginning to get me nervous. The more something turns into a consensus, the more crowded a trade becomes (in the near term). The long term does not change of course...

There are a limited amount of ways to play Brazil for American investors. We have energy giant Petrobras (PBR), mining giant Vale [formerly CVRD] (RIO), 2 major steel makers Gerdau (GGB) and Companhia Siderugica (SID), 2 major banks Bradesco (BBD) and Banco Itau (ITU) (no subprime I promise), homebuilder Gafisa (GFA), and a few regional consumer related names, along with an airline. Or iShares Brazil (EWZ) if you want the country ETF (but its top heavy in PBR and RIO)

Now compare that to China where we are flooded with a hundred companies of all shapes, sizes, and hype. With that said, as I keep saying, Americans are very inward looking people with belief that if it does not happen "here", it does not matter. That's a quite arrogant/narcissistic attitude that is coming home to roost. And if said attitude continues it will consistently hurt us more and more, as many other parts of the world grow, evolve, and prosper. Much of it happening with our dollars, as our massive debt/consumption finances their upswing in lifestyles. [Jan 21: A Tour Through the Middle East] With eyes closed to it, it can only hurt more.

Here are two stories just in the past few days

Wall Street Journal: Brazil Joins Front Rank of New Economic Powers

• For much of the decade, slow-growing Brazil seemed out of its league lumped in with the dynamic emerging economies of Russia, India and China in the so-called BRIC group.
• But slowly and without great fanfare, Brazil's economy has turned a big corner. Already a global power in agriculture and natural resources, Brazil has added a key ingredient that had long eluded it: a currency with staying power. (we used to have one of those) In turn, that's helping unleash the greatest burst of prosperity the country has witnessed in three decades, attracting foreign investors by the score and providing a growth engine for a flagging global economy.
  
• Brazil has enough money lying around that Monday it announced it would follow other booming countries like China and Persian Gulf oil states in setting up a sovereign-wealth fund, worth between $10 billion and $20 billion, to invest its excess cash. (money lying around?... interesting concept - we don't believe in that here)
  
• Brazil's newfound stability has elevated millions of poor Brazilians into the middle class, making it the largest population bracket in a nation long known for having only haves and have-nots. (as opposed to some countries going in the opposite direction....)
  
• On April 30, another piece fell into place for Brazil when Wall Street ratings firm Standard & Poor's upgraded Brazil's debt to "investment grade" -- making Brazil the last of the BRIC nations to have its creditworthiness win that coveted seal of approval.
  
• The nation of 190 million inhabitants hasn't shed all its economic perils. Much of its economic surge is riding on soaring commodities prices, including agrarian products, oil and minerals; a reversal would be deeply felt. (very valid)
  
• But Mr. da Silva has proven himself an adept bridge builder who seems equally at home having barbecue with George Bush or drinking cafe cubano with Raul Castro. "Brazil doesn't really have any enemies," That's just fine with investors who see Brazil as a relatively safe haven, a resource-rich democracy that's growing steadily, if not spectacularly, in a quiet corner of the world.
  
• Brazil is the only one of the four big emerging economies without nuclear weapons.
  
• Brazil was awash in foreign capital, much of it directed toward brick-and-mortar projects.
  
• On the outskirts of Rio de Janeiro, 13,000 laborers are working overtime to build German industrial giant ThyssenKrupp AG's new $4.6 billion steel plant, the largest mill to be built in Brazil in 20 years. Mexican billionaire Ricardo Salinas recently made a whirlwind visit to historically impoverished, but now economically surging, Northeastern Brazil to launch a chain of banks aimed at low-income clients. Illiterate clients will be able to register accounts using their fingerprints. International oil companies, such as Statoil SA of Norway and Royal Dutch Shell PLC, are set to invest $25 billion in Brazil in the coming years, according to Brazil's industry association for foreign oil companies. Alcoa Inc. is putting $2 billion into hydroelectric power, mining and smelting projects throughout Brazil -- the company's most ambitious investment program anywhere.
  
• Brazil lacks the savings and investment rates of China and India. But Brazil has reached a more mature stage of development than China and India -- with a larger share of the population urbanized and higher per capita wealth -- so it's simply less likely to take giant leaps these days.
  
• Since 2005... The percentage of middle-class Brazilians has grown to 46% from 34%.

MSNMoney: Booming Brazil. The New China.

• If there is a single word to sum up the global rallies in steel, iron ore, gold, grains and energy over the past three years, it is Brazil. It's not an exaggeration to suggest investors should now look upon the former Portuguese colony as the new China -- a top dog among global economic powerhouses that smart investors ignore at their peril.
  
• Although the nation's key Bovespa Index is up 535% since 2003 -- almost nine times the return of our Standard & Poor's 500 Index ($INX) -- it does not appear to be overvalued. Brazil's big industrial companies are still cheap, mostly because their story is not yet fully believed. They are not getting the credit they deserve as fiscally clean giants in a country largely free of the extreme corruption, political disharmony and waste that has hampered peers in emerging markets.
  
• Most analysts date Brazil's turnaround to the presidential election of Luiz Inácio Lula da Silva (or as we call him 'Lula'!). Virtually from the moment he took office in 2003, Brazilian stocks threw off a long-term bear market and got their bull on. Yet Silva stunned the world by putting competent pragmatists in key positions as central bank chief and finance minister. (Wow pragmatists as opposed to people beholden to Wall Street and the top 0.5%? Interesting concept - it would be nice if we could go back to that sort of thing here)
  
• Silva was aided in his quest to grow Brazil into an export powerhouse by a decision by military dictators in the 1970s to commit the country to self-sufficiency in energy. At the time, it meant the widespread development of the nation's vast sugar cane crop as an efficient feedstock for ethanol. Most Brazilian cars and trucks now run on pure ethanol, a mix of ethanol and gasoline, or natural gas cheaply procured from neighboring Bolivia. (ok so a long term vision that runs longer than 1 election cycle? Thinking ahead 10, 15, 20 years? Hmm... interesting - and whom is the 3rd world country exactly?)
  
• There's much more to Brazil's agriculture than sugar cane, though, as its tropical climate allows for two growing seasons. The country has the world's largest amount of uncultivated arable land, and farmers, in league with Japanese and U.S. agribusiness leaders Cargill, Bunge (BG, news, msgs) and Monsanto (MON, news, msgs), are steadily moving into the western steppes to grow more soybeans, wheat and alfalfa, as well as graze the world's largest cattle herds to satisfy a growing world hunger for protein.
  
• And the mining industry has exploded under the nearly monopolistic direction of Vale (RIO, news, msgs). Vale's shares have risen almost 1,700% since Silva took office and his finance team started selling the government's share of the company to the public. The second-largest mining concern in the world, Vale produces iron ore, nickel, copper, bauxite and aluminum, and runs nine hydroelectric plants to supply the world with raw materials.
  
• Though Brazil has China beat with native sources of food and natural resources, its expensive currency and smaller population have stymied efforts to create much of a manufacturing sector. Brazilian industrial outfits such as steel maker Gerdau (GGB, news, msgs) have ventured overseas to buy and distribute high-grade metal plate, and Embraer (ERJ, news, msgs) has hawked commercial jets. But mainly due to high tariffs and bad luck, the only Brazilian goods you'll likely buy in the U.S. are cooking oil, carved wood and orange juice.
  
• To be sure, Brazil is not perfect. Around a third of Brazilians live in poverty, and the median income of households badly trails that of Mexico and Chile. Yet economic growth around 4.7% and a sharp drop in inflation (which had topped 100% in the 1990s) have spurred growth in a middle class that is avidly buying wireless phones and refrigerators, traveling and going to college.
  
• In short, Brazil is China without a totalitarian government, lack of water or natural resources, or Tibet problem. It's an emerging market with real hope of sustainability.

Long Petrobras, Gafisa, Vale in fund; no personal position

Bookkeeping: Another Layer out of Energy Stocks

I'm a very long term bull on these guys, but enough is enough (some of these charts, esp. coal, are simply straight up) - taking another $4-$6K out of each position, and layering out. People seem to be throwing in the towel and taking for granted crude goes straight to $140-$150 at this point. If so, we are going to start seeing major demand destruction worldwide. (already happening in the US) Frankly this scenario reminds me a lot of fertilizer 3 weeks ago when everyone said it could only go up, and within a few days they began to sell off. While we cannot expect perfect timing, once a consensus is so heavily weighted to one side of the ledger of ever increasing prices, I begin to take the other side of that and get increasingly cautious.

1. Coal: Mechel (MTL), Alpha Natural Resources (ANR), Consol Energy (CNX), Massey Energy (MEE), Arch Coal (ACI)
2. Natural Gas: EOG Resources (EOG), Cabot Oil & Gas (COG), XTO Energy (XTO)
3. Services: Core Laboratories (CLB), National Oilwell Varco (NOV)
4. Exploration: Petrobras (PBR)
   

I am keeping the deep sea oil drillers as an offset for a continued run and/or takeout potential. I have the urge to buy Ultrashort Oil & Gas (DUG) as a trading vehicle (shorter term) but not until things begin to reverse. Buying this into a mania blowoff top phase will just do more harm than good. But I can see adding this relatively soon...

Continuing to bleed off the best parts of the portfolio might lead to some underperformance in the coming week(s) versus the markets, but I am ok with that. The #1 thing is actual performance (absolute returns) not performance versus the markets (relative returns) so by holding this in cash, we protect from any potential downside. As we trudge forward on the ever increasing slope upward, I'll be turning more cautious/protective.

This batch of sales generated roughly $50K of cash, or about 4.1% of the portfolio.

For an example of what the typical coal chart looks like ....



Long all names mentioned except Ultrashort Oil & Gas in fund; long Alpha Natural Resources, Mechel in personal account

Risk is High

While it sounds like we're shouting into the wind, I have to say risk is high for multiple reasons.

We did do a good job of passing previous resistance of S&P 1420. We now approach the 200 day moving average, just about 1430. If the market blows through that point, then one must take the bullish stance I suppose.



Things that make me nervous

1. Amazingly we are just about at highs for the year (within striking distance) - despite a housing crisis and credit crisis for the ages.
   
2. All bad news is being ignored on hopes for the future
3. We've now rallied essentially straight up for 2 months
   
4. Retail stocks are the new darlings, one example JCPenney (JCP) 90 days ago was expected to do 80 cents in earnings... as the quarter went by analysts were slashing expectations and got expectations down to 50 cents. The company reported 54 cents so they "beat", setting off a fireworks explosion in the stock yesterday and the lemmings applauded. Even though they missed what expectations were not 3 months ago by 26 cents. They say the rest of the year will be a challenge. No one cares. Buy stocks. Same for Saks (SKS), same for Nordstrom (JWN), same for Kohls (KSS). These companies are now reporting negative earnings growth year over year, yet people are paying higher prices for this. Why? And for how much longer? Are these the new housing stocks that go up no matter what bad news? As long as you believe a turn is coming in the 2nd half of 2008 you can buy these and say "yes you must buy when it is darkest". I don't believe in that thesis.
5. Commodities are ballistic. Look, I'm happy with it since we have some exposure there but some of these steel stocks and oil are parabolic. Just like fertilizer was 3 weeks ago when I went cautious. It is now out of the realm of sense and pure speculation in my opinion. Stocks like US Steel (X) now look like Potash (POT). I am very nervous about this group and am considering Ultrashort Oil & GAS (DUG) at least as a trade. Oil looks toppy to me here, and it is a most crowded trade...
   
6. We are now seeing real implications from high oil, steel (more on that this weekend), and commodities onto earnings of producers. Yet no one cares. Buy stocks.
7. The return of speculation in Chinese small caps. I am seeing some old favorites from last October now rising 30-40% in a day. When speculation fervor returns to the "worst of breed", my antenna go up.
8. Gold suddenly woke up from comatose the last 2 sessions? hmmm....
   
9. Complacency is everywhere.
   

Those are a few thoughts among many. While I do believe the Fed induced liquidity (read: inflation) is being pushed into the market and all commodities (including stock certificates) are being pushed to unnatural heights, we have to take 5 steps back and really ask - as earnings DEGRADE and stock prices continue UP, out the window goes the arguement that the stock market is cheap. This is clearly happening in retail now - we are seeing negative earnings growth, yet stock prices jump - same in financials, as equity holders are diluted massively (meaning earnings PER share are handicapped for years) but the stocks go up... so both groups become more expensive.

While our short exposure helped us last week to beat the market by a wide margin, it has evaporated all our gains this week. As much as I like the fundamentals of the commodities, things are now at a level where (in the short run) they are making less and less sense from a valuation perspective. I will say this again - if commodities do continue to increase at this pace, even the emerging markets will be plunged into slower growth and/or recession. And that's been the bedrock saving us, along with the weak dollar. So at this point I've been wrong to turn cautious the past week or so, but I find risks to be very high, so I am holding my ground here. Again, this period reminds me of September/October 2007 when the market went to all time highs in the face of a deteriorating fundamental picture that it chose to ignore. The fallout after that was not positive. The higher we go, the more I am worried we might have a similar chapter ahead of us.

Fluor (FLR) as a Play on Wind? $1.8 Billion says Yes

I get a lot of questions on why I don't invest in wind; frankly there are very few opportunities. Most major players are (a) in Europe (b) part of much larger conglomerates (GE/Siemens) or (c) smallish US companies with skittish histories.

But maybe we already own a wind play. Fluor announced a massive $1.8 billion contract with Scottish and Southern Energy to build a 500 MW wind farm in the ocean off of the UK.

• Fluor said the project would be the world's largest offshore wind farm. Construction work on the offshore site is expected to begin in summer 2009. Work to prepare for an onshore substation has already started. Construction is expected to be completed in 2011.
• The wind farm, which will be off the Suffolk coast of the United Kingdom, will provide carbon neutral, renewable electricity for more than 415,000 homes.
• Siemens AG also signed an 800 million euro deal to supply 140 wind turbines for the project.
• Fluor had been developing the wind project, called the Greater Gabbard Offshore Wind Farm, with Scottish and Southern Energy and had owned a 50 percent stake in the project. It sold its stake to Scottish and Southern Energy for $80 million and will record a one-time gain of 50 cents per share in the second quarter from the sale.

Aside from great news for Fluor (FLR), these are exactly the type of projects the world needs in my "World of Shortages" scenario... unfortunately American leadership is too busy working on corn ethanol initiatives while fighting (every year) over paltry solar initiatives or wind credits. Sigh. Even our nearest cousin, the Brits, have ambitious plans.

• The British government has plans to create 33 gigawatts of offshore wind capacity by 2020, and has welcomed the decision to go ahead with the project.

Even without any vision or assistance from government for things that will pay off over the next 5, 10, 15, 20 years (as opposed to rebate checks that do nothing), the "free market" is trying its best here to struggle through.... but again, I cannot stress enough how the rest of the world forges ahead while we look like an aging running back on it's last legs averaging 2.1 yards per carry with our stupid policies and lack of vision past 1 election cycle. We give more incentives to corporate farmers to not grow crops, and to oil corporations at $125 crude than we do to wind or solar. Smart. Very smart. (and it's not even a green issue, its a we are bankrupting ourselves and/or a national defense issue if you'd prefer!) We really need a money back guarantee on these people in D.C. When a flipping OILMAN is leading your green movement, you know you have problems of economic incentives and vision by government.

• Maverick oilman T. Boone Pickens has placed a $2 billion bet on wind power in just the first of a four-phase project to build the world's largest wind farm in Texas.
• Pickens said the total cost of the deal will grow considerably after the initial investment in General Electric Co. turbine technology.
• Pickens' Mesa Power said the Pampa Wind Project in the Texas Panhandle will eventually cover 400,000 acres and generate enough power for more than 1.3 million homes.
• Power from the project will begin coming on line in early 2011, he said. GE is expected to deliver 667, 1.5-megawatt wind turbines in 2010 and 2011.
• But the industry has relied on federal tax credits to survive, a point Pickens underscored Thursday. "I believe that Congress will recognize that it is critical not only to this project, but to renewable energy in this country, that they enact a long-term extension of the Production Tax Credits," Pickens said. (not at $80 oil, but maybe at $120 they'll do it... i.e. when their constituents raise hell over $4 gas)
  

Long Fluor in fund; no personal position

Reader Investment Pledges mid May Update

Time to do our monthly check in on the real function of this blog (aside from the daily entertainment, the laughs, the crys, and the money making ideas). This month we have some good news and some really good news.

Let's start with the good news... I've spent some time the past month speaking to a gentlemen who runs a small fund he started from scratch, and through resources he put me in contact with (who specialize in smaller independent funds), the 'launch costs' and 'break even costs' are going to be lower than I first anticipated. So this was very fortunate and due to this development I'm going to change my headline title from "need to raise $12M" to "need to raise $7M", although somewhere in the mid $3M to mid $4M range I will begin to get serious about actually taking the next steps.

Now on to the really good news - the past month was a bonanza in terms of pledges - we've been at a run rate of $200-$225K a month or so, but we doubled that this month and $421K was pledged. This came from both new (future) investors and a lot of people who made an initial pledge earlier in the year but have come back after watching the progress and reading the blog, and feel more comfortable committing more. So once again, as always, thanks for that trust.

I often get emails of "when will you actually start" and my answer is "I don't know, it is not up to me"; when I get to a pledged asset base where I feel comfortable I won't be taking a huge bath in year 1, than we'll move to the next steps of launch. I've pegged that at roughly $3.5-$4M so we are almost half way there. The good news is, if the pace continues at +$200-$225K/month, we'll be talking about an early 2009 launch instead of 2011 as first estimated (or hoped). But how much is pledged each month is a variable that is impossible to project.

Web traffic continues to increase and now we are averaging about 2000-2100 visits on most weekdays; and we've broken into the top 200K on Alexa rankings. Still gunning for Google at #2 ;) As always more readers should lead to more future investors as long as I do my part.

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

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

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

Totals
January 7, 2008 = $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008 (click here for full post): $1.19M raised
May 15, 2008: $1.61M raised

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

Amount	Who	Where
$75,000	Self	MI
$2,500	Michael D	Oceanside, CA
$7,500	Oth	Parts Unknown
$10,000	Dean D	San Jose, CA
$2,500	Oza P	MA
$20,000	Oren L	Chicago
$10,000	Rob T	NYC
$5,000	Ryan	Seattle, WA
$7,500	Ted	Sunnyvale, CA
$2,500	Brian P	Cerritos, CA
$50,000	David B	Middlesex, NJ
$50,000	Ian M	San Antonio, TX
$40,000	"LiquidWindows"	Deep in heart of TX
$5,000	Jonson	LA, CA
$5,000	Jimidean	Parts Unknown
$3,000	Brooks R	Baton Rouge, LA
$5,000	Zlatanscores	Parts Unknown
$3,000	Ben S	Portland, OR
$20,000	Sheng S	Omaha, NE
$10,000	msuberri	NJ
$5,000	David W	Houston, TX
$10,000	Ryan T	NJ
$3,000	NandaK	Nashua, NH
$10,000	WaltF	Louisberg, KS
$2,500	Joe	Scranton, PA (email)
$2,500	Todd	Nashville, TN (email)
$250,000	David R	South Carolina (email)
$100,000	A.F.	Los Altos, CA (email)
$50,000	Satya	Temple City, CA (email)
$10,000	Bobby L	San Jose, CA
$200,000	Ganesh S	Bellevue, WA
$2,500	Michael A	Charleston, SC (email)
$2,500	TJP	Sterling, IL (email)
$75,000	Bob B	VanBuren, AR (email)
$10,000	Pat L	Tuscon, AZ (email)
$25,000	Art H	Auburn, CA (email)
$5,000	Dan D	Augusta, GA (email)
$5,000	Jeffrey H	Greensboro, NC (email)
$50,000	Tom L	San Fran, CA (email)
$10,000	Wesley W	San Jose, CA (email)
$10,000	Tom S (daKat)	Minneapolis, MN
$5,000	Dan W	Mentor, OH (email)
$10,000	Jim G	Marana, AZ (email)
$5,000	Andrey G	Baltimore, MD
$20,000	Doug M	San Fran, CA (email)
$75,000	"Skooker"	Boise, ID (email)
$3,750	Brian C	Milwaukee, WI (email)
$2,500	Jason F	Big Apple, NY
$3,000	Chung W	San Jose, CA (email)
$3,000	Mac	Bellevue, WA
$10,000	BMW	Bay Area, CA (email)
$10,000	"steelelana"	NY
$10,000	"Jpassana"	Parts Unknown
$5,000	Brian J	Racine, WI (email)
$5,000	Ceferino J	Parts Unknown (email)
$10,000	Link M	Knoxville, TN
$5,000	Pankaj	Forest Park, OH
$20,000	Alex A	Big Apple, NY
$100,000	D.K.	Los Altos Hills, CA (email)
$20,000	Roger B	Arlington TX
$20,000	Rohit S	Chicago, IL
$5,000	Praveen K	Somewhere in Kansas
$25,000	Robert D	Niantic, CT (email - IRA)
$25,000	Scott R	Longbranch, WA (email)
$7,500	Roy S	Knoxville, TN (email)
$25,000	Douglas D	Atlanta, GA (email)
$10,000	Mahender B	Crofton, MD (email)
$1,611,250

Bookkeeping: Closing LDK Solar (LDK)

After the earnings report (solid) and guidance (not so much) from LDK Solar (LDK) earlier this week, I cut back my stake. I've decided to sell out completely today for a few reasons. First, the sophistication level in solar seems to not be so high so these stocks all trade in tandem... if company A reports a bad number they all sell off, or if company B reports a good number they all go up. So in some ways a basket approach is a bit useless. Second, I think LDK Solar is more of a late 2008 to mid 2009 story so I'll revisit it then. While it can jump in the meantime (up), I believe it will just be due to the sector and not anything specific to the company, so I can get that same 'sector' exposure through other names (with less headwinds). I want to keep my solar exposure (allocation) consistent - and I've piled a lot into Trina Solar (TSL) due to its valuation and prospects the next few quarters. I'd rather own more Trina, than put that same money into LDK Solar.

Now we do have some risks owning Trina as well, as (1) the market is well overdue for a correction (2) the solar sector has exploded and is due for its own correction and (3) Chinese leader Suntech Power (STP) might have a bad quarter due to some company specific situations and it reports next week (Trina is not out with their date but they report next week as well)- and as I said above, when 1 name has a bad quarter people trash the whole sector, regardless of individual fundamentals.

So while I've moved Trina Solar up to the top stake in the fund, I've cut back elsewhere to keep my allocation flat. At this point Trina Solar could gain 100% from here, and only trade at par with valuations of its peers such as Suntech Power (STP) or Yingli Green Energy (YGE) - this is why I am willing to hold it even though the above 3 conditions could lead to a sell off in the name. It's valuation is just that compelling, and it is being missed by the market. So as a warning ahead of time, we might take some losses in the near term (weeks) from this position but I think by end of year 2008 this will be a huge winner, and when I think of applying new money to the sector I'd rather go there instead of LDK Solar. With earnings from Trina coming in a few weeks I'll know shortly if this thesis is correct; but I'm going to a more narrow focus in the sector (less names). Once again let me stress this sector has come a long way in a short time and all the names are at risk of substantial pullbacks - and when this group pulls back it does not mess around - 25-30%+ pullbacks are the "norm".

I'm selling the last 150 shares of LDK Solar around $36.00; this has been one of the fund's biggest losers [Top Fund Winners and Losers] and I've owned it since Aug 30, 2007. I do believe it will have a nice 2009, but the chart below shows how it has done since September 07, and how difficult it has been to make money in this name.

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

Bookkeeping: New Position Started in Perfect World (PWRD)

I am beginning a stake in Chinese gaming company Perfect World (PWRD) in the $30.70s. I tried to buy this 2 days ago near $29 but Marketocracy.com did not have it in their database (ugh). So now it is ready to be bought, so I'm paying up 5.8% from where I had wished.

Perfect World is part of a cohort of Chinese gaming companies (some others include Giant Interactive (GA), Netease (NTES), and Shanda Interactive (SNDA)) Unlike American video games I don't have any sophistication or window into which games actually will be the big winners since many are based on domestic folk lore/tradition and the like. Not being a 14 year old Chinese teenager, I don't have that knowledge base. So I don't which company will have the "hot games" but I like the space, and I chose Perfect World vs peers for some other factors

1. lower end of valuation on forward estimates vs peers
   
2. smaller share count versus peers (which means any incremental revenue gains will be better reflected in earning PER share) and
3. (as of Tuesday) it had fallen back to a key support level. (which it has since bounced off)

But I'd be lying if I said, I clearly see their games as superior to any peer. But the model is very interesting - most of these games are "free" to play but you pay for items within the game.

I own Sohu.com (SOHU) which is part 2nd tier search engine and part gaming; the gaming arm was the hero last quarter so this is yet another reason to be interested in this sector. [Apr 28: Sohu.com Crushes Estimates - Up 15%] Sohu.com has put on a 50% type of move within a month.

Even here at $30-$31 the stock trades 18x 2008 estimates, for 30-40% type of future growth (could be much higher, I'm being conservative). These names are very volatile and an earnings miss has the potential to drop them 30% overnight - Perfect World reports next Monday - I believe there is however a good chance we could see a very good upside surprise. But I am not going all out and starting with a 600 share buy or about 1.6% of portfolio. If I'm wrong and we have some miss, I'll be happy to buy lower as the earnings story should not change in the future.

Other benefits; this is a much smaller company than we typically own at a $1.6 Billion market cap (gives us some more small cap exposure and smaller companies are always easier to grow faster), and it is not related to commodities so it continues the plan to find good growth stories that diversify away from that theme (so when the market trashes those groups, which is long overdue, we have some things that are immune). Last, it continues our theme away from the United States of Subprime - we are going to a country where the average consumer is becoming richer, not poorer.

Here is a summary of their last earnings report

• Chinese online gaming company Perfect World Co. said Monday that it swung to a fourth-quarter profit and beat analysts' estimates as online game operation revenue jumped, aided by the launch of some game expansion packs.
• For the quarter that ended Dec. 31, Perfect World earned RMB 146.2 million ($20.1 million), or RMB 2.48 (34 cents) per ADS. This compares with a loss of RMB 11.1 million, or RMB 0.43 per ADS, in the same quarter last year. In the most recent quarter, Perfect World used a much greater number of share to calculate its earnings on a per-share basis. Analysts polled by Thomson Financial expected, on average, a profit of 27 cents per share on $29.8 million in revenue.
• The company's revenue rose to RMB 258.4 million ($35.4 million) from RMB 60.8 million in the year-ago quarter.
• The company also said the number of active paying customers for games that follow its item-based revenue model rose to 1.6 million -- up 159.9 percent from the year-ago quarter.

Long Perfect World in fund and personal account

Petrobras (PBR) Hordes the World's Deep Sea Water Drillers

Wow, interesting factoid this morning via Bloomberg - Petrobras (PBR) has leased 80% of the world's deepest sea drilling rigs. I mentioned when I sold off Diamond Offshore Drilling (DO) I was very interested in moving that money (on a pullback) to Noble (NE) due to its Petrobras connection [Apr 25: Bookkeeping: Selling Diamond Offshore Drilling - Will buy Noble Later] but frankly it looks like every driller is going to have a Petrobras connection at this rate. Again, Petrobras in my book, will become the largest company (by market capitalization) on the planet (surpassing Exxon) [May 13: Petrobras (PBR) Business as Usual]

Why do we care about this news? We like... no... love shortages (as investors). Shortages create higher prices. Shortages of deep sea rigs mean higher prices for rig operators - think Transocean (RIG), Diamond Offshore (DO) and Atwood Oceanics (ATW) specifically. Also some Pride International (PDE) and Noble (NE) thrown in there....

• Petroleo Brasileiro SA, Brazil's state-controlled oil company, leased about 80 percent of the world's deepest-drilling offshore rigs to explore prospects including the Western Hemisphere's biggest discovery in decades.
• Petrobras, as the Rio de Janeiro-based company is known, is hiring rigs that can drill in at least 3,000 meters (9,800 feet) of water, Chief Executive Officer Jose Sergio Gabrielli said in an interview last week. The world has 21 such vessels, according to Rigzone.com, which tracks the offshore drilling industry.
• The company's ``insatiable'' demand is forcing producers including Exxon Mobil Corp. and BP Plc to pay more as they compete for the remaining units, said Kjell Erik Eilertsen and Truls Olsen, analysts at Fearnley Fonds AS in Oslo. Explorers that don't have rigs under contract may delay projects or pay rents of more than $600,000 a day.
• Petrobras is negotiating for as many as 17 more vessels to probe the Tupi discovery and neighboring fields, said Bill Herbert, an analyst at Simmons & Co. International in Houston. The company already controls almost seven times as much capacity as the next biggest user of rigs that can drill in 7,500 feet of water, according to research by Dahlman Rose.
• U.S. and European oil companies probably will pay $50,000 more per day to lease deepwater rigs during the next three years because Petrobras has already contracted for so much of the worldwide fleet, Nokta said. Such units are designed to cope with high seas and hold equipment needed to bore beneath the seafloor and identify oil and gas deposits as much as 6 miles below the ocean surface.
• Petrobras has signed leases this year for six deepwater rigs, more than twice as many as any other producer, according to Dahlman Rose. The contracts have an average duration of five years and four months at rates of $410,000 to $580,000 a day.
• Exxon Mobil leased Seadrill's West Polaris unit last month for $600,000 a day, Nokta said. BP agreed on May 1 to pay $540,000 a day for a Pride International Inc. drillship, $60,000 a day more than the company committed to three months earlier for an identical Pride rig, he said.
• Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico's 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, Gabrielli said.

Folks we are not running out of oil; but we are running out of oil at easy, cheap to get to places. Much of Petrobras' discovery is in oceans at depths of 4-5 miles. Very few rigs on the globe will have capability to drill there. Most large caps mutual funds out there are loaded with the Exxon's (XOM) of the world (yawn) - they are stuck in the 1990s, and own an asset that is only benefiting from higher crude prices - not an ability to meaningfully expand production in the coming decade. The 2010s will be Petrobras era; that's what they should be owning. But they are, as always, behind the curve.

And for investment, you simply must own these deep sea oil drillers - I believe both Atwood Oceanics and Pride International will be bought out within 18-24 months, the latter already looks well on its way [May 2: Restarting Pride International as Takeover Bait]

That said, the next time crude corrects to $110 you will see all these stocks hammered as if the next 3-5 year story is over. That's lemmings for you.

Long Petrobras, Pride International, Atwood Oceanics in fund; long Pride International in personal account

Bookkeeping: Cutting WuXi PharmaTech (WX) to Almost Zilch

WuXi PharmaTech (WX) is a small position that has languished for a long time that has popped severely the past 2 sessions - I don't see any news but maybe good news about earnings at the end of the month is leaking out. Either way I am going to cut this position to "tiny" (sub 0.1% stake) and buy back on any material pullbacks. That said, for the first time in eons the chart is looking nice, but we have a 30% pop in just a few weeks so I'm going to lock it in.

This is one of the contract research organizations, a sector I really like, but based in China where it should have a major labor cost advantage. Selling in $23.20s; so far this stake has been a money loser for the fund. [Nov 2: Two New Foreign Positions Added Today] Luckily the other name I bought on the same day in early November has been a huge winner for us.

Long WuXi PharmaTech in fund; no personal position

Ctrip.com (CTRP) Down on Earnings - I'm Buying

I sold out most of my Ctrip.com (CTRP) in early May in the upper $60s as the stock had made a huge run. [May 2: Bookkeeping: Cutting Ctrip.com to Almost Nothing] The company posted very good earnings but some vague future guidance has the stock down 10%+ this morning to the $56 range, so I am going to buy back what I sold off here in the $56-$58 range. This allows me to get back the shares I sold off for a 14-16% discount from where I sold them not 2 weeks ago. I still find the valuation hard to swallow but this company has been a personal favorite for years and is never "cheap". If the stock falls to the lower $50s I'd increase my position more.

I've increased my stake from 0.1% of portfolio to 1.3% with this AM's purchases.

• Chinese travel Web site operator Ctrip.com International Ltd. said Wednesday its first-quarter profit jumped on higher airline ticket sales.
• Net income rose 52 percent to 98.8 million RMB ($14.1 million), or 1.43 RMB per share (20 cents per share) from 64.9 million RMB or 0.96 RMB per share.
• The company said it earned 27 cents per share excluding expenses for stock-based compensation. Analysts polled by Thomson Financial expected profit of 18 cents per share, including stock-based compensation expenses, on sales of $46.5 million.
• Sales rose 47 percent to 366.7 million RMB ($52.3 million) from 249.2 million RMB.
• Chief executive Min Fan said the company was able to achieve strong results despite challenging weather conditions. Several analysts noted that the company was hurt by snowstorms in the first quarter.

Looking forward

• Citi analyst Catherine Leung maintained her "Buy" rating and said the company had a very strong first quarter. However, she said the company was meeting turbulence in the second quarter, primarily because of the recent earthquake in western China.
• Shares of Ctrip.com International Ltd. plunged Thursday after Chinese travel Web site operator lowered its second-quarter outlook, primarily because of the earthquake that struck western China Monday. The company said late Wednesday it expects growth of 30 percent, compared with a previous estimate for growth of 35 percent.

Well the earthquake is an issue, but it's a natural disaster, not something that is a Ctrip.com operational issue. Hence it means very little in the long term scheme of things. But the market, as always, overreacts to 90 day periods of time (the quarter) so we got a nice plunge to reacquire our stock position at a lower cost basis. Thank you market.

Long Ctrip.com in fund and personal account

Yingli Green Energy (YGE) Reports Good Quarter

The stock of Yingli Green Energy (YGE) is all over the place this morning, opening up in the $27s, then falling to the $25s and now in the $26s. This is what happens when hordes of speculators jump into a stock only for an earnings trade. I am looking over the earnings released this morning and it looks quite solid to me on first glance, with the all important gross margins coming in at the 24% range. Sequential revenue growth was only 9% but that is more of a capacity constraint issue, rather than anything to do with demand.

Either way they crushed the analysts expectations for earnings (part of it was currency exchange of course), but since they only guided "in line" for the future in terms of revenue perhaps that is leading to the see saw action this AM. Who ever really knows; it makes little sense to me. The key (to me) is maintaining gross margins and profitability - on both those counts Yingli scored very well. Also nice to see some new markets open up, France and South Korea (the United States is still nowhere to be found as we are too busy promoting corn ethanol) I have cut back this position for now as its now full of speculators and daytraders, and I was able to lock in some very good profits, and moved on to other fare in the sector with better value. But I'll rebuild this position on the next selloff.

• Total net revenues were RMB 1,595.0 million (US$227.5 million), an increase of 9.8% from RMB 1,453.2 million in the fourth quarter of 2007 and an increase of 272.2% from RMB 428.6 million in the first quarter of 2007.
• Gross profit was RMB 392.3 million (US$55.9 million), an increase of 9.1% from RMB 359.6 million in the fourth quarter of 2007 and an increase of 337.8% from RMB 89.6 million in the first quarter of 2007.
• Gross margin was 24.6% in the first quarter of 2008, in line with 24.7% in the fourth quarter of 2007 and an increase from 20.9% in the first quarter of 2007.
• Net income was RMB 223.5 million (US$31.9 million), an increase of 61.5% from RMB 138.4 million in the fourth quarter of 2007 and an increase of 2,580.5% from RMB 8.3 million in the first quarter of 2007. Fully diluted earnings per ordinary share and per American depositary share (“ADS”) were RMB 1.73 (US$0.25), compared to RMB 1.07 in the fourth quarter of 2007.
• “Our results largely demonstrated the successful execution of our vertically integrated strategy at the operating level and growing demand for our products in our end markets, including Spain, Germany, the United States and Italy, as well as new and emerging solar markets such as Korea and France.
• Our commercialization of 180 micron wafers at the beginning of February 2008 illustrates our strong capabilities in R&D.” (this is key, down from 200)
  
• “I am also very pleased that our expansion plan remains on track and that we currently expect to be able to achieve production capacity of 600 MW before mid-2009, ahead of schedule.

Key comments on gross margins

• As a result of a higher average selling price compared to the fourth quarter of 2007, the lower polysilicon usage per watt resulted from successful research and development efforts and the lower processing cost attributable to continuous improvement in operational efficiency of the Company’s vertically integrated business model, the Company was able to maintain its gross margin despite an increase in the average cost of polysilicon in the first quarter of 2008.

Guidance

• PV module shipments in the estimated range of approximately 255 MW to 265 MW, which represents a 78.9% to 86.0% increase compared to 2007.
• Net revenues in the estimated range of approximately US$969 million and US$1,020 million, which represents a 74.1% to 83.3% increase compared to 2007.

And as I typed this entry, the stock is already back to the mid $27s range... daytraders are having a fun time. Bottom line for us - this is solid execution and a company following through as promised. The day to day stock machinations we cannot control.

Long Yingli Green Energy in fund; no personal position

Some News Highlights

Here is what I'm reading that you may or may not find interesting...

• Fortune believes the next President could obliterate the auto industry as we know it with new fuel standards... coming from Michigan all I can say is ... the hits keep coming. "He or she will have the power to enact unbearably strict fuel economy standards on the cars and trucks sold in half the country. By so doing, he could render vast swaths of the current car and truck lineup obsolete and doom their manufacturers to the scrapyard."
• Bank of America, the nations largest consumer bank, says losses on home equity loans will be even worse than they predicted.... 3 weeks ago. How quickly things are degrading in the real economy and more specific to stock investing, the Kool Aid continues to be drunk as reality continues to hit these companies. Key takeaway? Something we've been saying for a long while "More customers are under financial stress and using credit cards to pay for necessities"
• Polar Bears are newly designated as endangered. Why do you care? More obstacles to any new energy exploration in the Arctic.
  
• Recession? Not so fast says the Wall Street Journal, citing big bank economists - the same economists who were not even calling for any recession until December 07 or January 08. Ironic, eh? Most of this story focuses on how much "better than expected" the government reports are, and how helpful the Federal Reserve has been :) I'll leave it at that.
• The TelegraphUK disagrees saying the global slump of 2008-2009 is just beginning. The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year. As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world. Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.

Let me pull out an interesting quote from the Telegraph story

• "Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
• "We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
• Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.

Conclusion: So this is where I buy stocks, right? I mean "it's all priced in" Damn I hate these UK newspapers full of reasonable conclusions and gravitas. Give me some Larry Kudlow! Not one mention of Goldilocks in that article is unacceptable.

• China's Earthquake Exposes a Widening Wealth Gap - something I believe is happening in more and more countries (including ours) and will cause more and more social acrimony globally in the years/decades to come. The global have's and have not's.
• One of my favorite topics is the slew of executive perks that never get reported and/or if the common public really knew about they'd be shocked. The real estate meltdown is exposing yet another - the fact companies are picking up the tabs for executives homes during recruiting or relocations. Can't sell on the open market? No problem - we have a ready buyer: the corporation - even if said corporation needs to turn around and sell it on the free market for a large loss. Remember, these are already the most well compensated folks in America even without the perks. (one of my favorites is CEOs telling the companies to pick up the tab for their income taxes - guys making millions, hundreds of millions who won't pay the $10, $20, $30K it takes to do their taxes) "Other shareholders are in for similarly rude shocks this spring, as companies disclose sizable bills to cover real-estate losses of transferred senior officers. At least eight companies say they've spent $500,000 or more to help an executive sell a former residence."
• The weak dollar claims another victim - American students studying abroad in Europe. Many other college students, hit by sticker shock, also are steering clear of Western Europe, especially the United Kingdom, and opting for study-abroad programs in Asia, Africa and Latin America.
• Toll Brothers CEO says there is no spring homebuying boom as we were promised last fall... because you see, last fall people were saying everything would be fine "in 6 months"... and here we are 6 months later. No recovery. But we are assured once again, it's going to happen.... "in 6 months". We'll see you in November when we're laughing at the same garbage. At which point they will be pointing to spring 2009 as the turnaround for housing, because (ding ding) that is 6 months after November. And so we'll keep going into the squirrel eventually finds a nut.
• Although America is the one country on Earth with no inflation, our closest cousin (finance based, asset based, debt ridden) the UK has leaders who actually expect inflation to accelerate. Again, let's thank our lucky stars as Americans we don't have to deal with these issues. Whew! The Bank of England painted a bleak picture of Britain’s economy on Wednesday, saying that it expected inflation to accelerate, making further rate cuts unlikely. The Bank of England painted a bleak picture of Britain’s economy on Wednesday, saying that it expected inflation to accelerate, making further rate cuts unlikely.

• Nissan is bringing an electric car to the US by 2010 - much needed and the type of technological breakthroughs we need to help with the "World of Shortages" coming ahead; GM's Volt is also coming that year. And while "free market" people (who love free markets until they go wrong and then they ask for government handouts) believe incentives are evil, the Israeli government shows that sensible incentives that help the greater good (as opposed to whomever is lining politicians pockets) can actually lead to positive outcomes; just another example of our government is now at the point where it is literally hurting us, not being "neutral" as it used to be (or for god sakes helping us) In this country we are still fighting off solar incentives (because there is no solar lobby) but giving $300B to large industrial corporate farmers. Mr. Ghosn, who also serves as chief executive of Renault, said the Israeli government would encourage sales of electric cars by sharply cutting taxes to levels below those on gasoline-powered vehicles. “We would never have done this if the Israeli government was not encouraging it,” he said. “Whoever puts the most incentive on the table is going to get the technology first.”
• Speaking of said farming bill - any presidential veto will be overturned by our grubby Congress. The House overwhelmingly approved a $300 billion farm bill on Wednesday afternoon, making it probable that the measure will become law despite President Bush’s anticipated veto. Among other things, Wednesday afternoon’s vote reflected the desire of many lawmakers not to oppose a politically popular bill in an election year. Unlike some House members, every senator has constituents who are farmers, so support is believed to be even stronger in that chamber, which is likely to vote before the end of the week.
• That stimulus check that is propping up stock prices in retailers, restaurants, and other early cycle stocks as each company claims THEY are going to see a big push from said money? Ah... as predicted it's going to go mostly go to (1) pay for gas (2) pay for food and (3) pay for debt. The latter would never happen unless Americans were truly scared and/or tapped out. Somehow I think Walmart will end up getting 20-30% of all this money, which we can send to China. So let's review, we borrowed money from China in the form of Treasury Bills so we could place more debt on the shoulders of our grandchildren. Then we give that money (borrowed from China) to Americans, who temporarily hold it for a few days/weeks, before spending it at Walmart, who sends the money back to China to pay for the goods they sold to Americans. Do you see how it is so ironic? And why we are in such trouble here. So let's clap like seals as we await the next "stimulus plan" which I believe will be sent to Americans by this fall/early winter. So we can repeat the same thing again.
  

• And let's finish with this somewhat funny (funny only in the quotes) about the Indian backlash to some recent comments from American leaders, that in Indians' eyes points the finger of rising food costs at them.... instead of say a Federal Reserve printing money like a madman, a corn ethanol boondoggle, a total lack of vision or investment, farm bills that pay farmers to not plant, high tariffs that keep out sugar cane ethanol (by the country that promotes "free markets" in all its literature), etc. No, it's the Indians fault :) I could go on... but let's see what the Indians think. Is there any country this administration has not been able to offend? This is very similar to a country with 5% of the world's population that uses 25% of its energy, blaming others for high costs... par for the course. But our circus act is going to fall on deaf ears as each year passes and our impact on global GDP and decision making lessens. Oh, Bush.
  

Instead of blaming India and other developing nations for the rise in food prices, Americans should rethink their energy policy — and go on a diet. That has been the response, basically, of a growing number of politicians, economists and academics in this country, who are angry at statements by top United States officials that India’s rising prosperity is to blame for food inflation.

Pradeep S. Mehta, secretary general of the center for international trade, economics and the environment of CUTS International, an independent research institute based here, said that if Americans slimmed down to the weight of middle-class Indians, “many hungry people in sub-Saharan Africa would find food on their plates.” (nice!)

He added, archly, that the money spent in the United States on liposuction to get rid of fat from excess consumption could be funneled to feed famine victims. (snap!)

Mr. Mehta’s comments may sound like the macroeconomic equivalent of “so’s your old man,” but they reflect genuine outrage — and ballooning criticism — toward the United States in particular, over recent remarks by President Bush.

In response to the president’s remarks, a ranking official in the commerce ministry, Jairam Ramesh, told the Press Trust of India, “George Bush has never been known for his knowledge of economics,” and the remarks proved again how “comprehensively wrong” he is. (ouch! and I cannot think of a better way to end a blog entry!)

ok ok, I could not end there - a few more....
The Asian Age, a newspaper based here, argued in an editorial last week that Mr. Bush’s “ignorance on most matters is widely known and openly acknowledged by his own countrymen,” and that he must not be allowed to “get away” with an effort to “divert global attention from the truth by passing the buck on to India.”

There may be some foundation to Indians’ accusations of hypocrisy by the West. The United States uses — or throws away — 3,770 calories a person each day, according to data from the United Nations Food and Agriculture Organization collected in 2001-3, compared with 2,440 calories per person in India. Americans are also the largest per capita consumers in any major economy of the most energy-intensive common food source, beef, the Agriculture Department says.

Food prices have not been rising continually as developing nations grew.....“They were static until 2006, then in 2007 and 2008 there was a sudden spark,” he said. But India has been growing for the last decade. This is “not last year’s phenomena,” he said. (I'm sure it has nothing to do with flooding the world with US paper currency, as the Fed was cutting rates, causing every country on the globe pegged to the dollar to also have to cut rates and flood the world with more paper currency to keep their dollar peg.... nope, nothing to do with that. Or corn ethanol. Nope - I say blame the Canadians.)

Ron Paul Fox Business Interview David Asman 05/13/2008

Tell them Dr. Paul... one day they will look back and see how correct you were. 8 Minutes worth your time.

Bookkeeping: Selling some Lennar (LEN)

Why do I own homebuilders? Only because they go up on great news like foreclosures accelerating.

• Foreclosure activity in April--that’s default notices, auction sale notices and bank repossessions (so yes there can be more than one hit on the property, but we look at the total percentage increases)--was reported on 243,353 properties. That’s a 65% increase from April of 2007.
• "In states like Michigan, we’re hearing from some of the trustees who actually do the foreclosures that the lenders have asked them to slow down because they don’t want to process any more into a market that won’t absorb the properties back through sales," says Rick Sharga of RealtyTrac.
• In Florida, a St. Lucie County court actually added a night shift to handle the massive backlog of foreclosure filings. The clerk of the courts was quoted as saying the caseload has become, “just horrendous.” The court used to handle about forty filings per month.
• The folks at RealtyTrac, and granted these folks list foreclosed properties for a fee, say they don’t believe we’ll see the numbers start to slow until the second quarter of 2009.
• All those foreclosed homes on the market will continue to push inventories up and push prices down in neighborhoods across the country. (Bingo)
  

I don't have any good explanation and I don't believe we have any home market calm until 2010, but the stocks stopped going down on bad news late fall/early winter 2007, so you have to respect it. [Apr 29: Housing Stocks Continue to Ignore the News] What I do is buy these stocks when they falter a bit, and inevitably as hopes increase and Kool Aid flows they go up, so I cut back. They've actually turned into some great trading stocks; so I keep doing the same trade over and over, and it works... the key here is we are getting higher highs and higher lows in a general sense. Or at least the lows are not lower. Today an analyst came out and said not so nice things but hey the stocks rallied because (all together now) "it's all priced in"

• In a client note Wednesday, Wachovia Capital Markets analyst Carl Reichardt said he expects hyper-competition among builders, limited mortgage availability, high supply and buyer fear to keep home sales and margins depressed throughout the year. (but other than that, this is a great story)
  
• However, he believes builders' stock prices already account for this dismal outlook.

Also remember, that Congress, who was threatened by the homebuilding lobby that they would stop paying them ... err contributing to their political coffers, if they did not get relief flew in with a "stimulus" package for the homebuilders under the guise of a Foreclosure relief act.... so yet another reason to be bullish on these guys. [Apr 4: Congress is Rushing to Help Home Owners!! (Not)] Congress could care less about the peons but once the homebuilders threaten to stop contributing to their campaigns, well then that gets them working hard and passing bills in record time... Boo Yah. Who said Congress cannot work hand in hand across the aisle? When their money supply is threatened they all come together very well in concert! Cramerica - for the corporation by the corporation. Let's review - bailouts for banks, bailouts for homebuilders, and more inflation for you, the consumer. Ahhh... nirvana. Why should stocks not go up in that environment? :)

I am selling 400 of my remaining 1000 shares of Lennar (LEN) here near $20 - I missed buying more on the last dip (near $18) since I was concerned that the stock market might actually go down... haha, that's almost funny in retrospect. (stocks rarely are allowed to go down in socialized markets, and when they are its only temporary). And the next time these stocks dip, I'll buy again and replace these shares because... well the stocks keep rebounding and showing good strength. It's as simple as that sometimes. I'll sell more if we trend towards $22...

Conclusion: Housing stocks.... mmmm...mmmm... good.

Long Lennar in fund; no personal position

Whole Foods Market (WFMI) CEO at a Loss of Why Sales are Slowing

If someone could direct the CEO of WFMI to my blog, it might help open his eyes - stock is down 12%, granted I wrote this Sunday and it's a bit frightful to short anything into earnings because people love to play the "the news is terrible but not as bad as expected" but as I wrote

Speaking of which one of my favorite short ideas (although its scary to short these into earnings because of the "hey its a terrible number but we expected abysmal so take this stock up 30%!) of this Walmart nation is Whole Food Markets (WFMI) - I expect economic reality to push people out of healthy organic foods back into junk or lower cost food (read: cheap) so a lot of formerly upper middle income people will be forced out. That's pooring of America 101 - and a threat to WFMI the next 2 years.

I've flagged this name and many others like it since last summer and we did a revisit on all the themes that (once Kool Aid wears off about any 2nd half recovery) are going to once again be good shorts, just like they were in the fall [Apr 14: Holy (Holey?) Crocs!]

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising]

It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go. I was looking at a chart of Whole Foods (WFMI) and that's a perfect candidate - its held up "ok" because it relies on the upper middle class who can afford to pay $7.00 for organic milk. Well, when economics start to hit, people are going to have to stop being so "healthy" and buy what they can afford. That's just reality. Hence this looks like the prototypical short. As is Harley Davidson (HOG) [Jan 25: I Can't Believe this Pig...err HOG was up Today] [Sep 7: More Retail Tells? Harley Davidson and Office Depot], as is just about every restaurant in America [Sep 19: Tough Times Ahead? Restaurants] - even magical Chipotle Mexican Grill (CMG), as if just about every retailer in America ex-Walmart (WMT), etc.

Nothing has changed... but the CEOs apparently don't seem to understand their own market

• Shares of Whole Foods Market Inc. tumbled more than 12 percent Wednesday after the organic and natural foods retailer's first-quarter profit fell and missed Wall Street estimates.
• The company reported higher same-store sales, but growth wasn't as strong as recent years and continued to weaken through early May.
• Chief Executive John Mackey said he didn't know why sales growth slowed but it could be due to the weakening economy and tougher competition.
• Edward Aaron, an analyst with RBC Capital Markets, called the same-store numbers disappointing and said they seemed to weaken as the past quarter evolved. He said the results confirmed his belief that traffic in the stores has slowed due to the economy.
• Goldman Sachs analyst Simeon Gutman said it appeared to be the first time in recent memory that economic trends were hurting Whole Foods sales.

Again folks, full year 2008 estimates for many stocks are simply wrong across the board (much too high on hopes for a recovery coming in 2nd half 2008) - so as stocks prices levitate or even stay FLAT and earnings DEGRADE over the coming quarters, stocks become more expensive. That can continue indefinitely I suppose but at some point people will need to wake up and ask themselves why they are paying MORE for stocks whose earnings are degrading, falling. At that point - the stocks will fall. And I don't believe it will be pretty. But until we reach that tipping point of reality - the Kool aid continues to flow.

I've written as well, I believe discretionary entertainment will also take a hit (ex video games) - RVs, boats, even sporting events ALTHOUGH most sporting events are now populated by the upper 10% whom this slowdown will hit last, and corporations. But I just cannot imagine the average football game where parking is $30, concessions are $50 for a family of 4, and tickets are $150-$200 being at top of mind for the bottom 80% in this country. Things like NASCAR which caters more to middle America will take a hit. [Apr 22: Coach with Interesting Report]

Coach (COH) is a name I always like to watch as a "tell" on the upper middle income US consumer in our conspicuous consumption culture - it is sort of in the same pan as Harley Davidson, speedboats, and Whole Foods (WFMI) - luxuries we don't need but we love our toys/excesses.

The RV story is already coming home to roost per the Wall Street Journal (as are boats) Some more shorts, I would not be surprised to see bankrupt within 2 years.

• Two of the country's largest recreational-vehicle makers, pummeled by high gasoline prices and the slumping housing market, face serious cash crunches and are taking drastic measures to ease the strain.
• Coachmen Industries Inc., whose sales have declined 40% over the past three years, is borrowing against the value of life-insurance policies it holds on employees and retirees.
• Fleetwood Enterprises Inc., which has posted five straight years of losses, recently sold its Riverside, Calif., headquarters and is seeking buyers for other properties, in an effort to raise $100 million to finance a looming bond redemption. In addition to RVs, about 25% to 30% of Fleetwood's business comes from mobile homes, a market that has been skidding even longer.

Conclusion #1: One day when I have a long-short hedge fund I will actually be able to make money off these short ideas. We had some great retail/restaurant short ideas in the fall that went into the ether.

Conclusion #2: Don't worry about anything I typed above or have been typing since last summer. Everything will be fine "in 6 months", and inflation will disappear - no wait, inflation never arrived - so it could not disappear since it was never here. Either way, ignore everything and buy stocks. The hedge fund computers are doing it, so you should too.

Deere (DE) Earnings - Why I'm Avoiding Equipment Stocks

On this week's earnings preview I wrote this in regards to Deere (DE):

Major ag equipment player Deere (DE) - I don't own the equipment stocks anymore; at some point the rising cost of steel, petrol products and the like will be hurting the bottom line unless they can pass all the costs along to farmers - over the next year if inflation does not abate this is the type of company who could see profit margins squeezed simply from the constant increase in input costs.

Here are the results - looks like a good call with the stock down 8%. Sometimes a rising tide (agriculture boom) does lift all boats. But sometimes you need to think farther ahead than that - as Wayne Gretzky says - don't be where the puck is, be where it's going to be. ("I skate to where the puck is going to be, not to where it has been.")

• Deere & Co., the world's biggest maker of farm machinery, said Wednesday its second-quarter profit rose 22 percent, propelled by lofty crop prices that stoked global demand for its farm equipment despite a faltering U.S. economy.
• But the Moline, Ill.-based company warned that rising costs of such raw materials as steel could cut into its earnings over coming months, sending its shares down 8 percent in morning trading. Deere also said it was seeing spot parts shortages "cropping up."
• Deere said sales rose to $8.1 billion from $6.9 billion a year ago. The company said its sales outside North America soared 46 percent during the quarter, dwarfing the 6 percent jump of its sales in the U.S. and Canada. (sounds familiar)
• But Mack told analysts that the cost of raw materials were "racing ahead well beyond what we anticipated," and shortages of various parts and components "are cropping up from time to time" despite suppliers' best efforts.

Remember, inflation is real - despite the governments best attempts to convince you otherwise. it WILL hit corporate profits - we are seeing it in FedEx (FDX), we are seeing it even in the best sectors and this is why, once the market stops drinking Kool Aid, it will have to recognize that corporate profits will be faltering everywhere - inflation is a tax on everything and everyone. This has been a consideration for me as I consider every company in the portfolio or new potential entrant - how much inflation will be eating away at it's future profits. And a large part of why I sold off Agco (AG) and CNH Global (CNH), 2 peers of Deere (DE) earlier in the year. Business is booming (on the top line - revenue) but costs are also booming. Avoiding blowups is as important as making money... rule #1 of making money = don't lose money.

No position

Bookkeeping: Been Building Trina Solar (TSL) this Week

While I've cut back on my other solar positions, the best fundamental value in this space remains Trina Solar (TSL) - only the technical picture has lagged on this name. We had a nice trade in this stock after a big spike (which it gave back) in mid April [Apr 15: Bookkeeping - Locking in Trina Solar Gains] so I keep waiting for "the" (sustained) move which I still believe is coming. I've been building this stake throughout the week, and the stock now approached a critical juncture.... after literally building a base in the $40-$45 range for 1 month, it looks poised to make a very serious move (the longer the base, the bigger the move). The only question is direction of said move. Could be down, could be up - earnings will probably determine it more than anything but last quarter's earnings, were in my opinion, the best of the entire polysilicon group. [Mar 4: Long Suffering Trina Solar Finally Gets some Relief] And the stock did not get rewarded for it.

The 200 day moving average is just under $46 which is where the stock has moved up to today. So it's a headwind for now. Tomorrow's earning reports in the sector will affect Trina Solar because investors clump all these names together, but my fair value for this stock is substantially higher... the stock has simply not responded in kind like its more speculative peers. But once it moves, I think this is one that will really punch the lights out.

I've built Trina Solar (TSL) back up to a 3.3% stake Monday through this AM, and if/when the stock breaks above its 200 day moving average I'll be adding more (could be later in the day). Frankly this stock has been a sizeable loser for the portfolio, despite a good trade about a month ago, but I believe the back half of 2008 will be this stock's time to shine. And 2009 will be even better. Now if it could only break through resistance...

So essentially I've kept my "sector allocation" to solar pretty consistent, but I've shifted heavily into this name versus the other two we hold.

EDIT 11:30 AM: $46 is now breached so raising allocation from 3.3% to 5.9% of fund.

Long Trina Solar in fund and personal account

Bookkeeping: Selling Some Yingli Green Energy (YGE)

Solar has been on fire the past few days due to some positive earnings reports out of the Chinese names. With Yingli Green Energy (YGE) approaching a 20% gain in 3 days, I am going to sell off another 200 of my remaining 500 shares. Earnings are tomorrow and clearly with the "right" numbers the stock could be up 30% tomorrow for all I know, but if so I will probably sell the last of my position into that spike. When this group gets hot and heavy as it is beginning to, I begin to get nervous. Either way, I can lock in some gains here so I am choosing to, with the stock near $26.20. This takes the position down from 1% of fund to 0.6%.

Again as I stated with some sales of late, on a technical basis, many traders would actually be buying this stock here as it broke above a recent high of $25.50 this AM, but with earnings tomorrow, and not being a riverboat gambler I prefer to lock in gains along the way.

Long Yingli Green Energy in fund; no personal position

Mercadolibre (MELI) Reports

Latin America internet name Mercadolibre (MELI) reported last night and the stock is down only a bit this AM early - after a huge run I was hoping for some sort of sell off - a constant refrain lately; but we have yet to get any serious buying opportunities. The valuation continues to be extremely rich but the scarcity value of these type of stocks is unique. I just love near 80% gross margins.

• Consolidated net revenues for the first quarter of 2008 increased 75.2% to $28.8 million, compared to $16.5 million for the first quarter of 2007. Marketplace revenues, which represented 81.4% of net revenues, grew 65.4% to $23.5 million from $14.2 million for the prior year period. Payments revenues, which represented 18.6% of net revenues, increased 136.7% to $5.4 million from $2.3 million for the prior year period. Revenue growth was primarily driven by solid growth in both gross merchandise and total payment volume.
• Gross profit grew 75.9% to $22.8 million from $13.0 million in the prior year period and gross profit margin, defined as gross profit as a percentage of revenues, expanded to 79.1% from 78.8% for the same quarter one year earlier.
• Income from operations grew 117.6% to $6.5 million, from $3.0 million for the same period one year earlier.
• Net income before income and asset tax expenses for the quarter was $4.9 million, an increase of 162.9% over prior year quarter net income before income and asset tax of $1.9 million.
• The Company's first quarter 2008 net income reflects an effective tax rate of 58.1%, in part due to added tax expenses derived from the introduction of new taxes in Mexico as well as certain new non-deductible expenses incurred in Venezuela. (ouch!)
• Registered Users -- New confirmed registered users for the three month period ended March 31, 2008 were 1.6 million, generating a total confirmed registered user base of 26.5 million users as of March 31, 2008, an increase of 34.5% over the 19.7 million users registered as of March 31, 2007.
• Transaction volume -- Gross merchandise volume was $449.7 million for the first quarter of 2008, a 43.9% growth from gross merchandise volume of $312.5 for the same period during 2007.

Long Mercadolibre in fund; no personal position

News of the Day - Inflation

Scouring the globe for news that does not matter to the high and mighty financiers of the world because Uncle Ben is on their side...

....what matters to the bottom 80% aka the proletariat is not of concern. But it's still interesting to read about their tales of woe.... err... I mean their impending rebound during the 2nd half 2008 recovery. And one day stocks may care... but until then may I introduce our official blog mascot and also our future covergirl? (boy?) of the mutual fund prospectus. (you think I'm kidding) ---->

In this round of stories we'll focus on inflation - something every country in the world has but not us. As I keep repeating inflation cannot cross the Atlantic or Pacific Ocean nor the Canadian or Mexican border - therefore it is a problem every other country must deal with but not us. We are so lucky that way. But if inflation were real and not just something bloggers like me make up in our over active imagination what would it look like...

Let's begin with shoes... yes shoes. Not that there is any inflation in the world, but if there was - it appears to have trickled down to even shoes, per the Wall Street Journal. As I have been stating since last fall, we are moving from a global deflation environment to a global inflation environment - and those cheap Chinese goods are going to be incrementally increasing in cost. Until the global multinationals decide China is too expensive and its time to exploit Vietnamese labor.... err, I mean create a new middle class in Vietnam.

• The hottest trend in footwear this season? Inflation. (oooh, my favorite style!) After a decade of declining prices, footwear makers at all levels are raising prices.
• Brown Shoe Co., which makes Via Spiga and Buster Brown footwear and hasn't altered prices in years, plans an increase of 5% to 12% for fall. And the Nine West shoe label plans to boost prices on some styles by 15% next year.
• The moves reflect higher costs in China, which makes about 85% of shoes sold in the U.S., as well as higher fuel costs and the weak U.S. dollar. And they could presage price increases of other goods soon: Handbags, belts and other leather accessories are made in the same region in China.
• For retailers already struggling with a downturn in consumer spending, the higher costs couldn't come at a worse time. They fear the price increases will further damp shopping, forcing them to eventually slash prices to move merchandise and hurting their profit margins in the process. (but don't worry, buy retail stocks - they have been rocking and rolling lately because of the "early cycle recovery" story - that is, the US consumer is going to be rocking and rolling by this fall - don't you worry about facts; the hedge funds say buy retailers so you should buy retailers.)
• ..estimates that shoe makers will raise prices by an average of 10% to 15% in the next year, which would be the largest single-year increase in more than 50 years, according to the BLS. (once we move to "barefoot in the office" day, then we can say there is no inflation in shoes...)
  

Now the government has this thing I love to talk about called the substitution effect; put simply when the cost of steaks gets too high they assume you move down to hamburger - so they substitute steaks for hamburger in their measure (seriously) and hence inflation disappears. So in the government's eyes we are going to be a world of bicycle riding, barefoot, and beltless (or using string to keep pants us) people. Because otherwise, inflation would go up. You think I am exaggerating right? Well the most respected man on the globe in terms of bonds is named Bill Gross - he works for a small firm called PIMCO. I'd like to directly quote him from this story about the farce that are government numbers that more and more people are waking up to each week. He calls the numbers a "con job".

• Americans are feeling a lot more economic pain than the government's official statistics would lead you to believe, according to a growing number of experts. They argue that figures on unemployment and inflation are being understated by the government. (I literally have typed this on a monthly basis as each report comes out; thank you - I now feel less alone)
• Over the past ten years, there have been other changes in the calculations, particularly for big ticket items. Cuts to estimated prices for items like electronics and cars that are thought to have improvements in quality year-after-year have lowered the overall CPI. In addition, changes in the way certain products, such as food, are tracked by the government, have also contributed to lower readings than otherwise expected.
• Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.
• Another flaw with the CPI numbers is that the government now assumes that higher prices for one item will lead consumers to buy more of a substitution item. That may be true. But if people buy fewer steaks and more hamburgers, for example, it's unrealistic to say that inflation isn't a problem, skeptics maintain.
• "The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff, president of Euro Pacific Capital (Booyah!)
• With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%. (higher - college tuition, food, oil, gas, medical costs - all the things we need in life? higher)
• Even the government's own numbers show there are many unemployed people not showing up in the unemployment rate. The official reading does not include 4.8 million people who want to work but haven't found a job, for example. Many of these people are dropped from the official calculation because they have become so discouraged from looking without success that they haven't looked in the previous four weeks. Simply adding those people to the number of unemployed takes the current unemployment rate to 7.8%.
• Still, the Labor Department's own broadest measure of unemployment, which includes as jobless those working part-time jobs because they can't find full-time positions as well as some discouraged job seekers, puts the unemployment rate at 9.2% in April. [Apr 2: The Underemployment Rate is Rising]
  

That's the second such mainstream report in just the past few days commenting on the joke that is government statistics [May 10: Finally Some Mainstream Reporters are Figuring Out the "Spin" From Government] Excuse me while I dab a tear (of joy) from my cheek. However, don't worry, in about 12 hours we can listen intently to the great work CNBC tells us Uncle Ben is doing to fight inflation when our "official" number comes in at 4%-4.1% - heck maybe they can get it down to 3.8% if we are very good boys and girls, and the pencil came with an extra big eraser this month.

Speaking of which, remember our government leaders and in fact, most trusted bankers, still live in a 1950s world where everything revolves around the United States of Subprime. So when our economic activity slows (which it has since late 2006), inflation must ebb because we are the end all and be all. That's worked out GREAT so far (err, not so much). But since it has not worked so far, that's ok - when things don't work, let's continue down the same path. It will work sooner or later - during each cut by the Federal Reserve we've been assured that inflation will come down in the "2nd half of 2008"... they still cling to thing like a soft blankie.

• Seeking to ease fears that rising oil and food prices will spark an inflation brushfire, San Francisco Fed President Janet Yellen argued Tuesday that prices have probably peaked and should be headed lower in coming months
• The key to her forecast of moderate inflation was the tame behavior of wages, Yellen said. Unit labor costs only rose a tepid 0.25% in the first quarter, she noted.
• In her remarks, Yellen said she believes the economy should improve a bit after June as the impact of the Fed's aggressive rate cuts begin to be felt. "I expect the economy's performance will improve somewhat in the second half of the year." (oh my favorite time of year... "6 months from now" - the nirvana time)
• Yellen said that, adjusted for inflation, interest rates are now around zero. (no, adjusted for inflation we are PAYING people to take money, real rates are NEGATIVE - now thats inflationary! Here, we will pay you to take our paper peso)
  

Now here is the punchline for said "unit labor costs" (read: workers) - unlike the 70s when labor was able to ask for increases during a huge uptick in inflation because (a) we lived in a less global world where you were not competing on wages with people 4000 miles away and (b) government reports actually showed inflation to be happening - it's a new world now. Cramerica! You can't ask for wage increases to offset inflation. That's GREAT! (for corporations). For those of you who actually work for a living? Not so great - that means you have to actually pay for things that have exploded in price with your measly 3-3.5% wage increase. But this helps to keep "inflation contained" and central bankers giddy as they cut cut cut, and create liquidity to stuff into the system. It's all good! Except for those who consume.

And to think most companies have been absorbing input costs so far - just wait until they actually begin passing the lion's share onto you. Then you can go to your boss and ask for a 6-9% wage to help you cope - and your boss can say (with hand raised to your face)... talk to the Yellen. (while smirking) So that's whats coming. Right now you are only seeing the leading edge of inflation. No wait, you are not seeing it because there is little inflation. But if there was inflation... you'd be seeing the leading edge. Or something. Whatever - just repeat to yourself - there is no inflation. And buy stocks.

Long the total lack of inflation in the US economy; priceless!

Petrobras (PBR) Business as Usual

As I've stated in the past, if the recent finds over the past 3-6 months offshore in Brazil are 50% of what they have been purported to be, I believe Petrobras (PBR) is on the way to being the largest company, by market capitalization, in the world. Very few stocks would I feel comfortable tucking under the pillow and then going on the 5 year, 'round the world yacht trip, but this is one. It will go up, it will go down, but over the years this is the type of company that should provide 20%+ type of annualized returns... until electric cars and solar panels dominate the planet. I care so much about their earnings that I didn't even realize they reported Monday... 90 day timeframes mean very little for this company but let's take a quick peak shall we? The one downer is the state control of pricing - good for Brazilian consumers and producers; not quite so good for PBR.

• Brazilian state oil company Petrobras posted on Monday a 68 percent rise in its first-quarter net profit, beating market expectations, on higher oil output and prices of some fuels it sells.
• Petroleo Brasileiro SA said net consolidated profit totaled 6.9 billion reais ($4.1 billion), up from 4.1 billion reais a year earlier. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose to 13.8 billion reais from 11 billion a year ago.
• Net revenue rose 21 percent from the same quarter of 2007 to nearly 46.9 billion reais, largely in line with forecasts.
• Oil production, or lifting, costs in Brazil jumped 20 percent from a year ago and edged up 1 percent from the preceding quarter to $8.66 per barrel.
• Petrobras only partially profited from the rally in international oil prices in the first quarter, as the company kept its domestic oil and diesel prices unchanged during the period. (just imagine results if they had fulled priced product at market rates) The company, which has a near-monopoly on refining in Brazil, is free to set domestic gasoline and diesel prices, although the government had long exerted subtle pressure to keep prices down

The real story here will be what exactly is sitting 5 miles deep in the ocean off Brazil's coast...[Apr 14: Petrobras Just Went Vertical] This also appears to be Ken Heebner's newest favorite; and that guy is pretty darn smart.

Long Petrobras in fund; no personal position

Reality Check - Home Prices, Retail Sales, and Walmart (WMT)

Let's cut through the spin...

First, this is getting old hat, but that imminent housing rebound continues to evade us. We continue to see startling losses in home values - but this is nothing new, nor something we did not predict. What will amaze you is the first time home prices stop dropping 14% year over year (which is a disaster) to 11% year over year (which is a disaster) we will hear trumpets blaring and samba dancing on CNBC. Watch for it; it should be coming within the year. All these housing stories start to sound the same, but the key takeaways here are

1. The disaster continues
2. New home builders were the first to slash prices but optimists continued to point to existing home prices "holding up" - my comment was - that is because these people (current home owners) are not facing reality, have emotional attachment and/or have no idea what the real housing market is like. They will change their tune soon enough - i.e. when the house in the neighborhood half a mile away (new homes) is being sold for $75-$125K less than your home... that puts some reality into your world. That is NOW starting.
   
3. "Walk aways" of people who are underwater are just really getting started - Jose Canseco did it, and it's spreading throughout the country. That's going to flood the market with more supply - it does not make ECONOMIC sense to keep paying for a depreciating asset. As I said late last year, 2008 (and part of 09) will be the year of the walk away
4. What markets are doing well? Those with (shocker) affordable homes! $110K or so range. They are seeing appreciation. Unfortunately in most of our urban centers where our populace is concentrated, $110K buys you a kitchen and bathroom... not much else.
   
5. 3 MILLION homes in America now sit ... EMPTY.
   
6. The quicker we let this pain play out, the faster we can heal. I will repeat every month; the best thing for the bottom 80% of Americans will be an era of lower home prices - the less they need to spend for a roof over their head the more they can spend for the minor things in life, such as eating or heating/cooling said adobe.
7. If you live in a farming area or energy related part of the country - don't bother reading the numbers below; it's a whole different world.
   

• Single-family home prices dropped 7.7% in the first quarter in the largest year-over-year decline since the National Association of Realtors began reporting prices in 1982.
• The median sales price fell to $196,300, down 4.8% compared with the last three months of 2007. (that is not year over year, that is quarter over quarter - which would be equivalent to 20% year over year fall)
• Sun-Belt cities were among the biggest losers. In California, Sacramento prices plummeted 29.2% to $258,500 compared with last year and Riverside prices fell 27.7% to $287,100. Prices in Las Vegas fell 20.2% to $247,600 and those in Phoenix dropped 15.4% to $222,200.
• Midwestern cities, hard hit by factory closings, also suffered huge losses with Lansing, Mich., prices falling 26.9%.
• The best performing market in the nation was Binghamtom, N.Y., where prices rose 11.8% to $109,700. Second was Peoria, Ill., up 10.4% to $119,000 and Spartanburg, S.C., where prices rose 10.2% to $130,300.
• All that foreclosure activity added to the glut of homes on the market. The total inventory has risen to an average of 10 months worth of unsold homes. In addition, a record number - 2.9 million - of vacant homes are up for sale, according to the Census Bureau.

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

On to retail sales - I won't even bother with the "better than expected" mirage. Remember folks, this does not take into account inflation. If inflation is 5%, then retail sales would have to be up 5% just for unit sales to be FLAT. So what is being celebrated today is a complete joke but let's clap like seals and drink Kool Aid on the resilient consumer. We are seeing demand destruction. Just to keep up with inflation retail sales should be jumping 5-10-15%. They are in fact down 0.2% this month but if you EXCLUDE autos, they are up ! Yee haw. See, in every report we can exclude something to make it look good.

• The Commerce Department reported Tuesday that retail sales dipped 0.2 percent last month, right in line with economists' expectations. It was the second drop in the past three months and was led by a 2.8 percent decline in auto sales, the biggest setback in this category in 10 months
• Excluding autos, retail sales rose by 0.5 percent, a better performance than had been expected as sales at general merchandise stores, a category that includes big chains such as Wal-Mart, posted a 0.5 percent increase (mmmm, Kool Aid)
  

I am going to start a new housing price index. I am calling it the CORE HOUSING index. While real housing prices are down 15-20%, the CORE HOUSING (tm) index is up 1.6%. In my trademarked core housing index I exclude all homes that dare to go down in value. Therefore I can make the number look bright and shiny (I believe this qualifies me for a job in government now) Therefore we have normal Case/Schiller Housing Index -15 to -20% price drops, but the all important Core Housing Index is up 1.6%. Things are looking up in housing (using core!), buy stocks! It sounds like a joke but this is what we are doing in all our numbers now - we are excluding this or that from inflation, we are excluding this or that from retail sales, as long as we exclude all the things with NEGATIVE effects, the economy is BOOMING. I'll continue to report the core housing index to you in the future, so you are not swayed by the dirty underhanded media which is Democrat controlled and reporting false numbers to you, so you feel bad about the economy and vote Obama. It's all a conspiracy.

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

But one retailer in the "pooring of America" is doing great - who else? Our friend Walmart (WMT) - BOOM. This is just the beginning - great times ahead in the next 2 years (at least) for these guys. They sand bagged their guidance and will crush it in the future.

• Wal-Mart Stores Inc. on Tuesday said first-quarter profits rose 6.9 percent, but the world's largest retailer offered a guarded outlook as consumers wrestle with higher energy and food costs.
• Without fuel, same-store sales for the first quarter were up 2.9 percent at Wal-Mart's domestic properties, rising 2.7 percent in the Wal-Mart Stores division and 3.6 percent at Sam's Clubs.
• In a research note, analyst Adrianne Shapira of Goldman Sachs said Wal-Mart's first-quarter numbers "demonstrated that it is best positioned to weather today's challenging environment," considering increases in customer visits and how much shoppers are spending each trip.

This chart tells you everything you need to know about the health of the American consumer/economy (ex farms, ex energy, ex exports, ex movie stars, ex upper 1%, ex bankers, ex professional athletes) Keep in mind, this stock has been comatose the entire 2000s; its the same price it was in 99. So this type of move, for this type of stock "tells us" a lot.

It's Good to Have a Balanced Portfolio

Today is coal, solar, and infrastructure day. Some huge moves.

We continue to wait for the serious pullback that never comes. Somehow I think once the market most frustrates you, and you give up, and say "forget it, there will be no pullback" and toss all your chips onto the table.... only then will she crush you. ;)

I'm underweight these groups from my normal allocation - especially gnashing teeth watching Foster Wheeler (FWLT) which was a top 3 position two weeks ago fly away. The way the portfolio was set up 2 weeks ago, we'd be having a huge day... bah and humbug!

Days like this are when being at all conservative or prudent is frustrating.

Long Foster Wheeler in fund; no personal position

Bookkeeping: Closing Shaw Group (SGR)

I am closing out one of my long held infrastructure names; Shaw Group (SGR). As always, I still like this stock for the long run but I already have a horde of infrastructure names, and the stock, much like Chicago Bridge & Iron (CBI) is now in a poor technical condition; although the latter is showing some signs of life now. So I'm going to sell for now, since my position is so small, reduce the # of fund holdings by one, and revisit (both names) if they get back on the right path in terms of technical condition. I still like almost every name in this group on a fundamental basis.

"Value players" will take the exact opposite tact to me, and be buying these charts when I am selling, but I'd rather focus on stocks on clear upswings. It's just a trading style, and money can be made in various ways (buying CBI in the $38s would of proven to be very fruitful for value types) With SGR there is a lot of resistance in the mid $50s; for the technical condition to signal "clear sailing" we've have to trade back above both the 50 and 200 day moving averages which is going to take a lot of work. Again, "value investors" would treat this different and in fact be building positions down here, waiting patiently for the market to reward the inherent value of the stock - which could come in days, weeks, month, or a year. I don't know. But I'd rather have the money working for us somewhere or sitting in US pesos waiting the next opportunity.

Since the chart broke down I've held very little Shaw Group (SGR) but am exiting the last measly 10 shares today. This was one of those "holding positions" (tiny positions waiting for a technical condition to improve) but the stock failed twice in April in attempted breakouts - hence, dead money. Below is a 6 month chart and obviously the stock has not been reacting very well, so I am exiting with a $4000 loss. I've held this name since fund inception, but don't have near term conviction to add more and the chart does not call for adding more. As I said above, I could see either of these names returning to the portfolio in the future.



No position

Import Prices Continue to be a Disaster

I want to segregate the import report from the bevy of other entries I do, because I find this to be a very important report that the mainstream financial press glosses over; I've been watching it very closely since blog inception (and before then). It is very important if you are not an economics person to understand what is really happening in "reality" as opposed to what is told or highlighted by the media....we are seeing 2 key trends

1. Import prices are off the chart, running at a mid teens rate - for a country that imports much of its consumer goods that is very troubling and in my humble sign a signal of what REAL INFLATION is in this country
2. I flagged the troubling trend in Chinese import prices back in the fall - for years we have had DEFLATION due to low cost Chinese goods - well the worm has turned this winter and now it is getting worse

Let's look closer at this important report

• Prices paid for imported goods rose 1.8% in April, the Labor Department reported Tuesday, as costs for petroleum and other products gained.
• The price for imported petroleum rose 4.4%. The price for non-petroleum products rose 1.1% for the second consecutive month -- matching the largest one-month gain for the index since these prices were first published on a monthly basis beginning in December 1988.
• The prices for non-fuel imports rose 1.0% -- matching the prior month's gain -- the largest one-month increase since the index was first published in December 2001.
• For the 12 months through April, prices for imports gained 15.4%. (folks, this is the reality, not the fantasy you will be told tomorrow in the Consumer Price Index)
• However, last week, the Commerce Department reported that both imports and exports fell sharply in March, driving the U.S. trade deficit down to $58.2 billion, in a sign of weaker global growth. [May 9: March Trade Deficit Reflects 2 Bad Trends] (This was celebrated on financial TV as a "good thing")
• Prices for imports from China rose 4.1% for the 12 months ended April 30, the largest such increase since the index was first published in December 2003, according to the Labor Department.
• Prices of goods from China rose 0.2 percent (monthly basis), while those from Latin America jumped 2.6 percent and imports from the Middle East increased 3.7 percent.

March 08, the year over year import price increase was 15% [Apr 11: GE Warning and Import Prices Show us Real Inflation]
January 08, the year over year import price increase was 13.7% [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis]
November 07, the year over year import price increase was 11.4% [Dec 12: Real Inflation Showing in Reports not Called PPI/CPI]

The trend is very, very, very clear - and it is alarming - and our Federal Reserve continues its policies to flood the world with cheap paper currency; just this morning word of more helicopters arriving courtesy of Uncle Ben (free money for everyone - woo hoo)

• ...the central bank will increase its auctions of cash to banks as needed.
• The Fed announced May 2 that it would boost the Term Auction Facility, or TAF, to $150 billion per month from $100 billion, the third increase since the program began in December.

The China situation is something we flagged early in the blog life [Sep 11: China Inflation Highest in 11 Years, Why do you Care?]

Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation.

You can see what inflation would really show by this entry (graphical) if not for the government meddling with the numbers [Mar 16: A Picture is Worth a Thousand Words: Inflation] Apparently as long as you keep telling the sheep that what they see in their normal lives is not really happening, the strategy is the sheep will keep believing the government figures.

I continue to believe ALL assets are being inflated due to these actions (a fixed amount of assets is being chased by a huge inflow of paper money driving prices up) - while commodities have been in a bull market for years, the charts of many commodities (see crude) are a 45 degree angle since the Federal Reserve (and ECB with their $500 Billion - yes $500 BILLION) began flooding the world with paper currency this fall. That includes equities - we have a fixed amount of stock certificates in this world, and as with other commodities a juicing of the money supply (supply/demand economics 101) is keeping them elevated over "normal levels". Without this infusion of currency printed out of thin air ($1.3 Trillion I have read is now the running total of what has been pushed into the system by Western Government Central Banks), one must wonder where the stock market(s) would be today (answer: materially lower) - as would be all commodities. But since commodities only hurt commoners who need to pay for them to eat/live/breathe, it's ok - we need to keep the bankers fat and happy. And keep stock prices high for the top class.

So as the folks at Minyanville say so well, inflation in things we need (food, energy), deflation in things we want (homes, clothes, iPods, etc). Quite a combo.

Tomorrow morning you will hear a different story with the Consumer Price Index - a number I will ignore, but CNBC will tell you "inflation is slayed so buy stocks". Heck we might go back to a 3% inflation with these fictional figures - do I hear 2%? Just keep feeding the sheep.

(Thanks to Bluedog for his artist rendition of Homer)

Bookkeeping: Cutting LDK Solar (LDK) Exposure

Based on the (gross margin) guidance for 2008, I am cutting back on LDK Solar (LDK) - I still like this stock as a 2009-2010 story as its new polysilicon plant will help it to reduce costs substantially but it's a long road to get that plant up and running... this is now more of a 2009 story. The sector is up this morning on good earnings news from Canadian Solar (CSIQ) but unfortunately LDK Solar did not partake, and is down 6% this AM. Again the results and guidance is not terrible - we just have limited upside for the next few quarters, especially if LDK Solar comes in at the lower end of its full year guidance (23-25%) and with a management that said 26-31% less than 90 days ago, it's a bit concerning that they have lowered their expectations so meaningfully in such a short period of time. On the conference call, LDK Solar says higher costs are here for a few more quarters

• On a conference call with analysts, LDK executives said they expected polysilicon prices to remain high over the next two quarters.
• Executives said margins were pressured by both higher polysilicon costs as well as an increase in shipments of wafers under long term contracts, which have more favorable pricing for customers.

I am selling 350 of 650 shares in the low $35s to bring LDK Solar back down to 0.9% exposure (from 2.0%). If/when the stock shows relative strength and breaks back above its 200 day moving average I am willing to re-expand this position, but right now there are just easier short term opportunities in other spaces. If the stock pulls back to the low $30s (down 10% from here) I'll also consider adding this stake back. I anticipate this stock to be relatively range bound in the $32-$38 range for the foreseeable future - good for trading at least ;)

One day, when this polysilicon shortage subsides these names will have an easier time of it. But I'd rather have a larger investment when those headwinds subsist; between now and then it's going to be a tougher road to hoe for the companies which are not showing the same ability to offset the increased costs.

Looks like the analysts (who I usually disagree with) :) agree with me on this one

• In a client note, Goldman Sachs analyst Cheryl Tang said the company's lower margin estimate -- 23 to 28 percent from between 26 and 31 percent -- signal cost pressures throughout the year
• "We believe the management's reduction of gross margin guidance may disappoint investors," Tang said, maintaining her "Neutral" rating and $28 price target.
• Oppenheimer & Co. analyst Sam Dubinsky also singled out the company's lower margin estimates, saying rising polysilicon costs threaten to offset the company's higher revenue guidance. Dubinsky kept his "Perform" rating on LDK. On Monday, the stock closed at $37.46.

Usually I like to find stories where the analysts are wrong, and thereby profit from it, but in this case the analysts basically echo verbatim what I said yesterday. So I cannot disagree.

Long LDK Solar in fund; no personal position

Bookkeeping: Taking Profits in Infrastructure - Fluor (FLR) and McDermott (MDR)

For some reason the 2 earnings reports in infrastructure were not on the calendar on Yahoo Earnings, but we had reports from McDermott (MDR) and Fluor (FLR) last evening; the former had already pre-warned [Apr 29: McDermott Issued Warning] so expectations were already lowered, and the latter posted a serious blowout. The whole sector is riding the Fluor momentum this morning but I am going to actually take some profits out of this group, as I am cautious overall on the market.

For Fluor, I really like what I read, but when a stock of this size, in this relatively quiet sector, is up 12% on a "gap up", I am going to take the profits and run and rebuy lower in the future. I sold 40 of my 50 shares (80%) of Fluor here in the $187 range. Certainly, as always, it could go higher but we made a nice profit here with most purchases in the $120s-$140s- this reduces my stake to 0.2% of the fund.



McDermott had some shaky results but again these are long term business cycles with very lumpy quarters, so I am not too worried - however I am taking profits here as well with the stock up nearly 5%, in the $56s - it had fallen to $52 yesterday. I am selling 100 of the 250 shares I have (this was once my top position) in the mid $56s. This reduces my stake to 0.7% of the fund.



Fluor Results

• Strong demand from oil and gas companies lifted earnings at infrastructure giant Fluor (NYSE:FLR - News) by 60% from last year, smashing Wall Street forecasts.
• Fluor earned $1.50 a share in the first quarter, the company said after Monday's market close. Analysts expected just $1.27.
• "We underestimated the strength of the oil and gas end markets," said analyst Andy Kaplowitz of Lehman Bros.
• What's more, the firm raised its full-year EPS outlook to $6.25 to $6.55 -- 21% higher at the mid-point of its $5.10 to $5.50 forecast on Feb. 28.
• Revenue in the quarter grew 32% to $4.8 billion, also above forecasts.
• Fluor won $5.7 billion in new project awards. That was down slightly from the fourth quarter but 28% higher than a year earlier. Though Irving, Texas-based Fluor is one of the more diversified engineering and construction firms in the world, oil and gas projects made up the lion's share of new-project awards, some $4.3 billion.
• The rest came from industrial, power, global services and government contracts. Total backlog at the end of the quarter stood at a record $31.5 billion.

• McDermott International (NYSE:MDR - News), another energy-related infrastructure firm that reported late Monday, didn't fare as well. Its first-quarter earnings fell 22% to 54 cents, meeting views. Revenue rose 6% to $1.45 billion, just missing forecasts.
• The firm had said that bad weather in Asia-Pacific and the Mideast would affect offshore work. (lame excuse)
  
• McDermott focuses mostly in the offshore oil and gas markets. Fluor mostly works onshore.
• "A lot of Fluor's customers have raised forecasts for capital expenditures over the next several years," said Kaplowitz, citing Exxon Mobil (NYSE:XOM - News) as one. Fluor's client roster features major and national oil companies, including Chevron (NYSE:CVX - News), Marathon Oil, ConocoPhillips (NYSE:COP - News), Irving Oil and the Kuwait National Petroleum Co.
• Though more than half of Fluor's revenue stems from the U.S., one exec said during yesterday's conference call that it has seen "very little effect from tightening credit and recessionary pressures."
• Kaplowitz says customers aren't looking at a slower U.S. economy this year but are making projections on what they think will happen three to five years from now.
• In the U.S., a lot of growth will continue to come from oil refinery expansion and upgrades, especially to handle more high-sulfur heavy crude, which is cheaper and more plentiful than sweet crude.
• Growth in the Mideast and China tends toward brand-new refineries and chemical plants.
• Alternative-energy projects are a small portion of overall sales, but they are expected to grow in tandem with rising demand for renewable energy sources.

Long Fluor, McDermott in fund; no personal position

LDK Solar (LDK) - Good Earnings but Worrying Margins

I can best sum up the LDK Solar (LDK) earnings review with the comment that the dark cloud of shortages of polysilicon continue to act as a dark cloud overhead. While the company beat solidly on both revenue and earnings this quarter, gross margins continue to degrade - down to 27.7% from last quarter's 30.1% [Feb 25: LDK Solar Reports Solid Numbers] - and much worse than the year ago period which was in the high 30%s. This continues to be an issue for the space. Even worse is guidance for 2008 which now is guidance for 23-28% gross margins (this is down from a 26-31% gross margin guidance for the full year given less than 90 days ago). As polysilicon prices stay stubbornly high, the drag on profit margins for these companies continues.

Essentially with lower gross margins you need a much higher revenue number, just to stay "flat" to where you would of been with higher margins. So incremental revenue gains over previous projections simply get washed out by lower margins. At *some point* polysilicon prices will drop and we should see margins stabilize/expand but we've been saying that for a few quarters now, and the target continues to get pushed out into the future. Frankly if I could trade after hours I would of been out on the initial spike to $38 but since I cannot do that in the Marketocracy.com account, I have to see how the stock reacts tomorrow and then re-assess, after thinking it through tonight. This is not of a situation of a lack of growth, but the associated profits with said growth continue to be curtailed - much farther out than originally anticipated. This is not a LDK specific issue and all the players on the polysilicon side of solar are facing the same issues - some can offset it with other efficiencies or scale but it's a drag on profits for all of them. So I suppose the story now is margins will improve..... in 2009.

• Net sales for the first quarter of fiscal 2008 were $233.4 million, up 21.1% from $192.8 million for the fourth quarter of fiscal 2007, and up 218.0% year-over-year from $73.4 million for the first quarter of fiscal 2007.
• Gross profit for the first quarter of fiscal 2008 was $64.6 million, up 11.2% from $58.0 million for the fourth quarter of fiscal 2007, and up 127.5% year-over-year from $28.4 million for the first quarter of fiscal 2007. Gross profit margin for the first quarter of fiscal 2008 was 27.7% compared with 30.1% in the fourth quarter of fiscal 2007 and 38.7% in the first quarter of fiscal 2007.
• Net income for the first quarter of fiscal 2008 was $49.8 million, or $0.45 per diluted ADS, compared to net income of $49.2 million, or $0.44 per diluted ADS for the fourth quarter of fiscal 2007.

Guidance

• "Regarding our polysilicon plant project, the construction remains on track for completion based on our previously announced schedule. With the recent funding we secured, in addition to our other financial resources, such as advances from customers, LDK is well positioned to pursue its aggressive growth strategy," concluded Mr. Peng.
• For the second quarter of fiscal 2008, LDK Solar estimates its revenue to be in the range of $278 million to $288 million with wafer shipments between 136 MW to 146 MW.
  
• LDK Solar also revised its outlook for the full year of fiscal 2008: Revenue to be in the range of $1.08 billion to $1.18 billion; Gross margin in the range of 23% to 28%

Long LDK Solar in fund; no personal position

Monday Readings - Energy, the Dollar, Central Europe Farms, and Public Storage Auctions

Today, we'll focus on energy/oil, the dollar, sad affects from the home bust, and what I contend will be the best long term investment - undervalued farm land (and it's not in the USA)

As our President trots with hat in hand to Saudia Arabia to ask them to pleeeeeaaseee open the spigots.... the NYTimes asks What Can we Do about Rising Oil Prices? Not Much

• With gasoline closing in on $4 a gallon, Washington is awash in proposals to bring down prices — once more turning the energy debate into political football.
• There have been calls for a gasoline tax “holiday” this summer, cries to force OPEC to pump more oil (or else!), appeals by President Bush to allow “environmentally friendly” drilling in Alaska’s Arctic National Wildlife Refuge, and demands to tax Big Oil’s billion-dollar-plus profits.
• But what can the White House, Congress or competing presidential candidates do to reduce gas prices in the near term? The short answer, alas, is not much.
• No industrialized economy is as reliant on oil, or as obsessed with gasoline prices, as the United States, the world’s biggest consumer of oil. But the oil market is largely immune to Washington’s machinations, and prices have more than quadrupled over the last six years for reasons that are increasingly disconnected from what happens in the United States.
• In the long term, there are only two ways to reduce prices: boost supplies or reduce demand. The country’s energy policy does exactly the opposite: it encourages consumption by keeping energy taxes low and discourages exploiting new supplies because of environmental concerns and not-in-my-backyard political objections.
• Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation, estimated that the nation’s oil import bill would probably reach $450 billion this year, up from $120 billion in 2002. “Our energy policy is bankrupt,” he said. “It is not prudent any more to ignore the supply side of the equation.”

So my "World of Shortages" thesis is beginning to pick up into the mainstream - more and more people are finally realizing the US is not the end all and be all; that there is a global competition for resources. Sadly, if we dropped everything today and put together a coherent energy policy (what I call a Manhattan Project II) it would still take 4-7 years to really make serious inroads - and the time between "now" and "then" will be filled with serious strains for many. But don't you worry folks, our leadership won't be working on a coherent strategy - they will be fighting, pointing fingers, and continuing their typical incompetence. So we'll keep pushing out solutions down the road a few more years. Even if we wanted to do nuclear for example... the Wall Street Journal reports the New Wave of Nuclear Plants Faces High Costs

• A new generation of nuclear power plants is on the drawing boards in the U.S., but the projected cost is causing some sticker shock: $5 billion to $12 billion a plant, double to quadruple earlier rough estimates.
• Nuclear plants haven't been built in meaningful numbers in the U.S. since the 1980s. Part of the cost escalation is bad luck. Plants are being proposed in a period of skyrocketing costs for commodities such as cement, steel and copper; amid a growing shortage of skilled labor; and against the backdrop of a shrunken supplier network for the industry. (as opposed to say if we built them maybe a decade ago? No, that would take proactive action - we are a reactive country; only after the emergency is here will we act)
• The price escalation is sobering because the industry and regulators have worked hard to make development more efficient, in hopes of eliminating problems that in the past produced harrowing cost overruns.

Last, we finish off the energy section with an interesting story in the NYTimes: As Gazprom Goes, So Goes Russia

• Gazprom certainly had reason to party: its chairman, Dmitri A. Medvedev, was riding high on the Russian campaign trail as the hand-picked successor of President Vladimir V. Putin. Although Gazprom forked over a handsome sum to book Ms. Turner and Deep Purple, Mr. Medvedev’s favorite band, the opportunity for the company, the world’s biggest producer of natural gas, to have its own man installed as Russia’s next leader was priceless.
• .... his ascent confirms that in today’s Russia, the line separating big business and the state is becoming so fine that it’s almost nonexistent.
• It’s hard to overemphasize Gazprom’s role in the Russian economy. It’s a sprawling company that raked in $91 billion last year; it employs 432,000 people, pays taxes equal to 20 percent of the Russian budget and has subsidiaries in industries as disparate as farming and aviation.
• If crude oil and natural gas are considered together, Gazprom’s combined daily production of energy is greater than that of Saudi Arabia.
• Now that Russia is seeking to reclaim the geopolitical clout it had in Soviet days, it is wielding its vast energy resources, rather than missiles, to reassert itself. More often than not, its most potent artillery is Gazprom itself.

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Two stories on the dollar....

NYTimes: The Dollar - Shrinkable but (so far) Unsinkable

• If the United States were any other country, these would surely be days of panic and austerity in Washington. With debts spiraling higher, a trade deficit exceeding $700 billion a year, and its currency plunging for years, the government would be forced to cut spending and jack up interest rates in a frantic bid to attract investment.
• For more than half a century, Americans have enjoyed a unique privilege in the global economy: The dollar has been the world’s dominant currency, the money used in most transactions and the repository for the national savings of many countries, including China, Japan and Saudi Arabia.
• Virtually limitless demand for American government bonds has supported the dollar’s value, and kept domestic interest rates down. Americans have been emboldened to spend in blissful disregard of their debts, secure that foreigners would always supply finance.
• But what are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Recent signs do suggest some fraying in the American relationship with its many foreign creditors. The balance of trade has gotten so lopsided and the question marks hovering over the American economy so thick that some foreign governments are beginning to hedge their bets on the dollar.
• For Americans, losing that status could be painful, sending interest rates higher and raising the costs of buying homes and cars. A country that has been operating with essentially unlimited credit might have learn to live within a budget. (the horror)

My own take, and it's a major outlier view is one day America will default on it's debt. Our debt will rise to the point that (at current pace) it will one day surpass a level we could ever service it - think of a day when the interest ALONE is larger than GDP. Meaning our entire economic output could be spent on interest payments; and that would leave nothing for anything else. So we default - we say, oops - that's never going to happen again, and away we go with a clean state. We look awful in the eyes of the world but really what else is new :) This is the path we are heading in 2-3 decades. Much like a bankrupt company we'd have a new slate and could then begin running up new debt with promises it would never happen again. Plus if you are upset, hey who has the world's strongest military.

But enough about that - the Wall Street Journal says the "Steady" Dollar Tempers Many of the "Weak" Dollar plays that have been so profitable

• For years, the dollar has been the sick man of the currency world, particularly when compared with the euro. Now, it looks like the illness isn't terminal, which could affect a variety of investment strategies that have thrived on the dollar's decline.
• At $1.5483 to the euro, the dollar is up about 3% from its all-time low against the European currency reached in late April. (woo hoo, break out the champagne! 3% off all time low - the strong dollar is BACK)
• No one expects the dollar to make a dramatic recovery. But if it stabilizes, that could eventually remove a tailwind for some companies and investments. A weaker dollar has juiced returns for U.S. investors in overseas stocks and bonds. Moreover, foreign profits among U.S. multinationals have translated into bigger gains at home. If the dollar steadies, such benefits would recede. (be careful what you ask for, this is all that is saving Wall Street's pumpkin)

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Now for a very interesting WSJ story on attempts to buy up farmland in the other great global food basket - Russia/Ukraine/former satellite states of USSR - I think this asset class will be a tremendous investment over a 30-40 year time frame as arable land disappears across the globe due to climate/urbanization - but you'll have to check the blog in 3 decades to see if I'm correct.

• The vast collectives that fed the Soviet Union are now a patchwork of tiny gardens, fields and vacant lots. But combined, they could help feed the world: Russia, Kazakhstan and Ukraine have fertile yet untilled land the size of Idaho.
• If someone could just stitch the land back together and create modern farms, agronomists say, the vast spaces north and east of the Black Sea could generate an extra 115 million metric tons of wheat per year -- 20% of the world's current production.
• Richard Spinks is trying to do just that. The 41-year-old Briton has literally been going door-to-door, leasing small plots of land from hundreds of thousands of poor farmers in western Ukraine. His company, Landkom International PLC, has planted wheat, barley and rapeseed on a combined 25,000 acres. Landkom expects to reap its first big harvest this fall.
• .... as technology gains have slowed, the search for additional arable land has intensified. That's created an opening for entrepreneurs with visions of re-collectivizing the land in former communist countries and rebooting production.

*********
Last, just a downer story from the NYTimes - we don't think about all the implications of the housing bust but just like we have foreclosures on homes, we now have "auctions" on people's stuff in public storage. A very sad state we have gotten ourselves in. Oh well, the key thing is the past 5 years we have enriched 100s of the top NYC bankers, and create multi millionaires out of them to create these toxic waste dumps of faulty mortgage loans. And that's really the important thing to come out of our capitalist system (you know, capitalist on the way up, socialist on the way down). And when said multi millionaires fall on hard times, our tax dollars and Federal Reserve are waiting in the wings to keep them propped up - unlike those silly peons who have public storage. Always a silver lining; the great American transfer of wealth continues i.e. the "anti-Robin Hood" country.

• The foreclosure crisis is hitting yet another American locale: the self-storage center.
• As they lose their homes, people are turning to these humble cinderblock and sheet-metal boxes to store their stuff. But some people cannot keep up with their storage bills any better than they could handle their mortgage payments, and storage companies are auctioning off their property for a pittance.
• The auctioneer, Blair Auction & Appraisal, has been conducting sales at self-storage facilities in the Midwest for more than a decade. “If a site used to have 10 auctions, these days it has 15 or 20,” said Wayne Blair, the owner. At one site in Detroit, he auctioned off the contents of 45 units.
• Bill Martin, a 50-year-old former manager in the technology industry, lost his house in the Southern California community of Lake Forest last August. “Storage has my hopes in it,” said Mr. Martin, who sleeps on a foldout bed in his mother’s guest room. “I don’t tell anyone this, but at least once a week I go over and look at my couch, my refrigerator, my TV stand, my mattress and realize I did have a life, and maybe there’s a way to go back to it.” (just sad)

Well folks, it is just a sad state - grown men in the Midwest needing to move back home to make ends meet [Jan 16: Interesting Human Economic Toll Piece in NYTimes], now grown men in the West Coast... the pooring of America continues... living standards continue to erode for many who don't have much of a voice - slowly but surely [Do the Bottom 80% of Americans Stand a Chance]

I eagerly await the "trickle down" economics theory to begin working for the vast majority in this country (I believe that theory is, cut taxes for the ultra wealthy so they can create new businesses full of $9-$11 service jobs for the rest of society). So far, not so good... "trickle on" yes... "trickle down" - not so much. We'll just have to wait patiently for the point where social acrimony reached a tipping point.

Zhongpin (HOGS) Reports Earnings

Missed the fact that Zhongpin (HOGS) was reporting today; looks like a small beat and more importantly their major business metrics continue to improve. Share count unfortunately is up 50% year over year, diluting some of the gains away. Since this is the smallest company in the portfolio by a mile, I really like to delve into the earnings report even more so than larger companies whose quarter to quarter performance is not nearly that important to me, as it is to the lemmings than dominate Wall Street.

• Revenues for the first quarter of 2008 increased for the tenth consecutive quarter to a record $108.7 million, up 94.9% from $55.8 million in the first quarter of 2007. Approximately 20% of the increase was from increased sales volume and the other approximately 80% was from higher average selling prices.
• Operating income for the quarter was $7.8 million, up 67.8% from $4.6 million for the comparable prior year period.
• Net income increased to a record $7.3 million, up 81.8% from net income of $4.0 million in the first quarter of 2007.
• Fully-diluted earnings per share for the quarter were $0.24, compared with fully-diluted earnings per share of $0.19 for the first quarter 2007.
• Weighted average fully-diluted outstanding shares for the first quarter of 2008 were 30,748,961, compared to weighted average fully-diluted outstanding shares of 20,982,304 in the first quarter of 2007.
• Zhongpin's strong revenue growth in the first quarter of 2008 was the result of increased prices for pork and pork products combined with increased sales to food service distributors and to restaurants and non-commercial customers.
• According to the Ministry of Agriculture of the PRC, the average pork price in the first quarter of 2008 increased 74.2% from the same period one year ago. (agflation!)
• For the quarter, chilled pork and frozen pork represented 50.7% and 36.9% of total revenue, compared to 51.0% and 36.4% in the same period of 2007, respectively.

By retail channel

• Revenue from Zhongpin's retail channels, including showcase stores, network stores and supermarket counters, represented 41.2% of total revenues. Revenue from retail channels rose 71.6% to $44.8 million, from $26.1 million in the first quarter of 2007. During the quarter, Zhongpin added seven new retail outlets, including one new showcase store, two new Zhongpin ''branded'' stores and four new supermarket counters, for a total of 2,946 retail outlets. Revenue from restaurants and non-commercial businesses represented 31.3% of total revenues in the quarter, up 138.0% to $34.0 million from $14.3 million in the same period a year ago. Food services distributors generated 25.4% of total revenues and showed the largest increase in revenue growth year-over- year, up 161.8% to $27.6 million from $10.6 million in the first quarter of 2007.

Gross margin

• Gross profit in the first quarter of 2008 was a record $14.2 million, up 83.3% from $7.7 million in the first quarter of 2007. Gross margin was 13.1% in the first quarter of 2008 compared to 13.9% in the first quarter of 2007. The year-over-year decline in gross margin was attributed to hog prices rising faster than the prices of pork products.
• Sequentially, gross margin increased 1.3 percentage points from 11.8% in the fourth quarter of 2007, due to stronger demand for pork consumption which was favorably influenced by the Chinese New Year holidays.

Expenses

• In the first quarter of 2008, general and administrative (''G&A'') expenses were $4.4 million, or 4.1% of total revenues, compared to $2.0 million, or 3.5 % of total revenues, for the same quarter last year. The significant increase of G&A expenses was primarily the result of increased expenses for compensation, advertising, training, amortization and depreciation.

Guidance

• Zhongpin plans to continue to expand its production capacity through both new facility construction and acquisitions. The Company is ahead of schedule in the construction of its western Henan Province facility in Luoyang City which is now expected to begin operations by the end of the second quarter of 2008. Zhongpin's eastern Henan Province facility in Shangqiu City is expected to begin operations in the fourth quarter of 2008. This is slightly behind schedule due to the delay of a waste water treatment facility to be built by local government outside of our facility. The new western and eastern facilities will add 70,000 metric tons and 80,000 metric tons annual capacity, respectively, of chilled and frozen pork. Once these facilities are completed, Zhongpin will have total capacity of 471,560 metric tons of chilled and frozen pork, excluding outsourcing from OEMs.
• In March 2008, Zhongpin began construction of a new prepared meat facility at Zhongpin's Industrial Park located in Changge City, Henan Province. The new facility will add 28,800 metric tons in annual capacity of prepared meat for a 114% increase over Zhongpin's current capacity of 25,200 metric tons, bringing total capacity of prepared meat to 54,000 metric tons. The facility is expected to begin production in September 2008.
• Based on its current expansion plans and its financial results in the first quarter, Zhongpin is confident it will meet its guidance for full year 2008 revenues in the range of $490 million and $520 million, gross margin between 12.6% and 13.0% and net income of between $30 million and $33 million, or between $0.98 and $ $1.07 per share, assuming a fully diluted share count of 30.7 million shares outstanding.

Long Zhongpin in fund; no personal position

Hedge Funds: It's a Mulligan Industry

I've written on this subject a few times including [Mar 28: Founder of Long Term Capital Failing Again] and [Feb 28: London Hedge Fund Goes from +87% Return to Out of Business in a Span of Months] but frankly, for a person in my position with my goals, I have to say I get supremely irked each time I read another version of the same story. The Wall Street Journal has 2 stories on this subject - it seems like such a strange game. Take other people's money, devise a method to "beat the system" by a large amount, creating the ability to earn large sums of money in very short periods of time ('generational wealth' I like to call it), but opening yourself up to completely blowing up from the risks involved.

Then when it happens, you blame it on a "Black Swan" event - that once in a lifetime risk that you could never of foreseen.... wash your hands, close down your fund. (wait a while) And then go back to the market to raise funds for a new fund, now that your smarter and learned from your mistakes... and here is the kicker folks - there are tons of people willing to give it to you. But only if you have the right pedigree and have shown the ability to destroy wealth in a fabulous manner. Is that perverted or what? I guess I just don't understand since I am not part of that "sophisticated" system. Again, perhaps I am just bitter and that feeling does not allow me to see the brilliance in the investors who continue to shovel money in the direction of these "stars".

For those new(er) to the market, and wonder why stocks go in crazy directions that don't resound with logic these are illustrative stories of what goes on behind the scenes; think computer dominated trading, think huge leverage, think massive risks and the ability (in some cases) to group together to push a stock where "said group" would prefer it to go... this is not your momma and poppa market from the 60s or 70s. We are just minnows in shark infested waters. And leverage is everything - even our "conservative" investment banks are apparently leveraged 30+:1 (see Bear Stearns). And money is so pervasive in the invesment banking industry, that $30M is chump change - I don't know the conversion ratio but apparently $1 million investment banking dollars (easily earned through such great ideas as tech stock IPOs that value companies on "eyeballs" or say mortgage back securities - NEARLY risk free) is equivalent to a $10 bill for normal Americans.

WSJ: Rebounds by Hedge Fund Stars (Stars?) Prove it's a Mulligan Industry

• Jeffrey Larson lost $1.5 billion for his hedge-fund investors in a few painful weeks last summer. He shuttered Sowood Capital Management LP in July, one of the more embarrassing meltdowns in recent memory.
• So what are the 50-year-old Mr. Larson's summer plans this year? He is trying to raise money for a new fund, arguing that he has learned valuable lessons. And he is attracting some interest.
• Just over a week ago, Drake Asset Management announced that it was closing its $2.5 billion hedge fund after heavy losses. Executives say they already have more than $800 million committed to a new fund.
• Some investors in Daniel Zwirn's D.B. Zwirn & Co. fund recently received subpoenas from the Securities and Exchange Commission regarding an investigation into the fund, which is closing. But some already have told Mr. Zwirn that they would be interested in giving him money for a new firm he is considering.
• Traders sometimes even get third chances. Take Brian Hunter. After leaving Deutsche Bank amid a dispute, his trades led to $6.6 billion of losses for hedge fund Amaranth Advisors. He now is advising a new fund.
• Investors have a range of explanations for opening their wallets for failed managers. Sometimes, managers demonstrate that big losses made them smarter investors, or they offer to waive some of their hefty fees for those who got burned in previous funds. Some managers who had stumbled in the past, such as David Shaw of D.E. Shaw and William Ackman of Pershing Square, restarted their careers and generated big returns.
• It can be helpful to have lost loads of money, rather than a smidgen of cash. (aha! that's the secret - go big or go home)
• "It's crazy, but the guy who's down substantially often will have a lot more options versus someone smaller who hasn't lost much money," says Neal Berger, who runs Eagle's View Asset Management, LLC and invests with funds. "Some investors will say 'lightning doesn't strike twice in the same spot,' or, 'there must be something smart about him that someone gave him the opportunity to lose so much money in the first place."'

Back to Peloton which I wrote about in February - WSJ: Peloton Flew High, Fell Fast

• When hedge-fund chief Ron Beller's investments in U.S. mortgages turned against him, he got a rude awakening to Wall Street's unsentimental ways. Bankers who had vied for his business reeled in credit lines and seized the fund's assets. In a matter of days, Peloton Partners LLP, once one of the world's best-performing hedge-fund operators, lost some $17 billion.
• There is a widespread weakness in the hedge-fund business: Highflying managers sometimes fail to fully factor in broader risks, such as what happens when troubled banks pull back the borrowed money many funds need to make their investments. Peloton was particularly susceptible because it borrowed heavily to boost returns. For every dollar of client money, Peloton had borrowed at least another nine dollars to buy some bonds.
• A Long Island, N.Y., native, Mr. Beller made his career at Goldman Sachs Group Inc., netting a post as a top executive in London. (aha that explains it, right pedigree - please take all my money; what could go wrong - every Goldman guy is teflon)
• At a Goldman-hosted hedge-fund conference in a Spanish coastal resort, Peloton's team held court with potential investors, laying out the fund's strategy: Make money on global economic trends through bets on a variety of assets, including bonds and currencies. The partners kicked in $30 million to help start the fund. Goldman's asset-management arm invested $50 million, said people familiar with the situation. By that fall, Peloton's assets totaled $1 billion.
• He berated some investors who decamped, questioning why they would forgo Peloton's gains, which by November 2007 had reached a stunning 87.6%, largely on the bearish housing bet. In late January, Peloton won two awards at a black-tie ceremony hosted by trade publication EuroHedge. But by Monday, Feb. 25, further sharp drops had left Peloton scraping for cash to meet margin calls from lenders, including UBS and Lehman Brothers Holdings Inc. On Wednesday morning, Feb. 27, yet another sharp drop in Peloton's mortgage investments killed a rescue. Mr. Beller at one point collapsed on a couch in distress. The next day, lenders seized Peloton's assets, bringing a chaotic end to the fund.

So follow along at home; huge leveraged gain in 2007, accepting hedge fund awards in late January 2008, out of business by end of February 2008.

Since it is now May 2008, I can only assume he has a new fund or is fund raising and getting a ton of capital because "that could never happen again" and "he learned from his mistakes". :) There just must be more money than sense in this world. I look forward to the day I can blow up institutions money in my hedge fund and be lauded for my learning curve....

Blackberry Bold Joins Blackberry Kickstart

Looks like there is some excitement today on the announcement of the new Blackberry "Bold" which is Research in Motion's (RIMM) foray into 3G; Apple's (AAPL) turn comes soon for their 3G entry. It feels like I am doing more product discussion [May 1: A New Phone for your CrackBerry Addicts] than stock discussion of late with RIMM. Jim Goldman from CNBC details how this smartphone war is shaping up, and if you'd like a video look at how the phone looks/works you can click here.

• It's been a year since RIM released an update, and during that time, just about every spotlight has turned to the iPhone from Apple with so many experts ceding the market to the upstart touch-screen wonder.
• And the Bold is something to behold. I haven't talked to a single person who has seen it, touched it, played with it, whose first reaction wasn't "I want that."
• The particulars shape up this way: First, no touch-screen on the Bold as has been widely rumored. Instead, a beautifully rich, half-VGA, 408x380, 65,000 color screen where, I'm told, images jump off the screen.
• Other notable items: 1Gb of on-board memory with capacity for 16 gigs; wi-fi, Bluetooth, GPS, a 2 megapixel camera, full HTML browsing (like the iPhone), 3.5G and good battery life.
• RIM isn't offering any specifics on release dates, but it should be some time this summer. A source tells me it will be priced competitively with iPhone, probably in the $399 or below range.
• Trouble for Apple is that, unlike Vista, RIM is indeed offering a compelling alternative to iPhone. The media player and spectacular screen will appeal to consumers and business users alike. The RIM keyboard will give the device the edge over Apple's iPhone for enterprise users as well. Business users who may have been on the fence between the two may lean their way back into the RIM camp with Bold.
• Still, several analysts are out this morning with bullish reports on Apple, including Piper Jaffray, which says current iPhone versions are in incredibly short supply lending credence to the June 3G release. And American Technology Research raised its Apple target to $220 from $210, and raised its iPhone shipments to 11 million and 17 million in calendar years 2008 and 2009 respectively, from 7 million and 10 million.

Again, these are 2 of the names I can find that actually have secular growth in the "overrated as a growth story" technology sector. I continue to remain long both; let the fighting begin this summer in a cell phone store near you....

Long Research in Motion, Apple in fund; no personal positions

Reviewing August 2007's Roadmap & Views

Every so often I try to put a collection of thoughts together as a big picture view of where things will be headed in the next 6, 12, 18 months. While most of these thoughts are constantly swimming in my head, it is fruitful to put them down on paper plus fun to look back and see how wrong or correct I was. When I had a fraction of today's amount of readers I outlined some thoughts at the tail end of August 2007 which can be found here [Aug 31: Et tu, September?] Since we have 3/4 of a year past now we can begin looking into these comments and see how they played out. I'll do a similar look at my early December outline [Dec 4: Et tu 1st half 2008? Predictions for the coming 6 months] (which was far more detailed) in mid summer. One day I'll get around to writing a new one for the coming 6-18 months ahead...

Now let's set the stage for late August since in hindsight everything looks predictable. A few key things to remember

1. Fed Funds rates were still in 5%+ range; the market had begun its dislocations in late July through mid August and the Federal Reserve had come to its first "rescue" with a discount rate cut, in a surprise move that caught shorts with their pants down (free markets and all) on a Friday 8:30 AM when the market had plunged. (I was among those caught the wrong way as the first hints of socialized markets and "interference" was upon us)
   
2. We were still being told, everything is fine in housing, this is only a subprime issue - and anyhow housing is only 4.5% of GDP, so even if it did fall off a cliff (which it would not) it is nothing to worry about. Housing will rebound "later in the fall"...
   
3. We were told the financial issues were only subprime and the confessions at that point were "the kitchen sink" - it wouldn't get worse than that
4. We were told there has never been a time when housing prices fell nationally so stop worrying
5. We were told not to fight the Fed
6. No one was talking about recession except Peter Schiff, Nouriel Roubini, TraderMark, and a handful of others. Every major brokerage house said no chance.... until December 2007 when many began changing their tune. Some still say no such thing ;) Ignorant bliss was everywhere back then; now it is less so but still in pockets
   
7. Inflation was not on the table as even a discussion point; other than some throwaway lines in each Federal Reserve statement over the past few years.
   
8. Clinton v Guiliani was the consensus for Election 2008... the first primary was many months away
   

Let's move on to my comments at the time

We were just embarking on the first of many homeowners bailout plants - Bush proposed some minor one that encompassed a whopping 100K people. Here were my comments on the housing bust

* We are in inning 2? 3? of a housing correction
* Home prices are sticky; as homes are illiquid. We are just now seeing the first serious falls, and these drops so far, seem minor versus what should be coming down the pike in the most overheated of markets, as prices are so out of whack with income it's silly.
* The supply of buyers is constrained by much tighter mortgage standards - leading to pure economic theory, less supply of buyers, increasing supply of inventory = not good for prices. I mean really, who can afford a $500K mortgage in CA with a fixed rate of 6.25% fixed? That's a $3100 payment, before property taxes. There are only so many people in this country who can afford that. I'd argue a very small amount. Oh and did I mention jumbo rates are north of 7%? I am being generous with the 6.25% rate. The same example applies to the $400K mortgage in Seattle and northern Virginia, New Jersey, Hawaii, Boston, the $350K mortgage in Arizona, Nevada, Maryland, Chicago, Portland, Denver. Where will these people come from? When they cannot resort to interest only 2/28s?
* And after we bail these people out (not with Bush's plan, but with the next generation of Bush's plan that will need to be created), who is going to be able to afford to buy those homes when these bailed out owners want to sell? Or after the bailout will they be content to sell for $150K less?
* When people even in good financial shape see weakness in housing they also naturally get cautious and retrench on their plans to buy, and this feeds on itself (you go first... no you go first... no you... someone buy this house!)
* Even those people who have no plans to sell their home, feel poorer on paper, and hence have natural tendency to tighten spending when feeling less flush in cash, even on paper.
* Bush's aid plan is going to help less than 100K out of millions who will be suffering in the home market
* The fact that free market Bush is even alarmed enough to come up with any sort of plan. Free markets are great... until something goes bad, I guess. Even for Republicans.

So all in all, relatively good calls. This was the first step in a long step towards socialization of losses onto the backs of the normal people and away from Wall Street - coming from Republicans no less. But what the government and Federal Reserve was doing then was a pebble in the ocean compared to what they did later in the year and into 2008, which I aptly said with the comments about "the next iteration of Bush's plan" (and Congress was even more hasty to create plans). I do believe the housing correction has moved to inning 3/4 now that new home builders are finally slashing prices... so 9 months later we've moved an inning up. Further, the early blips of home prices depreciation which I said would seem minor (and they were), pale in comparison to the 20%+ year over year drops we are now seeing.

Tighter mortgage standards *is* causing an issue - as it dries up potential buyers. We also seeing a retrenchment by buyers who can buy as they wait to see the housing market bottom before jumping in, as stated. People *are* feeling poorer across the nation as their home prices depreciate.

Onto the consumer...

* The retail "my house is my ATM" play, seems to be over. Retailers already foretelling this; remember stocks are discount mechanisms for the near future (6+ months out). Yes people have been calling this for years, but our consumption culture has always made them look like fools. But with the spigot of the ATM as a house now truly gone, people won't be able to refinance their credit card debt into a new mortgage. (and keep repeating every 2-3 years)
* Same point above but in regards to stock market gains - how will they feel with a potential 15% correction in stocks? More retrenchment?

The retail "my house is my ATM" play *IS* over. Retailers were foretelling this and their stocks went on to be crushed further into the fall and early winter. By mid January these stocks were obliterated [Jan 15: Will there be Anywhere Left to Shop?] As for the stock market, after the correction in the summer, we went onto new highs in the market under the illusion of everything was ok and the Federal Reserve is all powerful - into Sept/Oct 2007 - before a serious selloff in November and a beheading in January 08. But 401ks balances are not making people feeling any better nowadays.

Onto inflation - the one call I really rest my laurels on, especially food and the boondoggle that is corn ethanol... this came before anyone else was talking about it (except perhaps Coxe which I found out about many months later) [Jan 18: One Lonely Voice Agrees with me on Food Inflation] *Now* it is consensus...

* Grocery inflation as this ill begotten push for ethanol (using inefficient corn) is rifling through feedstock, corn syrup and any of the thousands of items which use corn as a basis, and now seeping to the end consumer.

Job market? Well I was "wrong" here because the fantasy that is the government jobs reports has been showing GAINS in financial, construction and every other type of jobs due to the magic of the birth/death model (lovely) So while I believe I am correct in reality, if you use government reports I am wrong left and right ;)

* Construction jobs - they are going to be accelerating into an abyss. Granted, some portion is illegal workers who were never on payrolls (official ones, that is) in the first place. But this is a trailing indicator. Who needs more homes when inventory is >9 months, on the way to ? 12?
* Mortgage jobs - huge cutbacks already announced and will be filtering through the future unemployment reports
* Financial jobs - we should start seeing lay off notices soon enough (next week?) I already read that across the pond there are cuts in credit departments already hitting. If we go back to pre 2004 levels of 'credit' (revert to the mean?) what does that mean?
* For those that remain, their year end bonuses will suffer. This year will be down, but NEXT year looks to be really down, as entire departments will no longer be needed/existing. What does this mean for the NYC and affiliated areas high end real estate market? I know, I know, those poor millionaires...

Credit market? Financial earnings? We were told everything is fine - the Fed was now on our side and once again - the kitchen sink confessions were now behind us, and financials were "safe" to buy and hey... "cheap" after their correction in summer 07 - I, on the other hand, was loaded up on Ultrashort Financial (SKF) - which in fact hurt me in September and October when the fantasy of belief was strong in the market - before reality hit later in the fall. As I stated, we saw MULTIPLE earnings revisions reductions. The credit markets? A complete disaster which only got worse as the year progressed and well into 08.

* Commercial paper market still extremely dysfunctional
* Earnings cuts in the financials - just started getting downgraded this week by the analysts - how are they even going to be able to provide guidance in October when the location of all this credit risk is in many ways unknowable (how do you tell what % of loans in a CDO you own is going to default in the next 2 years?) We are probably looking at earnings revisions down #1 of a multi step downgrade program in these names.

Google? I was correct on the stock (which got trashed starting in Jan 08) but not so much on the reasoning (yet)

* Internet ad spending down as financial companies provide a large bulk of it. Could Google disappoint? Psychological blow of all blows - the teflon stock of our era missing?

China? Nailed this one - although it took about 6 weeks. China was cut in half starting in November 07. Keep in mind this was in the environment where "it is safe to buy Chinese stocks into the Olympics" - yada yada.

* China looking like an exact mirror to NASDAQ 1999-2001? New bubble? The Shanghia Index over 5000, was only 4000 just over a month ago, and almost 100% up in 6 months? 50 PE on an index? Oh and a large portion of those earnings are investment gains, not operational earnings. With a country full of newbie investors who have never been through any bear market? Remember what happened when China fell just 7% in Feb 2007.

Earnings of Interest this Week

We are winding down yet another earnings season; only a few more land mines to dance through - we have the first of the Chinese solar names reporting and later in the week we have the first confessions in major retailers. Watch for a lot of confessions in the next 3-4 months about how the "2nd half of 2008" is not shaping up as rosy as everyone believes it will be now. They might get a short term spike from these handouts... err rebate checks, but I think far less than people expect - more important will be the strain consumers will feel under $4 gas, and next winter's heating bills.... along with agflation (food inflation)

I'll be interested to watch the market reaction next Thursday - will the major retailers cause a "relief rally" on "hey the results are not as bad as we thought" or will they cause a selloff on "what, you mean the consumer is under duress?" - any major slashing of guidance by KSS or JCP could cause the thinking to change to "hey maybe we better re-assess if 2nd half rebound is fantasy or not" - we'll see.

On the economic front we'll have export and more important IMPORT prices (which show me the true story in inflation - it's been running around 14-15% of late) Tuesday, and then to offset that truth is the lie that is Consumer Price Index (CPI) which is the government's report on what inflation "is". So truth on Tuesday, lie on Wednesday.

Companies I'm watching

Monday
Solar names JA Solar (JASO) which we don't own but the stock is behaving very well, and LDK Solar (LDK) which we do own; the latter, after being comatose, has shown some life of late.

Tuesday
Another Chinese solar Canadian Solar (CSIQ) which has just about the best chart in the entire sector

Speaking of solar we have Applied Materials (AMAT) which is trying to remake itself into a solar brand it appears

Cameco (CCJ) a uranium name which has NOT participated in the commodity boom (strangely) but if you want to play nuclear this is the way to do it - some signs of life here the past week

TJX (TJX) which is a retailer who caters to the off rack "poorer" America (TJ Maxx and the like), but the big kahuna of the pooring of America trend is going to be Walmart (WMT) - I truly think the next 12 months is going to be a time of revival for this brand (which is an unfortunate thing in terms of what it means for the direction of our country) As I said a long time ago a nation of Target shoppers will be forced involuntarily to become a nation of Walmart shoppers [Dec 26: Target Shoppers Turning into Walmart Shoppers]

Speaking of which one of my favorite short ideas (although its scary to short these into earnings because of the "hey its a terrible number but we expected abysmal so take this stock up 30%!) of this Walmart nation is Whole Food Markets (WFMI) - I expect economic reality to push people out of healthy organic foods back into junk or lower cost food (read: cheap) so a lot of formerly upper middle income people will be forced out. That's pooring of America 101 - and a threat to WFMI the next 2 years.

Wednesday
A seismic measuring company (oil field services) we once owned CGGVeritas (CGV) - I continue to like this space but this company has seemed to disappoint on earnings quite a bit.

Chinese travel player Ctrip.com (CTRP) - this is a name I have followed for many years; they are steady like a rock but the valuation is now getting heady for me so as I stated last week I cut back almost all I had going into this week's earnings. Hoping for some sort of miss or cautionary guidance to drive the stock down so I can buy at lower prices.

Major ag equipment player Deere (DE) - I don't own the equipment stocks anymore; at some point the rising cost of steel, petrol products and the like will be hurting the bottom line unless they can pass all the costs along to farmers - over the next year if inflation does not abate this is the type of company who could see profit margins squeezed simply from the constant increase in input costs.

Thursday
Hewlett Packard (HPQ) - a bit of a technology bellweather

JCPenney (JCP) - we know the numbers will stink; it's just a matter of how bad. As always it is dangerous to bet against these stocks into earnings because of the same reasons mentioned above i.e. "results stunk but hey not as bad as expected, take the stock up!" Wait until the 2nd half, when they constantly are bringing down estimates... it's not going to be a good Christmas for clothing stores.

Kohls (KSS) - see JCPenney although Kohl's is a better company in my view

Urban Outfitters (URBN) - this clothing name has defied the trend and still seems to produce product people will pay up for...

Friday
Abercrombie & Fitch (ANF) - a darling for a long time with its very pricey products; even teenagers seem to be trading down to Aeropostale (ARO)

Bookkeeping: Weekly Changes to Fund Positions Week 40

Week 40 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: 18.1% (vs 3.3% last week)
54 long bias: 60.2% (vs 77.7% last week)
8 short bias: 21.7% (vs 19.0% last week)

62 positions (vs 66 last week)
Additions: N/A
Removals: Kinross Gold (KGC), Silver Wheaton (SLW), India Fund (IFN), Huron Consulting (HURN)

Top 10 positions = 30.0% of fund (vs 31.3% last week)
41 of the 62 positions are at least 1% of the fund's overall holdings (66%)

Major changes and weekly thoughts
We went through another week where most bad economic news was shrugged off and stock prices continue to hold their own. As always, news does not matter until it matters - the "gas tax" on the entire US economy is being sneered at, as is all the bad news on Main Street - much of it hidden behind faulty government numbers which paint a far rosier picture. As for the "gas tax" (the inflation that hits all pocketbooks across the US as energy prices inflate), anyone with any vision can see it is going to hit profits but until a bunch of companies admit to it, the minions on Wall Street will continue to ignore it and sweet talk the future. The warning after the bell Friday by Fedex (FDX) is just a harbinger of things to come. While the "credit crisis" has been swept under the floor as "it can't get worse than it was" and "no matter what the Federal Reserve will create billions out of thin air to make sure things don't get too bad" the after effects of such a safety net are now being seen. No free lunch. And in the sound and fury of the credit crisis everyone is ignoring the recession - oh I'm sorry "a few bumps in the road on the way to 2nd half recovery". At some point the market will recognize this, and the hit to profits as oil is literally the grease that skids commerce in the 21st century - but until it is plain in people's faces and they cannot ignore it anymore (as they have so far), I guess stocks can continue to levitate on the fairy tale of 2nd half rebound.

For the fund I spent the early part of the week closing out some outlier positions to clean up the portfolio and begin to make it more concentrated; along with selling off parts of some huge winners we've had which have enjoyed multi-week runs. I do expect to be hit with a commodity related sell off at some point... the drumbeat will be "at some point high commodities will be a drag on global growth" and therefore "demand for said commodities will drop" and thus the stocks will sell off. I expect to hear a lot of that as we go into 2nd half 2008 as Western Europe joins the US in protracted slowdown and Japan... well Japan has been in slowdown for 2 decades. At that time many of our holdings will sell off... and people will turn to stocks that... rely on the US consumer "early cycle" which for reasons mentioned in the first paragraph will be a complete disaster. Sorry, there are just not many shelters in the storm in a high inflation, slow growth scenario - and banks, retailers, and restaurants sure are not it.

In a nutshell I am back in a more neutral/defensive stance - I do not know when reality will hit this market, but as we saw in January - when it does it can turn ugly very fast. Corporate profit estimates for 2008 are far far far too high. As they drop, stock prices should drop with them. But $1.3 Trillion of liquidity has now been "created" (no inflation created of course) to help prop up the markets, so it's a war between reality and liquidity. Further, in my view, complacency seems to have set into this market, with the undying believe in the Federal Reserve as the savior... much like September/October 2007. That didn't work out so well.

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

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

1. Monday, I closed out my 2 precious metals stocks, Kinross Gold (KGC), and Silver Wheaton (SLW) - I'd rather be exposed at this point to commodities that are used less as a hedge against inflation, as opposed to ones who will continue to benefit as inflation continues plus I think the fundamental story is still not appreciated by the Street. So these are a bit of overlap positions with other commodities I already have.
2. Same logic with the India Fund (IFN) which I closed as well - I own 2 Indian banks which essentially trade in almost identical fashion - right now there seems to be very little discerning between individual Indian stocks and the market as a whole - so it's a bit of overlap.
3. Tuesday, I had a wonderful trading gain in Brazilian homebuilder Gafisa (GFA) last week, and to top it off I was able to buy back my position (much of it sold in $49.60s) near $42 within days of my sale. While I see downside to $38 (or worse if the market crumbles) I was able to lock in a nice jumble of profits in the last week, in a name I really like, and then reacquire my stake at lower cost basis.
4. After Alpha Natural Resources (ANR) reported an outstanding quarter Monday, the whole sector jumped and Tuesday, I cut out much of my "trading" positions I was adding last Thursday, booking 15-20%+ type of gains for a 3 day hold. While this group needs a pullback, it is one of my favorites going forward - so I'll continue to trade around a core position.
5. I added to some fertilizer Tuesday (which I cut later in the week) - this group has been providing a lot of headaches the last week and a half - looking ready to jump technically speaking, but then falling back. So I keep buying a bit, then selling a bit, then buying a bit, and selling a bit as the charts are indecisive. For now I plan to hold off until I see a more solid move - so I will give back some gain but we need to see a pattern emerge. While I expect another huge move later in 2008, I could see this group fall back in the near term - it needs to build a solid base for that next run.
6. I cut solar exposure as well Tuesday, the Chinese solars all report in May so this group will be extremely volatile in the weeks to come. Unfortunately solar investors seem to group all these stocks together, so when 1 reports a good number, the whole sector pops - and when 1 reports a bad number, the whole sector gets sold off. Until we reach the point where winners and losers are sorted out in the sector - I expect the group to continue to trade in this herky jerky fashion.
7. I closed Huron Consulting (HURN) as this company yet again cut guidance (which it seems to do every 5th week - and cut its peer FTI Consulting (FCN) which later in the week reported yet another strong number but after a quick spike sold off
8. Tuesday was busy! I cut back Cummins Engine (CMI) after a heck of a run for a normally staid name.
9. Wednesday, I cut most of what remained of 3 smaller positions after 35-40% runs in 5 weeks... Baidu.com (BIDU), Mercadolibre (MELI), Ctrip.com (CTRP) - while I respect they can continue to go up, I'll let someone else take the risk - and look to buy back at lower prices.
10. Thursday, I cut a few names which I had yet to ring the register on, Mechel (MTL), National Oilwell Varco (NOV), and Cleveland Cliffs (CLF) - all are commodity related and again I am getting antsy that we have not had a serious sell off in this space for nearly 2 months. We are overdue.

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.

86 Stocks Returning 8%+ Last Week

Below is this week's list; another week heavily dominated by energy names - natural gas and coal leading the way... as always

1. Market capitalization of $2B +
2. Average daily volume 100K+
3. Stock price $10+
4. Return past week 8%+

We own names in green; we have owned or discussed names in blue

Symbol	Company Name	% Price 1 Week
CLR	Continental Resources Ord Shs	21.3
WTI	W&T Offshore Inc	20.6
ARG	Airgas Inc	20.2
EAC	Encore Acquisition Co	19.0
GLBL	Global Industries Ltd	17.8
AU	AngloGold Ashanti ADR	17.5
CRK	Comstock Resources Inc	16.9
FTI	FMC Technologies Inc	16.5
ATVI	Activision Inc	16.5
OCR	Omnicare Ord Shs	15.9
PCX	Patriot Coal Corp	15.7
ANR	Alpha Natural Resources Inc	15.7
DRS	DRS Technologies Inc	15.6
OGZPY	Gazprom Rep 4 Ord Shs ADR	15.6
ME	Mariner Energy Ord Shs	15.3
NOV	National Oilwell Varco Inc	15.2
CRZO	Carrizo Oil & Gas Inc	15.2
PXD	Pioneer Natural Resources Co	15.1
CCJ	CAMECO CORPORATION	15.1
BBG	Bill Barrett Corp	14.9
OII	Oceaneering International Inc	14.5
TE	TECO Energy Inc	14.5
UNT	Unit Corp	14.3
HK	Petrohawk Energy Corp	14.3
CLF	Cleveland Cliffs Ord Shs	14.1
APC	Anadarko Petroleum Ord Shs	13.8
AUY	Yamana Gold Inc	13.8
OC	Owens Corning	13.7
WLT	Walter Industry Ord Shs	13.0
WCG	WellCare Health Plans Inc	12.9
HERO	Hercules Offshore Inc	12.8
FDG	FORDING INC	12.5
PBEGF	Petrobank Energy and Resources Ltd	12.4
SU	SUNCOR ENERGY INC	11.9
COSWF	Canadian Oil Sands Trust	11.9
IPI	Intrepid Potash Inc	11.8
MEE	Massey Energy Co	11.7
DLTR	Dollar Tree Inc	11.7
DNR	Denbury Resources Inc	11.5
EXH	Exterran Holdings Inc	11.4
PCZ	PETRO-CANADA	11.3
MVL	Marvel Entertainment Inc	11.3
NBL	Noble Energy Inc	11.2
GIL	GILDAN ACTIVEWEAR INC	11.2
MEOH	METHANEX CORPORATION	11.2
SPN	Superior Energy Services Inc	11.1
BRY	Berry Petroleum Co	10.9
LDK	LDK Solar Co Ltd	10.9
FFIV	F5 Networks Inc	10.7
MR	Mindray Medical International Ltd	10.5
VIP	VympelKom OAO	10.5
ACI	Arch Coal Ord Shs	10.3
TCK	Teck Cominco Ord Shs Class B	10.1
WHQ	W-H Energy Services Inc	10.0
GG	GOLDCORP INC	10.0
BTU	Peabody Energy Ord Shs	9.9
TRA	Terra Industries Ord Shs	9.9
TDG	TransDigm Group Inc	9.8
PCLN	Priceline.Com Ord Shs	9.7
CNQ	CDN Natural Resource Ord Shs	9.7
XEC	Cimarex Energy Co	9.7
NXY	Nexen Ord Shs	9.4
PDS	Precision Drilling Trust	9.1
X	United States Steel Corp	9.0
ECA	ENCANA CORP	9.0
PXP	Plains Exploration & Production Co	9.0
DISCA	Discovery Holding Series A Ord Shs	9.0
EP	El Paso Corp Ord Shs	9.0
ATLS	Atlas America Inc	8.9
SSL	Sasol Level II ADR	8.9
HES	Hess Corp	8.8
FWLT	Foster Wheeler Ord Shs	8.8
SID	Companhia Siderurgica Nacional ADR	8.8
CAM	Cameron International Corp	8.6
TLM	TALISMAN ENERGY INC	8.6
EQT	Equitable Resources Inc	8.5
EL	Estee Lauder Ord Shs Class A	8.5
EOG	EOG Resources Inc	8.4
BJS	BJ Services Co	8.3
CNX	CONSOL Energy Inc	8.2
OIS	Oil States International Inc	8.2
SWN	Southwestern Energy Co	8.2
FMC	FMC Corp	8.1
MELI	Mercadolibre Inc	8.1
AA	ALCOA Ord Shs	8.1
PTEN	Patterson-UTI Energy Inc	8.1