WSJ: Trichet Says "Shocks" are not Over for Economy

For those who do not know, Jean-Claude Trichet is the European Union's version of Ben Bernanke. Further, unlike the United States Federal Reserve who is supposed to be balancing 2 missions - growth AND fighting off inflation (although they've totally forgotten about the latter in their desperation to stimulate growth - at any cost), the European Union's bank has 1 mission - fight inflation. That is why when CNBC says every 3 weeks "the EU will be cutting any minute now, just you wait" and hence "the dollar should rally", it is really hard to take them seriously. But they've been repeating it now for about 3/4 of a year - they don't understand the psychology over there - unlike the US, people actually have a memory over there - and the hyperinflation era of Weimer Republic hangs over their head every moment.

At the end of World War I, Germany was crushed, Britain and France emerged exhausted winners, and there were a lot of big questions at the time, such as, would revolution in Russia spread to the rest of Europe?

Enter the Treaty of Versailles, June 1919, which placed responsibility for the war on Germany, while France demanded that Germany pay in more ways than one. The German military was to be reduced to a shell of 100,000 volunteers and about 6 cruisers, plus the government was to pay reparations of some 132 billion marks (about $35 billion?depending on how you value the currency at this time), along with other payments such as ? of all extracted coal. French Prime Minister Clemenceau said, "We will squeeze the German lemon 'til the pip squeaks.'"

Germany was reduced to economic chaos after the armistice. In 1920, prices plummeted around the world in a great deflation. This price and wage deflation was reinforced by the economic policies of conservative governments. Germany's new Weimar Republic inherited the vast burden of debt and the crushing weight of reparations. Add in the fact that tax revenues were low due to the weak economy, while the outflow of payments in gold-fueled inflation.

It also quickly became apparent that Germany would be unable to meet its reparation obligations. In July 1920 the German mark plunged dramatically as the Weimar government informed the Allies it could not meet the schedule of payments, but that it would continue disbursements of coal and other natural resources. With the U.S. pressuring Britain and France to repay their own war debts, the Allies grew all the more determined that Germany pay up.

On January 11, 1923, French and Belgian troops (against the advice of the British) occupied the Ruhr, a region which furnished 4/5's of Germany's coal and steel production. The miners refused to work for the enemy and the Germans simply printed more money with which to pay them not to, allowing inflation to spiral completely out of control. The economy was strangled and the free fall in the mark was incredible.

By late 1923, the German government required 1,783 printing presses, running around the clock, to print money. Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants posted the afternoon price rises.

Actually some of those words sound eerily reminiscent of a certain 1st world country in this era - printing presses working 24/7 to combat deflation in certain assets (home/stocks). Hmmm...

With that said as commodities move ever upward, we continue to hurtle towards a global recession in 2009. Keep repeating - inflation is a tax on all things and all entities - producers and consumers. Right Kimberly Clark? (last I checked KMB does not sell food or gas - but somehow these price increases will NOT show in government reports - because you will substitute - i.e. oak tree leaves to wipe your behind instead of toilet paper, or instead maple leaves patched together instead of diapers... that's government "substitution" effect and how we can make inflation disappear) We pointed out this "real inflation" in consumer goods produced by the Procter & Gambles and Kimberly Clarks of the world back in April [Apr 10: Inflation Spans the Globe] Only in the hallowed halls of government does this disconnect continue - after all they cannot afford to pay seniors on fixed income the trust cost of living adjustment so 2.7% inflation it is! And will be. But more good news in the "real world" announced Friday - this will be the story of earnings reports in the next few quarters - company after company telling how their earnings are being pressured by input costs... all the while Consumer Price Index (CPI) - the government's report on consumer inflation will sing along at a leisurely 2.4-3.4% - lalalala - everything is beautiful in CPI land.

• Adding to the sticker shock faced by many U.S. consumers, Kimberly-Clark Corp. announced plans Friday to hike prices on tissues, toilet paper, diapers and paper towels -- again.
• Kimberly-Clark, like other consumer-goods makers and food companies, is being squeezed on the commodity front as crude oil surges to new highs and raw-material costs escalate. This is forcing companies to protect profit margins through price increases, sales of lower-margin businesses, factory closings and job cuts. (thankfully, it is "all priced in")
• The Dallas-based consumer goods giant said its latest round of price increases will become effective between July 20 and Aug. 31. It said boosting prices is "necessary to offset significant inflationary pressure from higher raw material and energy costs."
• Kimberly Clark said prices will be 6% to 8% higher on Kleenex facial tissue, Cottonelle and Scott bathroom tissue, Viva paper towels, Huggies diapers and Pull-Ups training pants. (not so fast Kimberly Clark! Consumers will be switching to tree leaves! Boo Yah! No inflation - substitution effect wins again)
• These products accounted for U.S. sales of about $4.5 billion in 2007. Back in February, Kimberly-Clark boosted prices on those same products by 4% to 7% (Folks, I'm not a math major but somehow 2 price increases of 4-7%, and 6-8% in the span of 4 MONTHS, somehow adds to more inflation than 2-3% per government reports. If any of you have a PhD in Mathematics could you please email me so that I can make sure my conclusions are correct. Or better yet can you please email the traders who live and die off government reports as gospel?)
• The company's commodity bill is rising: For the quarter ended March 31, Kimberly-Clark paid $160 million more for raw materials, such as fiber, and fuel. And this slowed profit gains: Three of its four business units reported a lower operating profit. (wow imagine that, higher commodity costs hit the bottom line - not according to Wall Street where $120 oil is good, $130 oil is great, $140 oil is groovy, and $150 oil will be superlicious?)
• Larger rival Procter Gamble faces the same predicament. It too has been raising prices to withstand rising costs for energy and base materials.

When will Congress bring "greedy diaper makers" to the floor for a hearing about how they are milking the US consumer? I mean to be fair to big oil - they should start bringing all these companies raising prices. Instead of bringing Uncle Ben to Congress or looking in the mirror - more dog and pony shows I say! Now there is one bright spot folks - unlike the 70s or early 80s, there is 1 place where there is little to no inflation. Your wages. Labor has very little power in the new era of globalization (flat world, labor offshore can do your work for 70-80% off) so we have some GREAT news for corporate America - their workers cannot really go and ask them for higher wages - hence labor costs will stay firm. Awesome news. Well... for everyone except workers. (but who cares about them, they are not necessarily in the 2000s global stock market - more middle class Chinese is all that counts)

Anyhow back to Europe - the Wall Street Journal says Trichet, unlike the UK's King or US's Bernanke does not believe everything is honky dorey. (or will be "in 6 months") Considering Germany's performance [May 21: Who is the World's Largest Merchandise Exporter? Not China. Or the US] versus the UK/US and the fact Trichet refused to budge on constant calls (from American pundits) to cut rates to so he could help our banks from their self induced wounds- instead standing firm as he foresaw inflation risk, I think I'll listen to his words with a bit more of a straight face than the circus conductors running the US.

• The president of the European Central Bank, Jean-Claude Trichet, said potential economic fallout from the turmoil in financial markets, coupled with pressures from rising food and commodity prices, add up to "an accumulation of shocks that is clearly not over."
• The currency he oversees, once the dream of a few pan-European idealists, is today shared by 15 countries, whose €8.9 trillion economy represents the world's biggest market after the U.S.
• Mr. Trichet's comments echo broader worries about a European economic slowdown as oil prices top $130 a barrel. The fallout affects the U.S. and Asia, because Europe is a key source of demand for the global economy as U.S. growth slumps. As European consumers buy less, demand for U.S. imports is slowing.
• The relentless surge in oil and food prices is dealing Europe's economy a double blow -- making it harder for the ECB and Bank of England to cut interest rates, and undermining consumer spending on other items.
• The ECB's key rate has held steady at 4% since last June, and many economists believe the bank will stay put until at least the end of the year. "Had it not been for this oil-price spike, markets would be betting on ECB rate cuts in the coming months," says Jacques Cailloux, economist at the Royal Bank of Scotland in London.
• Many Europeans say the soaring prices of gasoline -- and diesel fuel in particular -- are crimping their lifestyles. Christian Dänzer, a health-center manager from Bavaria, says he's using his car less now in his free time, but he can't avoid driving for work. In Germany, diesel costs the equivalent of over $9 a gallon. That's forcing Mr. Dänzer to cut back his spending on eating out, consumer electronics and clothes, he says. "Things I used to be able to afford, I can't any more," he says. (this should sound familiar to anyone who does not work in federal government or the Federal Reserve - in their world, there is little US inflation - why all the fuss? It's *only* food and gas after all. Ipods are cheap! Maybe when Apple comes out with the EDIBLE iPod then we can say food prices are going down as well)
• Trichet: At the moment, "we have a protracted period of high inflation rates. But we will preserve the delivery of price stability in the medium-term." (sorry to hear that, no inflation here in the States - consider moving; the Kool Aid is wonderful here)

USA Today: Debt-squeezed Gen X Saves Little

One day I'll get around to writing some theories on where this is all headed in the "long term" but since this is a market oriented blog, and the definition of "long term" in this day and age is 'next week', we'll stick to the 'medium term'. But since this story has to do with my generation (and therefore is important hah), I thought I'd bring it out. It does touch on 1 of my "long long" term concerns - the total inadequate savings of most Americans 45 and under for their retirement.

We are coming FROM a generation where many (not all) had solid social security benefits, corporate provided pensions, and a home paid off by the time they retired. Hence, decent revenue combined with a lower expense load (a mortgage/rent is the #1 expense for most people)

We are going TO a generation(s) where many (not all) have much lower social security benefits (pushed out to older ages and not indexed accurately to 'real' inflation), self reliant 401ks (mostly funded by your savings, not the company), and a home levered and borrowed upon over and over to consume - hence little equity, and certainly not paid off by retirement. So a much lower monthly stipend to live off of, combined with a higher expense load. Combined with financial illiteracy for many, combined with the inability to have discipline to save for something 20, 30, 40 years out. And this assumes a consistent inflation environment for this generation (which I don't believe to be true in my "future world" where 9 Billion humans compete for the same resources 6 Billion compete for today). Therefore, as I've stated in the past this will be the "Walmart greeter" generation - working as greeters until they keel over. Many will never retire. They won't be able to afford to.

So what is Generation X doing today to prepare and prove me wrong? Don't ask.

But some of it is not there own fault; the median wage statistic is just downright depressing but it goes to my piece on the "long term" trends that are happening in America - changes so subtle that it is like erosion. Until 1 day, ten years later you wake up, and the water is lapping at your doorstep. [Do the Bottom 80% of Americans Stand a Chance?] This is the worst danger of this inflationary era we enter - unlike the 70s, workers simply cannot get wages to keep up with the cost of living - this has been a problem the past decade, as globalization begins to equalize wages across countries, but we lived in relatively low inflation times (and people got by, by borrowing - versus house, versus credit cards, versus everything). Now we are in a much higher inflation environment - and it could be far worse in the coming decade+.

• For years, experts have warned that too many of the USA's 79 million baby boomers aren't financially ready for their coming retirements. Yet, if the boomers have had it hard, it's nothing compared with those next in line: Generation X
• Generation X now 27 to 43 years old — have even less assurance than the boomers of receiving company pensions and projected Social Security benefits.
• In 1979, when the oldest Gen Xers were teenagers, the sole retirement plan for 62% of workers was a traditional pension, according to the Employee Benefit Research Institute (EBRI). By 2005, when most of the Gen Xers had joined the workforce, that number had flipped: 63% of employees found themselves covered only by voluntary 401(k) plans. So much for the corporate safety net.
• Yet, burdened by high housing costs, stifling college debt, stagnating wages and outsize health insurance and gas prices, Gen Xers are saving too little for retirement, just as workplace benefits have shrunk.
• More than one in three workers ages 35 to 44 aren't setting aside any money for retirement. Among those ages 25 to 34, 45% aren't saving.
• Nine out of 10 consumers in their 30s are in debt.
• Gen Xers also are the first generation to graduate from college with significant student loan debt. About 20% of adults in their 30s are still paying college loans, according to the Federal Reserve study; the median balance exceeds $13,000
• Gen Xers also face this harsh reality: The standard of living that most of them have so far managed to achieve falls short of their own parents' standard at the same age. The median income for men now in their 30s, when adjusted for inflation, is 12% lower than what their dads earned three decades earlier. (just a depressing fact and I believe this will ACCELERATE as the globe becomes even more flat, and we move closer to global wage arbitrage)
• From 1974, when many Gen Xers were children, until 2004, when most were in the workforce, family income rose only 9%. And most of that gain came from 1964 to 1994
• Gen Xers also had the unfortunate timing of becoming adults in a period when the share of income that Americans spend on what most people see as essential needs, such as a home, health insurance and cars, has soared.
• Schwab found that Gen Xers often don't understand investment basics. Many, for instance, don't realize that an investor can contribute to both a 401(k) plan and an IRA. This might help explain why 82% of Gen Xers have no IRA, according to a Schwab survey.
• Some specialists suggest that Gen Xers, faced with escalating financial obligations and shakier job situations, have developed a wary, skeptical stance toward the corporate world.

Investment Pledges by State

I am going to begin tracking the pledges for the mutual fund by state; I will use this blog entry and simply keep updating this one entry as time passes. I'll post a link to this post on the right margin of the blog under "Track My Progress". The reason we need to keep track of investment pledged by state is (warning: boring technical mutual fund mumbo jumbo ahead) every state has its own rules/regulations and fees. So each state has it's own paperwork to deal with (this is how we keep a service economy going, as opposed to a nice national standard which would simplify life).

Long story short, to make it worthwhile to pay the annual fees (which vary in nature and amount in each state) for any 1 state, it will require about $40-$45K invested from that state to pay for the annual fee. For this reason many smaller funds, are only registered in a limited amount of states - obviously the end goal is to register in all 50 states as we scale up, launch and reach year 1 or 2. So while we are making incredible progress on raising pledges (Progress Towards Raising $7M) at nearly $1.8M as of this morning, we still will need a certain amount to make any 1 state eligible.

Since we will have new readers joining constantly, I'll keep this tally available on the blog and categorize the states under one of four categories as shown below. As more pledges come in, I'll move states to the appropriate category

Note: If "Jpassana", "Jimidean", or Ceferino are still around - I need to know your location; please contact me

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Category A: Enough funds to register States (12 states)
AR, CA, FL, GA, ID, IL, MI, NY, NJ, SC, TX, WA

[Note: Need to confirm ID, SC since 1 large investor in each is involved. FL is the only state that has no fee so although I have no investors there yet, I'm including it]

Category B: About halfway to $40K+ threshold States (6 states)
AZ, CT, KS, MD, NE, TN

Category C: $10K or less States (9 states)
LA, MA, MN, NC, NH, OR, OH, PA, WI

Category D: No investors yet (23 states)
Everyone else

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As always if you are interested you can post a comment direct on the blog, or email me (my email address is in the right margin of the blog) - at current run rate we can move our timetable up considerably and potentially could be live by spring 2009 when we are on pace to hit $4M pledged.

Bookkeeping: 'Rising Tide' Performance Week 42

Week 42 performance of the mutual fund

Comments: Week 42 brought a potential change in character for a market in the throes of ecstasy for 2 months. As I've been writing the past few weeks, this period has reminded me of September/October 2007 when the market rebounded off August lows, on the backs of the "Federal Reserve will save us" thinking, and "kitchen sink in financials is out, it's all upside from here". That has been replaced with ... frankly, the same "Federal Reserve will save us" thinking, and "rebate checks will save us" and "2nd half recovery is coming because it cannot get worse" thinking. Just as the thinking in fall 2007 was incorrect... as I did then, I now believe the same optimism is misplaced. This is going to be a long drawn out process with multiple headwinds facing normal Americans. What has changed since the fall is the degree of government intervention into markets, and the first marks of socialism we saw in late winter/early spring - where risk has been shifted from the corporation to the people. I expect this to continue as things degrade in the coming year, as well as a spike in the human frustration and societal angst among the populace in the bottom 2/3rds of America.

In the interim, the bull will be stubborn clinging to the joy of the upper 5%; only when evidence overwhelms his senses to a massive degree will he relent. Frankly the news this week is no different than it was last week or a month ago; only the mood to accept such news. Below the calm surface we saw a rip tide happening with 2 late day intraday reversals in the past week and a half; the latter coming this Monday. At this point I decided to step away from the punch bowl (Kool Aid of course) I've been stuck at, and adopt an even more cautionary stance... which served us well this week. Again, the bull is stubborn (so stubborn he is trying to make a bull case out of $140+ crude) so nothing will be straight down (or up), but I believe caution is best served for the foreseeable future. The economic news only continues to degrade although market participants have been overlooking it, pointing to the horizon and July 1, 2008 - the magical day when the 2nd half recovery we've heard now for 5 months.... begins.

We have massively outperformed the market since inception so I see no reason to press bullish bets here - aside from Trina Solar (TSL) I spent the majority of the week selling, not buying, and storing cash like a squirrel heading into a Maine winter. I'll treat all near term rallies as suspect and sucker bets, as the technical conditions have in my view, degraded. This pattern is looking awfully suspicious - first the financials falter, than come retailers, and homebuilders... while commodities hold up and everyone assures us "this indicates the economy is a lot stronger than the doomsdayers report". (this is where we are today) Then within 2-6 days the "impervious" commodities are shown the backside of a woodshed and summarily destroyed to the tune of 30-40% selloffs. Thank you very much. At which point, the hedge fund computers think it's a bright idea to buy "early cycle" recovery names since "that's what our programmers say to do since every recession is no longer than 6 months". So homebuilders, financials, and retailers will rally after being decimated - CNBC will tell us (again) it's "a sign of strength in the economy's near future" (just like the commodity strength was a sign - notice EVERYTHING is a sign of strength in the economy according to these people). The dollar will rally 0.4329832% and we'll be told, just you wait, this is yet another sign of strength... and we'll be told how the European Central Bank is itching to cut rates so they can throw their middle and lower class to the wolves of inflation. Then we'll wait... and wait... and wait... and then they'll put that story in the freezer to roll out 6 weeks from now during the next cycle.

So let's see if that is the story the coming weeks - if so, it would simply be a repeat of the same dog and pony show we've been doing since last August. The same pundit ignorance and spiel - costing people money over and over as they follow into these same trends repeatedly trotting out the same 1960s thinking - destroying the net wealth of anyone listening. You know - such classics as "subprime is contained, the bottom is in financials" or "housing has never gone down nationally, not to worry" or "even if housing did go down nationally it is only 4.5% of GDP so why the fuss" or "oil will never pass $100" or "all these government reports point to a strong economy, I have no idea why consumer confidence is at 26 year lows; if they only read the reports they'd clearly see everything is fine"... well you get the picture.

For the fund not much was happening this week, since we had a big stash of cash and unlike previous weeks where our hedged positions (shorts) hurt us as Kool Aid spilled into the streets, this week it helped to offset many of our losses in long positions. But with 1/3rd of our portfolio out of play and stored under the mattress it was generally quiet out there for us; coal did continue to rock - but after such a run I've cut it back to its smallest exposure in many months. Frankly, almost everything I like is still much too overextended, although I've made a few smaller buys late in the week as things on my buy list fell to support (first support). While this will sound counterintuitive, I'll probably be building up positions in our investment banks and housing stocks next week IF the above pattern begins to repeat (they've been trashed the past week and a half); because a rally in these sectors cannot be too far off on the "2nd half recovery" thesis. Especially if oil falls to $110 - then the consumer will be booming by August, and houses will be flying off the shelves (houses people cannot afford gas to go visit open houses, but that's beside the point). Jeez, I can almost write these CNBC scripts at this point with 1 eye closed.

The S&P 500 dropped an unattractive 3.5% this week with the Russell 1000 following suit -3.4%. Never thought I'd say this but Rising Tide Growth Fund had a massive week with a whopping +0.3% gain ;) All things considered that's quite acceptable (When do I get my own CNBC show - Boo Yah?). Cash was not trash this week. My goal is to beat the indexes by 15% in any 1 year, and with 10 weeks to go in "our" year 1, we are almost double that pace. I also wouldn't mind finishing as the #1 fund in my category (out of 1800+ competitors) when we measure at the end of July 2008 with a full 1 year track record. So that's the next goal.

As always if interested in pledging an investment when fund is ready to launch please attach a comment here, or send me an email (need your state please). And have a good 3 day weekend.

Price of Rising Tide Growth: $12.310
Lifetime Performance to date (vs Aug 3, 2007): +23.10%

Comparable S&P 500: 1,375.9 (-6.10%)
Comparable Russell 1000: 754.0 (-5.30%)

Fund return vs S&P 500: +29.2%
Fund return vs Russell 1000: +28.4%

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

Smaller Asian Countries Begin to Buckle Under Oil - I'm Closing iShares Signapore (EWS)

And so it begins... I've been writing how this price of oil will put us on path of global recession if it continues. Further, the true market price is being surpressed in many countries, especially Asian and Middle East so true supply/demand dynamics are not playing out like they are in the US where the embattled consumer is shriveling quickly into his home (until he is foreclosed upon).

First, some bookkeeping - I'm CLOSING iShares Singapore (EWS) on the deteriorating outlook for Asian economies as global commodity prices begin to seriously cause issues. No need to take the risk here. I like Signapore for the long run but we have some major issues encroaching the region. I sold earlier today the last of my 0.6% stake in the $13.30s. I took some profit in early April [Locking in Some Profits in iShares Singapore] in the $13.20s just 2 weeks after restarting the position in the $11.70s in mid March, so I missed the top here in the $14.00s+ but good enough. I don't know if Signapore itself subsidizes energy to its citizens but its the financial hub for the region - and since I am now concerned about the region, it's a regional call.



Now on to the fun stuff....

While I'm a near term energy/commodities bear [Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas (DUG)] my comments are more longer term in basis. Essentially we are going to go through years of "World of Shortages" in which commodities trail upward on a long wide slope, punctuated by some dramatic selloffs and bubble like runs up. (of which we have just seen one). But at some point as we've been pointing out, it stops making sense to build things due to commodity costs - either steel [Fast Rising Steel Prices Set Back Big Projects] or energy. Only "not truly free markets" are in fact holding us up - Asian and Middle Easterners willing to pay almost any price to keep their growth going. This cannot continue forever or at any price. This is a major distortion and few countries can keep this up or their budgets will be blown up (we don't mind that in the United States of Subprime; we just will print more money to "fix things" when we have massive deficits) - however not every country is so irresponsible so we now are beginning to see the first signs of economics trumping the distortions in the smaller Asian economies. Now if China/India follow suit a lot of things will be changing in this world.

I wrote in [May 21: American Airlines Cutting Jobs and Routes]

The only reason we are not seeing major slowdowns (yet) globally are many countries subsidize the true cost of energy to their consumers... namely China and India. At some point this will subside or reverse. The true forces of the market are not allowed to play out in these countries - since their consumers are not feeling the pinch - so they have no reason to restrict demand.

And now the first dominoes begin to fall....

• Asian governments are split on ways to cope with record oil prices, with some subsidizing costs for consumers to contain inflation and others raising energy prices to lower the effect on their budgets.
• Indonesia and Taiwan have both pledged payments to low-income families to help them cope with planned fuel-price increases and Finance Minister Michael Cullen of New Zealand announced tax cuts designed to help workers struggling with living costs.
• Malaysia said it plans to announce cuts to a 53 billion ringgit, or $16.5 billion, fuel subsidy in a couple of months, a move that may raise costs and fan accelerating inflation.
• On Friday, the South Korean energy ministry is considering boosting nuclear power output and raising electricity costs in the second half of the year to cope with soaring oil prices and other costs of producing energy, Reuters reported.
• China, suffering the deadliest earthquake in 32 years, said this week that it has no plans to remove fuel-price caps.
• "We see fiscal positions deteriorating in countries that subsidize the local cost of oil," said Robert Subbaraman, chief economist at Lehman Brothers Asia in Hong Kong. "If oil prices stay persistently high at these levels, these kinds of measures can do more damage than good."
• Oil has more than doubled in the past year, and prices of grains such as rice, corn, wheat and soybean reached unprecedented levels in 2008. The increases have stoked social tensions and led to wider fiscal deficits as governments subsidize food and energy expenses for their people. (US solution? Print more money - try it guys; oh wait that creates MORE inflation. No it does not... if you have the correct government reporting which makes inflation disappear like magic)
• Indonesia's president, Susilo Bambang Yudhoyono, facing elections in 2009, is raising fuel prices for the first time in almost three years to reduce subsidies. The government would have to spend 190 trillion rupiah, or $20 billion, on subsidies if fuel prices were not increased
• Taiwan, which plans to increase fuel prices on June 2, will distribute 20 billion Taiwan dollars, or $659 million, in subsidies to middle and low-income families to offset higher energy costs.
• In China, the government said Thursday that speculation that it may remove curbs on fuel prices as early as next month is "baseless." China caps fuel prices to limit their impact on inflation in the world's most-populous nation.
• Chinese consumer prices rose 8.5 percent last month, close to the fastest pace since 1996. Inflation rates in Sri Lanka and Vietnam have exceeded 20 percent, while Singapore's consumer price gains have reached levels not seen since 1982.
• Rising oil prices are giving a "big shock" to Japan's economy.

Conclusion: Ok folks let's review. Almost every country has soaring inflation, but us (and Canada). As long as you don't eat, drive, or have a home that requires heating or cooling. Fantastic. Therefore we can cut rates from 5.25% to 2% to save our lightly regulated, banking system which is out of control. (Free markets solve everything after all)

Further, our stock market LOVES high oil prices because well... it's just good. Meanwhile the world's consumers and producers will suffer. But that's ok - somehow that is good too, I just need to figure out how. Hopefully a hedge fund computer or NYC trader can email me with the details (I'd prefer a hedge fund computer please)

But on a serious note as I keep saying, inflation is a tax on all things, and on all consumers and producers. Only in our stock market do we think it's not an issue ... because most believe in government statistics that show it's not an issue. Only normal Americans living normal lives are seeing inflation - not anyone trading stocks I guess. I do believe we are going to see a serious correction here in commodity/energy prices - in the end, higher prices are the best solution to higher prices. It will lead to a major slowdown - except in the US as we will somehow skirt recession (if you use government figures of course). In fact here in the US, we are headed for a 2nd half recovery. (mmmm, Kool Aid).

As predicted government subsidies will have to begin to slow/stop in many smaller countries or they will be going bankrupt. China will hold out; we'll see how long (post Olympics). If they have to pass along those prices to their consumers - you're going to see a major shock to the system there. Social unrest is their #1 concern - so they might be backed into a corner. But either way it is all shaping up (if energy/commodities hold these prices or even stay anywhere near i.e. within 10-15%) for a very nice global recession of 2009 (except in the US which is not allowed to have a recession, per government rules). So we'll be fine in the US - no worries. Buy stocks.

As well all know this scenario is completely priced into stocks. Frankly I am surprised the market is not 20-30% higher from here, now that we know everything will be ok. Further, July 1, 2008 - the 2nd half recovery begins. Getting closer by the week.

Long Ultrashort Oil & Gas in fund and personal account

Bookkeeping: Adding to DR Horton (DHI)

Let me reinforce, I don't believe for one minute housing has any hopes of a real rebound until prices are materially lower [What Should Median Home Prices be Today?] which probably happens circa latter 2009 into 2010. But the stocks are good counterweights to our normal fare, and when our commodity or global stocks sell off, generally the financial, US retailers, homebuilder stocks bounce.

As I wrote last week as I lightened up [May 14: Selling some Lennar], I simply buy these when they sell off, and sell them off when Kool Aid is running in the streets - some of these names have been hammered since my sale last week. (DHI is down 22% in 6 sessions - notice a pattern in my purchases today?) So I'm going to begin rebuilding the homebuilder stakes now, with a purchase of DR Horton as it approaches March 2008 lows. I'm taking DR Horton up to a 1.7% stake with purchases here in the $12.80s (holding my nose the entire time). If we break that March low, we could be headed to the January lows near $10. So I'm not exactly loading up the boat here. If this trade works out, I'll sell this stake off around $15 sometime in the next 60 days, when CNBC tells me about the 2nd half recovery, replete with unicorns, mermaids and shamrocks. Lennar has not fallen enough for me to rebuy what I sold off.

Long DR Horton, Lennar in fund; no personal position

The Turn from Greed to Fear

Humans are amazing creatures - the turn from greed to fear can happen almost instantly. The market is as always part fundamental, part technical, and part psychological. Monday afternoon we discussed the implications of breaking over and above the 200 day moving average as the S&P 500 hit 1440 and the fact we'd have to ignore all our economic reality and adopt a reluctant bull stance [An Unrelenting Move]. Within half an hour of that post we saw a nasty intraday reversal [Second Intraday Reversal in 4 Sessions] I wrote then

As I wrote in the last entry, it would be poetic justice in some ways for mother market to have drawn in the last remaining bears, forcing them to throw up their hands and go long - just as she was about to drop the hammer. Could it be that dramatic? We'll soon see if historic precedence means anything anymore. If so, these 2 intraday reversals are a shot across the bow.

Ah mother market... she is wonderful in her pain allocation isn't she? Sucked in many of the last exasperated bears who have been hammered for weeks on end on that very brief push over the 200 day moving average, before taking a 3% sledgehammer to their cranium. Now, 4 days later, we appear on the edge of a potential breakdown; the bulls need S&P 1380 (50 day moving average to hold). As I wrote earlier this week, I expect this level to at least provide a "bounce" (which I won't trust) so in a general sense this is what I've done. I've lowered my short exposure down from around 27% to 20% late yesterday and this AM, expecting this 1380 to provide at least a (minor) bounce.

Here are potential moves from here.

On a break below this 1380 level, I will reacquire this short exposure I just let go - a breach of 1380 on a closing basis would indicate to me we have some serious downside ahead.

On a move up from this level (bounce), I will reacquire this short exposure - I don't believe in any bounces and think the market is living on borrowed Kool Aid. As the evidence starts to become clear to the wayward bulls that their 2nd half recovery, housing recovery [AP: Unsold Homes in US Rise to 23 Year High] , and all that nonsense is a joke we'll begin to see capitulation. But it could happen after a bounce, and not right away. Remember, every bull in this market is conditioned to short, sweet, cute recessions - the playbook says buy 3 months in because the Federal Reserve is all powerful and their flooding of the globe with currency (while creating bubbles) soothes the stock market. They do not realize this is the first consumer led recession since the late 70s/early 80s. ONLY when the evidence is so overwhelming will they cry Uncle. And sell stocks.

If this market were trading on reality I believe it would be 15% lower (at least). But Kool Aid is strong with young Skywalker. As I write this the market is around 1379 on the S&P so if we see a continued breakdown later into the day I'll be getting back my short exposure I sold off the past few hours.

Cash is 32% but that is because I lightened up short exposure quite heavily here - I'll move about 7% of that from cash to short exposure if we see continued weakness into the day. Risk is High - all bounces are suspect. All purchases on the long side will be small in scale for the near term. I need much lower prices on MOST of my favorite names to really be buying in scale. I continue to hope for a large scale commodity selloff, which would kick us in the groin in the near term, but I want lower prices to build positions back up.

Short Kool Aid

Bookkeeping: Beginning to Rebuild Mercadolibre (MELI)

Much like the previous entry, I am beginning to rebuild Mercadolibre (MELI), another position I was cutting on the way up. It went much higher than I anticipated (very hard to judge where this one will top out since the P/E ratio is parabolic) - there is always a threat of a secondary offering with this name so I am going at a slow pace, but I had cut this name to a 0.1% weighting, so I have a lot of room to build a position. I am starting today in the $42s and taking it to a 1.0% weight (I'm wondering if they are going to announce a stock offering and this is why the stock is so terribly weak the past 2 sessions) This stock is not old enough to have a 200 day moving average but I'd like to add in scale in the $37-$38 range if we are fortunate enough to get a sell off there. At this point the stock has fallen from $56s to $42s in a week (25%) so it's a good place to begin rebuilding the shares I sold off.

As always this is consistent with my layer in, layer out strategy - layer out as the stock price spikes, and layer in as the prices fall - I rarely catch the tops or the bottoms, but if I catch enough middles, we all win. That said, with this name I'm going slow since it could be $35 in an eye blink.

[May 14: Mercadolibre Reports]
[Mar 31: Mercadolibre with a 3PM Spike/Forbes Article]

Long Mercadolibre in fund; no personal position

Bookkeeping: Beginning to Rebuild Mechel (MTL)

Mechel (MTL) has now pulled back to its 50 day moving average, so I am going to begin to rebuild this position; certainly in a greater commodity pullback we could see a much larger pullback but I cannot predict the future and this is a good time to begin rebuilding as the stock has fallen back from a high of $58 (split adjusted $174) yesterday to $49s (split adjusted $147) today, which is a 15% haircut.

I've been ringing the register on this name on the way up. So I'm beginning to rebuild this today and taking Mechel back up to a 2.9% stake, with purchases in the $49s. I don't expect any quick turnaround as the commodity area is due for a sizeable pullback and in fact I'd love to purchase more in the low $40s, if we get there. This is the first of many names I have on a very large buying list, that has pulled back to an initial support area. So as my price targets hit, I will begin buying. In time I'd like to get Mechel back to a top 5 position as it has been in the past, but I'd like lower prices first.

[Apr 9: Mechel Continues to Acquire Most of Eastern Europe]

Long Mechel in fund and personal account

David Walker on CNBC this AM

So as with all things in America, we will not be proactive but instead reactive - one the tsunami is upon us will the "calls to action" begin - it is now starting in energy, although this has been a growing storm for years (ignored). Unfortunately many of our problems will take years to "fix" so even if we got serious "today", real solutions will take many years to start taking effect.

Now, the huge worry on the horizon once we get through our credit, housing, and energy issues is our national debt issue - especially entitlements. People have been signaling the warning signs YEAR after YEAR, but as with all things, they will be ignored until the problem is overwhelming... and THEN we will try to address it, in haphazard manner if past is precedent. [Mar 26: Annual Spring Warning on Entitlement Programs Falls on Deaf Ears]

I talk about the structural government imbalances on almost a weekly basis - not directly, but as part and parcel with the world view that we are simply a subprime nation and the effect on our dollar. While the dollar has gotten a lot of attention the past year, the truth is it's been in a swoon for many years. Frankly, anyone who tries to raise a fuss is quietly ignored to the point they feel like they are running into the wall.

Who will finally stand up and try to do something? My guess - no one will get anything done until its a crisis condition - which means we can kick the can down the road for maybe another decade. And then when it's a crisis we will pay 15x the cost it would cost now to be preventative. But that's the American way - if it's Katrina, if it's bridges, if it's Medicare, if it's mortgage regulation, if it's (fill in the blank) - this is how we do it. Ignore warnings and only address when its an imminent threat.

The few voices out there trying to get attention to these issues just seem to be drowned out under ignorance and/or "someone else will take care it down the road" thinking. Politicians don't want to touch it because (gasp) unpopular choices will have to be made. One such man who has been TRYING to sound the alarms is David Walker. Unfortunately he has now left government because his voice was not being heard [Feb 25: I Didn't Realize US Comptroller Resigned], so is trying now to sound the alarms in private practice.

Frankly, my take on it is one day within 2 decades the US will be facing collapse under it's own weight - entitlement spending has surged from mid teens (as % of GDP) to >30%. At current pace its going to take over half the budget, and throw defense on top of that, and you will be "crowding out" almost all other spending in about 2025-2030. That's the path we are heading down. But no one wants to touch it. This is why the DOLLAR will NOT be recovering in any meaningful way no matter what CNBC says - yes it can rally for a few months here or there. But we have systematic issues that are ingrained into our system, and a leadership that will not fix it. Until things implode one day. My long term prediction is the United States of Subprime will one day default on all debt, tell the world "we're sorry it won't ever happen again", and start with a clean slate. Sort of like an airline does every 5 years. We'll look like a 3rd world banana republic for doing this, but we won't have any other choice - and we're beginning to look like one of these republics anyhow. Just as with energy we have no clear long term policy, no vision, no courage to face our problems and instead hide behind baloney government statistics.

David Walker was on CNBC this AM - if you want to hear some truth, rather than the political spin, I'd encourage you this weekend to take time to listen to the video clips. I can't embed the videos into the blog so below are the links - if this is the only thing you read on the blog the next week, I hope you watch these 2 clips. Our leadership is spinning us into a coming disaster. Energy is going to look like a softball compared to where we go in the next decade.

8 minutes - An Inconvenient Debt
5 minutes - Healthcare Making America Sick

NYT: As Oil Prices Rise, Nations Revive Coal Mining

Much like healthier eating will go out the door for many Americans (not by choice) as food prices increase and squeeze many middle and lower income people downstream towards cheaper fare, so will go out the door environmental concerns the higher (and higher) crude oil prices go. In the end, the harsh reality of economics trumps everything. (again, crude oil is due for a pullback, in fact a serious one, but my theme is much longer term in nature - years/decade) I can only wonder how "resistant" we will be to drilling offshore in America if/when crude crosses $200. Suddenly, the environmental concerns will be thrown to the side... at the right price (pain)....count on it.

The NYTimes has a story on this trend in respect to coal - we continue down our "World of Shortages" theme; too many humans on the planet; and too many humans wanting to live 1st world lives. Every once deserted ounce of "energy source" is going to be revisited if it's at all economical - and the higher oil goes, the more things that become economical. Especially as shipping said energy becomes even more expensive, sourcing close to home will be even more important. Supply/demand 101. But it will be a pebble in the ocean if 1 billion Asians continue their migration into cities from the farmlands over the coming decades. Solutions such as electric cars... well, they still need another form of energy to keep recharging....

Now in the bigger picture of it all, while positive to feeding the shortage of global energy, one must ask what the environmental impact (coal coal coal) is as economics trumps all. The locusts called humans continue to ravage this planet. Hurry up wind and solar... we need you. Now. And no I am not a Mr Greenie - I'm a startled economist at heart frightened about the outlook for the future, living in a country which consumes 25% of the globe's energy (with 5% of the people) yet oblivious to this paradigm, which brings oil executives to its Congress to grill, while trying to fight off solar subsidies.... nice. Oh well, let's just hope it has nothing to do with supply and demand and we can blame it all on the Strategic Petroleum Reserve and "speculators". The "crossing our fingers and hoping" solution has been one we've been relying on many things (see Medicare in about a decade).

• These rugged green mountains, once home to one of Asia’s most productive coal regions, are littered with abandoned mines and decaying towns — backwaters of an economy of bullet trains and hybrid cars. But after decades of seemingly terminal decline, Japan’s coal country is stirring again. With energy prices reaching record highs — oil settled above $135 a barrel on Thursday — Japan’s high-cost mines are suddenly competitive again, and demand for their coal is booming. Production has jumped to its highest in nearly four decades, creating a sensation rarely felt in these mining communities: hope.
• Soaring commodity prices have had distorting effects across the global economy, driving up food prices and prompting fears of future energy shortages. But they have been an unanticipated boon to the coal producing regions of countries like Japan that had written off coal mining as a relic of the Industrial Revolution.
• While Japan’s coal industry remains tiny, its revival is an example of how higher commodity prices are driving a search for resources even in some of the world’s most urbanized and developed nations.
• South Korea has experienced calls to create a domestic coal industry in order to reduce dependence on imports. In the United Kingdom, where coal’s decline became a symbol of withered industrial might, companies are increasing production and considering reopening at least one closed mine as demand for British coal rises.
• For decades, Japanese coal, at $100 or more a ton, was simply too expensive because of high wages and extraction costs. But with global prices now reaching the same heights, Japanese coal is looking more attractive.
• But the industry’s long decline has made it difficult to gear up. There are almost no geologists left in Japan specializing in coal, or recent surveys of coal deposits in the region. To conduct its search, Hokuryo is relying on a stack of torn, yellowed maps hand-drawn by company geologists more than 40 years ago.
• Other changes in the last four decades could also hamper efforts to increase production. Hokuryo and other companies say they can no longer build large underground mines because no Japanese worker would want to work in such dark and dangerous conditions today. (well it's a flat world, you can always import workers from poorer countries - it works great for the Saudis - and Americans aka those Mexicans will do work that no American will do?)
• At the same time, environmental regulations prevent most strip-mining, which creates huge open pits that can be eyesores. There have been proposals to raise production using new, untested technologies like pumping in water or heat to liquefy coal so it can be sucked it out of the ground like oil.
• Even if such technologies worked, no one is expecting Japan to become self-sufficient in coal anytime soon. Domestic coal production contributes only 0.8 percent of the total coal consumed by Japan. Still, there is enormous potential: Sorachi, the region that includes Bibai, sits on an estimated six billion tons of coal, enough to supply Japan’s current level of use for 30 years.

Quite frankly it is amazing how everything is increasingly becoming reliant on the lynchpin that is Chindia growth. So many implications, both positive and negative, all from this 1 megatrend. Interesting times. Interesting times indeed.

Long a few coal stocks here or there... (or everywhere)

DryShips - Earnings Growth Continues & Potential Deepsea Oil Drilling Play

DryShips (DRYS) along with LDK Solar (LDK) are probably the 2 most "controversial" companies we've owned - well maybe along with Crocs (CROX). Of the 3, we only own DryShips (DRYS) as of today, and earlier this week the company reported yet another stellar quarter.

There are a lot of moving parts, but essentially the company reported $4.13 (vs analysts $4.05). This industry is essentially the companies that move grains, fertilizers, coal from one continent to another (think railroads on the ocean). Contracts are either longer term in nature or on the "spot market" (what the current market will bear). There are a horde of stocks in this sector, all with different ratios of long term contracts versus spot contracts. DryShips is far and away the most levered to spot pricing, which in times when the spot prices go up - is a great thing; but in times when spot pricing falls, is not a great thing. Below is the chart of the Baltic Dry Index which shows you the enormous volatility in spot rates.



If you isolated just on the past 18 months or so of the above chart, it would look a lot like the stock chart for DryShips (DRYS) - 1 year chart below



So obviously this is not a stock for feint of heart. However, the company has decided to finally put a portion of their ships on contract at long term rates (at very nice prices) so the volatility should abate just a little as DryShips protects some portion of their fleet from the day to day machinations of the spot pricing.

Now I, in general just prefer to own the physical items these shippers are moving around the world, but there are some interesting developments happening in the sector. First, it takes time - and money to build new ships. One longer term issue I had with this sector [Oct 23: A Near Term Top in Dry Bulk Shippers] is the potential of a flood of new ships coming out in 24-36 months. While some are pointing to the 'credit crisis' as a reason it might be harder to fund new ships, I think this is more of a US/UK issue - there is enough petrodollars out there to finance whatever is needed in this world. But these recent stories about the ever higher steel costs might be a true impediment [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects]. Now on the flip side to that, this is a tricky "reason" to buy companies in this sector because while it might be considered a "pro" for the sector, the same reason would be a "con" for the global economic growth engine, which is what is the underlying story behind these type of stocks. So it's a close call on if this might be a pro or con.

On the other hand, specific to DryShips (DRYS) is a (controversial) initiative to expand into the ultra deep sea drilling business. Myself, I kind of like it - even though it obviously is not their bread and butter. But since I own stocks in that industry and like that industry for the long run - DryShips foray into this area perked my interest up. They have a 75% interest in a Norweigen company, Ocean Rig, with intent to buy the whole darn thing. Per the earnings report

• I am also particularly excited with the implementation of our strategic vision to create a leading presence in the ultra deep water drilling (UDW) market and to take advantage of the extremely positive fundamentals of that sector. The acquisition of Ocean Rig, which already operates two UDW rigs, and the agreement to construct two state of the art drillships create a significant platform for our foray into this sector. As we have mentioned before, we intend to spin off this business unit to our shareholders through a U.S. listing within the next 12 months.

So as long as oil remains north of $75, this should be a very attractive business with the prices going for deep sea oil rigs, especially the ultra deep sea variety. An IPO spinoff of this business would be a nice cherry on top for DryShips owners.

Now the stock has had an enormous run, and I took profit along the way, selling far from the peak, but making nice gains from my entry points. This volatile stock has retreated from north of $115 a few days ago to the low $90s. It has support at the 50 day moving average of $85 but frankly when they sell this name off, support and resistance means very little. But with its valuation so attractive I'd like to begin rebuilding somewhere in this range (soon). Again, if I were not so cautious on the market as a whole - I'd probably begin jumping in here. But with the potential strains on new ships coming to market due to steel prices, and the potential spinoff of the deep sea rig business, this name is becoming more interesting as more than a daytraders dream stock. But once again, the risk to this name is a potential worldwide recession brought on by ever increasing crude prices. If we see oil permanently parked north of $150, we would have serious impairment of economic growth across the globe. But obviously my shorter term thesis is, we get a pullback in crude sooner rather than later [May 21: Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas]

Long DryShips, Ultrashort Oil & Gas in fund; long Ultrashort Oil & Gas in personal account

Bill Gross: Inflation Underplayed, & Higher Food Prices for next Decade?

It is nice to see more and more people (of importance) finally calling the government out on one of my favorite subjects - the total fiction that is government reporting of inflation - and how we somehow are the only country on the planet able to avoid inflation. I have a litany of pieces on this subject from day 1 in the blog. Sometimes I feel like we are entering an Orwellian novel with the peons (us) trying to be kept in the dark (so far pretty successfully). I mentioned Bill Gross in this piece [May 13: News of the Day - Inflation] I wrote

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".

I can only wonder what seniors on fixed income are wondering when they get their 2.3% cost of living increases in today's day and age. Gross is back out chirping today... via CNBC

• Americans are fooling themselves if they think U.S. inflation is under control, the manager of the world's largest bond fund said.
• Bill Gross, chief investment officer of Pacific Investment Management Co (PIMCO) said in his June investment outlook that he has been arguing for some time that inflation statistics "were not reflecting reality at the checkout counter."
• He said statistical practices in calculating price growth had favored lower U.S. inflation over the last 25 years and called for change. "Being fooled some of the time is no sin, but being fooled all of the time is intolerable," Gross said.
• "Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market's assumption of low relative U.S. inflation in comparison to our global competitors."
• He added that Treasury Inflation Protected Securities (TIPS) were difficult to value because of the "artificially low inflation number" arising from statistical quirks. (yes, "quirks")

On to another favored story we were early on [Jan 18: One Lonely Voice Agrees with me on Food Inflation], agflation (inflation in food prices) - remember our key themes here - agflation (higher prices), social strife, and protectionism (countries hording their own food resources instead of joining free trade). This won't just happen in food, but I believe across a scope of natural resources. But let's focus on food... these high prices should fix themselves soon right? 1 year? 2 years? Ummm... not so much.

• High food prices will continue for at least a decade even if they drop from the levels that sparked street protests or riots in Africa, Asia and the Caribbean in recent months, government-backed international agencies say.
• High prices, caused primarily by demand from fast-developing countries such as China but also by rising investor interest in food commodity futures markets, will hurt the world's poorest countries most, and also the poor in rich countries.
• Though the outlook for crop harvests in 2008 was generally positive, the OECD and FAO experts said supply and reserve stocks will still not be enough to satisfy needs this year, and likewise in the forecast period, up to 2017.
• As for the impact on developing countries, the conclusion of the FAO and OECD in the document was grim: "For the urban poor and the major food-importing developing countries, the impact will be strongly negative as an even higher share or their limited income will be required for food."
• Every 10 percent rise in the price of all cereals including rice added $4.5 billion to the food bill of countries that are net importers of such basic food commodities, the document noted.
• Overall, joint OECD/FAO report forecasts the nominal prices of cereals, rice and oilseeds heading between 35 and 65 percent higher between now and 2027 than the average in the past 10 years, the document said.
• The impact on richer, developed countries would be more modest because agricultural commodity prices amounted to a smaller amount of final retail prices for food. "Of course, these averages mask the much more significant impact on lower-income consumers. In addition, and to the extent that high prices persist and hence do not reduce the future rate of inflation, indirect economic impacts might also be important," the document said.

Conclusion: If you're in the bottom 40% economic status within richer Western countries, I urge you to hurry up and move to the top 25%. If you are in a poorer 2nd or 3rd world country.... well the globe is going to be a very tough place for many in the coming years - try to get into the top 3-5% in your country. With the continued loss of arable land through urbanization, continued climate change (I know, I know - let's not get started on that arguement), the continued movement of people's from self sufficient farming to living in larger towns and cities across the globe, a population growth rate going from mid 6 Billion to 9 Billion by 2050, and the mounting stresses/shortages of fresh water... well let's not worry about it. We have stocks to bid up with new found Federal Reserve money. Keep printing Ben. Keep stoking inflation - and buy stocks. We have NYC bankers 5th homes to worry about - keep the bailouts coming. Nevermind the rest of the world - if its not on ABC Nightly News, it is not happening. Congress? Keep doing your job paying US corporate farmers subsidies to not grow crops. We have SUVs to feed with our corn! Go team 'Leadership USA'!

Long Powershares DB Agriculture Fund, iPath DJ Livestock ETN in fund; no personal position

WSJ: What will Apple (AAPL) be Creating in 5 Years?

A very interesting take in today's Wall Street Journal regarding what Apple (AAPL) could potentially be doing in 5 years. I won't rehash my old posts but most of my bullishness on this name, aside from the potential market share wins of Mac vs PCs revolve around Apple as the center of the digital revolution. [Nov 24: Apple (AAPL) the Cultural Icon] Much of the ideas in this article, are similar to my longer term vision - i.e. Apple will be running your home ;).

My timeline on this name is quite far down the line, hence I don't get too stressed regardingthe quarter to quarter numbers, although we have to be aware of the lemmings knee jerk reactions to Apple's ALWAYS conservative guidance. Technology, to me, as a sector is very overrated - there is very little true secular growth. Hence, despite the expensive valuation - I am willing to pay up for the few real growth stories - with that said, I have Apple down at the lower end of its typical allocation due to this very nice run the past few months - would like to add back more exposure at lower price points.

And yes, the US consumer is stressed, and no Apple won't be immune. But this is becoming an international story - with nearly 50% of sales now overseas. And even stressed Americans still will cut things less important to them than such valued treasures as video games and Apple products. ;) Let's see what Forrester Research is predicting 5 years out.

• Forrester Research is the latest to look into the crystal ball in a new report that imagines the Apple products of 2013. But rather than predict Apple jet packs or other outlandish new directions, the research firm uses the company's recent history as a guide to forecasting.
• Forrester's conclusion: While much of Apple's great successes have been mobile products such as the iPod and the iPhone, the company will seek to colonize rooms throughout the home.
• Among the new products Forrester predicts Apple will create are wall-mountable digital picture frames with small high-definition screens and speakers that wirelessly play media, including photos, videos and music, stored on a computer elsewhere in the home. Such products already exist, but Apple could put its own twist on them -- for example, by adding its design panache and a touch-sensitive screen that lets viewers flip from image to image with a finger swipe, a la the iPhone.
• For the bedroom, Forrester envisions an Apple "clock radio" that pipes in music and other media across a home network.
• Possible, too, is an "AppleSound" universal remote control, also with a touch-sensitive screen, that lets users browse their music collections and change the songs playing through their stereo as they stroll around the house.
• Forrester also thinks Apple could extend into the home the technical assistance currently offered by "Genius Bar" personnel in Apple retail stores. Apple in-home installation services will become especially important as its array of products for the home grows. (ohh we love services over hardware, nice margins - right IBM?))
• The iPod remains the top MP3 player, with more than 70% of the market, and Apple is now the top retailer of music in the nation, ahead of Wal-Mart Stores. Less than a year after entering the cellphone business with the iPhone, Apple became the second-largest provider of smart phones in the U.S.
• That said, the company had an underwhelming foray into the living room with a television set-top device called Apple TV that plays music, photos and movies downloaded from the Internet and PCs on a home network. In an interview earlier this year after dropping the price on the product by $70 to $229, Mr. Jobs said he was disappointed in its sales. (and when Mr Jobs gets angry, Mr Jobs makes sure the next iteration will be better - Mr Jobs does not like to lose)
• Despite the hiccups, veteran observers of Apple say Mr. Jobs's intent is clear. "I see everything Steve is doing as positioning himself to take over completely the living room," says John Seely Brown
• Steve Wozniak, the co-founder of Apple with Mr. Jobs, says it would make "a lot of sense" for Apple to do a television set that can also access media stored on the Internet and local PCs. "I only started thinking that way recently," Mr. Wozniak says. "Apple is obviously in the world of delivering display devices already."

One beauty about Apple is they find a way to make elegantly designed product that is dummy proof.... if you have tried to install your Sony DVD to your Panasonic HDTV to your JVC surround sound stereo to your ... well you know all those fun cables involved. This is where Apple will simplify life - and people love having a simple life - and they will pay for it. So, as we do every 90 days we'll hear the lemmings cry about this or that line item in the earnings report and how its a clear signal the story is over... occasionally the stock will drop 25-35% allowing us to buy at bargain prices, which in turn we will sell back to the lemmings when they are "comfortable" that Apple is back on track - usually when the stock has rebounded 30%+. And so we'll repeat in 2009, 2010, 2011, 2012, etc. At some point growth will have to slow just due to sheer size but there are so many markets for Apple still to conquer not to mention the prime market they deal in...

....meanwhile Microsoft (MSFT) is chasing relics like Yahoo (YHOO) (hello AOL/Time Warner) - instead of fully focusing on morphing Xbox into something that could compete with what Apple is dreaming up for 2010 and beyond.

Long Apple in fund; no personal position

Bookkeeping: Quick Transaction - adding back some of yesterday's Trina Solar (TSL) Sale

Suntech Power (STP) is out this morning with a decent quarter - people will say its a "good quarter" or a "great quarter" - I disagree - at this point I cannot trust management to forecast anything because they "beat" by such a wide margin (especially on revenue) after disappointing so badly last quarter, yet guiding revenue far lower. How they continuously are unable to forecast 90 days out is a mystery to me - in fact it is NOT even 90 days out - they report half way through the quarter so when they issue guidance that means there are about 45 days left in the quarter - yet they constantly miss by a lot (either up or down). This shows me a company that has poor internal forecasting, and over time if this continues the Street will punish them. And it's not a matter of sand bagging because some quarters they beat by a lot, and some quarters they miss by a lot - no consistency. The Street likes predictability. Just my opinion. Further they are still banking on a boffo 2nd half of 2008 to make their full year number; still a lot of risk to that scenario. While their size and scale should help them in the long run, I am frankly tired of their inability to come anywhere near to their guidance in any quarter.

• Total net revenues for the first quarter of 2008 were $434.5 million, representing an increase of 76.1% from the corresponding period in 2007.
• Non-GAAP gross margin for the Company's core wafer-to-module business was 23.3% and non-GAAP consolidated gross margin was 22.5%. The gross margin increased from the fourth quarter of 2007 primarily due to an increase in the average selling price driven by strong demand for Suntech's solar products, which was partly offset by increased silicon wafer costs.
• Non-GAAP net income for the first quarter of 2008 was $60.6 million, an increase of 85.2% year-over-year, or $0.35 per non-GAAP diluted ADS.

That said, I am more bullish on the prospects for Trina Solar (TSL) after seeing all the other earnings reports in the sector. Even the worst of breed are beating expectations since a lot of trends in the sector seem to have improved this quarter. Yesterday I took a 2%+ allocation in Trina off the table to protect gains in case STP disappointed [Bookkeeping: Cutting some Trina Solar on Solarfun beat and Suntech Power Earnings Tomorrow], so with Trina's stock down about 6% from that selling point, I am going to add part of yesterday's sale back. I would add more if I believe in the market overall, or the solar sector had not run so much and was due for a pullback. Unfortunately for Trina they are probably going to be reporting earnings into a sector sell off - so I am not going to get the position back up to what it was. I do believe they will do very well this quarter but could be a victim of timing; or better said, if Trina Solar traded in an absolute vacuum I'd be willing to make this an even larger position. This sector is ripe for a major pullback unfortunately.

That said, I'm adding back here in the mid $48s to $49 and taking the position back up to 5.4% of portfolio. (up from 4.6% going into the day) I'll potentially add more on a pullback to $46 area. I believe fair value is far, far higher, although these names trade together so if the sector sells of, fair value will mean nothing to the speculators who run in and out of this sector. If there were less speculators and more investors in this space, Trina's stock price would be far higher. This continues to be a large, missed opportunity by the Street in my opinion. We'll see what earnings holds in the coming weeks.

EDIT to post around Noon-ish: I wrote I'd add more on pullback to $46 area so I have done so - new allocation is back up to 7.2%. If not for general nervousness about market, I'd be closer to 8-9% allocation. This is now the best value in my universe. Period.

Long Trina Solar in fund and personal account

Expect a lot of Dicks Sportings Goods (DKS) in the 2nd Half this Year

A few retailers are doing ok on "not as bad as terrible expectations" but as I keep repeating anything levered to the US consumer is asbestos in your portfolio. This sector has rebounded smartly on the "2nd half recovery" thesis along with the "rebate checks will save everything" thesis (even though most of that rebate check is now going to food or gas). I wrote on the weekly earnings roundup

Dicks Sporting Goods (DKS) - while this is a Wall Street favorite this is exactly the type of product that a poorer America will have to cut back spending on. Maybe not this earnings period but over the next year, much of the growth in this name will be new store expansion; but I could see same store sales beginning to deteriorate the higher food and energy prices go.

The problem with investing in anything to do with the US consumer is one day you could wake up and gets your Dicks [Sporting Goods] (DKS) handed to you ;) (down 17% as I type this) Folks, analysts (and many companies) continue to live in a fantasy world and their 2nd half earnings estimates are far too high. Further, MANY of these companies are now showing year over year earnings REDUCTIONS - yet the stock prices go higher each time the Kool Aid is brought out and the "2nd half recovery" is discussed - so people are paying MORE for LESS (earnings). More for less? Doesn't sound like something I'd like to buy.

Everyone is drinking the Kool Aid of a 2nd half recovery. But Dicks Sporting Goods is the perfect example of DISCRETIONARY spending that is no longer an option for many Americans as inflation (that does not exist to the Federal Reserve) eats away at them. Frankly, things like golf is a luxury many in the middle class will need to cut back severely on, or be done with. That's going to be reserved for people in countries like China or Dubai, as the wealth in the world shifts from debtors to creditors/those with natural resources.

• Same-store sales fell 3.8 percent for Dick's Sporting Goods stores and 7.4 percent on pro forma basis for Golf Galaxy.
• Dick's Sporting Goods Inc. on Thursday slashed its fiscal full-year earnings prediction and issued a second-quarter forecast under Wall Street's expectations
• For the full-year ending in January 2009, the sporting equipment and apparel retailer now expects to earn between $1.22 and $1.36 per share, compared with a previous expectation of $1.49 to $1.54 per share. The company earned $1.33 per share in the 2007 fiscal year. (so at TODAY's guidance they will be lucky to show 0% earnings growth, but by the time we get to December 2008 I predict they will be lower than $1.22 - it will get worse from here)
• Analysts polled by Thomson Financial expect a profit of $1.50 per share. (oops - Kool Aid)
• For the second quarter ending in July, the company expects to earn 34 to 38 cents per share. Analysts, on average, expect the company to earn 43 cents per share. (oops - Kool Aid)
  
• Same-store sales at Dick's Sporting Good's locations are expected to fall about 3 percent to 5 percent compared with the prior year, the company said.

Petsmart (PETM) which I wrote

PetSmart (PETM) - we'll know things are bad if we start seeing sustained issues here - for many people their pets are like kids; so if they cut back spending on this category in their budget you know they are truly stressed.

looks like they are suffering but people will give up golf before their pets - and they actually admitted there is inflation (this is why you ignore government reports and listen to companies) They are still clinging to their full year forecast, but lowering 2nd quarter... which means to make their full year number they need even bigger numbers in (drumroll) the 2nd half of 2008. So we know what that means. They are going to miss the 2nd half numbers. We'll check back later in the year to see this play out.

• Revenue rose 9 percent, to $1.2 billion from $1.11 billion, as greater customer traffic partly offset the effects of inflation, and pet services sales rose 22 percent, to $130.4 million. Same-store sales, or sales at locations open at least one year -- a key measurement of retailer health -- grew 2.9 percent.
• Pet products supplier PetSmart Inc. on Wednesday reiterated its full-year forecast, but gave a second-quarter profit outlook that fell short of analyst estimates.
• "Our top line performance for the quarter came in a bit higher than expected and was helped by an increase in inflation partially offset by continued weakness in traffic," Phil Francis, PetSmart's chief executive, said in a statement.

Last, since we need some sunshine we mentioned The Buckle (BKE) along with Aeropostale (ARO) as companies doing well as even teens trade down.

2 retail names that have been doing well on the clothing side - Aeropostale (ARO) and Buckle (BKE) - excellent charts and these seem to be winning business from the American Eagles (AEO) and Abercrombies (ANF). However, with high stock prices and high expectations comes a lot more risk around earnings period.

I wouldn't buy any retailer except Walmart (WMT) in this environment, but gun to head these names along with Urban Outfitters (URBN) seem to be the only clothing stores that are showing real growth.

• Teen apparel retailer The Buckle Inc. on Thursday said fiscal first-quarter profit rose 54 percent, on a surge in same-store sales.
• Earnings for the quarter ended May 3 rose to $18.7 million, or 61 cents per share, compared with $12.2 million, or 40 cents per share last year.
• Revenue rose 32 percent to $160.3 million from $121.1 million last year.
• Same-store sales, or sales in stores open at least one year grew 25.6 percent

So we have pockets of strength but buying into retail right now, you are simply looking for the few good houses in a very bad neighborhood.

I cannot short individual names but I would be if I could; instead I'm stuck with Ultrashort Consumer Services (SCC) [Apr 3: Jobless Claims Break 400K for the First Time this Cycle] which has Walmart (WMT) and McDonalds (MCD) as its top 2 holdings; 2 companies I believe will prosper in the pooring of America. But this is all I have to play the trend, so it is what it is.

Now if patterns repeat, in about 2-4 weeks after the retailers, financials et al get pummeled - the hedge fund computers will pile back into them. CNBC will trot out how well they are doing and "this clearly signals the bottom is in", and "it's time to buy early cycle names ahead of the recovery". This has been the same dog and pony show they've been trotting out every 6 weeks for the past 3/4 of a year. So when you hear it, just remember this post and try not to snort your drink up your nose when you hear it - for the 11th time.

Long Ultrashort Consumer Services in fund; no personal position

It Only Matters When it Matters

**Please note - I am trying to install a new commenting system without success. At this moment you have to click on the specific blog entry to post a comment successfully - and sign up for a new service to do so (for newer entries). But you cannot tell if someone else made a comment unless you click on the post itself. So we have some issues I am trying to have fixed. If it doesn't work I hope to go back to the old system. This entry seems to be ok to post a comment the old way - but some of today's earlier posts are not working. **

As I've been saying, now they are trotting out the same reasons that have existed the past few days, weeks, and in fact months for reasons for the selling.

a) Oil is high. As if $132 matters more than $128. That's the reason.
b) Financials stink. As if they improved substantially the past few days, weeks, months. That's the reason.
c) The Federal Reserve is beginning to face reality instead of constantly calling for an end of inflation (if we had any) or a 2nd half recovery. That's the reason. Because until the Fed spoon feeds traders a dose of reality, they can ignore it. And let me be clear, the Fed is still an eternal optimist compared to what is really happening and will be happening down the road. Notice how the Fed is changing their tune slowly but surely, to our view. But only until the evidence is smacking them in the face, to prove their earlier predictions were wrong. And these are our best prognosticators? Yikes. Maybe I need to go work for the Fed. Nah. No fun.

• The Federal Reserve on Wednesday sharply lowered its projection for economic growth this year, citing blows from the housing and credit debacles along with zooming energy prices. It also expects higher unemployment and inflation. (shocker!)
  
• Fed officials viewed economic activity "as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year," the documents stated. (oh still clinging to 'some' rebound; down from 'a hell of a' rebound, then in fall 2008 they will say, nevermind that rebound thing, it's coming next year)
• Under its new economic forecast, the Fed said it now believes gross domestic product will grow between just 0.3 percent to 1.2 percent this year. That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 percent and 2 percent.
• With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.5 percent and 5.7 percent this year. That is higher than the central bank's old forecast for the rate to climb as high as 5.3 percent. Last year, the unemployment rate averaged 4.6 percent. (not with this government's reporting methodology - I expect unemployment to be 1% or maybe 0.001% with our reporting - I mean its an election year - we can't be showing the truth can we?)
• the Fed raised its projection for inflation. The Fed now expect inflation to be between 3.1 percent and 3.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 2.1 percent to 2.4 percent. (not with this government's reporting methodology - I expect inflation to drop to 0.0001% as well! See if we were playing with a serious set of books we'd have unemployment in 11-12% range and inflation in 11-14% range - but since it's all fiction, does any of this matter? No.)
• the Fed's documents indicated that their rate-cutting campaign may be winding down.

As I have been saying, once the market turns back down, all the "reasons" they have been ignoring for weeks on end will be trotted out as reasons to sell stocks. The reality is, the backdrop is the same as it was 1 day ago, 1 week ago, and in fact 1 month ago. Only the market attitude is different. So now when the selloff happens, they bring up all the same reasons we've been discussing ad nauseam as reasons to sell. So the stock market can be summed up... when the market wants to go up, it will find a reason to go up, despite logic. And vice versa.

So now we will begin the next drumbeat which should be starting by July - the "everything will be fine in 6 months aka 1st half 2009" - you know, since "2nd half 2008" did not work out so well, now we can bid up stocks to outrageous levels on the "economic and earnings recovery of first half 2009". And once again for months on end we will hear "the market is discounting everything"... and it's time to buy stocks for the coming recovery. In 6 months. They just never tell you which 6 months.

Again, until reality hits the traders with an overwhelming amount of evidence, the Kool Aid continues. Since no one can think for themselves it appears, when the Federal Reserve induces even a touch of reality that seems to set off panic. No one can think out loud.... hmm, ya think this $132 oil will actually pinch profit margins? Keep in mind - again - Fourth Quarter 2008 PROFIT expectations are 60% HIGHER than Fourth Quarter 2007. The 2nd half recovery party is still alive and well to the analyst community. Sorry to be the rain on their parade.

We said last Friday "Risk is High" and it was not a time to press bets. We mentioned Monday that we had the "2nd Intraday Reversal in 4 Sessions" - the market was warning us there was a nasty undertow beneath the surface. Further, speculative rallies in the "worst of breed" stocks were everywhere (even now they continue). All classic signs to get the heck out of Dodge - yes you're going to miss that last 3-4% move in your stocks, but so what. Capital preservation is job #1. Always.

Technically, I will be looking to pare some short exposure around S&P 1380; I thought S&P 1400 would hold up better than it did. But it cut through like a knife. I expect a bounce off 1380 but won't trust that first bounce - we'll have to see how it holds. If we do break 1380 later in the week or next week, the plan is to buy back the short exposure I will be lightening up on on the first "test" of this level. Because that would indicate we could be headed meaningful lower. Despite the "2nd half recovery". Either way, I'll be heavy in cash and expect to outperform the market and my peers here in periods like this - those who throw caution to the wind and go 100% long because they drink Kool Aid in huge quantities. Weeks like this are when the hedged strategy will benefit us. In fact, we were up yesterday during the sell off. And today. Boo... and Yah.



Conclusion: With unemployment at 0.0001% by 2nd half of 2008, and inflation down to 0.0001% by 2nd half of 2008, this is a great opportunity to buy stocks ahead of the 2nd half recovery. Please do so.

Coal - Just Amazing

Earlier this month, during a period the dollar rallied a whopping 2% and we were told "the strong dollar is coming!" and all commodities were selling off in response I wrote in this piece [May 1: Walter Industries - the Most Fascinating Company]

I am trying to hand you a gift here, so that you make enough money so that EVERY reader can invest in my mutual fund when we launch in 2009 (right?) - remember, coal is going to be next year's fertilizer... with CNBC anchors aghast at coal and wondering "where did this all come action come from, I thought the bubble ended last year with that stupid potash!". I'm telling you now, a year ahead of time. I'm using Alpha Natural Resources (ANR) and Massey Energy (MEE) more specific for the metallurgical coal but any coal name has some exposure. [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In] I did a full analysis in that entry comparing the 2 names and potential profits/upside.

And....

Missed fertilizer? Get coal. So you can tell your friends next year you were there first. Come back in 1 year, book some profits, send check to my fund and we are all happy. In the meantime, you can sort of laugh quietly to self when CNBC tells you it's time to get out because the dollar will be going up 7% vs the Euro in the next 2 months.

Rarely do I pound the table or use that sort of language (above) but this was just a totally missed opportunity by the Street.... further, in this piece [May 5: Alpha Natural Resources Booming Earnings - Just the Start] I wrote

As I keep saying, metallurgical coal is about where fertilizer was 15 months ago - we have a long wave of earnings estimates upwards coming in the year+ ahead, with the biggest pushes up in earnings coming in about a year. Alpha Natural Resources (ANR) is up about 7% premarket as I check off a fabulous earnings report.... just getting started in a long and winding road up over the next year I believe.

I wrote a piece on fertilizer in October 2007 about just how wrong these analysts (who are supposed to be industry experts and just follow one sector) were... when a no name like me could see the coming earnings explosion [Oct 23: Analysts Still Doubting the Fertilizer Stocks] - since then estimates for many of these companies have gone up 2-3x in the out years. Replace the word fertilizer with metallurgical coal and check back in 15 months; once again analysts are so... so... so... wrong. And this creates opportunities for us, before CNBC jumps on the bandwagon next Valentine's Day proclaiming the bubble that is coal.

So the "wisdom" spouted from every corner at the time was buy retailers, financials as this is the early cycle bottom and the strong dollar will hurt commodities... I was saying there was no strong dollar - we are in major danger here and no one wants our dollar. But the hedge fund computers were buying that junk for about 7-10 days before selling it all off to suckers who listened to the conventional wisdom.

As for the thesis that coal was the next fertilizer - well it was a major hit - but it appears it has come to fruition much earlier than I anticipated. But anyone doing their homework ahead of time could see that large moves were coming - while I wrote those 2 entries in May - in April I was commenting about the huge contracts being signed/discussed [April 8: Posco Agrees to 200% Coal Price Increase] and [April 8: ArcelorMittal Sees Metallurgical Coal Prices Rising 150-200%] And this folks, is how by doing homework, you can (a) get in ahead of the crowd and (b) have conviction to hold / buy more - when the stocks are selling off and the talking heads are promising you the commodity play is over due to the "strong dollar". (people always email me asking "where" I get my ideas - here is a case example - just read, investigate, read, read, read, think, and read more. Then proceed to ignore almost everything coming from "pundits" aka used car salesmen with nicer ties, and top 20 business school degrees ;))

With that said, while I was expecting big moves in the coming year, I did not think it would come in such a compressed manner. These moves are breathtaking - these are 1 month charts of the 3 main names in the metallurgical coal area that I follow; the gains are from the beginning of May when I wrote these 2 pieces

Alpha Natural Resources (ANR) +50% in 3 weeks



Massey Energy (MEE) +40% in 3 weeks



Walter Industries (WLT) +40% in 3 weeks



Now, I've been cutting layers out of the 2 positions I've held, Massey Energy and Alpha Natural Resources along the way, and we are (much like everything in the sector) approaching parabolic status. But just remember the conversation 3 weeks ago when everyone was saying, the run is over because the dollar is strengthening. The next time the Federal Reserve meets the same "run" will happen because "they" will say the Federal Reserve is fighting inflation. How? By putting "strong language" into their statement. I don't know about you, but I have never seen "words" bring down the prices of groceries or fuel. Only in Wall Street logic does it work. And when that happens, commodities go down - and banks, retailers, and assorted junk goes up. On the hedge fund computers saying "this is what must happen". Until it reverses a week or two later.

The perfect storm is developing for US coal, especially metallurgical - until/unless China stops buying steel as if it is nobody's business. Just today steel giant Mittal (MT) bought a 14.9% stake in another metallurgical coal producer overseas - with the prices for iron ore and metallurgical coal going through the roof, it behooves the steel companies to secure their own supplies. So on top of ALL the other positives in this group, we now have potential takeover bids coming in the next year.

• ArcelorMittal, the world's biggest steelmaker, may offer at least A$4.2 billion ($4 billion) for Australia's Macarthur Coal Ltd. to secure supplies as prices for raw materials surge.
• ArcelorMittal may acquire Brisbane-based Macarthur, the world's biggest maker of pulverized coal used by steelmakers, to increase its self-sufficiency in coal beyond 15 percent after prices of the steelmaking raw material tripled this year.
• ``I would assume they will go for full control,'' Andrew Keen, an analyst at Sanford C. Bernstein in London who has an ``outperform'' recommendation on ArcelorMittal, said today by phone. ``This could become a hotly contested situation because a lot of people have very deep pockets at the moment.''
• Buying Macarthur would take ArcelorMittal's coal self sufficiency to about 20 percent, compared with the 45 percent coverage it has in iron ore, another key raw material, Bernstein's Keen said.

Again, this all works out... until energy prices get so high, and commodity prices so high it no longer makes sense to buy steel. [May 17: Fast Rising Steel Prices Set Back Big Projects]

Our "World of Shortages" theme continues to deliver big benefits for the fund. [Dec 6: Coal Stocks Quietly in a Bull Market] When the rest of the herd gets on the coal train over the coming year, we'll already have been sitting in it since September 2007. With that said, this group is due for a correction....

Long Massey Energy, Alpha Natural Resources in fund; long Alpha Natural Resources in personal account

Test

Ignore. Testing stuff with comments.

American Airlines Cutting Jobs and Routes

I know the "real economy" does not matter to Wall Street's fantasy world, but as we've discussed in the past an era of higher (if permanent) energy will cause major dislocations in our economy and be leading to major recession, potentially global in nature. I have not had a time to write about all the implications in 1 entry but some I have commented on in the past are the major hit to retailers, restaurants - the change in driving habits - the change in habitat (a flocking to cities and inner ring suburbs, along with smaller homes that are cheaper to heat/air condition) - people in low paying service jobs (that now dominate the rungs of society) will need to quit since it won't be cost effective for them to drive to work - and a few other ideas. The most important thing to remember as investors is the damage it will inflict across the nation/globe. It is a tax on all things - consumers and producers. Store closings are just beginning along with a reduction in expansion plans - AOL has a list of 36 chains closing stores here. And we have not even "begun" a recession yet. Yet the stock market could care less - they find these rising prices as a "benefit" because it indicates there will be no recession in the US. That is 1960s thinking; American - centric and without understanding of global conditions. But as long as that persists, stocks can levitate on "hope". As stores close, restaurants close, and all types of discretionary income falters - people lose jobs. In large swaths. We have transformed ourselves to a service economy based on consumption. How people can tell us a recovery is coming soon in the face of these headwinds, is nearly criminal. But buy stocks; it's all priced in. $130 is good, and $150 oil is great. $200? Even better. This is why I don't believe we will have a straight line up - demand destruction is beginning - now in earnest. It will roll through industry by industry that rely on the American consumer - we've discussed RVs, boats, Las Vegas gaming, entertainment, sporting events... it's all coming. And if oil *does* get to $150+ it will hit harder. $175 harder. $200? Forget about it.

We did talk about airlines [Apr 8: Now on to Airline Inflation]

These are all little stories in a larger patchwork of much higher living expenses for the US consumer.... in fact global consumer, as the "World of Shortages" leads to a permanently higher cost of living. As we get story after story, from sector after sector, this just continued to build my thesis of a long period of strain for the US consumer, and no "2nd half recovery". No one likes to talk about it, but living standards will degrade for many (especially the "working class") as real wages continue to falter at a rate of increase below "life costs" - essentially meaning you fall behind more year after year. Why should the top 20% care? Well their taxes are going to be raised to help keep the bottom half from falling off a cliff.

Consumers can plan on shelling out considerably more money to fly and they'll have fewer choices when doing so. At the same time, they will be asked to pony up for services that once were part of the cost of a ticket, according to experts.

"The days of discount flying are over," said Julius Maldutis, president of consulting firm Aviation Dynamics and a veteran industry analyst. Of course, there will always be specialty-discount carriers like Southwest Airlines and JetBlue, but Maldutis warned that flying for cheap on major carriers will go the way of the horse and buggy.

Again, for the stock market UNTIL evidence is so overwhelming in their face, they will whistle past the graveyard singing a happy tune and talking about the "recovery in 6 months" til blue in the face. Maybe if you repeat something to yourself enough, you begin believing yourself. It seems to work in the Oval Office. Well, the evidence is beginning to mount

• In response to rising fuel costs and a slowing economy, American Airlines said Wednesday it will chop mainline domestic capacity by 11% to 12% in the fourth quarter and lay off an undisclosed number of workers.
• "The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy," CEO Gerard Arpey said in a prepared statement. (what about $140? $160?)
• "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve," Arpey said. "We must work to overcome our near-term challenges and to secure our company's long-term future." He noted the industry has been hurt by overly rapid growth at other carriers. (No you are right, "hope" is how the government solves problem because they have an unlimited budget and printing presses - you suckers in private industry - not so lucky)
• As for revenue initiatives, American said that since April 16 it has participated in or led 15 fare increases, 14 of which were at least partially successful. On Wednesday, the carrier introduced a $15 fee for the first checked bag for some passengers, but excluded premium passengers, full-fare passengers, and international passengers. It also increased fees by $5 to $50 for services ranging from reservations services to pet and oversized bags.

The only reason we are not seeing major slowdowns (yet) globally are many countries subsidize the true cost of energy to their consumers... namely China and India. At some point this will subside or reverse. The true forces of the market are not allowed to play out in these countries - since their consumers are not feeling the pinch - so they have no reason to restrict demand. But it sure is happening here.

Conclusion: This is all priced in. Recovery begins July 1, 2008. We are not in recession and in fact will be roaring out of one soon. Buy stocks.

Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas (DUG)

This type of run simply looks overextended and toppy to me - I believe sooner rather than later (probably within a week or two) we are going to see a sharp reversal in oil to the downside. And it will take the commodities with it. Things have now moved to purely speculative mode - who else is left to buy and who is not on this train? I doubt very many....

I am going to buy Ultrashort Oil & Gas (DUG) as a "trade", not investment. This ETF has destroyed so many people but when it reverses I believe it will be powerful (this does not short oil directly but shorts a whole bunch of exploration companies) And yes, I am still a huge bull for the long term, but nothing straight up (or down). Parabolic moves get me thinking in a contrary nature. We appear to be nearing that stage, and I believe the the risk/reward is in my favor.

I am going to buy here in the $25.90s and see if we can sell it for $30+ within a month (that would be a nice 15%). Heck this ETF was trading there last week, so we might get it even quicker. I reserve (up to) 10% of the fund for "trades" rather than investments, so this is the first one we have had in a while.

I bought 1200 shares, creating a 2.5% stake. I'll probably be the only guy in America with this position, which makes me even more bullish ;) If you want less risk I suppose you could buy a refiner or airline here which also would spike if/when oil retreats.

I tried this once before in October so you can find more information about the ETF by following this link [Oct 23: New Short Position - Ultrshort Oil & Gas (DUG)]

Long Ultrashort Oil & Gas in fund and personal account

Bookkeeping: Cutting some Trina Solar (TSL) on Solarfun (SOLF) beat and Suntech (STP) Earnings Tomorrow

Former fund holding Solarfun Power (SOLF) has had an enormous run here capped off by an impressive earnings report this AM. While I thought they would beat, their ability to increase MW shipped was far better than I expected (40% sequential) so revenue exploded higher, driving EPS way past analysts expectations. Average Selling Price also continues to surpass my expectations for the entire sector. Gross margins were "weak" (in my book) at only 16.5% but most solar investors could care less - they only look at the earnings beat.

• Net revenue was RMB 1.20 billion (US$ 171.0 million), an increase of 529% from the fourth quarter of 2007.
• PV module shipments showed good momentum, reaching 40.3MW, which represented 40% growth over 4Q2007 and 517% from the first quarter last year.
• Average selling price (“ASP”) was strong at $4.07 and was significantly higher than the ASP of $3.85 in the fourth quarter of 2007. Spain and Germany saw particular pricing strength and the Company also benefited from the strong Euro during the period.
• The geographic breakdown of net revenue was as follows: Spain 46%, Germany 36%, France 8%, Italy 6%, and Switzerland 4%. The company’s customer base remained diversified with only two customers accounting for over 10% of sales.
• As the Company had guided, gross margins softened slightly to 16.5% due primarily to higher polysilicon and wafer costs.
• Earnings per basic ADS were RMB 2.21 (US$ 0.32). (vs analysts .16)

A main takeaways - just imagine if this company had similar gross margins to peers, i.e. 22-24%. When the polysilicon shortage reverses we could have some very impressive quarters from a few of these players - looks like it will be 2009 though, more than 2008.



With Suntech Power (STP) reporting tomorrow, and my caution towards that name, and the fact Trina Solar (TSL) now looks like it will report next week instead of this week - combined with the fact the solar sector is way overextended I am going to cull Trina Solar (TSL) here near $52. Again to put it into perspective, Trina should report gross margins in 23-24% range (they did 27% last quarter) - so if they can expand their production (still a question) they should easily beat their number as well. But if the sector sells off (which it is well overdue to do) it will fall with the rest of them. So I am cutting back now back to a (still overweight) 4.9% stake.

Again, I expect a very good report, but Trina is reporting at the tail end of a major move in the sector - unfortunately timing is everything and the clock is striking near midnight for the solar sector for this run... that is the only reason I am culling this position a bit (lock in profits) I created most of my Trina Solar position early last week in the low to mid $40s range, adding 3-4% once it broke over resistance at $46 [May 14: Been Building Trina Solar this Week], so this is a tidy profit for a week's work. Of course I wish Trina had run like Solarfun but I can only go with what I perceive as the best fundamentals, we can never predict whom gets the hype and daytraders piling in. I'll look to add more to Trina if we get a pullback to $46.

Long Trina Solar in fund and personal account

Who is the World's Largest Merchandise Exporter? Not China. Or the US.

Think Germany. Yes Germany. What a surprise. When I read this story it reminded me of the story of the turtle and the hare.... as we discussed last week [May 16: Friday Readings] sometimes being old fashioned and conservative is not such a bad thing.

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.

So while the Germans (turtles) were mocked for not moving to this "new wave" finance based, service economy.... instead doing outrageous old school things such as "making stuff that other people want", it's turning out pretty well over the long run. Versus the hares who are now enjoying their service economies whose only saving grace are things they are exporting... what little they have left and has not been outsourced. Meanwhile Americans are brainwashed... err instructed... err reminded, that an economy cannot do well with reasonable regulations that keep things from constantly going out of control or into bubble status every 4-5 years, with higher tax rates that provide a true social safety net or relative equality among people, nor could their companies function without CEOs getting "what the market bears" instead of a (very good) but reasonable wage like "those socialists" (because only people paid in the $10M+ range at the top of a co. could ever make a solid decision, mind you). How those backwards people are thriving is beyond me... they seem to be doing EVERYTHING opposite to what Fox News tells me is the core of America competitiveness. Oh the irony of it all.

• Turning bolts, Germans were told - often by other Germans - had no future in Germany. The persistence of heavy manufacturing symbolized the country's inability or unwillingness to transform itself into a modern, services-oriented economy like the United States or Britain, two oft-used yardsticks.
• Today, the manufacturing sector in Germany is growing as a proportion of the country's total economic output, and Germany looks set to outpace far larger economies like China and the United States as the world's largest merchandise exporter for the fourth year running.
• In addition, making all manner of valves, motors, machine tools and robots is providing Germans with something rare in the global economy: shelter from the storm. Thanks to bolt-turning, the German economy grew at an annual rate of 6 percent in the first quarter of this year.
• "The critics have one point in that the Germans are dependent on the 'old economy,"' said Andreas Rees, chief Germany economist in Munich for UniCredit. "But paradoxically that is an incredible strength of Germany right now."
• German manufacturers have had very fortuitous timing because major emerging markets, above all China, have a voracious appetite for their products. These countries now account for about 7.5 percent of German merchandise exports, roughly the same portion as the United States.
• Rather than complaining about the strong euro, German executives are prone to emphasize its benefits. Crude oil, a vital ingredient in some plastics, now costs almost $130 a barrel, and prices of basic metals like copper, aluminum and steel have also skyrocketed. But the euro's strength has cushioned the blow when the commodities are priced in dollars.
• "I would imagine it's difficult in the United States," said Gerhard Lerch, general manager of ContiTech, a multinational maker of auto parts and other industrial components. "But we pay in euros." (oh dear)
• But each day German manufacturing executives have to deal with the shortage of qualified engineers. The machine-tool industry alone estimates it will hire 30,000 new engineers in 2008, up from a projection of 10,000 it made in November. Over all, the German Association of Engineers reckons employers could hire up to 95,000 people, who would generate economic output of €7 billion. (solution: import Americans. They'll work, and cheap!)

Speaking of those backward socialists, somehow they had the foresight to create a cottage industry in solar power - before it was an emergency. See, pro-active, not re-active (like some countries). Who would of thunk it? An interesting read here for any of you solar investors.

• Yet the sun was shining here the other day — and nowhere more brightly than at Q-Cells, a German company that surpassed Sharp last year to become the world’s largest maker of photovoltaic solar cells. Q-Cells is the main tenant among a flowering cluster of solar start-ups here in an area known as Solar Valley.
• Thanks to its aggressive push into renewable energies, cloud-wreathed Germany has become an unlikely leader in the race to harness the sun’s energy. It has by far the largest market for photovoltaic systems, which convert sunlight into electricity, with roughly half of the world’s total installations. And it is the third-largest producer of solar cells and modules, after China and Japan.
• Conservative lawmakers, in particular, want to pare back generous government incentives that support solar development. They say solar generation is growing so fast that it threatens to overburden consumers with high electricity bills.
• Solar-energy entrepreneurs warn that reducing incentives will deprive Germany of its pole position in an industry of the future. As proof, they point to the United States and Japan, which were once solar stars but have faded as their government subsidies became less enticing. (we were too busy getting rid of those jobs, so we could hire more mortgage brokers. And for god sakes, please do not put us in the same sentence as Japan! We are not Japan! Our people are taller!)
• Germany’s surging market has lured investors from Canada, Norway and the United States. More than 40,000 people work in the photovoltaic industry, helping to revive blighted regions like this one. (there you go again with the outlandish idea of "making things" - it is far superior to revive blighted areas with tanning salons, nail salons, banks, 7-11s, and Chinese take out joints - get with the program)
  

Conclusion: Buy stocks. Especially in countries that like to erode their manufacturing base as the service economy is the best economy of all with its lower wages, weaker benefits, and consumption culture - which at its core simply trades the same money from 1 person to another to "create wealth" (works even better when the central bank creates new paper money, so everyone feels even more "wealthier" - especially when it never creates inflation; a fancy magic trick).

Motley Fool on Chinese Gaming

We had another solid report out of this sector today, from The9 (NCTY) which actually licenses a game I am familiar with, World of Warcraft. Here are some details.

• For the first quarter of 2008, The9 reported total gross revenues of RMB463.8 million (US$66.1 million), which increased by 4% compared to RMB447.5 million (US$63.8 million) in the fourth quarter of 2007 and by 63% compared to RMB284.7 million (US$40.6 million) in the first quarter of 2007.
• For the first quarter of 2008, online game services gross revenues were RMB462.2 million (US$65.9 million), representing a 2% increase from RMB451.4 million (US$64.4 million) in the fourth quarter of 2007 and a 64% increase from RMB281.3 million (US$40.1 million) in the first quarter of 2007. The increase was primarily because of continued revenue growth from Blizzard Entertainment's World of Warcraft despite the holiday impact during the quarter
• Gross profit for the first quarter of 2008 increased by 3% quarter-over- quarter and 60% year-over-year to RMB208.0 million (US$29.7 million). The sequential increase of gross profit was largely in line with the increase in net revenues. Gross profit margin for the first quarter of 2008 remained relatively stable at 47% compared to the previous quarter and the same period of last year.
• For the first quarter of 2008, net income was RMB89.7 million (US$12.8 million), which increased by 4% from RMB86.0 million (US$12.3 million) in the fourth quarter of 2007 and by 36% compared to RMB66.1 million (US$9.4 million) in the first quarter of 2007. The sequential increase in net income was a result of the cumulative effect of the foregoing factors.
• Fully diluted earnings per share and per ADS for the first quarter of 2008 was RMB3.21 (US$0.46), compared to RMB2.93 (US$0.42) in the fourth quarter of 2007 and RMB2.65 (US$0.38) in the first quarter of 2007.

This was a strong beat, 46 cents versus analysts 32 cents but frankly Perfect World (PWRD) grew much faster, and has far superior gross margins (near 90% versus NCTY's sub 50%) I take it this comes from owning your own games versus licensing them. That said, Perfect World "disappointed" the lemmings with its guidance and news of the 3 day shutdown due to the earthquake.

Here is a story from Motely Fool on the sector.

• Investors in Chinese gaming stocks felt aftershocks of last week's disastrous earthquake. Shares of Giant Interactive (NYSE: GA), Perfect World (Nasdaq: PWRD), NetEase.com (Nasdaq: NTES), and Shanda Interactive (Nasdaq: SNDA) fell by 6% to 13% yesterday, on news that China was shutting down Internet cafes as part of a three-day mourning period for the quake's victims. Most, if not all, of the companies are shutting off their servers until the country's roughly 100,000 cafes reopen on Thursday in observance.
• The company's (The9) flagship title is the Chinese port of Blizzard's globally popular World of Warcraft. Along with smaller titles in the company's portfolio, The9's registered user base now stands at 38.1 million gamers, with as many as 1.2 million playing the multiplayer games at the same time.
• The9's stellar report followed a mixed showing at Perfect World. The quarter was spectacular for Perfect World, with revenue shooting 248% higher to $43.2 million, and earnings growing even faster, to $0.38 a share. The performance beat expectations, but Perfect World stung investors with a bleak near-term outlook.
• Leaning partly on the three-day mourning lull, but also on its own ramped-up operating overhead, Perfect World is looking for meager sequential growth of 0% to 5% for the current quarter, and on lower operating and net margins. That's not good, but it's also about the only blemish here.
• With Giant, Perfect World, and now The9 having easily topped market guesstimates, it would be a surprise if NetEase (which posts tomorrow) and Shanda (which posts next week) don't keep the streak going.

Continues to be a promising sector, far under the radar of most investors. But not without risk.

Long Perfect World in fund; no personal position

Bloomberg Forgot to Drink their Kool Aid

This is a decidedly anti-Kool Aid message from Bloomberg, which unfortunately intertwines with a lot of my "longer term" thoughts... as we move from "credit crisis panic" to "denial of recession possibility" to what comes out the other side. Again, we are an asset based, credit expansion economy - less and less of us "make things". So until our assets start reinflating (the biggest of which is our homes) we cannot once again repeat the credit orgy we just exited from. Or we could continue to go hat in hand to the Middle East and Asia where we send all our cash in return for goods/natural resources we need, and ask them to finance us even further then they already do (mostly with our own money of course). Maybe we can have telethons in Middle Eastern countries - "Adopt an American" - you know fund raisers to help us spend over and above our means... or as Hillary would say: It takes a village of Saudi oilmen to raise a bloated debt ridden American. ;)

• A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down.
• Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital.
  
• Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages.
• ``Once you've made terrible, overly optimistic errors, that paralyzes you for some time,'' says economist Paul Samuelson, a Nobel laureate.
• The bottom line: The U.S. may have to get used to a new definition of normal, characterized by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial-services industry.
• Long-term growth in the U.S. may drop to 2 percent to 2.5 percent a year from the 3 percent rate of the last 15 years (not if the government reporting machine has anything to do with it! I'm looking for 5,6, dare I say 7%! By the 2nd half? Ok ok that's amibitous - let's be content with 2009)
• Even after markets recover, ``the cost of risk capital is likely to be significantly higher than during the credit bubble,'' he says. (not if you print new capital out of DC printing presses at a rate of 1:5?)
• Less risk-taking can mean a less-vibrant economy, says Samuelson, 93, an emeritus professor at the Massachusetts Institute of Technology in Cambridge, Massachusetts. ``What you could lose are some new ideas that would otherwise get to be practical and get their chance,'' he says.
• Workers too are feeling the fallout from the credit crisis. The share of respondents in a May 1-8 Bloomberg/Los Angeles Times poll who described themselves as financially secure fell to the lowest level since 1992.
• The depressed housing market may keep some workers from pulling up stakes to pursue new employment. ``Many times, job candidates are willing to talk to you about an opening,'' says Sally Stetson, co-founder of Salveson Stetson Group, an executive-search firm in Radnor, Pennsylvania. ``But then reality sets in as they look at their home price and they pull back.''

But don't worry, a Japan style situation could never happen here. Because we could never have an overinflated stock market that crashed and burned, and then essentially went sideways for a decade [Mar 26: Stocks Tarnished by a Lost Decade] That could never happen here. Nor....unlike them, would we ever have a situation of nationwide housing price deflation after yet another bubble. Nope. Never. [Jan 24: They Said it Could Never Happen. Ever. They Lied] Nor would we have government regulators looking the other way as banks went unchecked or hid liabilities, and now refuse to admit them, dripping and dropping losses out at a methodical rate so as to not reveal the truth. Nope, only in Japan would such things happen. We are too good for that. Never here. Nope.

Well at least we, unlike Japan, are welcoming immigrants here to help drive the economy & create growth. What's that? Oh... um... well... um... well we still have better football players than Japan. So take that! How clear can I make it that we are not at all like Japan!

And send those 2 Bloomberg writers some Kool Aid. Sheesh, what a downer - they are missing the 2nd half recovery for the forest.

Conclusion: Buy stocks. It's all priced in. And we are nothing like Japan.

Canpotex Eyes Expansion of Port Facilities

I have not written about fertilizer for a while since the stocks have been digesting some huge gains (and we've been making money in other sectors such as infrastructure, coal, solar, metals). These potash producers still remain as my top holdings, although in reduced exposure. When the charts indicate they are ready to go, I'll be increasing exposure. For now I'm keeping that allocation in cash, although the stocks are showing relative strength today. I've been waiting patiently for a larger selloff in this group that never seems to happen. Hopefully soon. This is still a 5+ year story, until meaningful expansion of potash production occurs HOWEVER there will be multiple nearer terms risks chiefly (a) Western governments eventually pushing away from biofuels under public pressure as others on the globe starve (b) increased input costs hurting margins and (c) price increases cannot continue at the pace it has in the past or else fertilizer will be more valuable than Roger Maris baseball cards within a few years. None of these are game changers, but they can (and will) affect sentiment. And if (b) and (c) happen in the right combination you will begin to see degrading margins which will also cause panic among the masses. In the end after a period of hyper growth, these companies are going to be cash flow machines. But lemmings will still panic during that conversion.

However, interesting news continues to percolate and like much of the world's ports, it appears expansion is necessary to take on the increase in global trade (i.e. voracious appetite of the Far East) I don't have much to add to this story but there are some interesting quotes within.

Note Canpotex is a consortium of Potash (POT), Mosaic (MOS), and Agrium (AGU).

• Canpotex Ltd, the export marketing consortium for Canadian potash fertilizer producers, is looking at expanding its Pacific coast port facilities, the National Post newspaper said on Tuesday....is considering a project to almost double its shipping capacity with a $300 million to $500 million project, the paper said.
• "We feel the fundamentals of our business have changed," said Steven Dechka, Canpotex's chief executive, cited in the report. "We feel we now have to be ready for the next 20 to 50 years," Dechka said at a fertilizer conference in Vienna.
• Canpotex is considering 10 million tonnes of new capacity by expanding its terminal in Vancouver, British Columbia, or building a new terminal at the northern port of Prince Rupert or at Cherry Point in Washington state.
• Potash Corp has announced plans to boost its production capacity to 17.2 million tonnes by 2015 from current levels of 10 million tonnes. (7 years to get 70% increase)
• Mosaic plans to have 15.5 million tonnes of capacity over the next 12 years, an increase of 5.1 million tonnes. (12 years to get 50% increase)
• Agrium wants to add about 800,000 tonnes of capacity to its 2.05 million tonnes of production in Saskatchewan, and is also examining whether to build a new mine.

Due to barriers of entry, and slow (and costly) expansion [Nov 16: Potash Expands Mine for $2 Billion], this still remains the widest moat in any "commodity" that I can find. But it's not quite the easy stock story it was a year ago before everyone jumped on board the fertilizer train.

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

Target (TGT) Earnings Report - Shocker, Eh?

Nothing new here for blog readers - this earnings report essentially reinforces everything we've been saying will be happening to the US consumer for nearly a year now. But since it is a bell weather company, and reflects the middle class more than Walmart (WMT), along with the "we were trying to be upper middle class, or lower upper class by spending above our means for years, and extracting home equity.... but we're heading back down" subset of Americans, I watch this one very closely. Frankly, the charts of Walmart v Target (TGT) tell the tale...





....the guys on CNBC will tell you that Walmart is now operating so much better, (a stroke of genius hit them about 12 months ago - out of the blue!) and Target has lost their way, blah blah. Nonsense. People are moving downstream - Target was an excellent retailer for years, and did not suddenly get dumb 12-18 months ago. The economy turned, and their shoppers are migrating to Walmart. I wrote about this in December [Dec 26: Target Shoppers Turning into Walmart Shoppers]

In my piece 'Do the Bottom 80% of Americans Stand a Chance', I (virtually?) penned a lot of the long term issue hitting the "middle class". I also talk a lot about tell stocks - Fedex (FDX) or UPS (UPS) for the general economy, Coach (COH) for the aspirational upper middle income/lower upper income [Coach (COH) Imploding]... we also are getting a lot of hints from companies like Starbucks (SBUX), Harley Davidson (HOG), etc on the stressed US consumer.

To that "tell" list we should watch Target (TGT). Target is one of the best run retailers in America - but the past few months the news flow has just gotten increasingly worse. So unlike say a Sears Holding (SHLD) which is full of badly run Kmart stores, when one of the best of breed retailers is struggling, you take notice. With a not so great retailer you might think, well maybe they have issues with execution but Target is not that kind of company. I think what is slowly happening is more and more Target shoppers are becoming Walmart shoppers... not by choice.

So before we get to the numbers, don't get caught into the "better than expected" nonsense you hear from this or any other retailer, by the pundits. We care about year over year performance - most retailers are sucking wind. Only because expectations have been slashed so severely do we get these "beats". Other important notes

1. Same store sales matter
2. The composition of sales matter - are people buying cheaper stuff with lower margins?
3. Inflation (which I believe to be 12-15% in many goods, and higher in some) is not part of the reporting - meaning if good XYZ is 5% higher than last year, then sales should be up 5% just to hold units sold flat. Thus we should be seeing a large uptick in REVENUE just to keep UNIT sales flat. We are not seeing that, which shows that unit sales are being destructed.
4. The bottom line is profits - some retailers are discounting to such a degree that they ARE driving top line (revenue) but since they discounted so heavily it is not helping their bottom line.
5. In the end, stocks should be valued on their stream of earnings / cash flow. This is why it is ridiculous that stocks get pushed up for "better than expected" when their year over year profits are falling - this means their stocks are getting MORE expensive. But as long as people cling to a recovery in "6 months" they can justify buying these stocks (at any price) since the earnings rebound will be happening "soon".
6. Until evidence is so overwhelming to the contrary, the lemmings on Wall Street will cling to the "everything will be fine in 6 months" theory. They've been clinging to it since last July. One day the squirrel will find the nut, and they'll be correct. But it sure won't be the next 6 months.
   

Let's peek a bit closer at Target.

• Target Corp (TGT) reported a 7.5 percent decline in quarterly profit on Tuesday as shoppers passed over clothes and jewelry in favor of basics like food, hurting the retailer's margins.
• But as the U.S. economy has faltered, so too have Target's sales, particularly of higher-margin items, as shoppers forgo purchases of new clothes and home furnishings to concentrate on necessities.
• Sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings. But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent. (again, I cannot stress how bad that is in an INFLATIONARY environment - if food costs are up 10, 15, 20%, yet same store sales are receding - what does that say? Very bad things. Same for any other product that is going up in price - even if you believe the government reports on inflation, sales should be going up 3-4% a year, just to stay flat)
• Its first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise.
  

Again folks, we have not even "begun" the recession according to the pundits. Most food costs have not been passed onto the consumer. Most coal and natural gas prices have not been passed onto the consumer (only gasoline has) What happens in 6 months from now? 12? Oh yes... the consumer recovery. The consumer dealing with 2-3% wage increases. The US needs a new asset bubble and fast... cmon Ben, keep printing, maybe we can get a new stock bubble since housing is out of the question for the next few years. That'll get those Americans spending again!

I'll keep repeating this - almost everyone under the age of 50 on Wall Street only knows short, shallow, Fed providing pacifier recessions. Easy in, easy out, corporate dominated. The consumer has been running hard for 25 years. This time around we have a credit crisis, a housing bubble, and inflation. Everyone has been conditioned to buy a few months into a recession (not that there is one of course) because if you buy 3 months in (to a recession that does not exist), we are out in 3 months from that point. They do not think or even consider possible an era like the 70s or early 80s. Let's review... high prices in goods, led by oil "shock", and lack of growth. A consumer under attack from all directions. Doesn't sound at all familiar, does it?

Conclusion: Buy stocks. It's all priced in. 2nd half recovery commences on July 1, 2008.

No positions

Alert: Mechel (MTL) Changes ADR Ratio

I was alarmed by the large loss in portfolio value this morning in my Marketocracy.com account, but apparently Mechel (MTL) has changed their ADR to share ratio from 3:1 to 1:1. So this effectively creates a 3:1 split - unfortunately it is not showing in the portfolio as such... so fyi, until it fixed the portfolio value will be understated by about $14,000 or 1.1% (i.e. I lost 66.6% on this position overnight, since my share count is the same, but the stock price dropped by 2/3rds). First time I've seen one of these foreign companies do this, to be frank...

• Mechel OAO (NYSE: MTL - News), one of the leading Russian mining and metals companies, announces that effective today it has changed its American Depositary Receipts (ADRs) to its ordinary share ratio from 1:3 to 1:1.
• Mechel's ADRs have been listed on the New York Stock Exchange since October 29, 2004. Each ADR is issued for one American Depositary Share (ADS). From the date of its listing, each ADS represented three ordinary shares of Mechel OAO. However, beginning today, each ADS will now represent one ordinary share of Mechel OAO. To implement the ratio change, two additional ADRs were issued for each ADR after the close of the market on May 16, 2008.
• The decision to change the ratio of Mechel's ADRs to its ordinary shares was adopted by Mechel OAO's Board of Directors with the intention to increase liquidity of Mechel's ADRs, bringing its price to more customary market standards.

Long Mechel in fund and personal account

Boone Pickens - Oil to $150 by End of Year

As I wrote last week, it is somewhat sad that our alternative energy leadership is coming from one of the legendary oilmen in the country, Boone Pickens (not sure where the T at the front of his name disappeared to) [May 16: Fluor as a Wind Play? $1.8 Billion Says Yes] I wrote

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.

Boone Pickens is back following up his comments from earlier in the spring [Apr 17: World's Best Oil Investors Thinks Oil Goes Higher, not Lower] I wrote

For those of you who don't know T. Boone Pickens is probably considered the most astute energy investor period. He is like Buffet of oil, and looks like he was the 369th richest guy on the planet. (Interestingly he is a big investor in wind energy) With everyone and their mother calling for a selloff in oil, he is reversing his short and going long.

A very good interview on CNBC this morning - maybe with age comes both wisdom and the clarity to speak your mind. Sometimes I feel like I am 40 years older because most people just don't speak the truth out there in our politically correct culture; or maybe people just don't stop to think things through out past next week or next month. I feel a lot of comfort in the fact that this very astute person is on my side in calling for wind, solar, natural gas and the like - and railing on the politicians in Washington focused on stupidity like gas tax holidays INSTEAD of focusing on the root causes of our problems. As always we are a reactive country, not a proactive one. He said it best... all people in Washington are worried about is getting elected or re-elected, to the neglect of the greater good. Leadership is a total mess. Bingo. He rips on the boondoggle that is corn ethanol. Bingo. And as I've been stating, as oil goes higher (and other commodities) - this WILL lead to a global recession as this will be a tax on all producers and consumers. At some price points it will begin to make sense to cease economic activities.... i.e. demand destruction.... Pickens agrees. But it sad that we know this is the path, yet do nothing to try to fix it - instead focusing on stupid political pandering. Blaming oil executives. Or speculators. Where is our Manhattan Project for energy?

A worthwhile 8 minutes

Some Energy Company Specific News - Petrobras (PBR), Hess (HES), and Tesla Motors

I've mentioned quite a few times in the past [May 13: Petrobras (PBR) Business as Usual] that in due time I believe this company will be the largest, by market capitalization, in the world. Bloomberg shows us that PBR just passed Microsoft (MSFT) as #6.

• Petroleo Brasileiro SA, owner of the Western Hemisphere's largest oil discovery in three decades, passed Microsoft Corp. and Industrial & Commercial Bank of China Ltd. to become the world's sixth-largest company by market value.
• Petrobras surged with other oil and metals companies as growth in developing countries such as China and India increased demand for raw materials. Six of the top 10 companies by market value are energy or mining companies, while three are from China.
• Petrobras, which has seen its market value quadruple since 2004, is worth 41 percent less than Exxon Mobil Corp., the world's largest company at $498.6 billion. By overtaking Microsoft, Petrobras also becomes the third-largest company in the hemisphere after Exxon and General Electric Co., according to Bloomberg data.

Or as an interesting play on Brazil oil, through the backdoor by an American oil giant, what about Hess (HES)? Talk about a great investment they made 7 years ago. I've followed this name only with 1 eye, but it is up 30% year to date.

• Hess Corp., the fifth-largest U.S. oil company, may double its reserves on a $36 million investment made seven years ago.
• That's when Hess, the oil producer founded by the late Leon Hess, former owner of the New York Jets football team, bought its stake in an offshore Brazil exploration block. The company's market value has jumped 76 percent to $41.3 billion since the Western Hemisphere's largest oil find in three decades was made about 85 kilometers (53 miles) away, raising speculation Hess may also have a gusher.
• ``Hess is the U.S. company most leveraged to success down there,'' said Robert Goodof, who helps oversee $22 billion in assets at Loomis Sayles & Co. in Boston.
• Hess and Irving, Texas-based Exxon Mobil Corp., the world's largest oil company, each have 40 percent interests in the prospect.
  
• At current prices for U.S. oil futures, 2 billion barrels would be worth more than $250 billion.

So while most large cap mutual funds will focus on Exxon Mobil (XOM) - of which this find would definitely be a benefit, it would be a far greater impact on Hess. One to keep an eye on in the horde of exploration and production companies.

Last in the world of electric cars - which we are seeing entrants from Nissan & GM by 2010, we have the potential for an IPO coming from Tesla Motors. While this is a more specialized higher end company - this will be an interesting listing, especially if commodities continue (or even hold) their staggering gains.

• Most people probably won’t be able to afford one of the sexy electric sports cars from Tesla Motors. The Roadster sells for about $100,000 and only recently began shipping in limited quantities. But fans of Tesla may be able to buy something else later this year: Shares of Tesla’s stock.
• Elon Musk, Tesla’s chairman and a major investor, told attendees of the TieCon conference this weekend that he plans to take his electric-car company public by the end of 2008.
• Tesla ...has generated a huge amount of buzz in Silicon Valley circles. Sergey Brin and Larry Page, the founders of Google, were among its early investors. Mr. Page says he has already ordered one of Tesla’s $100,000 cars for himself.
• Tesla’s road has hardly been smooth, however. The company has hit some production delays, in part because of design changes, and it sued a competing company last month, alleging it stole Tesla’s trade secrets.
• Before going public, Mr. Musk said Tesla plans to raise another round of financing, which would help it begin production on Tesla’s luxury electric sedan by 2010

Here is a link to the car website for you top 1-2%'rs in the audience ;)

Some Great Bloomberg Articles

Bloomberg is just on fire today with a series of eye openers. I'll file these two under "oh I thought everything was fine in corporate profit land" (buy stocks) and "oh I thought banks had thrown in the kitchen sink - for the 7th time - and were finally forthcoming" (buy stocks).

I've had a serious issue with the latter story because 'off balance sheet' accounting (essentially hiding things away from the public view) seems to be against everything a transparent society is about. We saw it bring down the Enrons of the world and we were supposed to have new regulation (Sarbanes Oxley) that took care of this. Then we find out half a decade later many of our highest profile banks are playing the same tune? Stuffing junk into fancy acronyms like SIVs? Then in the biggest sham, our Treasury Secretary proposed a plan to fix this problem by creating his own off balance sheet entity - so basically this vehicle would take the bad product from 1 hidden spot to a new one... and *poof* like magic, all our problems go away? Back in October, I called this the "Super Bailout Fund" Here is how it worked....

If you had a company, and you had something to sell... and no one wanted to buy it, what would you do?

Did I mention that the product you want to sell is not even on your balance sheet, it's actually hidden off to the side in an off balance sheet area so it doesn't even really appear to exist. Wait, it doesn't appear to exist until it causes you problems.

But back to our story... what would do you?

Here is an idea - why don't you partner up with a few other fellow companies in your industry, and create a 3rd party entity. You and your friends will shuffle money to fund this 3rd party entity, and than said 3rd party entity will buy the product you cannot sell. So just like that, problem solved! There is a buyer for your product. The buyer is... yourself!

Now I don't know about you, but if a normal business did that, we'd call it a joke. Or worst. (fraud?) But in our financial hallways, we call it innovative and wonderful. In fact our Treasury Cabinet member is the one encouraging it. Folks, this is sad and a shell game at its worst.

Thankfully this hair brained idea failed - but to have our government proposing these sort of 'solutions' is simply embarrassing. But again, it is Cramerica - for the corporation by the corporation and when your Treasury head comes from Goldman Sachs....

So let's have a reality check, shall we? First, Banks Keep $35 Billion Markdown off Income Statements

• Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show.
• The balance-sheet adjustments are in addition to $344 billion of writedowns and credit losses already reported on the income statements of more than 100 banks.
  
• These companies have raised $263 billion from sovereign wealth funds, their own governments and public investors to shore up capital. The balance-sheet writedowns also reduce equity, which needs to be replenished. Adding the $35 billion leaves the banks with a $116 billion mountain of losses to climb.
• While some declines in valuations may reverse, most of the losses are permanent impairments caused by surging defaults on U.S. mortgages, said Janet Tavakoli, author of ``Collateralized Debt Obligations & Structured Finance,'' published in 2004 by John Wiley & Sons Inc.
• ``Of course we can't tell how much of a bank's portfolio may actually be good stuff that will pay back at maturity,'' Tavakoli said. ``But there's tremendous value loss that's fundamental, not just due to credit market gyrations.'' Keeping those markdowns off income statements just delays the realization of the losses
• ``The banks that have taken advantage of this accounting approach are going to have a price to pay later,'' said Hintz, the third-highest ranked securities analyst in an Institutional Investor magazine survey. ``You don't avoid the price. Those that have taken it all in their income statements will come out with clean balance sheets and move on.''
• Ignoring bad debt and postponing inevitable losses was one of the main reasons behind Japan's decade-long economic slump that began in the 1990s, (but we're not Japan - we are free, open, and transparent (cough)) Faced with new capital requirements and a weakened ability to meet them, Japanese banks deferred the recognition of their losses.
• ``U.S. regulators may be tempted to go soft on banks too,'' said Whitehead, who teaches securities regulation, in an interview. ``The new capital rules already rely significantly on self-modeling by the banks. So if anything, the risks may be greater in the U.S. today than they were in Japan in the 1990s.''
• A review of the balance sheets and regulatory filings of more than 50 banks showed that 20 of them chose to keep some subprime- related losses off their income statements. The marks were recorded instead on balance-sheet items labeled ``other comprehensive income'' or ``revaluation reserves.''
• Rosenberg said the next round of equity-strengthening probably will be in the form of common stock. ``It's like shampooing: lather, rinse, repeat -- write down, raise capital, repeat,'' Rosenberg said. ``How long can they keep doing it? Shareholders are in for a long ride.''

Looks like more kitchen sinks coming down the line - woo hoo. See this is the problem with bottom fishing in many financials - even AFTER they come clean (and many are still in denial or at least still in 'hiding the truth' stage), they will be required to raise capital which means more shares issues to the public. So companies that entered 2007 with X shares are going to exist 2009/2010 with X+ (some large number here) of shares. So your earnings PER share are hindered. For years. And this is why, after the dead cat bounces and heroic tales of why financials are such an excellent buy, told to us nightly on CNBC - for many in this sector you are going to see a long age of sideways as earnings gains are simply going to be sapped by a crush of near shares.... meaning EPS growth will be much more difficult to come by. But for now, our regulators are happy to play kick the can down the road - keep kicking, keep printing money, keep accepting junk loans from these banks for Treasury Bills and keep juggling the balls in the air hoping housing rebounds and/or this all was just a nightmare and will fix itself - and/or we find more and more suckers to buy new equity in said banks. (with money created from the Fed of course)

Conclusion: Buy financial stocks. They're cheap. CNBC told me.

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

Over we go to the corporate earnings world - oh lo and behold we are told how wonderful things are - if you only exclude financials, everything is so rosy. And even more rosy in the coming 6 months (remember fourth quarter 2008 expectations for earnings are over 60% higher than fourth quarter 2007) - do you believe in this economy we are going to see that sort of rebound? No... so stocks are not cheap on forward earnings. And even if we look backward we can see, if you take out energy stocks, the S&P 500 had a bad half year. (We were told everything was fine if you only exclude financials of course) Anyhow that's the past - don't worry about it (other than to read what I type below) - let's look to the future - that's all that matters. So now we look forward to the era of 60% year over year growth coming later this year. Boo Yah.

• Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.
• Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998
• ``It's kind of a Catch-22,'' said Joseph Quinlan, 49, New York-based chief market strategist for the investment management unit at Bank of America, which oversees $643 billion in client assets. ``The better energy does, the weaker the rest of the S&P. It masks some of the weakness.'' (thank you, I've been trying to say that for months on end to no avail)
• Even after taking out financial firms and consumer companies that reported lower earnings, oil profits accounted for almost half of the overall gain of 11.02 percent for the S&P 500, Bloomberg data show.
• ``A lot of that margin which dropped to the bottom line, that's gone,'' Bank of America's Quinlan said. ``The easy money is behind us, for both the oil companies and investors.''

Conclusion: Buy US stocks; they are cheap on earnings, both in the past and future. The 2nd half of the year will be booming with 60%+ earnings growth. Malls will be packed. Houses will be flying like hotcakes. And stocks should gain another 50% in the next 7 months. Nevermind, that energy "tax" on all producers (and consumers) - it's all good. Just imagine how good it will be this quarter with oil in the $110-$130 range, when the last 2 quarters it was $80-$110. Business should be booming for non energy companies since inflation does not affect anything or anyone in America. Since we have none. As shall be revealed to you tomorrow at 8:30 AM. And even if we have any; it doesn't matter - because nothing in the real economy matters. Stocks only should go up.

Second Intraday Reversal in 4 Sessions

Hmm... interesting. Not within 30 minutes of my last post we've seen a sharp reversal in many of the leadership stocks. The same thing happened last Wednesday. Notice the late day selloffs both days in the 5 day chart below.



I have to tell you in "normal" markets that is a big danger sign. When this happened last summer and in mid fall, it foreshadowed some serious corrections. It seemed to showcase some trouble under the surface (potentially hedge funds blowing up and forced to liquidate positions to make margin calls). However, in socialized markets with the "Invisible Hand" [Jan 9: An Amazingly Blunt Commentary on the Plunge Protection Team] working it's magic, it is hard to know the outcome. Either way I continue to believe Risk is High, even if Kool Aid drinking is higher. If we were in truly 'free market' days I'd be worried about seeing 1 of these large intraday reversals; not to mention two in a week.

Again, the conditions are setting up here for the market's most wicked of mannerisms - doing the opposite of what many expect. The level of complacency has risen quickly the past few weeks (2 months ago we were wondering if Bear, Lehman, Merrill would exist, and if our banking system would survive, now 60 days later we are thinking unicorns and mermaids are ahead). Indidivual speculators... err, investors are looking for which small cap no name stock they can run in to, to drive up 40% tomorrow (instead of thinking about risk). As I wrote in the last entry, it would be poetic justice in some ways for mother market to have drawn in the last remaining bears, forcing them to throw up their hands and go long - just as she was about to drop the hammer. Could it be that dramatic? We'll soon see if historic precedence means anything anymore. If so, these 2 intraday reversals are a shot across the bow.

After seeing this pattern again, I definitely will not be reducing short exposure going into the close. Risk just got a tad bit higher.

An Unrelenting Move

While it is still 1:30 PM, and moves made during the middle of the day don't provide the same signal as the end of day close, the bulls continue to mock the bears - the S&P 500 has now moved above the 200 day moving average. If we close above, a lot of anxious sidelined money awaiting the ever elusive "pullback" will be potentially making a bee line to get back into the market for fear of lagging the market so badly. This is about where performance anxiety will really fill institutional money - much of which has sat on the sideline since the March lows.



One day (in a galaxy far far away) when the correction happens, all the things now being discounted as "priced in" will be trotted out as "reasons" for the selloff. But as always, "perception is reality" and perception now is all systems are go for this 2nd half recovery. Until evidence (in overwhelming force) to the contrary appears, we can continue merrily along. Even Cramer is out today saying oil is not a tax on the economy in the new era. So this is Wall Street thinking at it's best; when you've been saying something for a long time (he has been saying it is a tax), when the market price action goes opposite to your view, than you rationalize it (now oil is not a tax except for consumers). Got it. So if $130 oil is good for us, I suppose $140 will be even better. Do I hear $150? Maybe that would signify Dow 20,000.

While it would be ironic to see the market correct just after a clearing of a long term resistance level (sucking in all the technical traders), we cannot count on it. Therefore as mentioned in this week's summary if we appear to be closing (late today) above this 200 day moving average, I'll start paring back short exposure. As I said, I am not really looking for new buys, unless it is something that has not already run to a great degree, but instead of having 23% of the portfolio working against me, I'll need to get that number lower so our 60% long exposure is not completely wasted away by the Ultrashorts.

While I don't believe in this rally - much like we did in September and October 2007, you have to respect the price action and standing in front of a herd of rampaging bulls, only loses you money. Being intellectually correct does not make one money - ask all those people who were correct about the internet bubble but whose portfolios were decimated by betting against it. Only 8% higher to go in the S&P to reach all time highs ;)

For example of the current level of mania, Pacific Ethanol (PEIX) reported a "better than expected" 6 cent loss versus a 5 cent loss last year. Since that demolished the analysts expectations of a 9 cent loss, this is worth a +46% gain today. I am seeing a lot of small cap fare doing the same nonsense. This would indicate the latter stages of a rally, but I've been saying that for a week now. :)

Another sign of trouble - many former leader stocks are not participating; this is mostly a 'worst of breed' small cap rally. But with that said....

Conclusion: Everything is priced in. Buy Stocks.

P/E Ratio by Position mid May Update

I last looked at this measure in mid January [Jan 20: P/E Ratio for Portfolio] so now 4 months later it's time to take a fresh look. I won't rehash all my thoughts on P/E ratios (you can follow the link) but at a 40,000 point of view

1. I like earnings; it is very hard for me to value stocks with no earnings i.e. valuing hope or earnings in 2011 is difficult. (US housing is the only example of stocks I have right now with no earnings)
   
2. At heart, while not a pure value investor, I am a relative value investor - i.e. all things being equal I prefer growth at a reasonable value. This seems to work very well in all sectors except solar where the most expensive stocks seem to get rewarded by trigger happy speculators....err, investors.
3. I look forward, not backward - what I've done here is look at Dec 2008 estimates - or if the stock has a different year end than December, the nearly yearly period to December. If you looked backward you would of missed the entire fertilizer run, deeming the stocks 'expensive' when in fact they were dirt cheap based on what was coming in the upcoming quarters.
   
4. In most cases I try to buy stocks I believe the analysts are missing part of the story and understating earnings potential - so the P/E ratios below are not necessarily what I believe to be true (fertilizer has been a great example of this, which the analysts have been so wrong for so long)
5. Except for the 2 investment banks (and US housing) I believe almost every company will beat current analyst estimates for the year, and this is the whole basis for my investing style.
6. Aside from a few names I expect 2009 earnings to show meaningful growth over 2008...
7. In some sectors, I believe 2009 growth will be so good, I am looking past somewhat average 2008 estimates and looking out 1 more year (coal being the best case)
8. I am willing to pay up for scarcity value (i.e. hard to replicate business models or hard to enter businesses) I truly have no way to value a Baidu.com for example - so I think P/E ratio is useless for these.
9. I do pullback exposure when valuations seem to get rich (in my opinion) versus growth rates - we can see that now in Mastercard, Fluor, and a few other names - while I like the companies, I just cannot put a large weighting to stocks that are this rich to growth rates.
10. An 18 P/E ratio in 1 sector might be expensive, whereas it might be cheap in another - hence I only compare P/E ratios among peers
    
11. P/E ratio is but one of many measures one can use; and as with most things its an art not a science. If you approach it as a science of absolutes, you will miss out on many opportunities. It is but one tool in a very large tool kit.

Below are all my non ETF holdings, sorted by sector. I've sorted within each sector the stock with the largest weighting at the top, and the farther down the list, the lower the portfolio weighting is.

In general you will find most of the stocks I own as relatively cheap on full year 2008 estimates, especially in relation to their (relatively) high growth rates; especially the names I keep towards the top of the portfolio. Even within each sector, certain companies have major advantages which may or may not deem a premium multiple.

Agriculture - Fertilizer
MOS 11.5
POT 20.3
CF 10.8

Infrastructure
JEC 29.8
FWLT 23.0
MDR 20.7
FLR 29.6

Financial/Consulting
GS 11.5
BLK 24.5
MS 8.8
FCN 24.8
MA 32.8

Solar
TSL 15.8
YGE 27.5

Energy - Coal
ANR 33.1
MEE 21.1
CNX 33.7
ACI 24.6

Energy - Oil Service/Drillers
PDE 12.7
ATW 16.4
CLB 22.0
NOV 16.6

Energy - E&P esp. Natural Gas
EOG 17.4
XTO 17.7
COG 26.0

Energy - Everything
PBR 16.3

Metals/Mining
MTL (Russia) 15.1
RIO (Brazil) 14.0
CLF 16.6
SLT (India) 16.4

Healthcare
ISRG 59.1
ILMN 65.2

Technology - Computer/Communication
AAPL 36.0
RIMM 36.5

Technology - Internet
BIDU (China) 89.1
MELI (South America) 111.6

Home Builders
GFA (Brazil) 13.7
DHI (US) earnings? haha
LEN (US) earnings? haha
HXM (Mexico) 16.5

India Banks
HDB 25.5
IBN 19.1

China Misc
PWRD (gaming) 18.6
CTRP (travel) 53.1
HOGS (hogs) 10.1
SOHU (search/gaming) 33.0
EDU (education) 47.4
WX (medical outsource) 30.7

Industrial
CMI 15.6

Drybulk Shipping
DRYS 5.9

Perfect World (PWRD) - Good Earnings, Light Guidance; Buying the Dip

Perfect World (PWRD) reported very good numbers this morning but due to 'disappointing earnings' (some of it due to 3 day shutdown in China due to mourning period for the earthquake) the stock is down over 9% this AM. Sort of silly, so I added more here in the low to mid $28 range, which coincides nicely with some key support around $28.00. Growth metrics this quarter look very nice; revenue grew 18% sequentially and 248% year over year. Gross margin expanded 2.5%! sequentially and nearly 10% year over year! (wow). Net income up 8.3% sequentially and 296% year over year.

• Total revenues were RMB303.2 million (USD43.2 million) in 1Q08, an increase of 17.3%, or RMB44.8 million, from RMB258.4 million in 4Q07 and an increase of 247.8%, or RMB216.0 million, from RMB87.2 million in 1Q07.
• Online game operation revenues were RMB264.5 million (USD37.7 million) in 1Q08, an increase of 14.9%, or RMB34.3 million, from RMB230.2 million in 4Q07 and an increase of 245.4%, or RMB187.9 million, from RMB76.6 million in 1Q07. The sequential increase in online game operation revenues primarily resulted from the successful launch of Chi Bi, expansion packs for the Company's existing MMORPGs and the successful implementation of the "Perfect Festival" marketing campaign.
• Gross profit was RMB265.6 million (USD37.9 million) in 1Q08, an increase of 20.9%, or RMB45.8 million, from RMB219.8 million in 4Q07, and an increase of 290.9%, or RMB197.6 million, from RMB68.0 million in 1Q07. Gross margin was 87.6% in 1Q08, which increased from 85.1% in 4Q07 and 78.0% in 1Q07. The sequential improvement in gross margin was mainly due to a higher level of economies of scale generated from rapid revenue growth, a reduction in IDC costs and an increase in overseas licensing revenues, which have a higher gross margin.
• Net income was RMB158.4 million (USD22.6 million) in 1Q08, an increase of 8.3%, or RMB12.2 million, from RMB146.2 million in 4Q07, and an increase of 295.8%, or RMB118.4 million, from RMB40.0 million in 1Q07. Basic and diluted earnings per ADS were RMB2.83 (USD0.40) and RMB2.67 (USD0.38), respectively, in 1Q08, as compared to basic and diluted earnings per ADS of RMB2.62 and RMB2.48, respectively, in 4Q07, and basic and diluted earnings per ADS of RMB1.27 and RMB0.82, respectively, in 1Q07.

Guidance

• Based on the Company's current operations, total revenues for the second quarter of 2008 are expected to be between RMB303 million and RMB318 million. This represents an increase of 0% - 5% on a sequential basis and reflects the impact of suspending game services in response to the three-day national mourning for earthquake victims and the earthquake's impact on the Company's operation in Sichuan. In addition, the Company has incurred and expects to continue to incur additional operating expenses in the second quarter of 2008, including increase in R&D expenses in connection with Beijing and Shanghai operations and other operating expenses in connection with the new U.S. Subsidiary, which will reduce operating margin and net margin for the second quarter.

US Subsidy? Hmmm

• In April, 2008, the Company established Perfect World Entertainment Inc, or PW USA, a Delaware corporation and its wholly owned subsidiary, to capture potential business opportunities in North America. PW USA is expected to primarily focus on solidifying the Company's international expansion strategy.

So I guess I see this one different than the market; much like Ctrip.com (CTRP) there is not much a company can do about earthquakes or 3 days of national mourning. If a company is supposed to lose 10% of its value since it is losing 3 days (out of 365) I guess that is market logic for you. I took the opposite tact and now have pushed Perfect World up to 2.3% stake from 2.0%. Perhaps next quarter gains will be muted but things continue to look rosy for the year(s) ahead, and this quarter's beat of 3 cents should offset any shortfall next quarter and the full year number should remain beatable. A forward PE of 17 is not unreasonable considering the metrics they are putting up.

Long Perfect World, Ctrip.com in fund; long Perfect World in fund

Bookkeeping: Weekly Changes to Fund Positions Week 41

Week 41 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: 17.7% (vs 18.1% last week)
53 long bias: 58.7% (vs 60.2% last week)
8 short bias: 23.6% (vs 21.7% last week)

61 positions (vs 62 last week)
Additions: Perfect World (PWRD)
Removals: Shaw Group (SGR), LDK Solar (LDK)

Top 10 positions = 38.1% of fund (vs 30.0% last week)
28 of the 61 positions are at least 1% of the fund's overall holdings (46%)

Major changes and weekly thoughts
The market enjoyed a very nice week, making up all of last week's losses and more. On a technical basis, we are (once again) at a key point on many of the indexes - all but the NASDAQ sit right below the 200 day moving average; the NASDAQ poked above this resistance Thursday and Friday. I wrote in mid January that the S&P 500 was in its worst condition in half a decade, as major technical averages were broken and we've had quite a ride since then. The government in many forms, seen (and I believe unseen) have come to the rescue, sloshing the world into another liquidity driven era.... maybe in our lifetime we will never be allowed to have a proper recession again. Or at least not one the government reports will show. As an offshoot of such actions, inflation is the course taken as opposed to allowing a full cleansing. I expect this to be a continuing course of action, until the weight of reality overwhelms the behind the scenes socialism in our "free markets".

The feel here is (to me) akin to September/October 2007 when we were told the market knows all, the market sees into the future and has discounted everything in the 6 to 9 month period ahead. Somehow (back then) the credit destruction, horrific stock fall in January 08, and historic measures by the Federal Reserve, most obvious in an implicit backing of all investment banks was not "seen" by the all knowing market. Nor do I believe is the consumer led recession we are embarking upon now "seen". Most market participants have grown up in short, sweet, and corporate driven recessions of 90-91 and the early 00s. Very few were around for the late 70s/early 80s or have bothered to read up on it it appears. So their textbooks all say buy a few months into a recession (although of course we are not in a recession) because if you buy 3 months in, we will be out within 3 months (since no recessions last more than 6 months in the past 20 years) ... again, not that we are in a recession. ;) Much like last fall, only when the evidence is so obvious and impossible to argue with, do I expect the market to face the reality. And when it does come, I believe it will be another sudden twist and turn downward that will catch a very complacent market from out of the blue. But timing all this is another matter entirely! But as I stated Friday "Risk is High" - we are starting to see speculation in "worst of breed" stocks, which tells me we are closer to the end of a move, than the beginning - but how close to the end I don't know. (if anyone knows, please email me!)

Economically the news continues to be poor; my belief is even when the news "turns" into good, it won't be a V shaped recovery but a long sideways "slow growth" period... and we are not even close to getting to that point. The market is betting on a V shaped recovery "in 6 months", from recent pricing action (reaching highest prices of the year). Again, one of my favorite phrases is "perception is reality" - as long as perception is everything will be fine in the near future, than the stock prices will reflect that. Commodities, China, and inflation hold the keys for our near term. We've had an enormous moves in the prices of commodities, and almost all themes now relate directly or indirectly to the voracious appetite of China to continue to consume and prop up much of the world. The price rises have been so vicious in commodities, that if oil repeats its performance of the past few months, in the NEXT few months we will be looking at crude $160 by end of summer. I don't think this will happen; while I am a long term bull, I believe a propensity to correct will be here sooner rather than later. If I am wrong and crude (and associated commodities) continue their run we are in even deeper trouble, as the implications will be dire for consumers worldwide and many companies. We are seeing the first hints of this with the warning from Fedex (FDX) a week ago Friday, and Deere (DE) this week [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] While I predicted from fund inception we'd see a sharp rise in commodity prices/inflation due to a "World of Shortages" - we've already taken some huge steps in that direction just since last August. The pace of increase cannot continue or we will be plunging into a global recession by 2009, as pricing for producers and consumers alike will eat into their income streams. Airlines and refiners will simply be unable to adjust to this sort of era, if it happens at the same pace we've seen the past few months. Demand destruction would intensify in the developed world.

The American economy is 70% consumer driven and I could make an arguement that many of the top 10 states, of which control 50% of the $13-$14 Trillion in US Gross Domestic Product, are in recession or heading there shortly - #1 California (real estate related) is 13% of the American economy alone, #4 Florida (real estate related), #7 Ohio (manufacturing) and #9 Michigan (manufacturing) are there. New York (finance based economy centered in NYC) will be slowing down considerably as the effect of its 2008 layoffs filter through (offset by its tourism from overseas I suppose) - one could argue either way on #5 Illinois, #6 Pennsylvania, #8 New Jersey, and #10 Georgia. Only #2 Texas (energy), do we see a clear path for sustained growth anytime during the next 18 months. Yet somehow the overall economy is not in bad shape and will rebound "in 6 months". Interesting. Again, I expect the market to whistle past the graveyard until they trip over headstones. I'd also ask if China drops from 11% GDP to 6% GDP, how would that affect the investing landscape? Almost all major themes and countries that are booming (ex: Brazil) are reliant on this 1 engine - especially as others in North America, East and West Europe, and Japan slow. So these are the things I'm mulling as we move forward towards the 2nd half (which according to everything I've been told since Jan 1, 2008 is going to be the boom time for the economy) We'll know soon, it gets here in 6 weeks.

For the fund, we continue to mint winners in coal, and of late have added some nice gains in solar, global infrastructure, oil services, metals and (gulp) housing. We continue to avoid the bulk of financials and retailers, which despite tremendous bounces from time to time, I still contend have many headwinds coming in the next 18 months. I've moved one solar name to a major overweight, anticipating a very nice earnings report and an extremely underestimated valuation versus peers - I had just been waiting for the technical condition to finally show promise which it finally did. If the solar stocks continue to ramp through mid week I plan to take a substantial amount off the table as solar stocks are a volatile group and when they correct, it is not pretty; we are the tail end of this ballistic move in the group in my opinion. I've also pared back severely in all energy exposure, only leaving a small overweight in coal, which I won't be cutting any further than I have now. We sit with large cash and short exposures for our long weighted fund; we will have to reassess this market if and when the market breaks out over its major resistance lines. (the 200 day moving averages) Frankly (almost) all my favorite names have made tremendous moves and I don't really want to chase stocks up 40-50%; we have made a lot of money and are beating the indexes by a large margin so I'd rather play safe than sorry for a while here, and give up some potential gains in return for a lower risk profile. The one thing I would reverse would be the heavy short exposure if we break above resistance, as it makes little sense to continue to give back profits gained from long exposure, on the short side. But I'd be more focused on adding to cash rather than new long positions if that is indeed the scenario.

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 was quiet. After the bell, LDK Solar (LDK) reported good earnings but a degradation of future margins, as stated I would of liked to sell some in after hours as the stock was near $38 but we don't have that option in my mock portfolio so I decided to cut exposure Tuesday instead, and after further thought (and a reallocation to Trina Solar), cut the position entirely on Thursday. I still am bullish on the name long term, but think we have better upside in other names over the next few quarters - this was exactly the rationale for cutting Suntech Power (STP) out of the portfolio a few months ago.
2. Tuesday I cut exposure to the global infrastructure group - in retrospect too early as the sector had a great week.
3. I followed that up with a closing of Shaw Group (SGR), which again was too early in timing considering how hot this sector was - but I owned so little it would of not impacted the portfolio. I've decided to winnow this group to fewer names for now - I sold Shaw Group for non performance which it immediately (once I sold) decided to show me up - it put on a huge move Thursday and Friday.
4. I had spent the early part of the week building up the position in Trina Solar (TSL) to about 3.3%, after the stock broke above its 200 day moving average ($46) I quickly took this up to 6%+ and I added more on strength later in the week. Unfortunately, the speculators ran into Solarfun (SOLF) late in the week driving it up a massive amount ahead of earnings - it would of been nice if that had happened to Trina instead. But at the core I like growth at a reasonable price and Trina is the cheapest among its peer group; by a staggering 50%. Meaning we can see 100% gains and still only trade at peer valuations - hence for someone of my ilk, it is too hard to pass buy to chase into stocks of similar composition, but are being chased by momentum daytraders. Maybe this will be Trina's week.
5. Along those lines, I cut back my Yingli Green Energy (YGE) ahead of earnings after a nice run. I did not get the top but compared to where we bought the position we still made a nice gain. This is an example of a direct peer to Trina that trades at double the valuation for no apparent reason other than the world missing the forest for the trees. So we've pared out solar names from 3 to 2, and overweighted into the cheapest name.
6. I pared some of home builer Lennar (LEN) - nothing special here - I buy it when it sells off, I sell it when it runs a little - I expect to continue to do this for the foreseeable future, along with DR Horton (DHI). I don't believe in any imminent housing rebound but the stock market continues to treat these guys well, so they stay in the portfolio.
7. Thursday, I rebuilt part of a position in Chinese travel company Ctrip.com (CTRP) - we had sold this one in the upper $60s on May 2; so we were able to rebuy the stake at $56-58 this week. That does not mean it is the bottom, or near the bottom but anytime I can create a transaction for 14-16% in 2 weeks time, I'll take that all day. I'd like to add more in the lower $50s. This stock has been great to me for any number of years, despite never being cheap. That said the Chinese earthquake might cause some problems in the position for the next 3-6 months.
8. I cut a smallish stake in WuXi PharmaTech (WX) after a large gain (following months of poor performance). I still like the long long long term story here, but I'd like to see more normal trading. Right now this name seems to be in the "Chinese small cap" speculation that comes to the stock market every few months where every Tom, Dick, and (insert chinese name here) gets run up - if they have good prospects or not. We are now in one of those phases which makes me even more inclined to believe a stock market correction will be coming sooner rather than later. Random speculation is usually a sign we are near a top.
9. I started a new position in Chinese gaming company Perfect World (PWRD) - a bit risky to do this ahead of earnings, but I like the space and this company has multiple drivers for upside. We'll know Monday how this move turned out in the short run.
10. Friday, I took out what probably is my last layer of energy stakes. I've culled this area sharply the past few weeks and am now at a portfolio weighting where I'd be content holding these through a selloff, whether minor or major, in the group.
11. Late in the day, I added to my Intuitive Surgical (ISRG) position, which I might reverse (sell what I just bought) if the stock drops below support (i.e. fake breakout). If we see $295 I'll be pushing this stock back down to 1%ish.
    

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.

Inflation Makes it Way Across the Globe

Let me emphasize that luckily, inflation does not cross American borders, so we have nothing to worry about. But as we look across the globe at other countries we need to make a mental checklist of all those unfortunate areas that do not have such excellent government reporting as we do. [Apr 10: NYT - Inflation Spanning Globe] Further keep in mind, unlike many countries - especially Europe - whom when inflation ramps - their workers get higher wages (sort of like what happened in the United States in the late 70s/early 80s) we are in a "new era" - this era is called the "corporate era" where workers are told to "shove it" when they ask for wages that rise with inflation. If there was any inflation that is. Since there is no inflation in America, its a moot point. But I'm just saying...

So as we categorize the world into pockets - we now see slow growth (ex exports to Chindia) for Japan. We see slow growth in most of the Western Eurozone as they fight inflation, and specific to countries which followed the US policy of "regulation stinks, let financial innovators run amuck" we have housing busts forming (Spain, UK, Ireland). The Middle East is awash with inflation [Feb 26: Rising Inflation Creates Unease in the Middle East] because most peg their currency to the dollar so when the Federal Reserve lowers rates, they must do the same, creating a flood of paper currency into already hot economies flush with petrodollars.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren't facing recession.

Isn't that strange that in every country PEGGED to our dollar, when the Fed floods the system with liquidity - every country tied to us gets more inflation, but we do not? Almost ironic isn't it, but I trust the government reports - and if they say no inflation - they no inflation it is! [Mar 16: A Picture is Worth a Thousand Words] In China we are now seeing nearly 9% inflation. In India, white collar wage inflation is sometimes in the 20%+ range. Most of South America has central banks raising rates to try to fight inflation, as is Australia. So all in all, it appears America, Canada, and Antarctica are immune to the scourge - no inflation zones! But we'll focus today on some more unfortunate areas that do not have excellent ways to make inflation disappear such as Eastern Europe.

• Rising inflation is severely hurting Ukraine and other Eastern European nations, while the global credit crunch will slow growth in those countries dramatically in coming months, the European Bank for Reconstruction and Development said Sunday.
• "Inflation, now in double digits in many countries, (but not in the US since we are immune to it) is the region's most pressing current problem. If left unaddressed, inflation could risk price-wage spirals, (but not in the US since our workers have no bargaining power) exchange rate realignments, or could force a belated and sharp response by monetary policy," the bank said in a statement.
• Neighboring Russia, meanwhile, will continue its rapid oil- and gas-fueled economic expansion, with growth expected to reach 7 percent this year, the bank said.
• The EBRD is the largest financial investor in Ukraine, investing up to $1.6 billion annually into projects ranging from banking to infrastructure.

So the path is pretty simple - if you are a country with natural resources (Canada, Australia, Brazil, Russia, Middle East) you will have inflation but you will still have good growth. If natural resources is a smaller part of your economy - your going to get the inflation, but not so much of the benefits.

And as I will say every month, and will say for the future - this flattening globe is going to flatten a lot of Americans with it (*much of it* is simply unavoidable) - a high inflation environment will be much worse now that it was in the 70s/early 80s because the one thing the Federal Reserve does fear, wage inflation, is going to have a tough time happening here. That is great for Fed policy; that is great for corporations which can keep their #1 cost (labor) low, and increase prices, but it is not good for 1 cohort. Workers; especially those in the bottom 60-80%. But frankly, the major components of the US stock market do not need these people anyhow - there are plenty of emerging middle class throughout the world to offset the pooring of America. [Dec 8: Do the Bottom 80% of Americans Stand a Chance] However, this won't be such a good story for smaller and mid sized companies without international exposure since they are reliant on said group who is going to be punished the worst in this new era. We are heading to stagflation - I'm not the only one thinking it - some bright minds like Wilbur Ross and Maestro Greenspan [Mar 10: Wilbur Ross on Stagflation and Possible Bank Failures]

But this scenario would only work out if there were any inflation that faced the US worker/consumer. And since there is none.... nothing to worry about. Conclusion: Buy stocks.

Earnings of Interest this Week

Yahoo Finance was a bit slow in reporting earnings dates last week so this might not be a comprehensive list. We are done with the bulk of mainstream American companies this earnings season, but this week will be dominated by Chinese fare (solar and gaming) along with dry bulk shipping. These are the names I'll be watching to learn how the real economy (not government reported economy) is faring; especially the consumer this week with a slew of retail names.

Just a note - Trina Solar (TSL) is set to report this week but has not filed a date yet - according to Investor Relations email to me, they will announce their date Monday (China time!) i.e. hopefully by this evening.

Monday
Dry bulk shippers Dryships (DRYS) and Excel Maritime Carriers (EXM) report; both of which I've owned in the past, but only a small amount of the former at this point. They have had enormous runs; simply breathtaking and my contrarian view is this is setting up very similar to fertilizer a few weeks ago - huge runs into earnings, huge expectations and a propensity for a selloff "buy the rumor, sell the news" type of reaction. With that said, the Baltic Exchange Dry Index which these stocks seem to trade in lockstep with, is booming.

In Chinese gaming we have The9 (NCTY) and recent fund addition Perfect World (PWRD). Competitor Giant Interactive (GA) reported a so - so report Friday so there is some risk here with buying a bunch of Perfect World right ahead of earnings but from my readings, and reasons I outlined in my purchase [May 15: Bookkeeping: New Position Started in Perfect World] I believe we could have a nice upside surprise. If I'm wrong, that is ok too - we'll take the short term hit as I believe this is a sector that should have some very nice secular growth ahead of it. Thankfully, I'm never wrong (cough).

On the retail side Lowe's (LOW) reports; this is yet another candidate of the "expectations are so low and hey housing will be rounding in 6 months" so you never know the outcome. This is actually a quality retailer, but again - it's one of the best houses on a very shady block.

For kicks I'll probably mock the report over at Pacific Ethanol (PEIX) - with what I envision happening to corn prices later this year, I'd use any pop to short this type of name. But the darn thing is $3 nowadays, down from $9 on Jan 1, so maybe that ship has passed.

Tuesday
Solar cell maker China Sunergy (CSUN) reports on this day, and normally I'd write - this is exactly the type of name where expectations are so low we could see a huge move, but with the stock up nearly 80% ($8 to $14+) in 2 weeks maybe the move already happened. But have you seen Solarfun (SOLF) lately? Yee haw. Sadly Trina Solar (TSL) is the best value of the bunch but has yet to get its obnoxious solar move upward moment yet.

Big computer maker Hewlett Packard (HPQ) reports, fresh off their announcement of purchase agreement of EDS.

The other part of the pair of home improvement retailers, Home Depot (HD) reports. Frankly I'm surprised these stocks have not rebounded more on the "everything is fine, in 6 months housing will be booming, and there is little stress in the economy - buy stocks" thinking.

Russian telecom player Mobile Telesystems (MBT); I like Vimpel a bit better [Mar 30: Time to Enter Vimpel Communications (VIP)?] but I just have concerns worldwide with telecom as competition seems to creep up very fast.

Saks (SKS), which burst out of resistance the past few sessions as part of the "those rebate checks + everything will be fine in 6 months as the economy booms in the 2nd half" trade, reports as well. While Saks is a bit more insulated by catering to the top 10-20%, I still think it's much too hopeful to be piling into these names - but then again I don't see a housing recovery until 2010+ and those stocks are still doing well.

Now a very interesting name to me is Target (TGT) - I watch this one closely because its not as low as the "pooring of America" dream play, Walmart (WMT) - so it's audience tells me a lot more about the economy than most other retailers. Target is not exactly Tiffany (TIF) but it was considered a step up over Walmart so this report will be one to watch from an economic macro point of view.

Organic food distributor United Natural Foods (UNFI) is also of interest - while it's in a different part of the supply chain than Whole Foods (WFMI) - we'll see how "healthy" distressed American consumers will be eating about 6-12 months from now in what I foresee as a deteriorating economy. Agflation is hitting even junk food, not to mention the healthy stuff.

Wednesday
BJs Wholesale (BJS) - a "pooring of America" beneficiary. When I start seeing stocks like this (and Walmart) sell off - THAT is when I'll say the economy will be recovering "in 6 months".

Limited Brands (LTD) - another company I only follow for the nice pictures on TV when they talk about it. Victoria's Secret is not the first place to go when one is struggling with the costs of life. Another name I'll be interested in - when I see it put a real sustained move up, then I'll know the US consumer is coming back to health.

NetEase.com (NTES) - another Chinese gaming company

PetSmart (PETM) - we'll know things are bad if we start seeing sustained issues here - for many people their pets are like kids; so if they cut back spending on this category in their budget you know they are truly stressed.

Solarfun (SOLF) reports premarket so this might mark the end (or near end) of this leg of solar mania, with a blow off top (or sell the news) reaction.

Thursday
2 retail names that have been doing well on the clothing side - Aeropostale (ARO) and Buckle (BKE) - excellent charts and these seem to be winning business from the American Eagles (AEO) and Abercrombies (ANF). However, with high stock prices and high expectations comes a lot more risk around earnings period.

An old tech holding in the fund, Blue Coat Systems (BCSI) - I still like this name, but the stock just was acting like death warmed over. As any concern on the economy perked up, this group of stocks would sell off on risk of corporate cut backs, but apparently we are now entering a new era of "everything will be fine" soon so why have the stocks not recovered all those losses? Hmm... maybe Kool Aid does not permeate all surface areas.

Dicks Sporting Goods (DKS) - while this is a Wall Street favorite this is exactly the type of product that a poorer America will have to cut back spending on. Maybe not this earnings period but over the next year, much of the growth in this name will be new store expansion; but I could see same store sales beginning to deteriorate the higher food and energy prices go.

So instead of going out and playing golf or sports that actually require exhaling at a fast rate, we will continue to sit on our behinds and play video games from Gamespot (GME). And instead of eating healthy, we'll be eating cheap - such as SPAM from our friends at Hormel (HRL). Speaking of which, we have large chicken producer Sanderson Farms (SAFM) - expect more outrage about corn ethanol and we're constantly looking for "production" cuts (which have already begun to play out) which will lead to higher prices in time.

Suntech Power (STP) - the granddaddy of Chinese solar and former fund holding reports; I have a lot of caution going into this report. While size/scale will benefit the name in the long run - it might cause duress in the near term due to the polysilicon shortages. That said, the stock has NOT moved while the rest of the sector has taken off; which you could read in 2 polar opposite ways. #1 the stock price is "telling you" something bad is coming or #2 any good news should send this stock on a rocketship ride since expectations are quite low. I'm leaning to #1, but see no reason to risk money when there are much easier short term stories in the space.

What Tiffany (TIF) is to the upper 10%, Zale (ZLC) is to the rest of us. So this name should be pressured in the year(s) to come under a "pooring of America" scenario.

Friday
Nothing of interest

88 Stocks Returning 10%+ this Week

The market was very strong this week, and one group of serious outperformerance was dry bulk shipping (which has been hot for a few weeks now) - this appears to be a play on the China earthquake; more supplies needed to rebuild combined with some loss of local production = more imported goods needed in China. It was a sunny (ahem) week for solar. Global infrastructure finally took off after lagging for months on end. And what can I say about coal that I have not been pounding the table about since September. It has been nice to see names not associated with coal, natural gas, oil, or fertilizer finally get their due in the past few weeks. We also saw some strength in "old school" technology, which has lagged seriously - I think this was driven by the Hewlett Packard (HPQ) acquisition of EDS (EDS).

Our criteria

1. Market capitalization $1.75B+ (I've lowered this from $2B to try to find some slightly smaller fish in the sea)
2. Average volume 100K+
3. Stock price $10+
4. Return this week 10%+

88 names made the list, we owned about 10% of them. As always green shaded names we own, and blue shaded we have owned in the past or discussed in the blog (note Shaw Group was sold this week - too early of course)

Symbol	Company Name	% Price Change 1 Week
TDS	Telephone and Da Ord Shs	32.3
EDS	Electr Data Ord Shs	29.0
EXM	Excel Maritime Carriers Ltd	27.8
CVI	CVR Energy Inc	21.6
DRYS	DryShips Inc	20.4
DSX	Diana Shipping Inc	19.7
WGOV	Woodward Governor Co	19.7
ENER	Energy Conversion Devices Inc	19.2
GRMN	Garmin Ltd	18.9
BYI	Bally Technologies Inc	18.5
PCX	Patriot Coal Corp	18.5
ANR	Alpha Natural Resources Inc	17.1
VMC	Vulcan Materials Co	16.9
FLR	Fluor Corp	16.7
WDC	Western Digital Corp	16.5
OC	Owens Corning	16.4
CCU	Clear Channel Communications Inc	16.1
BID	Sotheby s	15.7
STZ	Constellation Ord Shs	15.6
SGR	Shaw Group Inc	15.5
AAP	Advance Auto Parts Inc	15.4
FWLT	Foster Wheeler Ord Shs	15.4
WRC	Warnaco Group Inc	14.9
BTU	Peabody Energy Ord Shs	14.9
TNB	Thomas & Betts Corp	14.7
NTT	Nippon Telegraph and Telephone ADR	14.6
CCO	Clear Channel Outdoor Holdings Inc	14.4
SINA	SINA Corp	14.4
MCO	Moody's Corp	14.1
CBI	Chicago Bridge & Iron Co NV	14.0
TSO	Tesoro Ord Shs	13.8
ATHR	Atheros Communications Inc	13.7
TIF	Tiffany & Co	13.6
WFR	MEMC Electronic Materials Inc	13.5
WBD	Wimm-Bill-Dann OAO	13.4
TRN	Trinity Industries Inc	13.3
PKX	Posco Depository Receipt	13.2
PHM	Pulte Homes Ord Shs	13.1
MRVL	Marvell Technology Group Ltd	13.1
HAR	Harman International Industries Inc	13.0
AMLN	Amylin Ord Shs	12.9
GGB	Gerdau SA Depository Receipt	12.4
GTI	GrafTech International Ltd	12.2
HRC	Hill Rom Holdings Ord Shs	12.2
HRS	Harris Corp	12.2
KBR	KBR Inc	12.1
LEAP	Leap Wireless International Inc	12.1
DELL	Dell Inc	12.0
MDR	McDermott International Inc	12.0
TK	Teekay Corp	11.9
JWN	Nordstrom Inc	11.8
ACGY	Acergy ADR	11.7
TTEC	TeleTech Holdings Inc	11.6
GNK	Genco Shipping & Trading Ltd	11.6
CY	Cypress Semiconductor Corp	11.5
ANW	Aegean Marine Petroleum Network Inc	11.3
SNDK	SanDisk Corp	11.2
JEC	Jacobs Engineering Group Inc	11.2
OZM	Och Ziff Capital Management Group	11.1
NTY	NBTY Inc	11.1
EDU	New Oriental Education & Technology	11.1
WLT	Walter Industry Ord Shs	11.1
EMC	EMC Corp	11.0
DISH	DISH Network Corp	11.0
RIO	Companhia Vale Do Rio Docea	10.9
MYGN	Myriad Genetics Inc	10.9
TS	Tenaris ADR	10.9
PCS	MetroPCS Communications Inc	10.8
SPLS	Staples Inc	10.8
IACI	IAC/InterActive Ord Shs	10.7
NICE	Nice Systems Depository Receipt	10.7
BR	Broadridge Financial Solutions Inc	10.6
SNE	Sony Rep 1 Ord Shs ADR	10.6
HES	Hess Corp	10.6
AA	ALCOA Ord Shs	10.5
SDA	Sadia ADR Rep 3 Pref Shs	10.3
SATS	EchoStar Corp	10.3
PVH	Phillips-Van Heusen Corp	10.3
IFX	Infineon Technol Depository Receipt	10.2
CA	CA Inc	10.2
SQM	Sociedad Quimica y Minera de Chile	10.2
SOHU	Sohu.com Inc	10.2
BTM	Brasil Telecom ADR	10.1
CTX	Centex Corp	10.0
BRCM	Broadcom Class A Ord Shs	10.0
ME	Mariner Energy Ord Shs	10.0
A	Agilent Technologies Inc	10.0
MLM	Martin Marietta Materials Inc	10.0