Bookkeeping: 'Rising Tide' Performance Week 43

Week 43 performance of the mutual fund

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



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

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

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

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

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

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

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

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

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of April 2008.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Weekend Homework for Readers - more Dow Chemical CEO

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

German Solar Subsidies to be Cut Less than Feared

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

Anyhow, after yesterday's spooky man under the bed was brought out, overnight we saw a reality check - the subsidy cuts (LONG expected) are going to be far tamer than the speculation brought to bear by the analyst community. This is a net positive because it provides us with a road map of what the German market will be for the next few years, and "bad news" (not that this was bad in my book) is always better than uncertainty on Wall Street. Now we can move on to hand wringing about Spain in a few months. The one I have to laugh at is the panic selling over Congress and Presidential lack of action on US subsidies. The market here is so pitiful and most of these names sell nearly nothing to the US market - it's a non issue. But that doesn't stop the stocks from selling off 15-25% each time the U.S. bill "stalls". Farm subsidies? They pass like a knife through warm butter. But a pittance thrown towards solar subsidy? Nah, we are gonna fight that one tooth and nail. You see, there is no powerful solar lobby - so hence no urgency to pass any legislation. Big oil? Big agriculture? Plenty of lobbying power there. That's all that matters in US Government 101.

• Germany's ruling parties have reached a deal to reduce support for the solar energy sector by 8 percent in 2009 and 2010 (and 9% in 2011), far less than the booming industry had feared.
• ...the deal came in lower than the 30 percent decrease in 2009 some German conservatives had pushed for.
• German law requires utilities to pay solar energy producers higher prices for solar power they put into the grid than power from traditional sources. The government says the industry can live with less support and wants to redirect help to other types of renewable energy.
• The cuts concern support for rooftop solar panels, which supply the lion's share of Germany's solar-produced energy. The decline in support for bigger installations on open fields could be slightly bigger, coalition sources said.
• "Positive for all solar companies," Cheuvreux said in a note.
  "The cuts as from 2009 will not be as drastic as the proposed cut of up to 30 percent that was proclaimed by the (conservative) CDU/CSU faction," Equinet said.
• In their talks on Thursday, coalition partners also agreed to raise the support for wind energy and biomass installations, participants at the meeting said. (meanwhile in the US? Sueing OPEC, more support for corn ethanol, etc etc - excellent work D.C.)

Short US Government

Faithfully - Journey w/ Arnel Pineda Chile Concert 2008

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

S&P on Homex (HXM)

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

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

Long Homex in fund; no personal position

2010: The Year Electric Cars Go Mainstream?

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

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

We discussed Tesla Motors (and potential IPO) here



Nissan's coming to market by 2010 per NYTimes



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



And via Wall Street Journal Norway's Think Auto is considering bringing a 110 mile range "city car" to the US by 2009.

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

US Rail Network Facing Congestion Calamity

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

Of course we love all sort of shortages here (as investors) because shortages mean profit opportunity. (we don't like shortages so much as consumers though because shortages mean higher prices) But shortages and crisis do create all sort of reactions - such as the increase in the American 4 day work week. Demand destruction 101.

• When Ohio's Kent State University offered custodial staff the option of working four days a week instead of five to cut commuting costs, most jumped at the chance, part of a U.S. trend aimed at combating soaring gasoline prices. "We offered it to 94 employees and 78 have taken us up on it," said university spokesman Scott Rainone.
• But the surge in gasoline prices is pushing more private employers as well as local governments to offer a four-day week as a perk that eliminates two commutes a week.
• In America's struggling auto making heartland, the shorter workweek offers employers a way of rewarding employees when the budget does not allow a salary increase, said Oakland County, Michigan, executive L. Brooks Patterson.
• Some 44 percent of respondents said they have changed the way they commute -- doing things such as sharing a ride or driving a more fuel-efficient car -- or are working from home or looking for a closer job in order to reduce gasoline costs, according to staffing services company Robert Half International.
• Some schools, including community colleges in rural areas where commutes are long and public transportation is scarce, already have plans to drop a day of classes, usually Fridays.

Of course, sir Buffet was way ahead of the pack in his investments in the rails but it is right up his alley, limited competition, higher barriers to entry.... but this very interesting story tells of a potential crisis down the road - but perhaps by then we'll have our flying cars/trucks ready to combat the problem ;) News like this continues to build a case, that if we don't find some serious breakthroughs on the energy angle, we could be seeing a retro move back to an era of more localized production as transport costs begin to dominate decision making (thanks to some readers who have emailed me some info on this angle of late). Remember this fall we were reading stories about how it was costing more to SHIP iron ore from Brazil to China, than the iron ore itself cost. For those who are new to this story, the railroads have been BOOMING carrying all the products that dominate our investment thesis - agriculture product, fertilizers, and coal specifically. [Apr 15: CSX Benefiting from Grains, Ethanol, and Export Coal] And most of it is being shipped to 1 particularly hungry customer in Asia.

• The blotches illustrated areas where, by 2035, traffic jams could be so severe trains would grind to a halt for days with nowhere to go. "For those of you who've ever seen a good rail meltdown, this is what it looks like," Rose, CEO of Burlington Northern Santa Fe Corp., said as the crowded hall shifted uncomfortably in their chairs. "It's literally chaos in the supply chain."
• The nation's 140,000-mile network of rails devoted to carrying everything from cars to grain by freight is already groaning under the strain of congestion, with trains forced to stand aside for hours because of one-track rail lines.
• And it's probably going to get worse over the next two decades.... The damage to the U.S. economy could climb into the billions of dollars. Higher shipping costs would raise prices for everything from lumber to grain. One analyst said the rail crunch could add thousands of dollars to the price of a car.
• Congestion around the country has remained chronic, even as the ailing economy has led to a 3 percent dip in freight train traffic in the first few months of this year compared with last year. And a new U.S. Chamber of Commerce report warns demand for freight trains is expected to double over the next 25 years.
• "Even if the estimates are half wrong, we can't put even 25 percent more freight in the system right now without serious implications," said Randy Mullett, an analyst for the nonprofit Transportation Research Board.
• "Even if the estimates are half wrong, we can't put even 25 percent more freight in the system right now without serious implications," said Randy Mullett, an analyst for the nonprofit Transportation Research Board.
• Other modes of transport can't take up the slack: Trucking faces its own congestion problems, a shortage of drivers and high fuel prices. Ships and barges can't reach large parts of the country. Airplanes couldn't begin to carry the millions of tons of coal, waste, chemicals, grain and cars hauled by trains. And hauling freight by rail remains far more fuel-efficient than trucking.
• "The amount of money we're investing nationally is pathetic," Rep. Peter DeFazio, D-Ore., said during a recent congressional hearing on congested freight routes. "We're heading toward fourth-world infrastructure." (boy, on this I agree - but when you are a broke, debt laden country spending on entitlement programs you cannot afford, sending warriors across the globe on missions you cannot afford, and sending rebate checks out you cannot afford - you can't really spend money on minor projects like... water infrastructure, roads, bridges, and non essentials like that - not until they begin breaking down in large scale - and then at THAT point we'll start the Congressional investigations on why we allowed things to degrade to this point. Note to Congressmen while searching for the answer - walk to mirror, look at mirror, rinse, repeat.)
• The Chamber says expanding capacity on the more than 150-year-old U.S. rail system would cost $148 billion over 30 years. Private rail companies would have to pay most of it, with federal and state tax dollars covering much of the rest. ($148 Billion -that sounds like an enormous amount - totally unachievable; who has that sort of money? What's that? We just spent more that $160 billion a few months ago to try to buy votes... err, create a "stimulus plan" so Americans can "shop til they drop" to "support the economy"? Ok, so let's invest in ourselves via infrastructure / create jobs OR send money out to people to buy products at Walmart - which in turn sends that same money to China for those goods - hmm... I know which one sounds logical to invest in. Let's do the other! Yee haw)

Just add this to the list of other things we won't bother spending money on until its crisis situation... we're too busy building that Monarch Butterfly museum or bridge to nowhere. Priorities people. I'll start setting aside some time for the "Congressional Overview Hearings on Predatory Railroad Pricing"; shall we do 2015 or 2016? I'll be open to either year. See you then.

No position

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

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

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

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

Long Alpha Natural Resources; no personal position

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

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

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

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

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

Mechel (MTL) Earnings

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

With that said, let's look at the numbers just so we have a historic record in the blog when people are talking about Mechel as a great investment on CNBC circa 2009 or 2010 ;) Note this is a full year result (2007) not a quarterly report. Last time around they reported the first 9 months together [Dec 12: Mechel Reports Earnings, Considers Mining IPO], so if you were inclined you'd take this report, and subtract out the numbers from the last report to get "quarterly" results. Since I could care less about a 90 day period, I won't.

• Net revenue in 2007 rose by 52.0% to $6.7 billion from $4.4 billion in 2006. Operating income rose 92.6% to $1.4 billion, or 20.9% of net revenue in 2007, compared to operating income of $725.7 million, or 16.5% of net revenue in 2006.
• Mechel reported consolidated net income of $913.1 million, or $2.19 per ADR / diluted share, an increase of 51.4% over consolidated net income of $603.2 million, or $1.48 per ADR / diluted share, in 2006.

Mining Business

• Mining segment revenue for 2007 totaled $1.8 billion, or 28% of consolidated net revenue, an increase of 41.3% over segment revenue of $1.3 billion, or 30% of consolidated net revenue in the 2006. The increase in revenue reflects production growth at our principal coal producer Southern Kuzbass, production growth at Yakutugol, and the acquisition of the remaining assets of Yakutugol, the largest Russian coking coal producer. These factors resulted in strengthened market position and increased sales of mining products to third parties for the year.

CEO Comments on mining segment

• "Mechel's mining segment experienced a breakthrough year in 2007. As demand and the pricing environment continued to improve significantly, Mechel increased production, successfully raising coal production by 25% and nickel production by 19%. With the acquisition of strategic assets, such as Yakutugol and Elgaugol, we have strengthened Mechel as global company with significant growth potential. As a result of favorable pricing and increased production, net income for 2007 increased 3 times compared to 2006. Profitability in the mining segment was also positively affected by cost control efforts and successful execution of the technical upgrade program for segment's mining plants technical upgrade program.

Steel Business

• Revenue from Mechel's steel segment increased by 42.5% in 2007 to $4.3 billion, or 65% of consolidated net revenue, from $3.0 billion, or 69% of consolidated net revenue, in 2006. Operating income in the steel segment increased by 37.3% to $558.2 million.

CEO Comments on Steel Segment

• "Although we successfully executed our plans to increase production capacity, the pricing environment for metallurgical products especially in the second half of the year remained challenging. With higher transportation costs and steadily growing prices for raw materials, scrap, electric power and gas, our steel products prices were flat to down. Record high nickel prices also affected profitability in Mechel's steels segment, which is Russia's largest stainless flat products producer. In addition, rebar market overstocking led to decreased pricing in the latter half of 2007, which put pressure on our profitability as we have a significant market share for long steel products.
• As a primary objective for the steel segment, we are continuing to concentrate on increasing output of high value-added products and achieving earnings growth through modernizing production facilities and controlling costs. Despite the ongoing high materials costs, we continue to see an improving economic environment for our products, which makes us optimistic regarding improved financial performance in the steel segment."

The smaller Power business which is newer

• Revenue in Mechel's power segment from sales to 3rd parties totaled $503.3 million, or 8% of consolidated net revenue, an increase of 917.6% over revenue from sales to the third parties of $49.5 million or 1% of consolidated net revenue in the 2006.

CEO Comments on Power business

• Mechel began to develop its power business in 2007 and the acquisition of the coal- fired Southern Kuzbass Power Plant and Kuzbass Power Sales Company made Mechel one of the main players in the energy market in the Kemerovo region, Russia's principal coal mining area. In 2007, Mechel also developed its power segment abroad by acquiring a 49% share of Toplofikatsia Rousse JSC, located in Bulgaria to extend its presence into new steam coal markets. Our power assets will require significant efforts to modernize the production facilities and integrate them into the Group's production chain.
  
• The segment's profitability in 2007 was primarily affected by interest payments of "in-group" loans obtained to make the strategic acquisitions during the year. Looking forward, we are very optimistic about the prospects for power generating facilities in Russia, where many regions lack energy. We expect that the forthcoming deregulation of the electricity market will drive the development of the Russian power industry and benefit Mechel. Based on these factors, we plan to continue developing Mechel's power segment, which will increase the Group's stability, decrease costs due to the generation of our own electric energy and build value for the shareholders of the company."

There is a lot more in the earnings report as the company spreads its wings into Eastern Europe - Bulgaria, Romania etc etc [Apr 9: Mechel Continues to Acquire Most of Eastern Europe]

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

Long Mechel in fund and personal account

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

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

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

Again, I've said this many times - inflation is a tax on all things; producers and consumers. Someone has to pay the piper; either in the form of crimped profit margins (producers) or large price increases (consumer). Or both. Wall Street is missing this story because they are relying on the fantasy story of 3% government inflation. 2nd half 2008 and 1st half 2009 profit margins will suffer. The only "saving grace" for corporate America continues to be that MUCH of their cost structure is human beings. Human beings that they are either laying off (if you read the company news, and ignore the government reports) or only allowing minor wage increases for those that remain. But for industries that consume large quantities of raw materials - a major headwind is now here. Those who do NOT have large ramps in revenues to offset this will see profit reduction. And for those who are currently enjoying these large ramps in revenue, if China and other developing nations begin to slow materially, their large revenue growth will stall, and they to will join the vortex downward. So risk increases; and this is reducing our pool of investing avenues by the minute.

• Joy Global Inc. said Thursday its fiscal second-quarter profit fell 7 percent as higher expenses offset increased sales, but the surface mining equipment maker still beat analyst estimates.
• Net income for the three months ended May 2 fell to $72.1 million, or 66 cents per share, from $77.6 million, or 70 cents per share, in the year-earlier period. Excluding one-time charges of 13 cents per share for a contract termination and 7 cents per share related to an acquisition in February, Joy Global had adjusted earnings per share of 86 cents.
• Revenue climbed 34 percent to $843.1 million from $629.2 million. Analysts expected $798.3 million.
• The company's cost of sales rose to $620.9 million from $420 million, and its product development, selling and administrative expenses rose to $108 million from $89 million.
• Orders reached a record $1.2 billion -- up 69 percent from the prior-year period on strengthened conditions in the U.S. coal market and continued growing international demand. Original equipment orders grew 102 percent, and aftermarket orders increased 22 percent.

Again let me emphasize that the demand for the products for the mining equipment makers is off the charts - I am not implying that anything will change tomorrow or in a few weeks. In fact I expect revenue to continue to ramp smartly, BUT profit margins will be squeezed. So I'd rather play this trend (rising tide) with other companies (boats). (even those boats have cost pressures, but it's all relative)

The guidance in the Joy Global report has some interesting tidbits, worth posting - we can glean information on many related themes by reading earnings reports of ancillary companies.

• The Company continues to benefit from unprecedented demand for its underground and surface mining equipment in response to the strong demand for coal, copper, iron ore and oil sands. All of these major commodity markets that the Company serves have extremely thin supply surpluses, or most often, significant supply deficits, as commodity supply increases to date have been unable to match commodity demand growth.
  
• In thermal coal markets, stockpiles at power generators remain at extremely low levels, and the rebuilding of inventories will add to the supply deficit. The Company believes the gap between coal demand and supply could reach 60 to 100 million tons this year.
• Industry forecasters expect steel demand to continue growing at 5% - 6%, led by growth of 10% in China demand. Both metallurgical coal and iron ore remain in significant deficit, and some projections indicate that steel supply could be 20 - 30 million tons less than demand this year due to shortages of raw materials.
• The U.S has become the swing supplier to the international thermal and metallurgical coal markets, and export demand and prices are redefining the domestic market.
• Based on the status of existing expansion projects and industry projections, the Company expects that the commodity markets will generally remain in supply deficit for the next three to five years or longer.

No positions

To Laugh or Cry - Spam is Hot

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

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

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

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

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

So it is here folks; the substitution effect is in full force. This means as Americans have moved from steak (2004, paid for by home equity) to hamburgers (2006, hmm my home went down in value and my wages are not keeping up with gas prices) to... spam (2008, recession? what recession - government reports say everything is rosy!), the government can now say inflation is negative. Because as you move down the (ahem) food chain, they consider that a cost savings to you and hence you are paying LESS for food. And as I've outlined multiple times, the real rise in meat products has YET to come [Update on Corn and Livestock]. Heck, there is even Spam inflation! (7% year over year). No shelter in the storm. Please make sure you eat your breakfast before you move forward to the details below....

• Sales of Spam — that much maligned meat — are rising as consumers are turning more to lunch meats and other lower-cost foods to extend their already stretched food budgets
• The price of Spam is up too, with the average 12 oz. can costing about $2.62. That's an increase of 17 cents, or nearly 7 percent, from the same time last year. But it's not stopping sales, as the pork meat in a can seems like a good alternative to consumers.
• Kimberly Quan, a stay-at-home mom of three who lives just outside San Francisco, has been feeding her family more Spam in the last six months as she tries to make her food budget go further. She cooks meals like Spam fried rice (cringe!) and Spam sandwiches two or three times a month, up from once a month previously.
• Spam's maker, Hormel Foods Corp., reported last week that it saw strong sales of Spam in the second quarter, helping push up its profits 14 percent.
• Spam sales were up 10.6 percent in the 12-week period ending May 3, compared to last year. Also helping sales, executives said in an earnings conference call, was the fact that people looking to save money are skipping restaurant meals and eating more at home.
• Quan just bought a couple more cans of Spam on sale and some ramen, the instant noodle dish long a staple on college campuses. Her food and gas budgets are together, so she's had to cut back on food spending while the cost of gas increases. Her favorite Spam meal? Spam and macaroni and cheese. (cringe!)
• Other companies are seeing similar boosts in their lunch meats. Kraft Foods Inc. reported last month that subsidiary Oscar Mayer, which makes hot dogs, bacon and cold cuts, saw double-digit revenue growth in the previous quarter in its Deli Fresh cold cuts. The company, based in Madison, Wis., has recently introduced new products including family sized deli-meat packs and deli carved, which offers thicker slices of meat.

The pooring of America continues - and yet another reason to bet against all forms of discretionary spending that focuses on the lower 2/3rds of America, especially [Stuff I've been Negative on Since Last Fall]. Even the bottom portions of the top third are going to be slowly forced away from the Whole Foods Market (WFMI) they hold near and dear [May 14: Whole Food Markets at a Loss of Why Sales are Slowing] They're heading for Spam-a-lot. While sad to see, they still have it a lot better than many in the developing world which would kill for.... Spam.

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

Long Spam

Ken Heebner: America's Hottest Investor

Ok, in theory I should not be posting about a fellow competitor since I want your money ;) but actually a lot of future investors who have emailed me have mentioned they also own CGM Focus so perhaps a paired trade of long CGM Focus/long Rising Tide Growth (short Kool Aid) will be a nice bedrock for the portfolio ;) Either way, I admire this guy for his focused strategy, going heavy into the names he believes in, and his passion for the work. He doesn't always get it right (flat with peers in 2006 and trailing in 2004), but he is usually 2 steps ahead of the pack. Much like myself, I've heard him say "I'll never retire" because this is just what he loves to do. (there goes my chance to take over CGM Funds once he hit the golf links) Certainly traits I like to share; frankly some of the quotes in the story could be direct links from the blog - a bit staggering. Fortune has a huge writeup so let's see what's going on in Heebner World.

• His flagship fund, CGM Focus (CGMFX), has already made a killing on energy and agriculture, and Heebner has no patience for the pet theories of this or any other analyst (or economist or strategist). "I want information, not opinions," Heebner will later tell me.
• Heebner is one of the few fund managers who routinely engages in short-selling.
• Heebner is multiple steps ahead of everyone these days. At an age when most of his contemporaries have either retired or given up the daily grind of running publicly traded funds, the 67-year-old Heebner is putting up the best numbers of an already exemplary 30-year career. He's Barry Bonds without the steroids. "He's a rock star - he's Bono," quips his Irish-born (and U2-loving) analyst Catherine Columb.
• Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500.
• 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500.
• Launched in late 1997, Focus has had only one money-losing calendar year (2002). (this is even more impressive for someone like me who likes to manage risk)
• Heebner is a true contrarian, who says he's most confident as an investor "when everyone else thinks I'm nuts." He works long hours trying to identify emerging trends in the economy. When he finds a promising one, he'll go all in, making huge bets on the stocks poised to benefit. Asked how long it takes him to identify those stocks, Heebner answers, "About ten minutes. I've been at this a long time."

This is my favorite part of the story

• Heebner shorted tech and telecom stocks with gusto from January 2000 to September 2001, profiting mightily from the bursting of the bubble.
• In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned.
• Used profits... to load up on oil and coal stocks, positions he'd started to establish in 2004. He even bought coal stocks for the Realty fund - a move that style purists might criticize but for which Heebner makes no apologies. "I did it because it was the best thing for shareholders," he says, noting that Realty's prospectus explicitly defines "companies involved in the real estate industry" to include mining companies, which obviously own a lot of real estate.
• In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.
• In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.
• In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8.

Boo Yah! By the way, I noticed Heebner has begun rebuilding his coal position as of the 3/31 holdings in one of his funds.

Onward....

• Not every one of his moves worked out so well, of course. ....one of Heebner's many strengths is knowing when to cut his losses. "A lot of fund managers fall in love with an idea and ride it all the way down," Kemp says. "Ken's quick to admit when he's wrong."
• Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out.
• He continued to put up excellent returns until the mid-1990s, when tech stocks started to dominate the market. For Heebner, that was a problem, because he usually shied away from technology. The barriers to entry were too low, and forecasting winners and losers too hard. Focus eked out single-digit gains in both '98 and '99, whereas many rival funds were soaring 40% or 50%.

• His ideas come faster, his focus is more intense, and his ability to sift through massive quantities of information and zero in on what matters is downright spooky.
• There's no simple formula that captures his investing principles, and explaining his approach is something even Heebner struggles with - which may be why CGM manages only $13 billion (including private accounts), a relatively modest amount given Heebner's track record. (my note: this is the stupidity of the 'big money' - they want you pegged into a square hole so they can do their asset allocation - funds that switch from large cap growth in 1 year to small cap value 2 years later make them upset - so they'd rather give up gains, to make sure you stay in a certain style box)
• Basically, he's the last of the gunslingers - a go-anywhere manager who can be investing in left-for-dead U.S. value stocks one day and red-hot Brazilian growth stocks the next. (my note: last? you speak too soon! Generation X coming baby)
• Heebner is a workaholic who's up at 5:30 a.m. reading stock reports and checking business news and who never leaves the office at night without a stack of articles and research that make up his bedtime reading. (sounds vaguely familiar)
• CGM is pretty much a one-man show. Heebner's entire investment team consists of two traders - Elise Schaefer and Sue Small - and Columb, the U2 fan. Being an analyst for Heebner is a bit like being a beauty consultant for Halle Berry, so Columb knows better than to try to suggest stocks. She operates more like a sleuth. Heebner will ask her to dig up the latest information on, say, scrap steel prices in China or deep-sea oil rig leases, and within an hour or two her findings are on his desk. (that's what I need - a sleuth)

Now for some scary stuff... some identical quotes from Heebner to what I've been typing

• These days Heebner is keeping close tabs on the latest economic data out of China, because China is the key to his enormous bet on commodities. As of March, 64% of Focus's assets were invested in commodities-related stocks. His biggest stakes are in steel (ArcelorMittal, Nucor, and United States Steel) and in oil (Apache, Devon Energy, Petrobras, and Schlumberger)
  

I wrote in this entry [May 18: Bookkeeping - Weekly Fund Changes Week 41]

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

Ok that is sort of scary.

• Petrobras, the Brazilian oil company that has announced two giant offshore oil discoveries, is his favorite. "Petrobras could become the biggest stock in the world," he says.
  

I wrote in this entry [Apr 14: Petrobras Just Went Vertical]

Off the Tupi discovery alone, I believe Petrobras was headed to be the largest company in the world, passing Exxon; before what could be happening today.

• He also thinks inflation will hit double digits within the next five years

I write... ok every week, I write about the "World of Shortages" and the effects of inflation. I'm starting to feel like a mini me.

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

Broken Record - Coal Flying

As I keep saying the coal sector is a lot like fertilizer when analysts had no clue about the earnings potential - I wrote in October just how wrong these guys who do this for a full time living and focus on only 1 sector were in the fertilizer sector [Oct 23: Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash Ahead of Earnings] and I'm writing the same things nowadays in coal [May 5: Alpha Natural Resources Booming Earnings - Just the Start] and [May 1: Walter Industries - the Most Amazing Company]. I continue to be amazed that guys who follow a sector 24/7 for their career miss some of these things, that random future mutual fund managers who follow countless sectors (instead of only 6-8 stocks) can see clearly. Maybe it's the lack of a MBA that allows one to see reality? Or not having to worry about my $5800 NYC monthly apartment rent? ;) As is typical "they" are now upgrading stocks after a 40-50% move up in the last month. Excellent timing again.

That said, I'd really appreciate a pullback here, please? [May 21: Coal - Just Amazing] These stocks continue to just be on fire with another sector wide move, led by our top dog Alpha Natural Resources (ANR) up nearly 10%. Days like this, I hate the fact I sold any along the way :)

• Coal stocks traded mostly higher Wednesday as a UBS analyst lifted his rating on one of the world's largest producers to "Buy," suggesting the company has some unrecognized potential to take advantage of soaring coal prices.
• Analyst Shneur Z. Gershuni raised shares of Peabody Energy Corp. from "Neutral," saying the company should benefit from better-than-expected coal prices next year. (late... to... game?)
• The company's exposure to metallurgical coal and its production in the Illinois Basin is "under appreciated by the market," the Gershuni said. Gershuni estimates the two markets make up 15 percent of Peabody's total production, but could account for as much as 45 percent of the producer's earnings if prices soar as expected next year.
• Gershuni raised 2009 earnings per share estimates on the company to $6.59 from $4.49. The current average estimate of analysts polled by Thomson Financial is $4.64. Gershuni also raised his price target on the stock to $86 from $67.
• Gordon Howald, an analyst with Calyon Securities Inc., said rising coal prices, especially in China, will likely spur growth for a number of U.S. producers. He recommends investors buy shares of Arch Coal Inc., Foundation Coal Holdings Inc. and Peabody.
  
• "We continue to believe the coal market has legs as we head into 2009," he wrote in a client note.

Now I did flip out Peabody Energy (BTU) for Alpha Natural Resources back in April (always been a big fan of Peabody though due to Australian exposure) [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In], just so I wouldn't have a portfolio full of coal companies (I have 4 pure plays, and 2 sorta coal plays), but frankly throw a dart and come back in a year and make money. That said, swapping BTU for ANR was a prescient call - click here to see a comparison the past 3 months. But I'm trying to make the most money as possible, hence my specific choices - on this one not only did we get the right boat, but we got the perfect seat as well. ;) If you don't know the individual companies you can always go to the ETF KOL [Jan 14: New Coal ETF (KOL) Introduced from Van Eck Global]

I'm not chasing these names after such epic moves, but with what I have left I am just sitting and watching with glee and when any related name pulls back, as did Mechel (MTL) last Friday I throw in a new layer of purchase. (up 14% since we bought Friday)

One day these will correct; when it happens we will ignore the white noise spewing from TV how the story is over and be buying hand over fist - coal is really a 2009 story, not a 2008 story; which makes the current move all the more marvelous.

Long Mechel, Alpha Natural Resources, Arch Coal in fund; long Mechel, Alpha Natural Resources in personal account

Bravo Dow Chemical (DOW) CEO

I am loving watching the CEOs of America begin to blast our politicians for their utter lack of leadership and ridiculous decision making. Tyson (TSN) Foods' CEO went off on the stupidity that is our boondoggle ethanol policy [Apr 28: States, CEO's Beginning to Snap Back at Ethanol; the "Administration" Holds Firm], now today the CEO of Dow Chemical (DOW) is blasting the entire lack of energy policy. I've watched this guy over the years since its a company in our state, and this is a bright mind; and coming from a foreign background, he has a lot more global view.

Frankly folks, for years we just hoped the politicians would stalemate (one brand of stupidity offsetting the other) and not do more damage - simply doing nothing was the 'best hope'. But after 15-20 years of heightened partisanship we are now the point that their total lack of vision is creating massive headwinds for the country as a whole. These people are now literally causing pain - they are like a series of iron spikes on the road as the country tries to roll forward. So before we hoped at best they would at least just be neutral (i.e. not cause more harm than good) instead of what their real purpose should be i.e. HELPING the country. But now it's just become a mess. But we are still in denial and the current solutions range from "suing" OPEC to bringing up CEOs on a parade to Capital Hill to grill them for their "price gouging". Sigh.

We are in a global competition and our "stewards" are at the level of a 3rd world banana republic. I am glad more and more people of power and influence are now coming to tell the truth. Oh by the way, there is a 20% price hike coming from Dow - not that it will show up in government reports. Because as all good banana republic leaderships do, you feed misinformation to the people to help keep the sheep calm. Go listen to CEO Andrew Liveris here - it is labeled under "Dow CEOs advice to US Lawmakers". And yes it hurts his company when energy prices go up, but it affects us all and our country's competitiveness. Listen to the CEO at about 4 minutes 30 seconds - when you hear about all the plants and jobs lost in America that Dow has done just to remain competitive globally.

• Dow Chemical Co. will raise product prices by up to 20% effective June 1 to deal with higher energy costs, the company said Wednesday.
• The Midland, MI based chemical company also criticized government inaction for the current "energy crisis," saying a lack of leadership in Washington is harming America's manufacturing sector.
• "The government's failure to develop a comprehensive energy policy is causing U.S. industry to lose ground when it comes to global competitiveness, and our own domestic markets are now starting to see demand destruction throughout the U.S.," said Chairman and Chief Executive Andrew Liveris in a statement.
• For 2008, Dow said it expects to spend about $32 billion on energy and hydrocarbon-based chemical feedstocks, up from $8 billion in 2002. In the first quarter, the company's feedstock and energy costs increased fully 42% from a year ago.
• Chemical companies have been struggling with cost inflation for some time, but Dow and its competitors have shown new urgency in recent weeks to pass along their escalating costs, leading to higher prices for customers

Remember, inflation is a tax on all things - producers and consumers. We will see demand destruction throughout the global economy due to these pass throughs which again are ONLY beginning to be seen by the end user.

No position

What's Your Opinion? Should Exxon (XOM) Go Green?

I will keep my opinion to myself, until seeing the results but there is a lot of fuss lately about the fact Exxon should be going "green".

So I am putting a poll on the website (all you email readers, please come over and visit) which basically asks, should a company be forced out of its core competency to invest in green energy? Try to take away any bias you might have from paying $4 for gas... I am asking from a purely scientific approach - Exxon (XOM) is a oil and gas company. Should public pressure be brought to bear to make them go green or should they just be trying to make profits at their core business (and yes I realize they are not doing a good job of devoting enough money to new oil and gas projects, and instead just feeding their cash flow back to shareholders in terms of share buybacks and dividends)

Read more here

Bookkeeping: Slowly Back to Natural Gas - XTO Energy (XTO) and EOG Resources (EOG)

I am slowly venturing back to severely pared positions in natural gas, with additions to XTO Energy (XTO) and my favorite EOG Resources (EOG). This is step 1 of a rebuild, and I hope to see lower prices in the near future on a general commodity selloff.

XTO Energy - frankly I don't like the chart and it's been lagging the peer group so I am considering perhaps changing to another name in the future, in my "basket approach" to natural gas. This chart is much worse than just about every peer I am tracking, so I am wondering if there is something company specific I am missing. That said, I had cut back severely on its run up (which also lagged the peer group), so I am sort of throwing a dart here since there is no real technical support here around $61. But its retraced 13% in 5 sessions (down from $70) and I am taking it back to a 1% exposure. I sold nearer to $66, so I am getting back some of that exposure (not all) Certainly looks like we could have downside to $56 (200 day moving average) if you looked solely at the chart.



EOG Resources - on the other hand, everything I read on this company excites me; they really seem to be hitting home runs in terms of production expansion. The stock has pulled back nicely to a first support level, the 50 day moving average right near $130 so I am adding here, as the stock is down from $145 level five sessions ago (10%). I sold a layer out around $138 but have not had a huge position here since it's been on an incredible run since last February and I've been tapping feet impatiently waiting for a meaningful pullback to build a position. I'd love to see this one falter more so I can add at lower levels. But for now we are moving her back up to a 1.4% exposure.



The 3rd name in my basket, Cabot Oil & Gas (COG) has not weakened to the point I want to buy, nearer to $57. That's a good thing from the perspective that the stock is showing a lot of relative strength, but not a good thing for someone who wants to buy more at lower prices.



My top candidate to replace XTO Energy in my basket of natural gas is probably Cimarex Energy (XEC) which simply refuses to sell off in a meaningful manner. When a stock appears this strong even when its peers sell off this gets my interest. I had considered buying this in the past but it's just not sold off to a level I want to buy. So my thought process is when XEC next sells off, I'll be buying - temporarily have 4 natural gas positions for my basket, and then sell the weakest of the group (technically) which is XTO, on the next energy run. That way I still only have 3 names in my basket.



I am hoping to see similar weakness in the coal names soon (at LEAST pulling back to their 50 day moving averages) but thus far nothing... another bullish sign for the group.... in fact I am using this as my leadership group.... i.e. if we get a more serious correction, I'll wait to see the market take the coal stocks out to the back of shed to whack them on the knee caps before feeling safe to venture back into the market in a larger sense on the long side. The "generals" (leaders) are always the last to go, and unlike the last cycle where the fertilizers were the generals, it appears the coal names have taken the mantle of "strongest group". So we want to see the strongest group blasted.

Long all names except Cimarex Energy in fund; long none in personal account

WuXi PharmaTech (WX) with Another Solid Quarter

WuXi PharmaTech (WX), a Chinese contract research organization (CRO) put out another good quarter but this stock never seems to trade in a logical manner; perhaps the gross margins or lack of "increased" guidance is causing the stock to fall 3% this AM. It just might be too small or unknown to be attracting enough attention or trade "normally".

• Net revenues increased 68.7% to $57.1 million in the first quarter 2008 from $33.8 million in the first quarter 2007. This increase was primarily driven by the strong organic growth and the addition of US-based services following the close of the AppTec Laboratory Services, Inc. acquisition on January 31, 2008. During the two-month post-acquisition period, our US-based services contributed $11.0 million for the first quarter 2008. (keep in mind some of that growth is not organic, i.e. due to acquisition)
• Net revenues from laboratory services increased 77.4% to $38.5 million in the first quarter 2008 from $21.7 million in the first quarter 2007, driven by a growing demand for our core discovery chemistry and process research services, and testing services from the AppTec acquisition.
• Net revenues from manufacturing services increased by 53.3% to $18.6 million in the first quarter 2008 from $12.1 million in the first quarter 2007, primarily due to an increase in the number and scope of projects.
• Overall gross margin was 42.5% in the first quarter 2008. Our laboratory services margin was 49.2% and manufacturing margin was 28.7% in the first quarter 2008. While our laboratory services margin remained robust, the manufacturing services margin was affected by the low utilization in our biologics manufacturing facility. Looking forward, we expect the utilization rate to improve in later quarters. (this is down from previous quarters)
• Net income increased by 131.9% to $13.9 million for the first quarter 2008 from $6.0 million for the first quarter 2007. Net profit margin increased to 24.3% in the first quarter 2008 from 17.7% in the first quarter 2007. Non-GAAP net income, as defined below, for the first quarter 2008 grew by 85.3% to $17.3 million, compared to the non-GAAP net income of $9.3 million in the first quarter 2007. Diluted earnings per ADS were $0.19 and non-GAAP diluted earnings per ADS were $0.24 in the first quarter 2008. (analysts at $0.15)

Guidance

• We maintain our 2008 annual consolidated net revenues guidance in the range from $280 million to $300 million.

I've held this stock since last November, and so far really no benefit. But I continue to like the story so I am keeping it, although it holds a very minor weight in the portfolio. Analysts are in for a $0.74 estimate for 2008 so with this beat of 4 cents we might be headed closer to $0.80 EPS for the year and at $21 this gives us a forward PE of 26 for almost double the growth rate.

Some earlier posts

[Mar 12: WuXi PharmTech - Very Good Earnings]
[Nov 12: Earnings - WuXi PharmTech]
[Nov 5: Two New Foreign Positions Added Today]

While you could throw ANY Chinese stock out there and say "it will grow, it has to just by demographics alone" - and to some degree that will be true, I'm trying to find names which fill more long lasting niches, especially in the business to business end. After seeing WuXi Pharmatech (WX) on Zach's blog in the past few weeks, this one really struck a chord with me. WuXi is a contract research organization (CRO) for pharma companies - think outsourcing. I have invested for my own personal account in a similar company in Ireland called ICON (ICLR), which if you pull up a 2 year chart only continues to perform year in and year out. There are also a few slower growing US competitors to compare WuXi against.

Long WuXi PharmaTech in fund, no personal position

Quick Update: Foreign Investment is Available after All

Good news for any of the non US citizens; it looks like you will be able to participate after all (now that I chased them all away with my incorrect information the past 9 months)

After filling out an application like anyone else you will need to form out a US tax form

IRS W-8

And then your investment will come via wire or if you have access to this, you can use a US Dollar check

Everything else should be the same as a US citizen from there.

I'll update our frequently asked questions to reflect this.

Bookkeeping: Cutting 4 Names on Technical Worries

I see the identical pattern in 4 charts, so I am cutting back exposure to all 4. These have the makings of companies that could be beginning to break down. If I am wrong, I'll pay up a slight premium, to regain exposure once the technical pattern improves. The names are different but it's the same pattern - 4 companies which are breaking down below their 50 day moving averages - unless they quickly reverse back over and above, this could portend a more serious move downward in these issues. I see a lot of other companies who could be approaching a similar set up with another day or two of bad behavior - i.e. we could have a lot of charts rolling over; so despite the tepid bounce back in the indexes (which we said in the weekly roundup would not be surprising as nothing goes straight down), I am seeing some things I do not like in individual charts.

1. Mosaic (MOS) reduced to 1.2% exposure (from 2.2%)
   
2. CF Industries (CF) reduced to 0.6% exposure (from 1.2%)
   
3. Gafisa (GFA) reduced to 0.8% exposure (from 2.0%)
   
4. Ctrip.com (CTRP) reduce to 0.7% exposure (from 1.3%)

The first 3 names closed below this key level today; whereas the latter has been below for about a week, but since it bounced a bit today I am using that as an opportunity to cut since I missed doing so on the initial breakdown.

These moves take another 3.3% away from long exposure and into cash. Although a bounce was expected in the indexes as (a) the market lost 3.5% last week which is huge for an index and (b) the S&P 500 is now at a key long term support level, the 50 day moving average of 1377 - I continue to be cautious in the mid term, although hazarding a guess of the day to day action is a fool's game. But I'm going to let the individual charts tell me the story; these 4 have turned (perhaps temporarily) for the worse, and quite a few others I see with potential to follow suit. I'll show the charts below

Long all names mentioned in fund; long Mosaic in personal account

Do....



we....



look....



familiar?....

Bookkeeping: Closing FTI Consulting (FCN)

I'm closing a smallish position in FTI Consulting (FCN) just under $62. I started this stake in November 2007 [Nov 27: 2 New Recession Plays] and I still like the thesis and this company specifically long term; even if the Wall Street Journal does not [Apr 28: Wall Street Journal does not like FTI Consulting] - I continue to believe this name will churn out 20% solid returns for the long run as it is becoming a gorilla in it's space. But it is (and has been for a long while) richly valued and with a growth rate of 20% or so, I am not sure what the upside is. Or put another way, I think I can find more upside in some of my other ideas.

Further, this allows me to continue to streamline my long positions - while the position created some balance in the portfolio away from global growth/commodity stories - I've purchased other stocks to replicate that exposure in the meantime. So this decision is nothing against the company itself which simply executes quarter after quarter. I could see a return to the portfolio at some point in the future; and the firm's niche consulting business should prosper in the weakening economy of latter 2008, 2009.... err, I mean the booming recovery of latter 2008, 2009.

Since Thanksgiving, I've managed to lose $300 on this name :) - which in the scheme of things means flat / dead money. The chart below showcases this flattish behavior (with many ups and downs along the way). I would not be surprised to see this stock retreat to its 200 day moving average nearer to $57; the chart seems to be whispering this to us.

Adios.

No position

Update on Corn and Livestock

The coming agflation in meat prices is a theme we've been watching for a long time; I've had my eye on Smithfield Foods (SFD) in particular since blog inception [Aug 26: Is Pork the Next Chinese Boom Play?] Since then, as input costs to feed livestock have increased we've seen a bevy of bad news out of the livestock producers (chicken, hogs, cattle) - one example of many posts on the subject [Feb 28: Smithfield Foods Continues to Struggle with Input Costs] I wrote then

I do think however (and today's news reinforces this thesis), this is what you will see a year from now: We are going to see cows slaughtered now because they are getting too expensive to feed. So what will that lead to down the road? You guessed it; a (relative) shortage of beef. And what does that mean for our pocketbooks? Inflation. Even more than we see now. Right now producers are passing along the grain costs - but at some point it's just going to get to a point where they raise less livestock... and for a country (world) increasingly loving protein that causes more issues.

By late this winter/early spring we started seeing the first capacity destruction at the major food producers [Mar 12: Pilgrims Pride Cutting Chicken Output] I wrote

Ironically, I just wrote about this subject in the previous post; but first mentioned it earlier in the winter - I thought it would hit cows and hogs first but it appears chickens will be the first to go. I've been writing about this group (Smithfield Foods, Tyson Foods, Pilgrims Pride and the like) since last fall, not that I am that interested in the companies themselves, but as macro economic flag bearers, especially on inflation. These politicians have helped create an epic disaster. It is playing out step by step as I forecast, but at a much quicker pace than expected. When meat producers start cutting back in the face of a spike in world meat demand, basic economics tells you where prices are going in the future. I just wrote I expect this to happen in the next 12-18 months - I was very wrong. It is already happening.

Timing the effects are tricky but I've been joking, you are going to need the equivalent of a mortgage payment for that Labor Day BBQ - I started a position in iPath DJ Livestock ETN (COW) in mid April as we started seeing some relative strength. A strategist I highly respect, Don Coxe agrees with my thesis [May 2: Don Coxe on Food Crisis] To make matters worse rainy weather in the Midwest [Mar 25: This Day in Agriculture] has created a lot of issues with this spring's planting season (most corn is no longer consumed by humans, but put into feedstock)....

So put that all together (and no, don't get me started on the ethanol boondoggle), shake it all about, and you have a thesis. One that Bloomberg reports today (citing information blog readers have known for many months) is starting to take shape, rather nicely (from our investment standpoint) and rather morbidly for American consumers. If you listen to the government, you have nothing to worry about as there is no meaningful inflation; now or in the future (they've been beating it into our heads since the first Fed cuts that they can cut as much as they want because as the US economy slows, inflation will magically disappear). If you listen to the companies i.e. Tyson Food's CEO saying "prices are going up materially", you see the truth.

As with much inflation - many of the price increases are now sitting at the producer level. So one of 2 things happen next. Producers eat these costs and their profit margins erode. Or they attempt to pass it on to a rapidly weakening US consumer. Or some of both. The key takeaway is what you see in the food aisle today or in just about any "consumer product" that requires petrol to transport (which would be.... EVERYTHING) is not showing the full effect of the inflation pass through. That should be coming in the next few quarters - coinciding nicely with the "2nd half recovery" story. (ahem)

• Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.
• The highest corn prices since at least the Civil War, based on Chicago Board of Trade data, mean U.S. feedlots are losing money on every animal they sell, discouraging production as rising global incomes increase meat consumption and a declining dollar spurs exports. Cattle may rise 13 percent by the end of the year on the Chicago Mercantile Exchange and Brazil's Bolsa de Mercadorias e Futuros, futures contracts show.
• Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed.
• ``It's pretty certain that we'll see a decline in domestic supply in the U.S.,'' Joesley Batista, chief executive officer of JBS SA, the world's biggest beef producer, told reporters in Sao Paulo on May 15. ``As a result, we'll have price hikes and improved margins.''
• ``We expect meat prices, especially beef prices, to rise this year,'' said Peter Weeks, chief economist at Meat & Livestock Australia, a trade group in Sydney. ``We've already seen big increases in beef prices in China, Russia, India and throughout Southeast Asia.''
• Steakhouse Partners Inc., operators of 21 steakhouses in California and the Midwest, filed for bankruptcy May 16, citing rising costs for corn-fed beef.
• Feedlots lost money on animals sold for slaughter the past 11 months, including $139.56 a head in April, compared with a profit of $46.79 a year earlier, said Erica Rosa, an economist at the Livestock Marketing Information Center in Lakewood, Colorado.
  
• Corn more than doubled in the past two years as demand for meat boosted feed consumption and U.S. government mandates and subsidies promoted the use of grain-based ethanol. Cattle futures gained just 31 percent over the period, and cash prices rose 16 percent.
• A 1,250-pound (567-kilogram) steer in the U.S. is worth about 4.2 times the cost of the corn he consumes over five months to reach slaughter weight, down from almost 12 times in December 2005 and the lowest since June 1996.
• Cattle may not remain cheap for long. Prices jumped 6.5 percent last month, the most since August 2006, and there are signs of reduced supply from U.S. producers.
• As the incentive for producers dwindles, demand for U.S. beef exports will jump 14 percent next year, the USDA said. Sales will increase because of a declining dollar, rising global incomes and a relaxation of bans imposed after a case of mad-cow disease in 2003, the USDA said.
• U.S. beef exports in the first quarter rose 29 percent from a year earlier, data from the USDA show. Increasing beef shipments to Russia, South Korea and other emerging economies will help push up prices in the U.S., JBS's Batista said.
• Global demand for beef, pork and chicken may grow as much as 50 percent by 2020 as the population increases and incomes improve,
• ``We are witnessing the globalization of meat as incomes rise,' (this sound sound VERY familiar to blog readers)
  

I keep repeating myself. We are in a global competition for resources. While our government leaders drag these CEO's up to Capital Hill to grill them for price gouging; Economics 101 continues on. In the end those with cash will prosper; those who live on debt will suffer. One day American leadership will begin to understand this - in our narcissistic world, the rest of the world continues to just be a footnote. We'll continue to report the reality here.

iPath DJ Livestock ETN (COW) is not a 'fast money' play, but I expect a nice growth curve over the coming year(s). So please stock up your freezer...

Long iPath DJ Livestock ETN in fund; no personal position

Bookkeeping: Adding some DryShips (DRYS)

I am beginning to rebuild the position in dry bulk shipper DryShips (DRYS) on the pullback to the first support level, the 50 day moving average ($85), with purchases here in the $85-$86 range. This takes DryShips up from 0.9% to 1.6%. As with all purchases at this time I'm going at a very slow pace, but I do find this name compelling. However, much like solar stocks this is exactly the type of name that can correct 30% in 2 weeks, so I tread cautiously. Speaking of which the stock is down from $116 to $85 in 6 days, or 27%. Maybe I should say these type of names can lose 30% in 1 week....

I have changed my tune on the mid term outlook in the industry (more bullish) as outlined in [May 22: DryShips - Earnings Growth Continues & Potential Deepsea Oil Drilling Play]

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.

I'll continue to pick my spots, but due to caution on the market as a whole, I won't be buying much - but as I did Friday buying a bevy of stocks down 15-25% or so (in about a week's time) we'll make some selected purchases along the way. Of course, there is no guarantee the market will fall further. Just my hunch; otherwise I'd be adding more of this name at this support level. Since the rise in price has been meteoric we have very little in the way of support once we break below $80 - hence in a true market selloff we could be easily looking at $65. This would be a nice area to add more.

Long DryShips in fund; no personal position but could change

Food Banks Suffering in US; Children Overseas See Aid Cuts

We outlined, well ahead of the "pack" (mainstream media) the food bank crisis that was developing in the US [Jan 18: One Lonely Voice Agrees with me on Food Inflation] - in that entry I showed how a simple google search for food banks returned some alarming news stories across the nation; and that's before commodities really started ratcheting up into February through April (most food prices have leveled off since to some degree). But as with petrol, many of the actual price increases have yet to really work their way through the system to reach the end user. So the crisis will be growing both here, and abroad. Again, to reinforce - most Americans spend perhaps 12-15% of their expenditures on food (higher for those at the lower runs of society) whereas much of the developing world spends 50-60-70% of their income on food; so when prices double or triple - it's a whole different ballgame. [Jan 30: Hungry Haitians Resort to Eating Dirt] And a little known fact, 1 in 11 Americans is now on food stamps. And growing. Fast.

• Like nearly a third of the first 50 customers to arrive at the Emergency Food Bank of Stockton that morning, Hoffman was new to the pantry. But since she lost her sales job at a local newspaper in December, she has not found work in Stockton, which has the highest foreclosure rate in the country and a hurting job market.
• "I'm down on my luck," Hoffman said, squeezing and sniffing the bread. "And food is going through the roof. I need help."
• Hoffman, 55, is one of the growing number of "nontraditional" food pantry clients across the country. They include more formerly independent senior citizens, more people who own houses and more people who used to call themselves "middle-class" -- those who are not used to fretting over the price of milk.
• "We're getting calls all the time from people who want to know how to get here," said Kristine Gibson, community outreach manager at the Stockton food pantry. "And when I ask where they live, they give an address of a nice neighborhood, one where you or I would want to live."
• April saw the biggest jump in food prices in 18 years, according to the Labor Department. At the same time, workers' average weekly earnings, adjusted for inflation, dropped for the seventh straight month. (note: adjusted for this government's fanciful inflation, not "real" inflation - just imagine how much longer this has really been happening for many)
• A survey it conducted of 180 food banks in late April and early May found that 99 percent have seen an increase in the number of clients served within the last year. The increase is estimated at 15 percent to 20 percent, though many food banks reported increases as high as 40 percent.
• "The way it's going, we're going to have a food disaster pretty soon," said Phyllis Legg, interim executive director of the Merced Food Bank, which serves 43 food pantries throughout foreclosure-ravaged Merced County.
• Food banks across the country are in similar straits: While demand is up, supplies and donations are down. The food banks, like their customers, also are suffering from high gas prices and struggling with the impact of rising food prices on their operations. Some have had to cut back on how much food they give, or how often.
• "If gas keeps going up, it's going to be catastrophic in every possible way," said Ross Fraser, a spokesman for America's Second Harvest.
• In Albuquerque, N.M., the Roadrunner Food Bank reported that the pantries it serves are turning people away and running out of food.
• In Baton Rouge, La., the public school system has found students hoarding their free and reduced-price lunches so they can bring them home and have something to eat at night.
• In Merced, the food bank is planning to curtail a brown bag program, which supplies groceries to senior citizens, from once a week to once every two weeks, Legg said.
• Even in San Francisco, a city that has been relatively unscathed by the foreclosure crisis and economic downturn, food pantries are seeing hundreds of new clients.

I cannot stress again, how bad inflation is for a country where (anecdotal) statistics show that 70% of people, regardless of income strata, live "paycheck to paycheck". Suddenly the paycheck does not cover nearly as much as it did 1 year ago, 3 years ago, 5 years ago. First comes higher debt service, savings liquidation.... then comes bankruptcies. That's going to be the 2009 story.

But these are the people on the globe who have it good. Let's peek in at kids in the developing world. We've discussed in the past how aid programs are being cut [Mar 26: US Government's Humanitarian Relief Agency Cutting Back] & [Mar 24: UN Agency Appeals for $500M to Avoid Food Aid Cuts]

• At dawn in a ramshackle elementary school in rural Cambodia, the children think of only one thing: their stomachs. They anxiously await the steaming buckets of free rice delivered to their desks.
• But by the end of the month, they will no longer get free breakfast from the U.N. World Food Program. About 450,000 Cambodian students will become the latest victims of soaring global food prices.
• Faced with a shortfall of more than 14,000 tons of rice, and with more pressing needs to meet, the World Food Program stopped the free breakfasts in March. The schools' remaining stocks are expected to run out in the coming days.
• "I feel hopeless," said Boeurn Srey Leak, a 15-year-old in sixth grade.
• Rich countries have pledged $469 million for food aid to address what is expected to be a $755 million deficit, due to food prices that have risen 76 percent since December. But the money will not arrive in time to save some food programs from being cut or ended.
• The numbers are grim. In Burundi, Kenya and Zambia, hundreds of thousands of people face cuts in food rations after June. In Iraq, 500,000 recipients will likely lose food aid. In Yemen, it's 320,000 households, including children and the sick.
• World Vision may stop helping 1.5 million people — nearly a quarter of the number it serves — because of rising food prices and pledged donations not yet delivered. At least a third are children.

This continues to be a growing crisis that gets very little attention in the US. Well, on to BBC News I suppose.

WSJ: Lofty Prices for Fertilizer Put Farmers in a Squeeze

Front page article in Wall Street Journal = short term top in group? Usually. :) Since the front page article on the NYTimes [Apr 30: Finally (A Year Late) Fertilizer Hits the Front Page of the NYTimes] these stocks have gone nowhere. Remember the risk factors I outlined a week before that article came out [Apr 23: Potash Hits $1000 on Spot Market]. I still believe we have another large move in this group later in the year, but they are consolidating some enormous moves and certainly can move to the downside in the near term. Now I guess I have to be on the lookout for when coal begins to hit the front pages of these newspapers - then we have to begin to really worry ;)

• At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading fertilizer makers and stirring anger among farmers in the U.S. and India.
• Fertilizer prices are rising faster than those of almost any other raw material used by farmers. In April, farmers paid 65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over the same period, according to Agriculture Department indexes.
• Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food crisis that has sparked rioting, rationing and export controls in many countries.
• Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. (Hmmm... should we break up the potash "cartel"? Somehow this concentration of power was not an issue a few years ago when these companies were scraping to make a profit, eh?)
• In a May 8 letter to North Dakota's three-member congressional delegation, he accused fertilizer companies of "price gouging," and asked for an investigation. (Americans continue to grapple with a "World of Shortages" and "everything revolves around me" thinking. They have yet to wake up to the global competition for resources; resources they could once consume in massive quantities with no real large scale alternative consumers of said goods. Remember, to most Americans if it does not happen in America... well it is not happening. So all those other consumers of said commodities? - they don't exist. So it must be price gouging. Works in oil, works in food, works in fertilizer, works in copper, works in iron ore, works in everything - it's all price gouging. Or speculators. Well, I look forward to seeing our fertilizer CEO's dragged up to Capital Hill - Lucy's got some 'splainin to do!) On Friday, Sen. Byron L. Dorgan, a North Dakota Democrat, said he is asking the Federal Trade Commission to scrutinize the industry's business practices.
• Major fertilizer producers deny any allegations of gouging. They say they are simply raising prices to reflect tight supplies and growing demand after years of relatively low prices. (same damn excuse as those "greedy oil companies")
• But there's an unusual piece in the pricing puzzle: In several countries, obscure laws shield makers of potash and phosphate from certain antitrust rules. In the U.S., for example, phosphate makers are among a handful of industries empowered by the 1918 Webb-Pomerene Act to talk with competitors about pricing and other issues.
• In India, the head of one of India's largest buyers of fertilizer is appealing to the United Nations for help. "The fertilizer prices are artificially going up due to the manipulation of traders and suppliers," said Udai Shanker Awasthi, president of Indian Farmers Fertilizer Co-operative Ltd., in an interview Friday. (has Economics 101 been outlawed in our schools - globally?)
• Brazil's government is considering nationalizing the country's fertilizer deposits to help reduce farmers' production costs. (seems to be working wonders in country after country, in the oil sector - why not fertilizer - just 1 more inefficient nationalized competitor to deal with)
• Fewer than a dozen countries have substantial potash reserves, while more than 160 countries consume the fertilizer.
• In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel. (I like cartels; as long as I'm on the investing side of them)
• "That's the whole key that we're running into this year," said John Hawkins, a spokesman for the Illinois Farm Bureau. "The barriers that we have seen in the past between domestic and international prices have just fallen down. We're now participating in a global fertilizer market." (finally, someone gets it)

Folks this is just the beginning; political stupidity is not an American trademark. We will see knee jerk reactions as shortage after shortage -- err I mean, after price gouging after price gouging of readily available product -- hits the world. Countries will become nationalistic and protective, which will only exaggerate the problems further. As this plays out, someone - somewhere overseeing all this from above will be snickering to self at the behavior of human kind. This is so predictable, that it is and will continue to be sad to see it play out.

At this point I have about 15-17 industry groups I can see being trotted up to Capital Hill for "investigative hearings" as price increases continue into the years to come. Because as we all know it is either "price gouging" or "speculators" causing all the issues. (I'm sure the West's central bankers won't be trotted up to ask why they are exaggerating all these shortages with a global flood of paper currency) Why are we not dragging US farmers up to the halls of the Senate for their 'price gouging' on wheat, corn, and soybeans? Oh yes - they have votes in the coming election. Sorry for asking! I look forward to the day seeing the average inward looking US politician sparring with the average Greek drybulk shipping magnate over how they are price gouging the Baltic Dry Index rates. Or the average Peruvian copper miner. Or the average Brazilian iron ore miner. Or the average Thai rice grower. God help us.

Long a lot of fertilizer for a long time in fund; long Mosaic in personal account - cautious on the sector for now as I cannot model stupidity very well in terms of stock price; super bull for the long run

Frequently Asked Questions

As the website has grown in popularity I am getting a lot of individual questions on specifics of the fund, the website, and other associated material. I have addressed most of these over time, but many times in email or as "comments" right on the blog - and since many of you just read through a reader and never come to the actual web site ....and/or many have come to the site in the past few months (missing some of the history), I'll create a post here, and throw it as a permanent fixture on the blog so any new readers can quickly find most of the common questions in 1 spot. If you have a question I did not address just send me an email and/or attach a comment to this blog entry and I'll answer. Transparency is (aside from performance) going to be what sets us apart.

Let me preface these answers by saying this is where I think things will be today - nothing is fixed in stone but I am giving my best answer as conditions stand today. But below are the most commonly asked questions.

Mutual Fund Specific Questions

Q: When will you launch the real fund?
A: That is up to the readers - obviously this site is a vehicle for readers to get a comfort level with my ideas, my investment style, thought process, and performance. My goal is to be able to reach an asset level where I can break even in year 1, i.e. the annual expenses (not including start up costs) pay for itself - I believe that number to be about $7 million in assets (which over time I've lowered from a larger number as I've received more information and pointed to more resources). I also believe it is much easier to invest in something that is live and ready to go, than a "concept" - so I am willing to launch at roughly $4 million in assets "pledged" (Progress Towards Raising $7M), with the belief that asset growth will happen much quicker when there is a vessel ready to go that someone can react to immediately rather than reading along a blog for 12 months. So I believe growth will accelerate once the fund is "live".

We are currently at just under $2 million pledged (EDIT: As of July 2008 we are over $3 million pledged), and if our run rate is somewhere in the $200-$250K/month , we'd reach $4 million by end of 2008. So 90 days in advance of this target I would begin the process of filings, paperwork, lawyers and such. It could be earlier; it could be later - all depends on the flow of monies pledged. The "pledged" run rate has been higher than listed above in the past 45 days, but again I am trying to be conservative.

Q: What will your fees be?
A: We will be a no load fund; for those who do not know a load is a fee paid up from; usually 4-6%. Meaning just for the honor of investing with me, I get 4-6% up front. So we won't be doing that.

As with all funds we will have an annual fee; since we will be small up front to start I will begin at roughly 1.75%; then as (if) fund assets grow to some threshold (I don't have an exact number) my intent is to drop that to 1.50%. My goal is not to be the cheapest fund on the planet - if you are looking for that Vanguard Group has some excellent index funds. But I won't be charging 2.00-2.25%+ like some other funds either.

Further, I think one major problem with the mutual fund industry is there is no incentive for good performance (other than say ego or attracting assets) but a lot of funds sail along with middling performance, acquire assets and if the fund does well or does not do well, the fees are paid. In any business I run, I'd want the people incentivized to outperform - so similar to about 200 mutual funds out there do (including many at Fidelity, Vanguard) there will be some sort of fee for long term out performance versus indexes; I don't know the exact structure but it will mirror what is industry standard. So if the fund does very well, there will be additional benefit - if not, then some penalty to fees. The other carrot is I will have the majority of my own investing funds in this mutual fund, especially at the front end.

Last, I will have one punitive fee and that is on short term trading - essentially investments held by shareholders for a short duration (6 months, 9 months?) will be assessed a fee (2% seems to be industry standard). I've read an article in this month's SmartMoney which staggered me; fully 35% of mutual fund transactions are estimating to be due to investor redemptions (NOT due to strategy), most of the time at the worst time (i.e. during a market downdraft). Further, in our attention deficit society our mutual fund community seems to be turning into a very similar ilk to the stock community - trading in and out of mutual funds. I want to eliminate that as much as possible since it will wreck havoc. (i.e. being forced to sell in large waves during the January 2008 lows) So this does not mean you cannot take your money out at any time, but (for example) when you purchase, unless you hold for 6 months there will be a small fee attached - this should alleviate rapid fire trading. Also my constant communication (which most funds lack) should alleviate this concern / short term redemptions to some degree. I also always hold a lot more cash than the typical mutual fund so I can easily meet redemptions.

Q: I want in, but I don't live in the U.S. Help!
A: You are eligible to invest - you will need to register with a US tax number by filling out this form: W-8, and then you will fund your investment either with a direct bank wire OR if you have access a check funded with US dollars. The wire sounds much easier. Everything else will be the same as the American investors.

Q: My state is not eligible yet per your posting - how will that work?
A: As I wrote in [Fund Launch - State by State], to pay for the fees to register in each state; I need about $40-$45K in investment from that state to break even. So as the "pledges" come in, I am making a list of what states to register at right from the get go - hopefully over the coming 3/4 of a year it broadens out to include more states so more people can participate right off the bat. But just because a state is not eligible today does not mean it won't be in the future. 1 year ago I had zero states eligible since I had zero future investors. Simple enough. So as more interest comes in the future from each state, more states will open with the goal of all states being eligible - but I will just need potential investors to continue to make me aware of their interest. Registering in a new state is literally a 24 hour process, so once a threshold is met, that state can be "opened" for investment, almost immediately.

Q: Will your strategy change?
A: No, my overall strategy will be the same, but my tools at disposal to take advantage of said strategies will broaden. This will be covered in the prospectus, but essentially I want to make the fund as flexible as possible - this would include short positions and some options (mostly long dated calls, LEAPs and the like) in my best ideas. I do believe this will create an even better performance than what I am able to do in a restricted fashion on Marketocracy.com. I've had a lot of great short ideas go by the wayside this past fall, and a lot of my best ideas on the long side - if layered over with some LEAPs or long term call options would of given us some huge returns. But more complexity always adds more potential risk, which will be outlined in the prospectus.

Q: How do I know you won't run off with my money?
A: Well, that would defeat the purpose of this endeavor, but over and above that I won't ever see your money. I will be paying a 3rd party source to handle just about everything outside of making buy and sell decisions. So as with any fund, you're going to be sending money, receiving paperwork, etc from someone not named Rising Tide Growth Fund.

Q: What's the minimum investment?
A: $2500 for initial investment in either regular account or retirement.

Q: Can I do monthly installment investments like other funds?
A: Yes, as with any fund, you will be able to do automatic withdrawals from your bank account to buy shares of the fund on a monthly basis.

Q: Can I buy your fund in an IRA/Roth IRA?
A: Yes, as with any fund, retirement or regular accounts will be available.

Q: Can I buy your fund in my work's 401k?
A: No, you are limited to what options are in your 401k. Unless you asked your workplace to include the fund in the 401k. And then the answer would be yes.

Q: Will you be available in the Fidelity, Charles Schwab, or Ameritrade supermarket of funds?
A: From what I've been told Ameritrade has free registration for funds in their supermarket, so if true, the fund will be made available there. The other two have relatively hefty fees, so not until the asset base reaches a certain level will I register there (the costs need to offsets the benefits)

Q: You have a high turnover and generate short term taxes.
A: Ok, not really a question but a statement. Yes, I have a high turnover. So does Ken Heebner. He makes good returns, and attracts a lot of assets due to his acumen. I make good returns and hope to attract a lot of assets due to my acumen. Will I throw off taxes? Yes. I find it more attractive than the alternative (losing money). Would I like to run a fund that generates 50% annual returns with zero taxes? Wouldn't we all. I will try to marry short term losses with short term gains to neutralize some tax implications, but frankly my #1 goal is to minimize short term losses so that I don't have many to marry to. We will have tax implications; more gains will imply more taxes - no way around it.

Website Questions

Q: What happens to the website when you launch (also written as "Will you keep posting on the site?")
A: This website has one goal and that is to showcase my record, thoughts, themes, and investment style to attract investors. When we launch for real, we'll have a new website - but hopefully archive this site somewhere within the new site. Due to SEC regulations I don't know exactly what the end result of the new site (in terms of blogging) will be but in summary - transparency and investor communication will be something that I think will be a key selling point of this fund versus the industry. So yes, posting will continue although the nature of which might evolve over time. But investors will continue to be let in on the thought process and stock selection. The website (blog) portion will be open to all readers, investors or otherwise.

Q: Will you sell my email?
A: I honestly don't even see most people's emails. All that stuff is handled by the de facto web content (blog) distribution channel - Feedburner.com. And again, selling your email would take away from the main point of my blog - attracting investors.

Q: Your website is ugly / poor / too busy / slow / did I mention ugly? Can you fix that, or move that, or do this or do that to make it easier on me to read it?
A: Sorry. Thankfully my investment acumen is many times better than my website acumen. I use a 3rd party blogging site called blogger.com. It is for newbies like me. When we move to a new website, it should look more typical of other mutual fund family websites; I've had one reader/future investor willing to volunteer help on that end so I hope to make something worthy of my readership. ;)

Why Don't You... Questions

Q: Why Don't you just start an online Newsletter, it would be so much cheaper and easier and you'd make a nice profit?
A: Yes I get this one about twice a week - I do realize that, but my goal is not "future newsletter writer" but running money. That's my passion and focus.

Q: Why Don't you offer individual private accounts?
A: A couple of people have asked this and it sounds interesting. I am not in the industry so I don't have the faintest clue about the mechanics of such things, nor am I set up or licensed to do that. Many investment managers who run small shops also run private accounts, which is something I am open to someday in the future. But I can only do one thing at a time, and this is job #1.

Q: Why Don't you do a hedge fund instead, it is so much easier and cheaper?
A: Yes, it is easier and cheaper. But if you think it's hard finding investors of normal ilk, just try finding a bevy of "qualified" investors. I'm a big proponent to bottom line results. If you put up results, capital will find you in time. I actually run this mutual fund in a way similar to many hedge funds - trying to limit volatility to some degree, and having short versus long exposure, to hopefully benefit from a down or up market to some degree.

Etc Questions

Q: Should I buy ABC stock?
A: I won't answer that for liability reasons nor do I know your specific situation nor am I your investment advisor. Although I could recommend a good mutual fund (ahem) for you.

Q: You've done ok so far, but how do I know you will keep it up?
A: You don't know. I don't know. As every mutual fund advertisement says, past performance is no guarantee of future results. Instead of starting this idea in a much easier time say 2004, 2005, 2006, I began in the birth of the credit crisis late last summer, and it's been one tough environment. But in retrospect it might of been a good thing because in 2004-2006 blind monkey could make money throwing darts as the market generally just went in 1 direction - up. Making money in down markets is much tougher and separates the wheat from the chaff. I hope to continue to be wheat, and not chaff but for all you know I've just had a 9 month streak of luck.

Q: What an idiot, I read your article on Seeking Alpha and you sold ABC stock right before it took off? Loser. You, and your fake fund - suck.
A: Thanks. I can only imagine what Jim Cramer gets in the mail if lowly old me gets this sort of "feedback".

Q: How can I take a guy who has a Kool Aid avatar seriously? (ok I made this question up, but just in case anyone is thinking it)
A: You take those guys on CNBC who spout Kool Aid endlessly seriously, so why not take me seriously? If not for copyright reasons, I'd probably splash Kool Aid man on the cover for the prospectus to represent all that is great in the investing world. ;)

Q: Will you hire me?
A: No, I won't. :) I can't even afford hiring myself at this time. In the long run, it would be sort of a neat thing to run a company with an umbrella of individual unique mutual funds run by individuals of atypical background but with a good track records. Something to mull for the long term future.

Solar iPhone?

Have I ever mentioned that Apple (AAPL) is about 4 steps ahead of everyone else? [May 22: What Will Apple Be Creating in 5 Years?] I have no idea the logistics or logic to this, but you have to give credit for thinking out of the box. And it plays into my "very long term" theme of a whole different world of energy will be adopting as 9 Billion humans come online by 2050. In fact as I think over the possibilities I can see a very different world by 2050 in terms of energy consumption - while it seems impossible for a whole new world order since if you go back 50 years, 1960 is not "very" different than 2008.... but if you compare 1960 (combustion engine) to 1910 (horses/coal/steam) - a lot can happen in half a century or less. And in this age of technological revolutions it can happen much faster than we think. And it will need too, to contain all these human locusts circling the globe....

• Employees at computer, phone and software company Apple have filed a patent to place solar cells on portable devices, Trade the News reported Monday.
• Outfitted with such technology, Apple’s devices, like the iPhone, could have photovoltaic cells stacked underneath LCD touch screens, thus maximizing the area available for harnessing the sun.
• The filing said that information regarding the performance of a device’s solar cells could be displayed on the main screen next to info for battery power, text message alerts and time of day. Or this information could also appear on top of the solar cells themselves, which are likely to display some version of the Apple logo.
• n any case, Apple's new technology could herald the next generation of wireless mobility. Without the need to electrically charge devices--either via outlets or USB cables--users could at last start to break free from on-the-grid power connections.
• Apple is certainly not the one in this field field. Mobile product manufacturers have looked at solar energy for some time, as consumers demand more battery power from portable devices
• One related product is the 6.4-ounce Solio Mg, $200, from Better Energy Systems. Its three magnesium blades fan out to reveal solar panels, which can store enough power to charge most phones and PDAs twice; an hour of clear sun will give most cell phones 25 minutes of talk time or an iPod an hour of playing time. It takes ten hours of direct sun to fully juice the device.
• Also, the world’s first solar bag--the Voltaic Systems’ Generator laptop bag--is covered in solar cells and can charge a laptop. It generates up to 14.7 watts after a day of direct sunlight, can carry a 17-inch Apple Powerbook and comes with adapters that allow other electronics, such as cell phones, to be charged.

Long Apple in fund; no personal position

Bookkeeping: Weekly Changes to Fund Positions Week 42

Week 42 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: 22.8% (vs 17.7% last week)
52 long bias: 49.3% (vs 58.7% last week)
9 short bias: 27.9% (vs 23.6% last week)

61 positions (vs 61 last week)
Additions: Ultrashort Oil & Gas (DUG)
Removals: iShares Signapore (EWS)

Top 10 positions = 33.2% of fund (vs 38.1% 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 showed a turn for the worse this week, with some ominous hints Monday after reaching out to grasp new highs for the year. As the news in the real economy worsened the past few months, the market has rallied on "it's all priced in" and "it's not as bad as we expected" or "even if it as bad as expected, it will be better in 6 months". As I said then, once the market turns down, the news flow really won't be that different - it is just a matter of when will the market begin to treat bad news as bad as opposed to good. For whatever reason crude oil @ $132 sets people into thinking that high oil prices might actually be bad for the economy, whereas crude @ $128 is just fine, thank you very much. That is one example - we have many. This will continue on for many many months ahead in fact - I expect the news flow to continue to be a steady beat of "bad", but some weeks that will be seen as "ok, it's priced in - tell me something I don't know" and other weeks it will be seen as "oh ok, I guess things are sorta bad out there". As always the market is in large part psychological as much as based on fundamentals or technicals.

With the market taking such a beating last week it would not surprise me to see some "hopeful" buying at some point this week - down 3.5% is not usually followed by an immediate down 2% more - but we never know. As always it depends on how much Kool Aid is out there - frankly, as I peruse the news, trying to find glimmers of hope I keep running into mounds of coal. We have a bevy of economic reports and I'm sure for at least a handful we'll be able to explain them as "showing signs of economic recovery". I continue to believe we are really just getting started with this recession (ahem, sorry) slowdown. I continue to believe 2nd half 2008 earning estimates are pure fantasy in most sectors, and if logic had any part in the market (which for long stretches it does not) as come down earning estimates for the future, so should be the price people are willing to pay for said stocks - just the opposite has in fact been happening the past 2 months - again very similar to September/October 2007. Unfortunately, following that period came November 07 and January 08.

For the fund, I've grown increasingly cautious the past few weeks - we've been able to partake in much of the rally while still maintaining a 10-15% cash exposure for much of it and a 10-20% short exposure - the long portion of our fund has been filled with some serious winners so even with a 60-70% long exposure for much of the past 2 months we've been able to keep up or even surpass the general market. So we've had our fill of the pie, and now I am stepping back from the table, but again as stated above - after such a horrid week it would not be surprising to see some uptick in the markets as hopeful bulls rush in. In that "hopeful" scenario - if it plays out, we'd lag the market with our current "cautious" exposure. Yet, I don't see any reason to really get overexposed on the long side for rallies that I believe will be short term in duration. Further, most names I really want to buy in scale, have had very large runs, so until they begin to falter and hit key support levels my purchases will be limited. At this point we have one major overweight long position in Trina Solar (TSL) - and that's about it. While solar stocks could fall 30% in 2 weeks (as they are apt to do when the market panics) the stock valuation discrepancy (versus peers and growth rate) is so out of line, either I am completely missing the forest for the trees on the next earnings report, or we have a major dislocation in reality versus expectation. Since I have most of the rest of the portfolio in a bomb shelter, I am willing to let this one fly since my "fair value" is so much higher than current levels. But if the market does trail off in one of its panic spirals I can see this one selling off very hard along with its sector - attractive valuation be damned.

Going forward, we've adopted a bit of a barbell approach - although the barbell is very weighted away from these "early cycle" names in homebuilders, financials, retail, etc. But if past is any indication once the market has beaten these sectors to a pulp; in a sustained selloff - it will then move on to the market leaders - and beat them to a pulp later in the correction... meanwhile running the early cycle names up on hopes of "economy recovery" - this has been the pattern over and over since August so that's the playbook I am going on - hence sometime in the next 4-10 days you will probably see me buying our few names in these sectors, mostly with a very ashamed look on my face since I don't believe for one moment there is any recovery coming soon - but knowing how the hedge fund computers love to buy these every 6-7 weeks, for no good reason. So we'll see if it plays out that "neatly" - the pattern has been SO precise it makes me believe it won't work out so nicely - because once something becomes old hat on Wall Street it quickly gets exploited and no longer works. But I own 2 investment banks and 2 housing stocks for just these reasons - that said, they won't be major overweight positions until maybe 12-24 months from now when I could see a "real" recovery happening. Not a CNBC created one.

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. Most of my transactions this week were with the Ultrashorts, or smaller transactions that I don't outline individually on the long side. ($4K or less)

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

1. Monday Perfect World (PWRD) reported a stellar earnings report, but due to guidance issues (part of it earthquake induced) the stock took a hit, which it followed through the rest of the week. Nothing has changed for the long run and frankly the metrics in this earning report surpassed even my rosy expectations - but the market only cares about 90 days at a time and since the moody toddler didn't get what it wanted, PWRD was punished. I lightened up a bit on this position but as we approach support in the low $20s I'll begin upping this stake - $20, $21, $22 would be a great area to add. Even at current $24 range I am paying 15x 2008 earnings for 30,40,50% type of growth.
   
2. Early in the afternoon the market was approaching yearly highs and had peaked its head over the 200 day moving average, which caused me to entertain the idea that this was just an unrelenting move and despite all the bad news, the market was unabashed in ignoring it, so if the day ended in this fashion we'd have to reverse course, and go with the bulls. Within 30 minutes this all changed with a nasty intraday reversal - and I was back on full caution.
3. Wednesday, I cut some Trina Solar (TSL) near $52 after Solarfun Power (SOLF) put out a nice earnings report giving the sector a life, and ahead of a Suntech Power (STP) earnings report the next morning. I had bought much of this stake a week earlier in the low to mid $40s so I wanted to lock in some games and I took the name down to a 4.9% stake. I said, I'd like to buy this stake back near $46, which ironically we got the very next day - I jumped the gun and added up to 5.4% stake at $48 (just hard to be away from this value), and then went back north of 7% allocation as we broke back down to $46s. So we were able to squirrel away some profits in this 24 hour period, and not give it all away to mother market. Again, let me stress if people begin to panic sell this can be a $35 stock in a few hours, but at least we took some off the table and bought back at lower prices. The sector has moved so smartly, I anticipate a serious pullback in due time.
4. I began a stake in Ultrashort Oil & Gas (DUG) on part trader intuition (this position has destroyed a lot of people of late) and part everyone and their mother was calling for oil $150. It just seems like a crowded trade - an added benefit is this position shorts against exploration and production companies - not the commodity itself so even if the commodity went up, if the market is weak; the individual companies could certainly go down. That is how it ended up working in retrospect - I set a target of $30 to sell, with my entry below $26 which would garner a 15%+ return. We already have a 10% return in 2 days; so far so good.
5. I outlined how amazing the runs have been in coal; much like fertilizer still a favorite sector but it is too much at once - I am in full cautionary stance in regards to this sector despite improved fundamentals (China earthquake will cause even more need for imported coal). We've seen 40-50% moves in 3 weeks - remember, I was buying when CNBC was telling me commodities were dead and the hedge funds were selling due to the "strong" dollar. As always, thank you CNBC.
6. Friday, I began making some sporadic "first layer" buys of positions I'd cut back severely on, in Mechel (MTL) down 15%, Mercadolibre (MELI) down 25%, and DR Horton (DHI) down 22% - the % falls are in a week or less. Again, this is not calling a bottom in any of these names - I don't have a crystal ball, but I sold these higher and now can begin to rebuild my positions at a lower cost basis. If they go lower (which frankly I hope they do), I can use the large stash of cash (and or convert some Ultrashort exposure into cash) to buy.
7. I closed out iShares Singapore (EWS), as the first signs of demand destruction in energy cross the globe - once Asian economies lessen their subsidies, this destruction (and concurrent economic slowdown) will accelerate. Unfortunately, petrol is still the lifeblood of Earth 2008. Maybe it will be a different story Earth 2023, but we have not even begun to take the problem seriously as a globe. So the way to suppress demand (temporarily) will be a global recession. On the positive front, at this level of pricing a lot of alternative energies come into play as will "old school" supplies of energy, long closed off or forgotten as too expensive to access. I expect years of this pattern ahead (a decade or two in fact)
   
8. And that's about it ... it was a quiet week - I was not interested in buying stocks until they hit some of my initial targets - despite the selloff, most of it happening in sectors outside of what we hold so we did not see the large scale type of selloffs I am looking for to build up positions. I would not be surprised to see those selloffs in our holdings relatively soon.

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.

Best Performing Stocks Year to Date

Since we have a break in the action here, instead of doing our normal best performing stocks of the week (not many made the list this week due to a poor market), this is a good time to look at what is performing best so far this year. Further, due the composition of the list and with many of these stocks due for a correction it's probably worthwhile to take a look now, as things might change relatively soon. We looked at a similar list in early November [Nov 4: How to Make 75% in 3 Months] when the list was dominated by large cap Chinese stocks, a few big cap tech stocks, Indian stocks, and fertilizer. Except for fertilizer most of those groups stunk for the better part of the following 5 months, and hence "returned to the mean". However, the list did turn out a few gems we jumped on, so looking at such lists helps us to identify what has been working and what other people are interested in that we might be missing.

Frankly, as I look through this list I feel very content with our stock selections over the past 5 months - we own 3 of the top 12. I've also said a few times coal would be the next fertilizer (as the next "big investing theme") but you never can time these things exactly and while I thought it would play out in latter 2008 or early 2009, the trend is already here - 4 of the top 5 names year to date are coal stocks.

A few other key sectors have been ... well, anything energy related, especially natural gas and land drillers (who had been previously missing out on the entire energy rally due to overcapacity)... Brazil also dominated, as did steel (iron ore and metallurgical coal being offshoots of steel). Lower in this entry, I've highlighted some posts on some of the individual companies or sectors at the top of the list, as we've been talking about them for quite a while.

As always the criteria for this list are

• Market capitalization $2 Billion+
• Average trading volume 100K+
• Stock price $10+

And added to those criteria I've listed every stock returning 25%+ year to date - the list is 122 stocks long. We own 17 of them; considering we generally only hold 50-55 long positions, this means roughly a third of our positions made the list. I'll take that all year, every year. (please note some stocks we bought during calender 2008 so we have not enjoyed the full gain listed below - however many we bought during the panic of March 2008 - i.e. the "Bear Stearns bottom" so we might have gotten even better prices than if we had bought on Jan 1, 2008)

Green shaded are names we've owned during calendar 2008, and blue are names we've discussed, or in some cases readers have mentioned (i.e. hey TraderMark you fertilizer lover - why don't you buy SQM!). Keep in mind I don't discuss every stock in every sector i.e. there are a good 9-10 coal stocks out there, I tend to discuss 4-5 on a normal basis; same for natural gas or energy/exploration companies. Same with the countless "energy" names.

What' missing? Despite all the hubbub about the "bottom is in financials - if you don't buy you're going to miss the huge move!!" - not one single financial made the list (unless you consider Mastercard a "financial") - only 3 retailers made the list - two of which that thrive on the pooring of America - Big Lots & Dollar Tree, and most homebuilders at this point have lost so much market capitalization (size) they no longer even qualify for such a list. So "bottom fishing" is not in fashion despite all the cries from the pundits that you should be doing it. A lot of fingers have been sliced off trying to "catch knives".

Also to the surprise of many I am sure will be the lack of solar stocks and dry bulk shipping stocks. These stocks have had an immense run of late, but took staggering losses in the first quarter of the year, so are just making up lost ground. Due to their extreme volatility I have a hard time putting these type of positions at the top of our portfolio as opposed to say a fertilizer or coal exposure. But they do make excellent trading vehicles to help us turbocharge returns - but timing is everything; it is very easy to lose 30% in 2 weeks with these names due to the nature of (ahem) "investors" who likes these stocks. But hopefully over time more stable institutional money will move into these sectors creating at least some basic form of stability.

Here are some highlights if you are new to the blog and did not see when we discussed some specific names at the top of the list. I just picked a representative sample for each - most aside from WLT, and CMP have been discussed numerous times. Again, I still like all these groups for the LONG run; but think they are very overdue for a correction in the near term. If you are ever interested in reading up on all posts on a topic/stock, on the right margin of the blog is a "label cloud" - I label each entry with a specific topic - so if you click on said label you will pull up all historical posts for that company, sector, or theme (i.e. inflation, economy) etc.

1. Walter Industries (WLT) [May 1: Walter Industries - the Most Amazing Company]
2. Alpha Natural Resources (ANR) [Apr 8: Changing Coal Allocation - Peabody Energy Out, Alpha Natural Resources In]
3. Cleveland Cliffs (CLF) & Vale (RIO) [Mar 7: Starting 2 Mining Positions Emphasizing Iron Ore]
4. Compass Minerals Int'l (CMP) [Mar 3: Who Knew? Salt?]
5. Natural Gas [Feb 11: An Interesting Development in Natural Gas]
6. Mechel (MTL) [Nov 5: Two New Foreign Positions Added Today]
7. Sohu.com (SOHU) [Dec 5: Sohu.com Raises Guidance]
8. Brazil [May 16: Brazil is Sexy]
   

Symbol	Company Name	% Price YTD
WLT	Walter Industry Ord Shs	147.1
CLR	Continental Resources Ord Shs	128.2
PCX	Patriot Coal Corp	126.4
ANR	Alpha Natural Resources Inc	125.6
FDG	FORDING INC	104.7
SATS	EchoStar Corp	101.8
EAC	Encore Acquisition Co	98.9
SQM	Sociedad Quimica y Minera de Chile	90.0
CLF	Cleveland Cliffs Ord Shs	86.0
WTI	W&T Offshore Inc	81.2
PDS	Precision Drilling Trust	75.1
MEE	Massey Energy Co	73.4
CMP	Compass Minerals International Inc	72.9
GGB	Gerdau SA Depository Receipt	69.6
BIG	Big Lots Inc	68.3
MLNM	Millennium Pharmaceuticals Inc	66.7
OIS	Oil States International Inc	66.0
SID	Companhia Siderurgica Nacional	65.7
ENER	Energy Conversion Devices Inc	64.4
WLL	Whiting Petroleum Corp	63.0
XEC	Cimarex Energy Co	62.7
SWN	Southwestern Energy Co	61.7
CPX	Complete Production Services Inc	61.3
PTEN	Patterson-UTI Energy Inc	60.3
UNT	Unit Corp	59.9
CRK	Comstock Resources Inc	57.5
CXO	Concho Resources Inc	56.8
SPN	Superior Energy Services Inc	52.7
MTL	Mechel ADR Rep 3 Ord Shs	51.9
CSX	CSX Corp	51.7
HK	Petrohawk Energy Corp	51.4
NBR	Nabors Industries Ltd	51.2
EOG	EOG Resources Inc	51.2
GDI	Gardner Denver Inc	51.0
HP	Helmerich & Payne Inc	49.8
R	Ryder System Inc	49.6
COG	Cabot Oil & Gas Corp	49.0
WHQ	W-H Energy Services Inc	48.9
BAY	Bayer ADR Rep 1 Ord Shs	48.9
XCO	EXCO Resources Inc	48.3
ME	Mariner Energy Ord Shs	48.3
HERO	Hercules Offshore Inc	47.1
TTWO	Take-Two Interactive Software Inc	45.9
AKS	AK Steel Holding Corp	45.5
DRS	DRS Technologies Inc	44.6
PXD	Pioneer Natural Resources Co	44.6
X	United States Steel Corp	42.4
SD	SandRidge Energy Ord Shs	41.5
GTI	GrafTech International Ltd	41.4
TCK	Teck Cominco Ord Shs Class B	40.8
SOHU	Sohu.com Inc	40.7
ACI	Arch Coal Ord Shs	40.0
CENX	Century Aluminum Co	39.6
CNQ	CDN Natural Resource Ord Shs	39.1
SCHN	Schnitzer Steel Industries Inc	38.8
ROST	Ross Stores Inc	38.3
PEGFF	Pacific Rubiales Energy Corp	37.9
ECA	ENCANA CORP	37.3
SDA	Sadia ADR Rep 3 Pref Shs	37.1
STO	StatoilHydro ADR Rep 1 Ord Shs	36.6
POT	Potash Corp	36.4
TRN	Trinity Industries Inc	36.1
PXP	Plains Exploration & Production Co	36.1
TS	Tenaris ADR	35.8
ATN	Atlas Energy Resources LLC	35.3
FLS	Flowserve Corp	35.3
UMBF	UMB Financial Corp	35.2
EQT	Equitable Resources Inc	35.0
DBD	Diebold Inc	34.9
KSU	Kansas City Sthn Ord Shs	34.9
CXG	CNX Gas Ord Shs	34.6
FRO	Frontline Ord Shs	34.3
HAS	Hasbro Inc	34.1
CNX	CONSOL Energy Inc	34.1
CHK	Chesapeake Energy Ord Shs	34.1
RRC	Range Resources Corp	33.8
DVN	Devon Energy Ord Shs	33.5
WRC	Warnaco Group Inc	33.3
FTI	FMC Technologies Inc	33.3
CPS	ChoicePoint Inc	33.0
BUCY	Bucyrus International Inc	33.0
COSWF	Canadian Oil Sands Trust	32.8
PDE	Pride International Inc	32.5
WWY	WM Wrigley Jr Ord Shs	32.0
AEM	Agnico Eagle Ord Shs	31.9
BBL	BHP Billiton ADR	31.7
NAVZ	Navistar International Ord Shs	31.5
WAB	Wabtec Corp	31.2
CFFN	Capitol Federal Financial	31.0
PWE	Penn West Energy Trust Units	30.8
SU	SUNCOR ENERGY INC	30.8
LEAP	Leap Wireless International Inc	30.6
SSL	Sasol Level II ADR	30.2
SM	St Mary Land & Exploration Co	29.9
HXM	Desarrolladora Homex DR	29.9
APA	Apache Corp Ord Shs	29.6
MT	ArcelorMittal ADR	29.1
NFG	National Fuel Gas Co	28.9
BBG	Bill Barrett Corp	28.6
FST	Forest Oil Corp	28.6
OC	Owens Corning	28.5
GMT	GATX Corp Ord Shs	28.3
FLR	Fluor Corp	28.2
SYMC	Symantec Corp	28.0
BHP	BHP Billiton ADR	27.8
DLTR	Dollar Tree Inc	27.6
BNI	Burlington Northern Santa Fe Corp	27.5
CELG	Celgene Corp	27.4
MOS	Mosaic Co	27.1
TNE	Tele Norte Leste ADR Reptg 1 Pref Shs	27.0
MA	MasterCard Inc	27.0
FMC	FMC Corp	26.6
TLM	Talisman Energy Ord Shs	26.6
TER	Teradyne Inc	26.5
WW	Watson Wyatt Worldwide Inc	26.4
HAL	Halliburton Ord Shs	26.0
VMI	Valmont Industries Inc	25.6
PBR	Petroleo Brasileiro ADR Reptg 2 Ord Shs	25.6
MSM	MSC Industrial Direct Co Inc	25.5
KWK	Quicksilver Resources Inc	25.5
RIO	Companhia Vale Do Rio Docea	25.5
CPO	Corn Products International Inc	25.4