49 Stocks Returing 6%+ this Week

A small list of winners in this tough week for the market.

Criteria

1. Stock price $10+
2. Average volume 100K+
   
3. Market Capitalization $2B+
4. Weekly return 6%+

Green we own; blue we have owned or have discussed in the blog. Energy - what else, dominated. Fertilizer made a nice showing this week as well. We've got both those covered in spades. Again, as I've been repeating for a few weeks *if* this correction plays out as the past few - first will go will be the bad sectors (financials, retailers, homebuilders) as people realize a 2nd half recovery is not happening (that's been happening the past 2 weeks), then middle of the road sectors such as technology will begin to weaken (that finally happened late this week), then the generals/leaders get taken to the shed which for the better part of 2 years has been the commodities. And ironically hedge funds will rush back into the "bad sectors" right around this time since all of Uncle Ben's money has to flow somewhere. This is not to say it has to play out exactly the same this time around, but until a pattern breaks it is best to expect it to repeat - so for now, if the market does continue to break down I'd expect the generals to be taken out either this week or next. Which would be ironic in the face of $140 crude...

p.s. notice SandRidge (SD), which we highlighted in last week's top performer list, make yet another appearance?

Symbol	Company Name	% Price Change 1 Week
SQM	Sociedad Quimica y Minera de Chile	25.5
PCX	Patriot Coal Corp	25.3
IVN	Ivanhoe Mines Ord Shs	21.9
XCO	EXCO Resources Inc	19.6
HK	Petrohawk Energy Corp	17.9
CLR	Continental Resources Inc	16.1
MEE	Massey Energy Co	13.6
UPL	Ultra Petroleum Corp	13.3
CXO	Concho Resources Inc	13.2
OSIP	OSI Pharmaceutical Ord Shs	13.2
COG	Cabot Oil & Gas Corp	12.9
NSM	National Semiconductor Corp	12.8
VRTX	Vertex Pharmaceuticals Inc	12.6
ACI	Arch Coal Inc	12.1
WHQ	W-H Energy Services Inc	11.2
CMP	Compass Minerals International Inc	11.0
WLL	Whiting Petroleum Corp	10.7
KWK	Quicksilver Resources Inc	10.7
JBL	Jabil Circuit Inc	10.6
HANS	Hansen Natural Corp	10.1
ADCT	ADC Telecommunications Inc	10.0
ROC	Rockwood Holdings Inc	9.8
CRK	Comstock Resources Inc	9.7
MTW	Manitowoc Co Inc	9.4
RYAAY	Ryanair Hldgs ADR	9.4
G	Genpact Ltd	9.2
IPI	Intrepid Potash Inc	9.1
POT	Potash	8.9
SD	SandRidge Energy Ord Shs	8.8
FCL	Foundation Coal Holdings Inc	8.4
CSE	CapitalSource Inc	8.2
OII	Oceaneering International Inc	7.9
PVA	Penn Virginia Corp	7.3
CF	CF Industries Holdings Inc	7.1
TDS	Telephone and Da Ord Shs	7.0
KBR	KBR Inc	7.0
FST	Forest Oil Corp	7.0
MHP	McGraw-Hill Companies Inc	6.9
EAC	Encore Acquisition Co	6.6
MON	Monsanto Co	6.6
ANR	Alpha Natural Resources Inc	6.5
BUCY	Bucyrus International Inc	6.5
MOS	Mosaic Co	6.4
HMC	Honda Motor ADR rep 1/2 ord shs	6.3
BVN	Buenaventura ADR	6.1
ARW	Arrow Electronics Inc	6.1
EAS	Energy East Ord Shs	6.0
CNQ	Canadian Natural Resources	6.0
CHK	Chesapeake Energy Ord Shs	6.0

CNBC: As Energy Costs Soar, US Looks to Solar

I've been investing in solar since 2006, but realize I probably gloss over some of the basics since I've been around it for a while so this article from CNBC has a nice overview from the U.S. point of view. Unfortunately, as with almost all things, America is reactive not proactive and we're about 5-10 years behind some other major Western (and Eastern in case of Japan) 1st world countries. In fact we are probably falling behind China to some degree (and pathetically some of the Middle Eastern countries who are moving to alternative energies!). But China and the US are the 2 main future engines for solar to thrive off of (and India is just now starting to get into the game). I've written in the past, compared to Bush - almost any human being in America will seem like a "greenie tree hugger" so the next administration should be a lot more friendly to alternative energies of all sorts - but at this point economic reality (i.e. pain) has finally pushed the United States into this path, with or without the politicians providing any leadership.

As with all things, whether health care, entitlements, regulation, infrastructure, dykes in New Orleans - we'll only address things when it turns into emergency status. Which we are quickly approaching in energy - the problem is most solutions are very long range in nature (i.e. nuclear - nearly a decade from planning to running) Another fine mess we've gotten ourselves into... proactive is a dirty word here....but just wait until we have to deal with entitlements (Social Security is a drop in the bucket in comparison to the Medicare disaster) in a serious manner in about 10-15 years. [May 23: David Walker on CNBC this Morning] So we'll keep kicking the can(s) down the road, only planning for 2-4 years out (1 election cycle) while long term issues get stuffed into the closet - until they get so large they spill out and cause societal pain. Look for a lot of crisis' (plural?) in city sewer systems, bridges, roads, and our entire infrastructure system over the coming decade or two as well. [May 29: US Rail Network Facing Congestion Calamity] As we all know when you build something 50-70 years ago it only needs a smattering of upkeep ;) We reap what we sow...

But I digress - back to solar; while a potentially lucrative investment there are a lot of potential risks as well [Jan 3: The Long Term in Solar]; unlike most of the other sectors we invest in - this one has relatively low moats i.e. barriers to entry (but the growth rates are so spectacular we cannot ignore the near term out of fear for the long term) so the entire landscape could be different in half a decade - caused either my massive consolidation or disruptive technologies. But we take this group 1 year at a time, and at least for the next 18-24 months we should be ok.

• Apple is considering harnessing the sun to power its iPod music players. California's Ironwood prison is installing more than 6,000 solar panels, and Boston's Fenway Park is tapping solar power for Red Sox baseball games.
• After decades on the fringe, solar power is closing in on America's mainstream as surging fossil fuel prices and mounting concern over climate change spur states, businesses and homeowners into a quickening embrace with alternative energy.
• Panels bolted to roofs to convert sunlight into electricity are still too expensive in most regions to compete with cheaper, less environmentally friendly fuels like coal without generous subsidies. Solar's high costs have kept the resource out of reach for many residences and businesses. But not for long, industry analysts and scientists say.
• The tipping point at which the world's cleanest, most renewable resource is cost-competitive with other sources of energy on electricity grids could happen within two to five years in some U.S. regions and countries if the price of fossil fuels continues to rise at its current pace, they add.
• Tom Werner, chief executive of SunPower

  SUNPOWER CORPORATION SPWR 79.33 -0.36 -0.45% NASDAQ

  Quote | Chart | News | Profile

  [SPWR 79.33 -0.36 (-0.45%)], the largest North American solar company by sales, sees such "grid parity" for solar power in the United States and elsewhere happening in about five years, or possibly as soon as 2010.
• "That's actually more aggressive than what we would say previously, and that's because the cost of electricity is going up faster than we had ever modeled," Werner said an interview at the Reuters Global Energy Summit on June 3.
• Suntech Power Holdings

  Suntech Power Holdings Co Ltd STP 40.24 -0.21 -0.52% NYSE

  Quote | Chart | News | Profile

  [STP 40.24 -0.21 (-0.52%)], one of the largest of a growing number of Chinese solar companies, sees the same five-year timeline, thanks to increasing supplies of silicon that will help drive down costs.
• In the United States, much depends on November's U.S. presidential and congressional elections. A Democratic win of the White House, and possibly greater Democratic control of Congress, could spur aggressive U.S. measures to limit climate-warming emissions of carbon dioxide—including legislation opposed by President George W. Bush that would cap emissions from 86 percent of U.S. facilities. If passed, such cap-and-trade provisions would make it costlier to emit carbon into the atmosphere and discourage the burning of fossil fuels. The economics of solar and other cleaner energy sources would be more competitive.
• Democrat Barack Obama wants to require U.S. utilities to generate 25 percent of their electricity from renewable sources like solar by 2025.
• "Obama or McCain would be better than Bush," said Feldt.</li>
• Although solar power is easily installed, building solar panels is expensive because of tight supplies of silicon, their costliest element. Most industry analysts expect a constraint on silicon supplies to end within two years. But they are divided on whether this would help or harm the industry. (I have the same questions - many moving parts will go into action once polysilicon prices drop - which I outlined in my piece above; it's the chicken and the egg scenario - will far lower prices drive enough demand so companies can stay in the black as competition increases to a fierce level?)
• Some say a drop in silicon prices would tip the scales from boom to bust by dramatically boosting supply of photovoltaic panels that make up 90 percent of sales in the industry. Such panels use refined crystalline silicon. But rival technologies are emerging such as thin-film panels that require almost no silicon, raising the possibility of a costly battle in the industry over which type of solar power will dominate.
• The solar industry will look very different just two years from now," said Ted Sullivan, a senior analyst at Lux Research, a New York market consultancy.
• Some analysts urge investors to look beyond volatility in the near term to a promising future for solar in energy-thirsty nations such as the United States, which could overtake Germany as the world's top solar market within four years, according to the European Photovoltaic Industry Association, a lobby body.
• "While silicon oversupply in mid-2009 is likely to pressure companies' margins, we believe investors at some point will become comfortable with solar's improving costs," said Ronan Wolfsdorf, a solar and renewable energy analyst at consultants Macroenergy Monitor in Cambridge, Massachusetts.
• Under laws in 25 U.S. states and Washington D.C., solar and other clean energy sources such as wind must constitute up to 30 percent of a utility's energy portfolio in five to 15 years. Just 10 states had such requirements in 2003. And some businesses are bringing solar to the masses.
• The United States—the world's fourth-largest solar power market after Germany, Japan and Spain—saw nearly 150 megawatts of solar capacity come online in 2007, up 45 percent from 2006, for a total of 750 megawatts, according to the Solar Energy Industries Association, a U.S. trade group. (we used to be #1, but since manufacturing is not "cool" in our new age service economy we passed the baton to Germany a long time ago)

So unlike what some of the pundits who are still stuck in the 1980s believe; solar is real. It is very real - it is just a matter of figuring out who the ultimate winners will be. Much like the internet era which at one time was dominated by say AOL and Netscape - we have no idea. No one thought of Google in 1997 or 1998. So the industry trend is there; knowing which players will be dominant in half a decade is impossible to know and just pure speculation by anyone claiming to know today. We'll take it year by year; but in the end it will be an industry much like semiconductors - high volume, low margins - but the potential for growth in a "World of Shortages" scenario over the coming decade or two should be enormous. And we like expanding pies like this - multiple big winners can emerge.

Staycations and the Shrinking Home

This is my new favorite term, staycation - however it feels almost mocking when a British newspaper is using it when talking about us. It's all sort of pathetic really - Americans trapped in their homes and neighborhoods (you guys with mass transit would not understand what we're talking about, but I read only 5% of the US population has access to mass transit - doh!) I believe my best trade last week was the ability to buy gas for $3.99 mid day Thursday (crude would eventually rise $6 that day, then $11 the next) - in fact it was $4.09 at the same station when I drove by later that night. I averted my eyes Friday.

• Wal-Mart (NYSE:WMT) , the largest US retailer, wants to trademark the word. Lowe's, the home improvement chain, is building its summer marketing campaign around the idea. And state tourism board officials in Maine want residents to think about taking one.
• As American consumers face a slowing economy and record energy and fuel prices, the "staycation" is looking increasingly like the marketing buzz word of the summer of 2008.
• These, it declares, are "affordable, fun and family-friendly things to help you relax, celebrate and enjoy the special moments of summer in your own backyard". They include finding and planting your state flower, visiting a recycling centre and cooking up summer recipes. (sounds like... fun... yeh, a ton of fun)
• The marketing push is based on growing evidence that Americans will travel less this year. One sign of that came in a recent survey of more than 2,000 US residents by Rand McNally, the leading US road map publisher, which found that 57 per cent of Americans planned to shorten their holidays and stay closer to home this summer.
• The origins of the word remain uncertain. Hunter Walk, an internet product manager, bought the domain name staycation.com in December 2005 after spontaneously using it with friends some months before. (damn, good call!)

Speaking of which, on a tangent topic long time readers will know I proposed as we enter this next wave of "World of Shortages" - energy costs will drive people back into cities, and inner suburbs... outer suburbs will the the environ for the upper 5-10%, with those long commutes and 3000+ sq foot homes. Not only with gas to drive to work begin to matter, so will the costs to heat or air condition your home (many will find that out next winter) - clearly heating 1800 sq feet will be a more palpable solution that heating 2800. I have been struck, even locally in a 5 year "1 state recession" how almost all new homes built have been 3000 sq foot or more. I think this will change and the first signs are now coming. Not to mention the slowly but surely "pooring of America" simply requires a smaller, cheaper stock of housing so that people do not have to resort to exotic mortgages just to have a basic home over their head.

• Now KB is among the first homebuilders to recognize the error of its ways, and it is returning to its roots as a purveyor of low-cost, smaller homes. In some cases KB is even using the same façades from the go-go years and then shrinking the house that lurks behind them to be half as deep - and about half as expensive.
• When the real estate market comes back, it will not be with a sonic boom. It is likely to be subtle, below the public's radar. (agree! think tech stocks circa 2000-2004 - people are assuming if they miss the bottom of the housing market they're going to leave 20% on the table in 6 months. no no no.)
• In hindsight, the reason for the current malaise is simple: too few buyers. By 2007 more and more people were frozen out of the market - especially the entry-level buyers, who now account for as much as 30% of new-home sales. They're the twentysomething young professionals who rent until they get married or the first child arrives, and then reach for the American dream of homeownership. From 2005 to 2006 some first-timers rushed to purchase homes they couldn't afford with the help of exotic loans.
• Three factors are driving the New Affordability: housing prices, house size, and the government's expanding role in the mortgage market.
• The houses themselves are being radically downsized to meet buyers' budgets. At the peak of the last boom, in 2006, KB's customers craved cathedral ceilings, formal dining and living rooms, and fancy wrought-iron railings on windows and balconies. Today's buyers, KB found, are willing to trade size and amenities for far lower prices. But they're extremely specific about what they want to keep. Buyers welcome houses half as big as the models that reigned at the peak, as long as they offer plenty of bedrooms. They also don't miss the formal living and dining rooms if KB provides a "great room" combining the two in one open space that includes a generous-sized kitchen.
• Bargain-hunters are drawn to these small houses, which look just like the behemoths built in 2005 and 2006. In Beaumont, a community of tract homes 70 miles east of Los Angeles, the Seneca Springs community is dotted with 4,000-square-foot, seven-bedroom Mediterranean homes that KB built at the peak. But right next to them the company is erecting new houses with exactly the same 50-foot façades- and a big difference you don't notice from the street: They're about half as deep and roughly 2,000 square feet. Those homes preserve the community's curb appeal by keeping the façades looking similar and sumptuous. But purchasers love that the new homes boast five bedrooms, and they especially appreciate the pricetag: about $220,000, vs. $420,000 for the big neighboring homes built at the peak (and that now sell for around $300,000).
• Market forces were partly to blame for KB's detour in 2005 and 2006. Builders could sell all the $400,000 homes they wanted, and the margins on those McMansions were a lot fatter than on small houses, chiefly because they could build them on virtually the same small lots as the old-fashioned starter houses.
• Mezger's back-to-basics approach depends on two variables beyond his control: land prices and labor costs. In Jacksonville, for example, the price for finished lots with roads and utilities in place tripled from $25,000 to $75,000 between 2002 and 2006. KB couldn't make money building its old staple and had to build big. By 2006 KB's median price in Florida had jumped from $180,000 to $270,000, and the size of its houses had ballooned from 1,800 to more than 3,000 square feet.
• Today both land and construction costs are falling rapidly. In California's Inland Empire, the price per finished lot has collapsed, plunging from $150,000 at the peak to about $50,000. Labor costs, the single biggest expense after land, are also dropping as construction trades look for work. In Florida, construction costs for a 2,000-square-foot home have dropped to $80,000, vs. $100,000 at the peak, a 20% reduction. The result is that the average sales price there has fallen from $275,000 to $215,000. In the inland areas of Southern California it has dropped from $350,000 to $260,000.

If we truly are entering an era of sustained higher energy prices (with ebbs and flows of course), the era of the McMansion will have peaked circa 2006; big houses will once again be reserved for a smallish subset of society. Most will have to "make do" with 2000-2400 sq feet - oh the horror (the European readers will get a laugh out of that)

So let's review - our future will be filled with staycations in our much smaller homes - sounds like fun! :)

Bookkeeping: 'Rising Tide' Performance Week 44

Week 44 performance of the mutual fund

Comments: After a boring week last time around, we had a lot of excitement this week with large moves Monday, Thursday, and Friday. This bipolar action reminds me of much of the January - March action where crazy mood swings were taking us up/down 2% almost daily. As always human psychology is amazing to watch - yesterday the world was good because Costco and Walmart were accepting a whole new class of consumer (especially the latter) and that was a signal of "strength". The weekly unemployment claims report was 15K less than expected but continuing claims were at a 4 year high, but the market chose to focus on the weekly claim instead of the long term claims (typical).... anything to grasp at for signs of hope. Then today, all that hope was erased when the monthly jobs report showed a fraction of reality. Fear and greed; fear and greed - such a thin slice separating them.

We spent most of the week in heavy cash and short exposure, which served us well every day but Thursday when we got smacked across the head, with a pitcher of Kool Aid (perhaps 2 pitchers). But instead of panicking and rushing in to buy like the lemmings that apparently run Wall Street nowadays, we just sat in our turtle position poking our head to observe but generally just sitting under the shell. That served us well Friday on the horrid reversal. Looking back it would of been preferable to punt our short exposure at 3:59 PM instead of in the morning and noon time, but the Invisible Hand has slapped me on the behind so many times, you become conditioned to see them show up at 3:30 riding on the white horse and killing your short positions. Today the rampaging bears stomped the hand; then chewed it for good measure. As for fund sectors, somehow these coal, fertilizer, and natural gas names continue their relentless move up... crude up $17 in 2 days (cripes!!) helped. Again I found it hilarious yesterday that crude up $6 was ignored, but today (along with the unemployment report) it was pointed at as a culprit for the downfall. As always "it doesn't matter until it does". I guess the new Wall Street logic is crude oil up to $130 is GREAT for the economy, but over $130 is BAD. Yep, that's what 6 years at an Ivy League gets you nowadays - super logical to me. That said, I am worried about next week because in the past commodities (the generals) were the last to fall in a general correction, so we might have that shoved down our throat next week (fair warning - if that pattern plays out next week will stink for the fund, although we have cut back commodity exposure pretty sharply... but we're overdue for a spanking)

Technically, we broke out of narrow range with the action Friday - obviously to the downside. This sets us the market up for a mindset of "sell the rallies" instead of "buy the dips". A quick glance at the charts shows us with potential to head down to April 2008 lows as a first stop, and that would be the 1325-1330 area (currently 1360) so that is only 2.2% down from here (ah, we can do that in a day if we really tried). But generally one would think some pathetic attempt at 'bargain hunting' would happen first so maybe we get some bounce - if we do, I'll use that to re-establish some short exposure I let go into the abyss today. And if that level does not hold, then a retest of the "Bear Stearns bottom" would seem the natural course - perhaps we'll be talking about the "Lehman Brothers bottom" when we get there? More corporate bailouts on the way if we're lucky! Boo Yah! For those of the CNBC inclination, tune in to Kudlow tonight to hear how this is a great thing and the Goldilocks economy aka "2nd half recovery" shall commence in 3 weeks.

The indexes despite a bevy of bulls showcasing their brawn on Thursday, gave up the ghost this week - the S&P 500 lost 2.8% and the Russell 1000 was down 2.6%. Rising Tide Growth was holding up well, even through most of Friday but crumbled a bit there in the last 30 minutes Friday - still we were able to get through with only a 0.5% loss. All things considered we'll take that.

Next week I'll have our mid month update on pledges and some more formal time frame for actual launch - we are having a great month in terms of pledges (thank you). 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).

Price of Rising Tide Growth: $12.185
Lifetime Performance to date (vs Aug 3, 2007): +21.85%

Comparable S&P 500: 1,360.7 (-7.13%)
Comparable Russell 1000: 748.3 (-6.01%)

Fund return vs S&P 500: +28.9%
Fund return vs Russell 1000: +27.9%

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

Bookkeeping: Reversing the Early Week Sale in Perfect World (PWRD)

I sold down my Perfect World (PWRD) position sharply earlier this week around $26.20 [Jun 4: Cutting Back Perfect World for now] I wrote

However, at this point technically we have some technical resistance ahead, both the 50 and 200 day moving averages lie ahead; the 50 day in the $26s and the 200 day around $27. Honestly this is as perfect of a setup as you could ask for from a technical perspective. Sell now right below resistance areas, and rebuy either (a) on a move over $27 or (b) on a pullback. So I'm executing the first part of that strategy (sell) here around $26.20... then for the second part (buy back), if the stock shows strength we'll pay up maybe around $27.50 and get the position back or on a pull back to lower to mid $20s we'll do the same buyback.

Well here we are in the $23.70s, so we can execute the 2nd part of that trade; this is a 9% drop in 48 hours, so we'll take that all day, every day. Now again, I really don't like to buy charts like this where the stock is below both the 50 and 200 day moving averages because the potential for a much larger drop (with no real technical support) is out there, but much like a certain solar company I own, the valuation is getting very compelling down here. (below 15x forward earnings, for more than double the growth rate)

If one were drinking Kool Aid, one could say that a double bottom might be forming, from which we could get a nice bounce. Since I don't imbibe, I'll just say if it pops back to $26+, I'll probably do this exact same trade again (sell as it approaches resistance) and see if it pulls back again or breaks through resistance. March lows were $21 - so that's my downside target - we'll keep building this position up if it continues to falter. For now I am just taking it back to where it was Wednesday; a 1.1% stake.

Long Perfect World in fund; no personal position

Bookkeeping: Starting to Buy Stuff I Don't Like

As I wrote in our weekly summary, if this plays out as past corrective periods - as everything else sells off the commodities (I am using fertilizer, coal especially) will hold up.... and then (if we break that key support on the indexes) everything will be trashed... and then out of the blue yonder people will run (yet again) to the "early cycle" recovery stocks... even though the only cycle we are entering is a recessionary one. They will probably keep doing this every 6-8 weeks for the next 2 years until we actually do emerge from the "not a recession". So to help balance the fund I buy some of these junky names in financials and housing. I actually like (relatively speaking) the 2 investment banks I own, and the housing stocks are just a crap shoot - they all move together.

But I am going to begin small purchases here on this side of the portfolio - we'll know they are bottoming when the market is selling off and they reverse upward; so judging by today's action they are definitely not bottoming. So we'll continue to go incrementally - essentially these buys are made so that in that inevitable period when commodity stocks are taken to the woodshed and the "early cycle" stocks are the flavor of the week, we'll have something working in our favor (we always underperform those weeks)

This is not a large lot - all 4 positions together I only added about 1.25% allocation from cash, just spread it evenly into these names

1. Goldman Sachs (GS)
2. Morgan Stanley (MS)
3. DR Horton (DHI)
4. Lennar (LEN)

The homebuilders, especially, look really pathetic but that's what happens when the psychology changes from unicorns, mermaids and Kool Aid (i.e. "spring 2008 is going to show you housing is back!" <--- something we heard all fall and winter) to reality. Please note - these are not growth stories at this moment in the cycle, and I would not trust any of them in a room alone with your children. In fact by the time Goldman Sachs got done with your child, his piggy bank would be stolen (they're just that damn efficient). But they are part of a barbell strategy of owning some "junk I don't believe in" so when "junk I don't believe in" rallies due to "thesis of recovery I don't believe in" happening, we have something working in our favor.

p.s. after the liquidation of the short exposure this AM, we are back up to 31% stake in US pesos. Again if the market is breaking down in the last 5 minutes or so of the day and the Invisible Hand does not come to the rescue I'll be moving some of that cash back to short exposure, reversing the sells from earlier today. But there is no reason to be aggressively long in this type of environment when economic reality is still far from discounted in stock prices.

Long all names mentioned in fund; no personal positions

Groundhog Day & ECB's Trichet Sends Dollar back to its Bedroom

Here we are at the exact same spot we were Monday - we just had 3 days of down to start the week, (always ending in a spike in the last half hour of the day, out of the blue to keep us over key technical levels), and then a blessed rally yesterday on the "great retail numbers" and "great unemployment numbers", yet here we are, at exact same spot we were to start the week. [S&P 500 at Bottom of its Range]

Anyhow, as we discussed in the weekly round up, we were in the middle of no man's land to enter the week; with a very tight range of 3.5% (1430 on upside, 1380 on downside). Well in just a few short hours we've come down to test the bottom of this range.

I'm doing the exact same thing I did earlier this week - that is lighten up the short exposure as we hit the bottom of the range. Then the game plan is to buy that short exposure back on (a) a rally or (b) a break down below say S&P 1373-1375 indicating a true break of support. We've been so close every day this week (except yesterday) One day, we'll break through this range on the bottom and the invisible hand won't be doing futures buying in the last 30 minutes to create an illusion of a rebound that every computer program across hedge fund land follows through with real buying (we saw that Monday, Tuesday and Wednesday) this week.

But for now I must assume the invisible hand will be doing its magic trick again late in the day and bring the S&P back to support and create a bounce and save the day. We shall see; if I am wrong and the market falls off a cliff late this afternoon I'll be adding back some short exposure that I sold off in quite large dose this AM. We are very range bound and sooner or later we are going to break strongly one way or the other (all economic sense and logic would dictate down but the market has nothing to do with sense or logic)



Further, the calls for "2nd half recovery" are looking more silly by the moment (again readers, let me know when your favorite pundit cries uncle and switches to "1st half 2009" recovery!). As are the calls for the "stronger dollar". Yesterday Trichet [May 24: Trichet Says "Shocks" are Not Over for Economy] shocked the world (pole axing the dollar and spiking oil) by indicating he might be RAISING interest rates in Europe as soon as next month.

• Trichet yesterday said the ECB may raise interest rates as soon as next month, two days after Federal Reserve Chairman Ben S. Bernanke indicated he's finished cutting for now. A near doubling in the price of oil in a year and record food costs are forcing central bankers to look beyond weaker consumer spending and focus more on restraining inflation expectations.

Frankly that surprised me. Now remember, CNBC and all the pundits have been making the "strong dollar" case on this thesis - as Europe follows the US into weakness, their central bank will be forced to cut rates (which will stoke inflation and kill their lower and middle class as well), and not due to any strength in the USA, but simply in RELATION to the lower rates in Europe will the US dollar REBOUND. Woo Hoo. Sounds great on paper (or TV) but I've been posting that this is a bunch of nonsense. But I simply thought the European Central Bank would hold rates steady since they actually give a damn about inflation. I did not think (nor did anyone judging by the crazy reactions yesterday) that the ECB would have the gall to RAISE rates when the Euro zone is clearly heading for a major slowdown. That is textbook Paul Volcker action. And it kind of ruins the whole "The US dollar will strengthen, not do to anything good happening in the US but because Europe will cut rates" theory. Oil is responding in kind screaming up $6 yesterday and another $7 today. More staycations! Book your room soon! (oops, nevermind - your room is your bedroom)

I know economics is boring to most but folks, this is fascinating stuff. I am trying to explain it in "easy to understand" language so the non financial readers of the blog get what is going on in this worldwide drama. There are so many moving parts and things are so global in nature versus even 10 years ago, so it's a kaleidoscope out there. I am getting the most enjoyment out of these stuffy pundits getting knocked on their rear ends by all their wrong predictions! :) But they're stubborn I'll tell you - until the writing on the wall - jump off said wall - and smacks them in the face for a few months straight - only then *might* they say... "oops". But even then, I doubt it.

We'll continue reporting the reality; or at least my very biased version of it ;)

Unemployment Rate

I am not going to take the time or effort to analyze the unemployment report because its a highly flawed piece of garbage that understates reality. Mish still has fun doing it, so I'll refer you to his site if you want to have a reality check on the unreality. But at least the 5.5% unemployment rate (while highly understated in my book) will cause some shock for those who have been lulled to sleep by "2nd half recovery" talk. If you use old methodology for how unemployment used to be figured before the government started messing with the numbers so the sheep of America would not be alarmed you can see we are well in the low to mid teens (source: ShadowStats.com) and have been there for a LONG time; but we're heading back to recession 2001-2003 levels if you use 'real figures'. (the red line below is the figure offered to the sheep and the pundits, who then relay it back to you as "truth") Again once discouraged workers "give up" and just go home to live with mom and dad (even at age 40/50) they no longer are counted in any government report.



So instead of justifying these faulty numbers, all I am going to do is once a month when this report comes out is to point you to a few old posts (weekend reading for those newer to the blog)

[May 10: Finally Some Mainstream Reporters are Figuring Out the "Spin" from Government]
[Apr 2: The Underemployment Rate is Rising]

I will briefly repeat the same trends we've been talking about since fund inception which continue to be borne out over time

• The # of hours being worked is falling, so even the people not being fired are suffering
• Wage growth continues to fall below (or trend at) government inflation figures - if you used real inflation, then wage growth continues to fall pathetically behind that figure. Which means even those employed are falling behind (this has been happening for a decade now, EVEN using the government inflation figures - much longer if you used real inflation - if not for the house asset bubble this would of been obvious much sooner but people have been borrowing from house ATM to make up the ever growing shortfall)
  
• Our main job drivers, once again, continue to be the federal government and healthcare jobs - woo hoo - both of which drive up costs for all of us as taxpayers or people who need health insurance.
• Do you remember the "jobless recovery' of 2003-2004? Back then when the economy was "recovering" people were wondering why job CREATION was not happening at "typical" recovery rates of previous boom/bust cycles. My theory is we are now seeing the other side of that - just like a lot of jobs were not created in 03, 04 (maybe into 05, I don't recall when the economy began adding jobs at a normal pace) - we are now not losing as many of those jobs... because frankly, they were never created - we've had an undercurrent of unemployment (and underemployment - i.e qualified to do blue collar work but your job was shipped away so you work in Burger King) sitting in the shadows for a long time.
  
• Most blog readers are of "better than average wealth" so maybe much of what I type does not touch them due to their economic condition' but I just want to point out which I have in the past that the median wage in America is under $18. That is about a $37K a year job. And half of Americans are below that. This is why I am so grumpy about the evil tax that is inflation and how the "unprecedented" actions to bail out those at the top and ignore the increase in inflation it helps to propagate. Inflation is corrosive to the bottom half (or more) of Americans - I mean literally we'll have very large numbers of people next winter deciding whether to eat or heat their home in the north. So when I type negative things about the economy at large, I am not talking about life for the upper 25% (mutual fund investors, blog readers) per se, I am talking about the majority of Americans - who would never have the means to invest in a mutual fund.

As I wrote the last time the stimulus plan was first proposed, as things degrade later this year and into early 2009 - we'll have another stimulus plan to prop up the economy - urging Americans to spend money they don't have so Walmart (WMT) can profit. Because in the end Costco and Walmart (and gas stations) seem to be getting all these rebate dollars - and sending it back to their suppliers in China (and Middle East).

So once again, here is the daisy chain. Borrow money from our grandchildren (throw even more debt onto their backs), via borrowing the funds from China via US Treasuries, send these funds to Americans in cute check form - who in turn will use those dollars to spend on oil (which we send the cash to the Middle East) or Walmart/Costco products (which we send the cash to China). And this is our path when stripped down to it's reality. Mark my words - we will repeat it within 6-9 months... so expect another check in the mail. Knock knock China - we need another loan.... can you spare a brother another $200 billion?

Steller Trina Solar (TSL) Earnings Masked by Currency Adjustment

In this era where the masses only look at what Briefing.com tells them and/or never actually open up an earnings report to look inside but only react to the "headline" number, Trina Solar (TSL) is giving back yesterday's gains on what I consider to be a stellar report. The stock is back down to the $46 level, so I'll be adding to my position when the market opens as I consider this a gift based on what I saw today. I'll explain the reality behind the numbers below.

As anyone in the market for more than a few months know, earnings are all about "expectations" - Trina Solar reported $0.51 EPS which beat the analysts expectations of $0.48. Considering the small P/E ratio this normally would be good enough but considering its "solar" and people want to game earnings, people were hoping for a larger beat - my estimate was they would actually do something in the $0.60 to $0.65 range. Which they did achieve. Huh? You just said they did $0.51.... how did they reach the $0.60-$0.65 range?

Well essentially the management of Trina Solar, as they are apt to do, pulled a surprise on us (in the past they decided to surprise us with adventures such as starting a new polysilicon plant out of the blue, without any heads up), but this time around they decided to change their currency from Chinese Renminbi to US Dollars. Strange. I have no idea why and there was no heads up for this. Here is their explanation:

• Effective January 1, 2008, the Company changed the functional currency of its operating subsidiary, Changzhou Trina Solar Energy Co., Ltd. (''Trina China''), from RMB to US dollars. This change is in accordance with FASB Statement No. 52, "Foreign Currency Translation", and was based on Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars. During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. Such remeasurements are and will continue to be, to the extent we continue to have such non-US denominated obligations, recorded as transaction gains or losses in the consolidated statement of operations.

So the net effect of said "decision" was a $4.0M loss this quarter due to this currency change. This is obviously not part of their operational business but more of an accounting function that won't be repeating in future quarters. So if we took away this "decision" their net income would of been $16.9M. With this adjustment their net income was $12.9M - essentially they lost 24% of their profit this quarter due to this exchange. But again, this has nothing to do with their core business.

So what would their EPS of been if they had $0 gain/loss from foreign currency? $16.9M / 25.1M shares = $0.67 EPS

And we would of woken up today to a stock probably trading in the upper $50s as Trina Solar beat earnings expectations of $0.48 by 19 cents. But so it goes, and again - the "masses" will just react to the headline number, which incredibly even with losing $4M in profit due to the currency change STILL beat expectations. That's how strong business is.

Just for reference the 3 main competitors who are most like Trina are Suntech Power (STP), Yingli Green Energy (YGE), and Solarfun Power (SOLF). In the last quarter how did they benefit/gain from foreign currency exchange?

1. Suntech Power gained $2.9M due to foreign currency exchange (they earned 33 cents per share, which means 2 of the 33 cents had nothing to do with their business, only foreign currency exchange)
   
2. Yingli Green Energy gained $9.8M due to foreign currency exchange (they earned 25 cents per share, which means 7 of the 25 cents had nothing to do with their business, only foreign currency exchange)
3. Solarfun Power gained $2.8M due to foreign currency exchange (they earned 31.5 cents per share, which means 5.5 of the 31.5 cents had nothing to do with their business, only foreign currency exchange)

So here is the irony in it all - all 3 of their most similar competitors created "earnings" (anywhere from 2 to 7 cents) from the foreign currency exchange... not only did Trina Solar not get that "cheat" to help goose their earnings, they gave away 16 cents worth of earnings due to this decision. It is almost bemusing in a way.

But again, NONE of these companies should benefit (or lose) from the currency exchange in reality - but just like most US multinationals are "beating estimates" by having a weak dollar and hence they get these currency benefits (which would reverse if the dollar ever rallied for more than a few days), these companies have been able to goose their earnings the same way. Most investors again, do not look past the headline number or dig in and see this - they just go off what Reuters or Briefing.com tells them.

So in summary what I am saying is if Trina Solar had not seen any benefits like their 3 main peers and simply gained NOTHING from currency exchange they would of reported 67 cents and beat the estimate by 19 cents. If they had gained 2-7 cents more from foreign currency exchange (like their closest peers) they would of reported anywhere from 69 cents to 74 cents. My goal was 60 to 65 cents (analysts 48). So while the masses believe this was a small beat, the reality is this was a tremendous beat. So we'll buy more on the panic selling this AM.

Back to Trina Solar earnings - gross margins continue to be best in class, repeating the trick from last quarter [Mar 4: Long Suffering Trina Solar Finally Gets Some Relief] coming in at 25.8%, above my expectations and above Trina's own guidance.

And here is guidance which is also upped from last quarter

• For the second quarter of 2008, the Company expects to ship between 43 MW and 45 MW of PV modules and has expectations of total net revenues in the range of $169 million to $177 million. The Company believes gross margin for the second quarter will likely be between 23% and 25% and estimates operating margin to range between 13.5% to 15.5% of total net revenues.

• For the full year of 2008 the Company expects total net revenues to be in the range of $770 million to $808 million, with PV module shipments between 200 MW to 210 MW. The Company is expecting gross margin for the year between 23% and 25% and believes operating margin will likely be in the range of 15% to 17% of total net revenues.

For future margin guidance keep in mind they said 23-25% for this quarter and came in at 25.8%. So they are playing the Wall Street game - under promise, over deliver (Apple is a master of this). All in all, a great report - which the lemmings on the street in their short sightedness will miss. Due to this currency exchange situation I am unclear if my $4.00 target for EPS for 2008 will still be hit since I was incorporating 60 cents this quarter as part of my model but it should be (minimum) $3.80s-$3.90s for the year. But they did up revenue guidance for the year so $4+ should still be do-able.

That said, I am getting tired of management constantly pulling these surprised out of their back pocket, which is leading to an industry leading LOW P/E ratio since you never know what they are going to pull next. Thankfully their operations are so strong it is counteracting the management "surprises".

I'll be adding on the weak open this AM.

EDIT 9:45 AM - I've moved Trina Solar from a 7% weight to 11% weight. This is a $70 stock masquerading as a $46 dollar stock.

Long Trina Solar in fund and personal account

Jeffrey Lacker - my New Favorite Federal Reserve President

After reading this essay in the Wall Street Journal, I'm going to have to move up Jeffrey Lacker as my favorite Federal Reserve participant, trailing only old friend Paul Volcker [Apr 9: Paul Volcker Speaks] as someone who actually realized the unprecedented actions of this Federal Reserve [Mar 22: A Historic 9 Days for the Federal Reserve] are just setting up for more risky activity in the future by unchecked banks. (heads we win, tails we still win) The fact he is stating this while actively involved in the system deserves even more brownie points.

• In a striking insider's critique, a Federal Reserve policy maker said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior and could endanger the Fed's independence.
• ...show that concerns that outsiders, including former Fed Chairman Paul Volcker, have raised about the Fed's actions -- in particular its rescue of the investment bank Bear Stearns Cos. -- are shared by some inside the Fed. Those people -- including presidents of some of the 12 regional Fed banks -- remain a minority. Nonetheless, their views will matter in the months ahead as the Fed, the Bush administration and Congress grapple with the implications of the Fed's unprecedented actions.
• "The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking," a phenomenon called moral hazard, "which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending," Mr. Lacker said, according to a text of his remarks.
• In an interview, Mr. Lacker said that "before this recent episode, there [were] well-understood and well-articulated boundaries around when we would lend" -- to manage short-term interest rates, to help banks deal with temporary shortages of cash, or to facilitate the closure of a bank taken over by regulators.
• "The innovative credit programs and other things we've done have gone beyond previously accepted boundaries. We'll be wrestling with the consequences." The new program could put the Fed's independence at risk, he said. "It crosses a line into what is essentially fiscal policy to direct credit to particular sectors, creating expectations of similar treatment."
• Mr. Lacker said the Fed has already "gotten questions from firms saying, 'I'd like to take over this other firm. Can you help like you helped with Bear?' (pathetic - CORPORATE WELFARE - this is what you BREED - ENTITLEMENT by CORPORATIONS for handouts!)

[May 4: Moral Hazard now run Amuck]

NYTimes: Food is Gold, So Billions Invested in Farming

Thanks to the multiple (5!) readers who sent me this same article - most have been with me for a long while so they know one theme I proposed starting in the winter - the value of farmland and hard assets in the agriculture industry.

I first wrote about it on the blog on Feb 1 [Starting Position in Powershares DB Agriculture Fund]

If I had a way to buy futures contracts on farmland I'd be buying that too. And yes I am very serious. I think values for farmland across the world are going to rocket in the next decade.

Then on Feb 8 [Wheat is the New Corn]

This is part of the very awful cycle I've been talking about since last summer. Take out all the issues about weather, droughts, climate change, whatever. The simple fact is new farmland is not being brought online at a very quick pace. Crop yields are increasing but not nearly enough to support demand.

The way things are going, within a decade farmland is going to have more value than ocean front property.

Then on Mar 12 [Grain Boom May Spark Rural Revival]

I've said in the past if there was an easy instrument to purchase farmland, I'd like to be in it. Even more so in the former Soviet satellite nations where farmland is much cheaper than the American heartland.

Etc. Quite a few other posts touched on this topic, and today in the NYTimes we have a great story outlining that "smart money" is following my game plan. If only I had the funds to follow up on my own ideas. Notice who is in the middle of this all - Blackrock (BLK) who else. [May 8: Blackrock is Fix it Firm to Manage Risky Assets of Others in Distress]

• Huge investment funds have already poured hundreds of billions of dollars into booming financial markets for commodities like wheat, corn and soybeans.
• But a few big private investors are starting to make bolder and longer-term bets that the world’s need for food will greatly increase — by buying farmland, fertilizer, grain elevators and shipping equipment.
• One has bought several ethanol plants, Canadian farmland and enough storage space in the Midwest to hold millions of bushels of grain.
• Another is buying more than five dozen grain elevators, nearly that many fertilizer distribution outlets and a fleet of barges and ships.
• And three institutional investors, including the giant BlackRock fund group in New York, are separately planning to invest hundreds of millions of dollars in agriculture, chiefly farmland, from sub-Saharan Africa to the English countryside.
• “It’s going on big time,” said Brad Cole, president of Cole Partners Asset Management in Chicago, which runs a fund of hedge funds focused on natural resources. “There is considerable interest in what we call ‘owning structure’ — like United States farmland, Argentine farmland, English farmland — wherever the profit picture is improving.”.
• The investors plan to consolidate small plots of land into more productive large ones, to introduce new technology and to provide capital to modernize and maintain grain elevators and fertilizer supply depots.
• But the long-term implications are less clear. Some traditional players in the farm economy, and others who study and shape agriculture policy, say they are concerned these newcomers will focus on profits above all else, and not share the industry’s commitment to farming through good times and bad.
• Grain elevators, especially, could give these investors new ways to make money, because they can buy or sell the actual bushels of corn or soybeans, rather than buying and selling financial derivatives that are linked to those commodities. When crop prices are climbing, holding inventory for future sale can yield higher profits than selling to meet current demand, for example. Or if prices diverge in different parts of the world, inventory can be shipped to the more profitable market.
• Perhaps the most ambitious plans are those of Susan Payne, founder and chief executive of Emergent Asset Management, based near London. Emergent is raising $450 million to $750 million to invest in farmland in sub-Saharan Africa, where it plans to consolidate small plots into more productive holdings and introduce better equipment. Emergent also plans to provide clinics and schools for local labor.
• “We are getting strong response from institutional investors — pensions, insurance companies, endowments, some sovereign wealth funds,” she said.
• The fund chose Africa because “land values are very, very inexpensive, compared to other agriculture-based economies,” she said. “Its microclimates are enticing, allowing a range of different crops. There’s accessible labor. And there’s good logistics — wide open roads, good truck transport, sea transport.”
• Last October, the London branch of BlackRock introduced the BlackRock Agriculture Fund, aiming to raise $200 million to invest in fertilizer production, timberland and biofuels. The fund currently stands at more than $450 million.

Conclusion: Can only hope one day to have the money to invest in the early ideas, and not just blog about them.

Long Blackrock in fund; no personal position

Where will all the Automotive and Airline Workers Go?

Just skimming through all the restructuring/firings of late [May 21: American Airlines Cutting Jobs and Routes], I am wondering out loud where will all these people go to work next? Just looking at the airline industry, in the past week or two alone

• Continental(CAL) became the latest airline to announce cutbacks in its schedule, saying it will chop fourth-quarter domestic mainline capacity by 11%, resulting in about 3,000 job losses.
• On Wednesday, United Airlines, a unit of UAL(UAUA), announced plans to reduce its fleet by 100 aircraft, taking out 17% to 18% of its mainline domestic capacity by 2009, and eliminate several thousand jobs.
• American Airlines, a unit of AMR(AMR), said it would lower mainline domestic capacity by 11% to 12% in the fourth quarter, retiring at least 75 mainline and regional aircraft. Overall capacity will decline by 7% to 7.5%, and thousands of employees will be let go.
• Delta(DAL, which is merging with Northwest(NWA), has announced capacity cuts of about 10%, which will be accompanied by about 3,000 job losses.

I realize this news is great for the "stocks", but being a bleeding heart liberal and all shouldn't I ask what we are going to do with these people? I count about 10,000 new Walmart (WMT) workers, medical transcribers and new federal government workers (state governments will soon be cutting jobs since they actually have to BALANCE a budget - so all we have left is the federal government to soak up these people). [Apr 15: Factories Fading, Hospital Step In] After all these are the "job growth engines" we've been seeing in the job reports (along with the fake construction and financial jobs created out of thin air) Don't even get me started on the automotive side which makes the airline industry look like a walk in the park.

I mean, at some point don't we need Americans who can actually afford to buy new cars (without crazy credit terms like we've seen of late - 7 and 8 year loans) [Feb 13: Car Loans Being Stretched to 7 Years] and be able to afford fly on the airlines? [Apr 8: Now on to Airline Inflation] Or is this going to be reserved for the upper 1/3rd of society? Just asking - being a liberal bleeding heart and all. Obviously we know these people do not deserve health care either because they "don't work hard enough" to deserve it (source: Fox News)...

Perhaps Signapore Airlines or a Chinese or Indian airline will pick up some of these workers - they come cheap! Or when does the day start when hungry Americans looking for a better life smuggle themselves across the border to Canada... to do work that Canadians won't do? Oh the irony of it all.

Oh well, we'll look forward to all the "green collar" jobs the candidates are talking about. Should bring a ton of new job creation here. What's that? We're about 10 years behind most major Western economies on that front? Oh ok. Well don't worry about details like that - 5M green collar jobs will be here soon enough - the candidates pinkie swear. Or perhaps many will return to our roots and become farmers again - I mean that is a product that the rest of the world actually wants. Wouldn't it be sweet to return full circle - a nation of farmers... again. (ruled by the financial elite financed by Uncle Ben of course) Ben, can the automotive and airline workers give you their junk debt so you can give them treasuries in return for a "rollover" loan that last "until credit markets return to normal" (i.e. could be forever). Or is that just reserved for the NYC elite? I mean it would probably be a nice touch to do and lift the burden from all these people - debt for cash - it works in corporate America - why not for the little people? Just asking.

And the service economy beats on.... the pooring of America, and elimination of the middle class right along with it. [Do the Bottom 80% of Americans Stand a Chance?] Two Americas, with kudos to John Edwards, is not only thriving, its accelerating. Conclusion: buy stocks, they don't need Americans.

Short the service economy

This Week's Performance will be tied to Trina Solar (TSL)

Our current #1 position reports tomorrow AM; usually my methodology is to cut back on all positions ahead of earnings but due to the severe undervaluation in this name, I am keeping my entire stake going into the cattle call tomorrow. I'm not sure if this quarter will be "the one" or it will happen next quarter, but the current $3.14 EPS 2008 analyst estimate I find to be completely beatable, in fact by a large margin. I am hoping guidance tomorrow better reflects that. But even at the "$3.14" we have a forward P/E ratio of under 15 for a company growing well over 100% this year, and should be able to grow >50% for the next few years. At the $4.00 or so I believe it can achieve this year in EPS its trading under 12.

Most peers trade at forward P/e ratio in the mid to upper 20s. So if you throw my $4.00 2008 estimate and give it a peer valuation you see where I am going with this one... and why I am not cutting back although we just never know how the lemmings will react tomorrow. Frankly I could make a very valid arguement that Trina should be valued higher than some of its peer group due to its integrated business model and potentially superior gross margins. The only fly in the ointment would be any sort of equity offering as almost every company in the sector has done in their short public life - Trina Solar has yet to do one, so they are overdue. But their cash flow is such they might not need to do one at all.

Either way with such an overweight on one position our performance for the week will definitely be determined by tomorrow's action in Trina.

Long Trina Solar in fund and personal account

Market Seems to like Cabot Oil & Gas (COG) Purchase

I don't see why all the hoopla - it seems like a relatively minor purchase at $600M but the market is loving it, pushing Cabot Oil & Gas (COG) up nearly 9%.

• Cabot Oil & Gas Corp (COG) said on Wednesday it has agreed to pay $602.8 million for producing properties, leasehold acreage and a gathering infrastructure from a private party in East Texas.
• The acquired acreage lies near Cabot Oil's existing property and will enhance its development of the Pettet, Travis Peak and Cotton Valley formations, the company said.
• The tract includes 25,000 gross acres in the Minden area of East Texas. The company said it will finance the deal through a combination of debt and common equity.

I continue to not own enough of this name...

Long Cabot Oil & Gas in fund; no personal position

Monsanto (MON) Plans to Double Grain Yields by 2030; Some have Doubts

Monsanto (MON) is a name I've had on the radar a long while, as part of the global agriculture boom. [Oct 9: Looking Ahead to Monsanto] It has always been deemed 'expensive' but frankly due to it's scarcity value (only one relative true peer in Syngenta (SYT)) it will probably trade at a premium for a long while. The trick for a stock like this is it must be bought during a serious market swoon, i.e. mid March to get a price that can create comparable upside to some other ideas in the fund.

First let's quickly point out the company has come out with a reiteration last week of guidance to double gross profit by 2012

• Monsanto says it still expects its gross profit to more than double by 2012 by increasing productivity and yields to farmers.
• In 2007, the company's gross profit was $4.29 billion. If the company can double that number, its gross profit will reach about $8.5 billion by 2012. Gross profit is the difference between income and the expenses directly attributed to it.

Now on to some commentary today by the company to double yields by 2030 (again we need breakthroughs left and right across agriculture and energy to compensate for a new batch of 2.5 billion humans set to join us by 2050)

• Monsanto Co. Chief Executive Hugh Grant set a bold goal for the company on Wednesday, promising to develop by 2030 new strains of corn, soybeans and cotton that can yield twice as much grain and fiber per-acre while consuming just two-thirds the water.
• A key part of realizing the goal is breeding crops that need less water to survive, he said. (for those readers who were not around in the fall - i.e. most of you - I had maintained then that in the future wars between countries will be fought over fresh water, not oil... err weapons of mass destruction - that will be the ultimate shortage; the one truly non negotiable factor in human life)
• While grain yields have been relatively flat over the last decade, its possible they could double over the next 22 years, said Michael Aide, chair of the Southeast Missouri State University Department of Agriculture. Farmers in southeast Missouri, for example, can grow about 200 bushels of corn per acre, far more than double what they could grow during World War II, he said. Over the last 60 years, yield increases have come in big jumps when new technologies like artificial fertilizer were introduced.
• Monsanto plans to increase its grain yields gradually, Grant said, as the company introduces new strains of crops. The company will use advanced breeding techniques to develop heartier, more fruitful crops. At the same time, it will use genetic engineering to give the plants the ability to withstand pests like corn worms.

Some commentators in this NYTimes story have their doubts

• Much of what is in the commitment are things the company was doing anyway. But Monsanto’s chief executive, Hugh Grant, said in an interview Wednesday that the company wanted to make the goals public “so this isn’t just a bound report on some library shelf.”
• Soybeans, corn and cotton that have been genetically engineered to provide herbicide tolerance, insect resistance or both are widely grown in the United States and several other countries. But they are largely shunned in Europe and some other areas because of concerns about potential environmental and health effects. (that has already begun to change due to economics - as with the environment once costs hit a certain price level, non economic considerations get thrown out the door)
• James E. Specht, a soybean genetics expert at the University of Nebraska, said he doubted it could be done. “The hype-to-reality ratio of that one is essentially infinity,” Mr. Specht said. “Seeing an exponential change in the yield curve is unlikely.” Mr. Specht said that on irrigated farms in Nebraska, soybean yields have been increasing by about 0.6 bushels an acre every year. At that rate it would take 83 years for yields to double from the 50 bushels an acre recorded in 2000.
• But Monsanto executives say that a new technique called marker-assisted selection could double the rate of gain made from breeding. That technique does not involve altering crops by putting in foreign genes. Rather it uses genetic tests to help choose which plants to use in conventional cross-breeding, vastly speeding up the process.
• Moreover, the company is not talking about the United States alone. In some countries, output could be increased dramatically just by introducing modern hybrid corn, whether or not that corn is genetically engineered, Mr. Grant said.
• Bill Freese, a science policy analyst at the Center for Food Safety, a Washington group critical of biotech crops, said some studies had shown that genetic engineering can actually reduce yields. He and other critics also say that the biotech crops developed so far have mainly been aimed at feeding livestock in wealthy countries, not improving the staple crops grown by small farmers in poor countries.
• While Mr. Grant said that skeptics might say Monsanto was exploiting the food crisis to win acceptance for its technology, other people “will say it’s long overdue, and thank goodness the companies are stepping up.”

No position

Commodities Ready to Turn Over?

It would appear so from the reversals we are beginning to see. Our friend in the analyst community [Jun 2: Stop Me if You've Heard this Before - Coal is Roaring] might have nailed the exact near term top in the (coal) sector with his upgrade, within 24 hours. Now that's excellent work. :)

He was on CNBC this morning, you can view the video here, or if you read the blog the past 2 months you have heard it all before - when the stocks were 30-60% lower.

Oh analysts.... such contrarian indicators.

If this pattern plays out as the past 4-5 cycles have - the executioner will come visit the commodity stocks as the market sells off, than we'll hear the "strong dollar" theories and how the market should rally now that the consumer is paying $3.70 gas instead of $4.05, the second half rebound is even stronger of a case, and its time to buy financials, retailers and homebuilders. Then for a period of 7-10 days, we'll watch in frustration as financial stocks rocket up 20% for no good reason other than the hedge fund computers deem that as "buys", and global growth stocks will suffer (and we'll lag the market). That folly will continue for about a week and a half and then in about 3 weeks we'll go back to the same old stocks rallying.... the ones that actually have a solid business case behind them instead of "the results from earnings are gosh awful but we were expecting deathly ill awful so buy 'em up!"

This has been an identical pattern that is to the point it's getting so predictable I am having a hard time believing it will just play out that simply this time around. But just in case it does I am getting my purchases of the 2 homebuilders and 2 investment banks ready to go to launch in a few days or early next week... because it will be "early cycle recovery story and the bottom is in financials" time. Woo.

p.s. folks have you noticed that late day rally EACH of the past 3 days as the "invisible hand" makes sure we close at or above the 50 day moving average. Don't want to trigger those technical traders to sell off their stocks. I am sure it's just coincidence ;) Frankly it's starting to get so blatant, it's getting to the point of amusement. Free markets and all...

Long Ultrashort Basic Material, Ultrashort Oil & Gas in fund; long Ultrashort Basic Materials in personal account

AP: Oil Dips Below $124 on Concern over US Economy

We've discussed many of these issues here in the blog... but a good comprehensive review in 1 story can be found in today's AP story. Oil has finally hit the point where its turned into an exorbitant tax on all things in the global economy. As the consumer of 25% of the world's energy (with 5% of the population) this is one matter when American habits do still have a major effect. Consumers are burrowing into their homes (who ever heard of the term staycatation until about a month ago? Now I hear about it daily) - $4 gas literally forces certain parts of US population to be hostage to their homes or surrounding neighborhoods.

• Oil prices dropped below $124 a barrel Wednesday and after Federal Reserve Chairman Ben Bernanke signaled that inflation had become a more prominent concern. "The stars for a significant correction in crude oil are lining up," U.S. analyst and trader Stephen Schork said in a research note.
• The Organization for Economic Cooperation and Development forecast several quarters of weak growth for most of its 30 members, which include the U.S., Japan, and several European countries, and on Wednesday cut its economic growth outlook through next year.
• Evidence continues to mount that oil prices, nearly twice what they were a year ago, have finally cut into demand.
• The latest MasterCard SpendingPulse survey found that demand for gasoline in the U.S., by far the world's biggest oil consumer, fell by 4.7 percent last week -- which included the long Memorial Day holiday weekend -- compared to the same week last year. Averaged over the last four weeks, demand fell 6 percent last week.
• The decision by some countries in Asia to lower subsidies on oil products also was seen as having a bearish effect on the market. On Wednesday, India and Malaysia joined a growing list of countries which are raising prices for fuels ranging from gasoline to cooking gas. (we started discussing this 2 weeks ago when oil was spiking, as a major risk factor)
• India announced increases which would boost gasoline prices in New Delhi, its capital, by 11 percent. Malaysia said it would hike gasoline prices by 40 percent and electricity for commercial and industrial users by 26 percent.
• Indonesia and Taiwan were among nations recently to take similar steps. (and now demand destruction can begin to happen in these countries, along with all the other Asian entities ex-China)
• "Investors are ... wondering if we've got to the point, with prices around $130 a barrel, if that's too much for consumers to bear," said Rachel Ziemba, an analyst at RGEMonitor.com in New York.

In the end, the problem of high prices is solved by 1 thing: high prices. Demand destruction 101. Now that markets are allowed to be "more free" (most Asian economies are still nowhere near truly free), we will begin to see reality set in. But again, this is a timing issue - demographic growth and industrialization still point to many longer term demand issues - this will be a series of spikes and valleys along an ever upward slope in energy usage. Until alternatives become a meaningful part of the global system (>15%) we should continue to have these problems; and they will be a tax on global growth. I don't see this threshold of alternative energy usage being breached for about a decade or so, based on current information. Hopefully it comes much sooner, so we are not "hostage" to our lack of planning as a nation/globe.

Long Ultrashort Oil & Gas in fund; no personal position

Readers - What is your 4th Favorite Technology Stock and Why?

I need help - I want to create some technology exposure as I can see this being an area that is not subject (highly) to increasingly priced commodities, and would be an area the hedge funds move their money as they panic flee in a sector rotation.

What I'm looking for is something not named Apple (AAPL), Research in Motion (RIMM) or Google (GOOG).... with the following features

1. Not some tiny $500M market cap company that relies on 1 huge customer who in the blink of the eye can destroy the future with 1 decision to switch to a new vendor - I'd prefer something in the $1B to $30B size
   
2. Not a "giant" like Hewlett Packard (HPQ)
3. Not VMWare (VMW) - I know the story and know the risks
4. Not Garmin (GRMN) - I know the story and know the risks
5. Not Nokia (NOK) - I know the story and know the risks
   
6. Not Salesforce.com (CRM) which I've been watching trade at 100 PE ratio for about 5 years now but it always executes ;)
7. The more overseas sales the better
   
8. Has a secular growth rate of at least 20-25% over coming 3-5 years (I'd prefer 30%+ but in technology its hard enough to find 25%)
   
9. Has some barriers to entry in its space
   

Frankly I keep reviewing my watch list and aside from a few networking names, maybe a Ciena (CIEN) I cannot find much to fulfill these requirements. I'm pretty sour on technology as a whole but even the slow growth semiconductor space has been rocking and rolling of late as hedge funds move to the party. I'd prefer something that I'd like to hold for a long while and am grasping for straws. Maybe you all have some up and coming star (again not a tiny small cap name which from past experience I can wake up and be down 50% on a lost contract; too much risk for me). Any ideas, feel free to add a comment to this entry with stock name, symbol and WHY you like it.

Or, perhaps I'm looking for the unicorn - just a mythological creature that does not exist ;)

Bookkeeping: Cutting Back Perfect World (PWRD) for Now

I really like Chinese gaming company Perfect World (PWRD) from a fundamental perspective; after selling off from its guidance after a very good earnings report [May 19: Perfect World - Good Earnings, Light Guidance - Buying the Dip] the stock spent a few days in purgatory before making a nice rebound. However, at this point technically we have some technical resistance ahead, both the 50 and 200 day moving averages lie ahead; the 50 day in the $26s and the 200 day around $27. Honestly this is as perfect of a setup as you could ask for from a technical perspective. Sell now right below resistance areas, and rebuy either (a) on a move over $27 or (b) on a pullback. So I'm executing the first part of that strategy (sell) here around $26.20... then for the second part (buy back), if the stock shows strength we'll pay up maybe around $27.50 and get the position back or on a pull back to lower to mid $20s we'll do the same buyback. Temporarily I'm cutting this position back from a 1.1% stake to 0.2% stake awaiting a move either way by the stock. Due to the higher expenses and 3 days lost for national mourning due to the Earthquake this stock might have some overhang over it, but it's a lot of consternation over nothing in my view.

[May 20: Motley Fool on Chinese Gaming]

Long Perfect World in fund; no personal position

Target Achieved on Ultrashort Oil & Gas (DUG)

On May 21 I opened a position in Ultrashort Oil & Gas [May 21: Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas (DUG)] I wrote

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

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

I am going to buy here in the $25.90s and see if we can sell it for $30+ within a month (that would be a nice 15%). Heck this ETF was trading there last week, so we might get it even quicker.

Well, we are now here at $30 (15% gain) in exactly 2 weeks; so this is an excellent trade especially considering when I bought it we were in super hype mode and people who bought this instrument the previous few weeks were simply being railroaded. I was fortunate to buy it on the day it bottomed; the only day it traded below $26. Recall I mentioned this was a "trade", not an investment or core holding. I am not going to sell it off here because of the market conditions and propensity for a bit more of a gain (plus it acts as a hedge against my long commodity positions) but I'll begin to bleed off this position over the coming week or two I believe... I'd be thrilled with $31-$32 in that time frame, considering my entry point and how quickly the gains have been achieved.

Long Ultrashort Oil & Gas in fund; no personal position

Bookkeeping: Taking Profits in Zhongpin (HOGS)

I don't see any particular news today but Zhongpin (HOGS) is up over $13.00 this AM (+15%) so I am taking profits, and moving this position to just a "holding stake" (0.1% of fund). Earlier this week, they did put out a press release with some updates on their new processing plants. This is a very thinly traded issue with high volatility so I'm taking this 2 day spike as an opportunity to cull the position and will buy back sold shares on a pullback.

• Zhongpin Inc. (HOGS), a leading meat and food processing company in the People's Republic of China ("PRC"), today provided an update on the construction of its new prepared meat facility at Zhongpin's Industrial Park located in Changge City, Henan Province and its frozen and chilled pork processing facilities in western and eastern Henan Province.
• On March 12, 2008, Zhongpin began construction of its new processed meat facility with an annual production capability of 28,800 metric tons, bringing Zhongpin's total capacity of prepared meats to 54,000 metric tons. Construction is moving forward on schedule and the company is currently evaluating and purchasing equipment for the facility. Zhongpin plans to equip its prepared meat facility with over 40 pieces of the most advanced, automated, state-of-the-art equipment, including sausage filling and cooking equipment, from top-tier equipment manufacturers in Germany.
• Construction of Zhongpin's new factory in Luoyang City, Henan province is also proceeding on schedule and the company expects to begin trial production at the end of June. Zhongpin is in the process of signing supply contracts with hog producers in the surrounding areas and has signed letters of intent with several major farms and sales agents for the purchase of more than 2,000 hogs per day.
• Construction at Zhongpin's eastern Henan Province facility in Shangqiu City continues and the facility is expected to begin operations in the fourth quarter of 2008. Once the new western and eastern facilities are completed, Zhongpin will have total capacity of 471,560 metric tons of chilled and frozen pork, excluding outsourcing from OEMs.
• "Our new factories in eastern and western Henan Province will allow us to further expand production of chilled and frozen pork in order to meet demand for high-quality pork in China. At the same time, our prepared meat facility will allow us to expand our product lines to target mid- and high-end consumers by appealing to their evolving tastes and nutrition requirements with a variety of prepared pork products," said Mr. Xianfu Zhu, CEO of Zhongpin. "We are confident that we will complete these facilities on schedule, which will further our efforts to build a leading brand of pork products in China."

Long Zhongpin in fund; no personal position

CNBC: Credit Card Use is Surging, Risking Another Debt Crisis

Again, as I always say "it matter when it matters" - all these "worries" that are cropping up here, there and everywhere have been out there for everyone to see, they've just been conveniently ignored for most of the past 2 months as we drank Kool Aid (and sang Kumbaya) much like we did in September and October 07 as the "damage was contained" and "the Federal Reserve will bail us out, they always do".

Two weeks ago it mattered, last week things didn't matter, now this week (thus far) they matter again. Psychology is just about everything in the short term of a market or an individual stock. So away we go - more and more dominoes are falling as we predicted last summer/early fall. Again, we await the first whispers of "1st half 2009" recovery as the pundits realize "2nd half 2008" recovery is a mythology they created to make themselves feel better. Just send me a comment to one of these postings sometime in the next 60 days when we get the first pundit to start talking about the 1st half 09 recovery....

Remember our path - credit cards used up, 401ks drained, beg, borrow, steal (pawn), then bankruptcy in 09. (an '10) Thats unfortunately going to be the fate for a growing subset of Americans. Still to this day, very little of this future fallout is priced into the market - they are still trying to decide if inflation is an issue for average Americans. And frankly it was one of my thesis for the Mastercard (MA) investment - while everyone was saying on TV a slowing economy will hurt Mastercard (this was before VISA came live) and you better "sell, sell, sell" I was saying ohh... not so much, cash strapped consumers will be piling more debt for every day needs onto credit; after all this is the American way. [October 16: Rebuilding Mastercard] I wrote

Mastercard (MA) got whacked in the summer credit swoon and seems to be thrown into the 'financials' bucket - granted its a financial company but it is basically a transaction company, simple as that. Further, half of its revenue is overseas and I expect that to continue to grow as we get the middle class of Brazil, China, India, et al up and running. They love all things American so credit is the next step (who needs savings in this world anyhow?!)

There are also worries in this name that the stretched consumer is going to slow down but I'd argue that "could" be a positive or at worst neutral as a stretched consumer uses what when he/she doesn't have cash? Credit! I've already been reading how the worst off in the US are paying off their credit cards ahead of their mortgages (and Mastercard does not even have that risk which is another misconception - the banks offering their branded cards are the ones who carry the risk)

And in December 2007 [Mastercard to Benefit from Visa IPO Hype] I wrote

And unlike some commentators, I don't think VISA coming public will hurt Mastercard. You essentially have a duopoly - the only 2 ways to play the increasing plastic based society (cash is trash!), without the credit risk. Further, the more I think about the cash strapped US consumer, and how he/she is turning to plastic to fund gas and groceries (as their discretionary budget evaporates and inflation rips into them), the more I see credit card usage and hence each transactions is just more money for these companies.

So far so good; frankly even the well off are going to put those $70-$80 gas bills onto their card.... let's see how the lower and middle class are doing (and oh yes you on the lower rungs of upper class - I see you too); readying themselves for the 2nd half 2008 recovery I am sure.

• Cash-strapped Americans are ringing up more and more purchases on their credit and debit cards, but there could be a steep price to pay ahead.
• Though the trend is a boon for the companies that issue the cards, analysts worry that there could be long-term problems not only for consumers but for the anemic economy and the already-troubled banks that will be underwriting all that risky debt.
• "Right now what we're seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri. (Obviously Mr Ianieri speaks the obvious truth, and therefore does not work on Wall Street)
• One of the main problems with that is US consumers--and their counterparts in Europe as well--already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt--or the type used in credit purchases--hit $957.2 billion in March, a 7.9 percent increase. (again, as I love to ask - these figures are when we are not even in a (cough) "recession" - what dare we ask happens when we get into one?)
• As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.
• Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor's on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt. (no no no, credit crisis is over - CNBC told me - mid March - Federal Reserve puts on super hero cape and fixes all problems - didn't you see that episode?)
• "It's a disaster, it's a time bomb," Ianieri says. "The credit crisis is a lot more severe than it's being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they're just trying to bide time for these banks." (shhhh!! 2nd half recovery - stick to the script; otherwise we scare the sheep. Government would never do anything like that, shhhhh!!!)
• Visa and Mastercard back comparatively little of the credit actually issued through their cards, meaning they have a low level of risk for defaults and other payment issues. They get paid a fee each time someone uses their cards, and the banks that issue the cards assume responsibility for the debt.
• Lehman analyst Bruce Harting, in his research note on Mastercard, pointed out that the company believes it can duplicate its US business model in countries including Brazil, Hungary, Poland, Russia, India and China, nations where it projects 39 percent revenue growth. (mmmm.... credit.... good)
• "The danger is in painting with a broad brush and casting all consumers as reluctant or unable to spend," says Greg McBride, senior analyst at Bankrate.com. "There are a lot of consumers that are not in the state of distress and can continue to spend in a manner that's not very different than a year or two ago when the economy was stronger. (yes, my blog readers/future investors fall into this category of course) :)

Now folks let me just ask you what happens to these people in the first part of the story when banks start pulling back their HELOC loans, starts cutting the maximum credit limit on their credit cards, stops giving new loans entirely to them, etc etc etc. Oh I know - 2nd half recovery. Coming in 4 weeks to the United State of Subprime....

Long Mastercard in fund; no personal position

Bookkeeping: Starting to Build up Indian Banks

Folks, hide the offspring and avert their eyes - these are charts no child should be exposed to. Oh the horror of it all





I normally do not buy charts like this; I like to buy strength most times, not weakness. But I am hoping a double bottom is being formed with mid March lows in both these names. Further, in the "No Indian Bank Left Behind" program, I am almost obliged to throw these guys a bone. I've not treated these 2 stocks as buy and holds, but more of trading vehicles and the layer in/out approach has actually worked wonders with these two since we have nice profits. I am upping HDFC Bank (HDB) to 1.1% and ICICI Bank (IBN) to 1.2% so this is a mini basket of 2 names of which I am "up" to 2.3% weighting. Not that much really of a portfolio due to my general caution of the market AND the potential for some pain in Asian economies as commodity prices soar. Plus if these names break below their March lows, the potential for much lower prices lies ahead (which is why I don't usually buy these sort of charts)

Folks, what is happening is India is they have this small thing called inflation. So the central bank there is doing the traditional thing, which is to raise interest rates. Banks usually don't like an increasing rate environment. See this is very unlike the United States when, when you have an inflation problem, you hide it under government reports, and say you have no inflation. Then your central bank can have the latitude to cut interest rates from 5.25% to 2.00% (as opposed to holding firm like Europe or raising rates). So you sacrifice the lower and middle class to the dragons of inflation while smiling and saying there is no inflation and even if there was it would "dissipate" in the 2nd half of 2008.

However, even with this gift, our banks which should be benefiting from these lower rates are so mired in the twin pillars of credit debacle and housing debacle that they are still stinking up the joint (remember we hate regulation here in America - and we basically allowed these guys to self police themselves - yee haw Cowboy). These banks are flat lining even with all the King's horses and all the King's men delivering interest rate cuts to them (license to print money for banks). Ah well, such is the socialistic system we live in - rob from the poor, give to the rich. In India they still have old fashioned notions I suppose... and their banks are suffering for it. But we're still talking about 2 giants in the country (they are beginning to open US branches by the way as the "East" continues to eat up the "West"), in homelands that will be growing exponentially for the next 20-30 years.

Long both names in fund; no personal position

Bookkeeping: Some Morning Transactions

Last week, I cut 4 names back on potential breakdowns in their charts. Three of those names immediately reversed (2 of them being fertilizer which seem to move together)

So this morning I have done transactions (reversing what I did last week) in 3 of the names... first Gafisa (GFA) - it broke its exponential 50 day moving average but NOT (in retrospect) it's simple. (see I'm evolving and learning myself every day) :) So I cut back, when in fact since it had not broken its simple moving average I could of held. The stock promptly bounced off that level (mid $38s) to become one of last week's big winners. I gritted my teeth. [58 Stocks Returning 8% this Week] Since that time, peaking at nearly $45 Friday, it has lost $5 bucks straight away in 1 and a half session, dropping to $40 (11%) so I'm getting another chance not to screw this one up, so I will rebuy what I sold off and make Gafisa back into a 1.8% position. Now I am checking both the simple (just over $39) and exponential ($40) moving averages - if it breaks BOTH - then I'll cut this name back again to a lower exposure. Nothing works all the time, so you'll see the triumphs and tribulations here in plain sight as we move forward on this journey.... because the stock did return back to near where I sold it, this "mistake" did not cost much at all.



On the other hand, the 2 fertilizer names I cut back for similar reasons, did break both their exponential AND simple moving averages on a closing basis. Traditionally, you sell/cut back at those points anticipating the potential for further downside. This did not happen in this case. So be it. I said if they reversed and showed strength, I'd pay up and reverse course. This happens alot when a stock is jumping up, down, and around a key moving average. No harm, no foul. So I added back some Mosaic (MOS) and CF Industries (CF) this AM.

I also added some Potash (POT) which I had not cut back on last week.

Current stakes in my trio of fertilizers (I added a fourth name yesterday of course, but these 3 I've held since late last summer)
Mosaic 3.8%
Potash 3.0%
CF Industries 2.4%

I've held Mosaic up to 8% of fund holdings in the past, so I have no problem going higher; much higher if this is the beginning of a larger move (if only my crystal ball would tell me if it was). But, what I do love about this group is it has consolidated for nearly 6 weeks, in a narrow base.... off such long bases come strong moves (we never know whether it will be up or down) - but as I've said since last summer, the fundamentals in this specific group (especially potash producers) are the best I've seen, period. The fundamentals call for MUCH higher prices - even after huge moves over the past 2 years. So we saw some stupendous moves upward last fall and in the spring... after such huge moves generally we get a consolidation/pullback periods. I was hoping/expecting for more of a pullback - maybe we will still get it... or maybe not. Most likely it will take one of those "waterfall selloff" moments in the general market to push these names down in a meaningful manner. But the charts are starting to really firm up... I won't post all 3, but you can see from 1 the same pattern in all. Again, there is (in my opinion) very large market risk at this time so this is the trouble we have with opening much long exposure at this time - but with less than 50% long exposure in the entire fund I'm willing to buy some of the higher quality fare even if things might reverse on me in the near term.



Now that coal has had a huge run, which we enjoyed thoroughly at Rising Tide Growth, wouldn't it be sweet, as that group rests/consolidates we could now enjoy a run in fertilizer of similar magnitude? Then when the fertilizer rests in 4-6 weeks, coal will be ready to resume a new run... and then when coal rests 4-6 weeks after that move... we could... ok ok, I am dreaming but it would be nice ;) Again, could be just another headfake and these fertilizer names could break down in a few days - we never really know - if we see continued strength later in the week or even this afternoon - I'll probably be adding more to these positions. Frankly fertilizer has been our top "sector" weight for most of our public life so we've felt kind of naked without it, but hey coal was a nice blanket in the interim.

I also added some Vale (RIO) as the stock has trailed nicely down to its 50 day moving average, but again if we ever get this "long awaited" commodity correction, all these purchases today will be underwater very quick - this is why we scale in (and out) of positions in pieces.

Long all names mentioned in fund; long Mosaic, CF Industries in personal account

India Warns They too Cannot Subsidize Energy Costs Forever

We talked about this just yesterday [China Leads Asia in Retreat from Inflation Battle]... at some price point these subsidies to cap prices in Asia become unaffordable - first went the smaller countries, now comes India, the last elephant to fall will be China which thanks to Americans sending money in droves every day (via Walmart) can afford to keep subsidizing but if oil begins a new summit ($150+?) it simply hits a point where even China cannot continue to subsidize everything (they are doing it in both the food chain and the energy chain)

UK Guardian: India Must Cap Subsidies, Will Sustain Growth

• India must not further subsidise soaring prices of oil and other commodities to protect consumers, but will be able to sustain high economic growth despite global challenges, the prime minister said on Monday. (that will be a good trick, let me know how that works out for you)
• As his government remains split over how to bail out state oil firms hit by the surge in crude, Manmohan Singh told a leading industry lobby group that a wider political consensus in favour of a sustainable pricing policy was needed.
• The government is concerned about the impact of high commodity prices at a time of slowing global economic growth. (don't you worry, US economy will be rebounding in 2nd half, slated to begin July 1, 2008)
• "We cannot allow the subsidy bill to rise any further nor do we have the margin to fully insulate the consumer from the impact of world commodity prices and oil price inflation," he said. (solution: Print Money. Lots of it - I recommend helicopter drops myself. Works like a charm here - further it creates no inflation; with the correct type of government reporting.)
• Oil prices are up more than 70 percent since mid-2006 and by 0855 GMT stood at just under $127 a barrel, but retail prices of petrol and diesel in India are now lower than they were two years ago. (scary - no wonder there is no demand destruction)
• Policy makers were expected to agree on a package for oil firms -- including a moderate rise in prices of petrol and diesel -- at the weekend, but their efforts have been complicated by fears of upsetting voters in an important election year. (some things never change, no matter what country you are in)
• The oil ministry has suggested price rises of 15-20 percent and officials have described a hike as "inevitable", but any increase is likely to be far lower given the potential fallout for the ruling Congress Party-led coalition and inflation fears.
• The prime minister said fiscal steps taken by the government to tame inflation -- at its highest in more than 3-½ years at an annual 8.1 percent in mid-May and stoking fears of more central bank action -- would yield results. (keep in mind India has been growing 9-11% so 8.1% inflation in a 10% growth world is at least break even... meanwhile in the lovely states we have shoddy growth with arguably 8-14% inflation... err, I mean 3.4% inflation ... with lots of growth.... in the 2nd half)

Bloomberg: India Can't Allow Subsidies to Increase

• ``Petroleum prices don't reflect world trends,'' Singh told the Associated Chambers of Commerce and Industry in New Delhi. ``This situation cannot continue for ever. We need further political consensus to adopt more rational economic policies.''
• Singh is under pressure to increase gasoline and diesel prices to alleviate shortages and narrow refiners' losses from $1 billion a week. He hasn't raised prices in the past 3 1/2 months on concern it may accelerate inflation, already the highest since 2004, ahead of national elections in a year's time. (and you though Valero (VLO) was having a tough time of it)
• Cooking gas prices have been capped since April 2005.
• India's communist parties, whose support helps Singh's maintain a majority in parliament, said May 31 they won't allow the government to raise prices. The communists said the government should instead cut import and excise taxes on fuel.
• Indonesia raised fuel prices by an average of around 29 percent on May 24, the first increase in three years, to cut subsidy costs.
• In China... the government controls prices of gasoline, diesel, jet fuel, coal and power.
• China Petroleum & Chemical Corp. was paid about 7 billion yuan ($1 billion) in state subsidies for oil imports in April, more than what it got for the whole of last year, according to a company official. China controls fuel prices to limit their effect on inflation, which is running near a 12-year high.

Inflation here (ok not here, we have no inflation)... inflation there... inflation everywhere (except for the U.S.). It appears if true market prices were being paid, we'd have a global consumer recession, not just an American/British/Spanish one.

WSJ: Pinched Consumers Scramble for Cash

No surprise here - I mentioned in the fall the path for "no more house ATM for you" American consumers would be credit cards first, drain 401ks (whatever they actually invested, which is very little) second, beg borrow steal (pawn) next, and away we go to bankruptcy circa 2009 last. Real wages stagnant for a decade (using government inflation figures, far worse with 'real inflation') eventually will catch up to you. Keep in mind folks, we are not even "in a recession"; what happens if we "enter" one.

Thankfully issues like this will be resolved in less than a month as the 2nd half recovery commences, and my scenario will not play out. Once July 1, 2008 arrives and the 2nd half recovery begins we won't have to deal with front page stories like this one in the Wall Street Journal - those fear mongers obviously do not understand the recovery story and/or the benign data from government that shows an economy poised to rebound imminently. (cough)

• After a long binge of borrowing, U.S. consumers face a credit crunch and a sagging economy. To sustain their living standards, many Americans are doing what comes naturally: scrambling to raise more cash.
• Sheron Brunner, 63 years old, bought a $250,000 life-insurance policy in 1997, planning to leave the proceeds to her three children. Health problems forced her to siphon her savings. A monthly Social Security check of about $700, her only source of income, doesn't cover her medical bills and rising everyday expenses. It wasn't enough, so this spring she signed what's known as a life-settlement agreement with J.G. Wentworth, a company that buys life-insurance policies and other tough-to-sell assets. The contract transfers ownership of a life-insurance policy to a third party, which then pays future premiums and collects the benefit. Ms. Brunner received about $45,000 for her $250,000 term policy. (unfortunately this is the generation of Walmart greeters I keep talking about; they actually have it well off since many have pensions and decent social security - it is their kids in their 40s that are going to lead the true "work til you die" generation of non savers - just imagine how LITTLE social security will pay for in 10 years after another decade of 2-3% cost of living adjustments, based on government data, while "real life goes up 8-15% a year)
• As consumers max out their credit lines and banks clamp down on lending, many older and middle-class Americans are resorting to pricey, often-risky alternatives to stay afloat. Some are depleting their retirement accounts, tapping 401(k)s for both loans and hardship withdrawals. While 401(k) loans generally carry reasonable interest rates, individuals who take them lose some of the valuable power of compounded returns -- jeopardizing their retirement security in the process.
• Some new fast-cash options allow homeowners to squeeze equity from their houses -- without the burden of monthly payments. One new product offers a one-time payment. In exchange, the company shares in as much as 50% of any future gain or loss in the property's value, typically collecting proceeds when the house is sold.
• Many people are resorting to more conventional means of borrowing: In March, consumers had a record $957 billion of credit-card and other types of revolving debt outstanding -- up about 8% from a year earlier, according to preliminary data from the Federal Reserve.
• Reverse mortgages are gaining new favor. Secured by a home's equity, this vehicle can provide consumers with a lump-sum payout, a line of credit, periodic payments or a combination thereof. Reverse mortgages often involve high fees and costs, which often add up to as much as 5% or 6% of the home value. A homeowner or his heirs must typically sell the house to repay the loan, which becomes due when the borrower leaves the home for more than one year or dies.
• In 2007, 18% of workers had taken a retirement-plan loan within the past year, up from 11% in 2006 (that's 1 out of 5 for the math challenged, up from 1 out of 10 just a year earlier) ;)
  

And the last sentence of the paragraph of the article pretty much sums it all up better than I ever could.... now my question is for all these people - what will you do in "retirement" (see Walmart employment line)

He tapped into his retirement savings instead, taking one loan and one taxable withdrawal. His logic: "Why plan for retirement if you can't make it today?"

Folks, in the end it's just a shell game, transferring debt from one place to another - until you run out of places to hide. But we are still in frantic hiding stage. The bankruptcies will be hitting in 2009...and 2010; just in time for the 2nd half recovery (of 2010)

Conclusion: Buy stocks. It's all priced in and most multinationals don't need us slimy Americans anymore to succeed.

Bloomberg: China Leads Asia in Retreat from Inflation Battle

China remains the inflection point of almost every major bull market at this point; thus we must monitor this Ferrari going at 165 mph down a careening oil slick mountain road. Recall, we are already seeing smaller Asian governments buckle under the global commodity price boom [May 23: Smaller Asian Countries Begin to Buckle Under Oil] and we are seeing the impact of steel [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects] Just speaking from a local perspective the impact on automotive of this steel issue is simply untenable. Hot rolled steel prices have risen from $830 metric ton in April to $1035 in mid May. Folks, thats in 6 weeks; this product was $500 a few years ago (and $150-$200 a few years in the early part of the decade). This industry has paper thin margins in the US as it is... a lot more pain for the Michigan, Ohio, and Indiana area. No subsidies here; just in China.

Bloomberg is out with an excellent article - some very solid pieces from them of late.

• Plummeting currencies did in the first Asian economic miracle. The second may fall victim to surging inflation.
• Central banks from Beijing to Bangkok are losing their bets that a global slowdown would temper price increases. While export demand from the U.S. and Europe may have eased, it has been replaced by rising domestic consumption that has helped push inflation rates in Asia as high as 26 percent.
• The result: In China, Thailand, the Philippines and at least eight other Asian economies, benchmark borrowing costs are lower than the rate of inflation, resulting in negative real interest rates, according to data compiled by Bloomberg. The risk is that prices will spiral even faster, leading to overheated economies and an eventual bust. (hey, same situation here - print Ben print, just imagine how negative they would be if inflation was actually reported with some accuracy)
• ``Unless there are concrete measures to tackle inflation, investors are going to reconsider the Asian growth story and realize it's not as rosy as it seems,'' says Sailesh Jha, an economist with Barclays Plc in Singapore. ``Confidence will weaken, and there'll be a significant correction in asset prices such as stocks as capital flows out.''
• The People's Bank of China, which announced in early December a planned shift to a ``tight'' monetary policy, has kept its main lending rate unchanged at 7.47 percent since the end of 2007, even as inflation soared to 8.5 percent, near a 12- year high.
• Without stronger action by the central bank, ``the eventual correction will come at a much higher price,'' says Kevin Lai, senior economist with Daiwa Research Institute in Hong Kong. ``The more the problems get delayed, the greater the risk. The subsequent bust cycle will be long and painful.'' (sounds vaguely familiar)
• ``Policy makers were expecting slower global growth to bring down inflation and do their work for them,'' says Robert Prior Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. ``That's not going to happen. Monetary policy is incredibly loose, and they have a lot of catching up to do.''
• Bank lending climbed 14.7 percent in Vietnam during the first four months of 2008 after a 50 percent increase last year, and rose 24.4 percent in Singapore in April compared with a year earlier. China's factory and property spending gained 25.7 percent in the four months through April.
• In Russia, the central bank's two rate increases this year have failed to damp consumer prices, which were up 14.3 percent in April from a year earlier, the fastest acceleration in five years.

The World of Shortages theory continues to wreck havoc under the surface. Eventually someone will need to pay the piper.

Bookkeeping: Beginning Starter Position in Intrepid Potash (IPI)

Based on this morning's earnings report and some follow up information from my analyst team (ahem - readers), we've come to the conclusion that Intrepid Potash (IPI) prices their fertilizer 70% by contract, 30% spot in each quarter. For the contracted portion, if last quarter is a representative sample, they priced the contracted portion with a 4 month lag. Assuming April 1 'contract' pricing came in December 2007-January 2008, we should begin to see meaningful upside in Q2. Q3 (starting July 1) should price in March 2008 and the full effects of the rampant bull in potash pricing should be reflected by then. A risk of course is potash pricing falls in the back half of the year, something I would find as a very small probability

[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]

With that said, I still want to hear myself tonight, but going on my analyst team I'm creating a starter stake in Intrepid Potash here in the $48s, with a 400 share buy or $19,600. Due to market conditions and potential for commodity pullback, plus the need to listen to the conference call, I'm starting small - this is a 1.6% stake. I would like to add to this position in the low to mid $40s on a sector pullback, or if the name starts to run on me I'll add as well. I don't expect this to take off tomorrow, but if this pricing mechanism outlined above is accurate the current 2008 estimate of $2.24 EPS should be surpassed by Dec 31, 08; but this will be a very backloaded year.

With that said, coal is a 2009/2010 story and that has not stopped the stocks from creating massive moves in 6 weeks. So we won't know when the market will recognize inefficiencies - you just have to identify them and be ready to latch on, once the whale starts swimming. This new information makes me far more bullish on this name than I was 24 hours ago; again every $100 increase in potash = 70 cents EPS to Intrepid according to their filing today.

We estimate that every $10 per ton increase in the price of potash will have a pro forma annual earnings impact of approximately $0.07 per share.

According to their filing this is their current pricing scheme

Q1 Average: $390 (Jan $357, Feb $397, Mar $417)

Q2 Looks like this - Apr $503, May $532, Jun $582

As an added bonus it appears the vast majority of their sales are domestic in nature; with China short changed in their potash this year, I can see certain Asian friends knocking on their door in the coming year. Again... just about everything is about China nowadays - but while they can slowdown their orders of steel, concrete, metals - keeping their people warm (coal) or feeding them (fertilizer) is going to be a very difficult thing to stop doing; so even if China does implode under its own supersonic growth rate, feeding and energy needs should not suffer. (Note that does not mean American stockholders of companies in these areas won't panic sell on first hint of China slowdown, but that's just American stockholders being American stockholders - very little to do with fundamentals)

Long Intrepid Potash in fund and personal account

S&P 500 at Bottom of its Range

Am I the only one who is having trouble accessing the website today?

Anyhow, as we discussed in the weekly round up, we were in the middle of no man's land to enter the week; with a very tight range of 3.5% (1430 on upside, 1380 on downside). Well in just a few short hours we've come down to test the bottom of this range. Now, for you technical analysis types, I've looked at BOTH the exponential and simple moving averages and both 50 days are sitting nicely at 1379-1380. So unlike last week, both types of moving averages show us the same thing. The S&P has dropped to 1378-1379 so we'll see how the rest of the day unfolds. Generally my strategy is to lighten up short exposure when we head into the bottom of a range and then rebuy that exposure if we break through (no bounce). Now when I did that a week ago Friday (rebuying some short exposure after breaking through "support") we got punished for that, but apparently the simple moving average was still sitting as support. This time, a break below 1375 or so would mean both versions of the moving average will have been broken. Frankly this looks like a text book breakdown; the initial surge down (2 weeks ago) followed by a light volume bounce (last week) followed by a retest down... but that's how things used to work. In this new and improved (managed) markets, we just never know what crazy things will happen out of thin air (see mid April)



More serious students of technical analysis can correct me on this ;) But from where I sit it would be important for the bulls to hold 1380 on a closing basis... if normal historical technical patterns are obeyed. For those of you who don't follow technical analysis, just ignore this whole post and realize we are at a potential inflection point :)

Stop Me if You've Heard this Before - Coal is Roaring

What can I say - this is simply an epic move. As I keep saying this group reminded me of fertilizer last summer/fall - totally underestimated. I am simply amazed by the strength and voraciousness of this move, even as a super bull on the group. Yet another upgrade today in the group and you are seeing some huge earning revisions and price targets across the board - analysts finally "get it" - after about 40-70% 1 month moves across the board. Always timely these analysts ;) Again, these guys focus on 1 industry (career/full time job devoted to 1 sector) yet missed the whole rocketship, only after the ship is in orbit do they "get it"? Where were they 2 months ago when the writing was on the wall i.e. [Apr 7: Posco (PKX) Agrees to 200% Coal Price Increases]? Now come the upgrades? :) Again, EXACTLY the same scenario that played out in fertilizer. Just more "value add" from these fellas.

• A Friedman, Billings, Ramsey analyst significantly raised his coal price predictions and upgraded a major miner to "Outperform," suggesting that demand will far outpace supply through 2010.
• Analyst David Khani raised his price forecast for metallurgical coal, which is used in steel production, by 90 percent for 2009 to $130 per ton. For 2010, he raised his expectation by 130 percent to $250 per ton.
• For steam coal, used in boilers to produce electricity, Khani raised his predictions by about 25 percent in 2009 and 2010.
• Based on his new price expectations, he upgraded Massey Energy Co. -- the fourth largest U.S. coal producer by revenue -- to "Outperform" from "Market Perform."
• Khani noted that lower supply and booming international demand is keeping the metallurgical coal market extremely tight. The steam coal market in the U.S., he said, is undersupplied as power generation demand accelerates the need for the commodity. He suggested that supplies will dwindle at the end of next year and prices should rise at a rapid rate.
• The analyst lifted his 12-month price targets for all the U.S. coal companies he covers, and added Patriot Coal Corp. as a "Top Pick."
• Risks: Khani said a weakening global economy, increasing credit defaults and soaring prices for drybulk ships -- which transport coal overseas -- could all weigh down the sector's growth rate.

TheStreet.com has an in depth article out today as well, nothing new to our readers who have been following along this story before the mainstream jumped on [Dec 6: Coal Stocks Quietly in Bull Market] Judging from web traffic in which I'd say about 1/2 of my Google hits the past few days are some incarnation of "coal" (just like 3 months ago they were some incarnation of "fertilizer" or "agriculture" or "rice") I can see the story is catching on. Which again, makes me short term concerned about the group.... but we'll keep riding with what we have left.

• The price of U.S. coal futures solidly crossed above $100 per ton this month, more than double what they were six months ago.
• About two-thirds of the world's coal currently goes to fuel electrical plants and the rest goes primarily into steel and concrete production. New demand is coming from emerging markets. Together, according to U.S. Department of Energy estimates, China and India will account for 70% of the increase in world coal consumption over the next two decades.
• The biggest difference is that global supply conditions have fundamentally changed over the last year, especially in the two largest consuming countries.
• China, the largest producer of coal in the world, is no longer coal self-sufficient. The booming economy was made possible by more electric power and steel plants, which both require coal to operate. The Chinese will eventually have to bring in more shipments of coal at higher prices, putting more upward pressure on global seaborne coal prices to sustain economic growth.
• The story is nearly the same in India. Despite its reserves and production, India is not coal self-sufficient either, and has reduced exports too.
• Supply disruptions and the lack of coal self-sufficiency in Asia and coal supply disruptions have created an immediate global problem.
• Australia is normally the largest exporter of coal in the world. Last year, Australia accounted for 65% of the world's coking coal exports. But, due to disastrous floods, six of the largest coal exporters in the world legally failed to deliver on contracts. This is a huge drop in supply.
• Normally, other coal exporters would fill the gap. But South Africa has experienced structural power shortages and Russia is focusing on exporting gas, not coal. So that leaves the business to other players -- like the U.S. coal companies that also benefit from a lower dollar exchange rate.
• New coal capacity can't be turned on overnight. It takes time, money and corporate/government partnerships to create new integrated mine-railway-port projects for coal. (sounds a lot like potash fertilizer, eh?)
• While many coal production projects have been announced worldwide, these are not likely to have an impact on current supplies until 2010. In the meantime, prices for available coal will continue to climb.
• The largest U.S. exporter of coking coal is Alpha Natural Resources(ANR), with a 22% market share of exports.
• The coming higher coal prices will drive larger public companies to buy into coal companies to ensure they have supplies. Even smaller coal companies with poor earnings records are candidates for bolt-on acquisitions. (we've discussed this in the past - just another potential upside to these stories)
• Take a look at Patriot Coal(PCX). It posted losses last year, but the stock is up 190% just in the last six months. The acquisitions, new capital raised and higher coking coal prices are making investors salivate over the potential returns.

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

Intrepid Potash (IPI) Solid Quarter - Future Looks Bright

Intrepid Potash (IPI) which I deemed would be the hottest IPO of 2008 [Apr 18: You Thought Visa (V) was the Hottest IPO of 2008?] has it's first earnings report as a public company and the results are as expected - very good.

This quarter is VERY understated versus what "market prices" for potash now bear as the company was selling potash (70% under previously negotiated contracts it appears) at average $325; some market pricing is double that now.

• Intrepid Potash, Inc. (NYSE:IPI - News), the successor entity to Intrepid Mining LLC, today announced first-quarter 2008 results with net income of $33.1 million, compared to last year’s first quarter net income of $6.4 million and exceeding full-year 2007 net income of $29.7 million.
• On a pro forma basis, assuming a 38.5 percent effective tax rate and the pro forma diluted current share count of 74.8 million common shares for Intrepid, pro forma net income per share would have been $0.27 per share in the first quarter of 2008 as compared to $0.05 per share in the first quarter of last year.
• During the first quarter, Intrepid produced 224,000 short tons of potash, a 3 percent increase over the 218,000 short tons produced during last year’s first quarter. First and fourth quarter production typically exceeds second and third quarter production as a result of the evaporation cycle at our solar facilities that occurs primarily in the spring and summer months.
• Intrepid sold 213,000 short tons of potash in the first quarter at an average FOB the mines or net sales price of $295 per ton as compared to 209,000 short tons at an average FOB price of $178 per short ton during the first quarter of 2007. Intrepid reports tons and per ton price and cost data in short tons; converting our $295 per short ton price to metric tonnes (“tonne”) would be the equivalent of a $325 per tonne first quarter average FOB price. The $117 per short ton increase in selling price was achieved despite having committed approximately 70 percent of our first quarter sales volumes at guaranteed prices that were primarily negotiated in September 2007, before the significant increases in potash pricing.
• Our posted price for red granular FOB Carlsbad has increased progressively in each month of 2008 from $317 per short ton at the end of 2007 to $357, $397, $417, $503, $532, and $582 per short ton for January through June, respectively. We estimate that every $10 per ton increase in the price of potash will have a pro forma annual earnings impact of approximately $0.07 per share. (quite staggering when you think about that level of increase)

Now the company does not indicate in future guidance how much of their future production is already under contract (at lower prices) versus open to being sold (at much higher prices) so it's hard to estimate the future prospects; however safe to say - analysts are understating the growth. They are going to be able to do almost 900K (short) tons for the years but the question is are they getting $300, $350, $400, $450, $500, $550 etc, and when the price increases begin to show up (which quarters?). Without that sort of specific guidance it is hard to make a judgement.... perhaps in the conference call they'll give more detailed info. But based on their guidance for every $100 increase in pricing they will derive an additional 70 cents a share.

No position (yet)

US News & World Report: Peter Schiff's Worst Case Scenario

We've highlighted Peter Schiff from time to time in the blog, mostly because he agrees with me. ;) [Mar 22: Financial Turmoil Raises Worries of Deeper Recession] Also since has a lot larger voice than I do, appearing frequently on TV to try to counterweight the "everything is fine, no recession, and even if there was one it will be over in 6 months crowd... and did I mention inflation is benign" crowd. Good to see someone like him making it into mainstream (non financial) press publications although he is deemed an "Ultrabear". I guess the truth hurts? Now my job is to balance his type of commentary which I find extremely true and in fact verbatim in many areas (remember, it overlays with most of what I say so therefore how could it not be true - hah), with what I see as the market view. Remember the end goal here is to make money, not be intellectually correct. There are many intellectually correct (but broke) bears from the tech bubble for example - you can be proven right in the interest of time, but if you lost all your capital proving your point, did you really win? Remember the most famous of quotes - "The market can stay irrational longer than you can stay solvent."

I'll just copy the story verbatim since there is little need to add my typical snarky commentary; one highlight is the commentary about what happens if China allows their currency to increase - talk about the perfect storm for the United States of Subprime.

Schiff spent the past decade urging brokerage clients to jump ship from the American economy ahead of what he views as inevitable pain caused by a toxic cocktail of lax monetary policy, wayward spending, and tougher competition from all corners of the globe.

Even with some pain already felt as America's economy stumbles, Schiff saw nothing but downside in a recent chat with U.S. News. You'll want to buckle up for some characteristically apocalyptic talk from one of the gloomiest market watchers around. Excerpts:

Say something positive about the U.S. economy.
There's nothing good to say about our situation. The policies both the Fed and government are pursuing are making the situation worse. We've been getting a free ride on the global gravy train. Other countries are starting to reclaim their resources and goods, so as Americans are priced out of various markets, the rest of the world is going to enjoy the consumption of goods Americans had previously purchased. This is a natural consequence of this phony economy. If America had maintained a viable economy and continued to produce goods instead of merely consuming them, and if we had saved money instead of borrowing, our standard of living could rise with everybody else's. Instead, we gutted our manufacturing, let our infrastructure decay, and encouraged our citizens to borrow with reckless abandon.

So what are you doing about it?
I'm getting my clients' money outside of the United States as fast as they can send it to me. I've been recommending that to my clients for close to 10 years. You've got to own resources and energy. I was saying oil was going to $200 a barrel in 2002. I've been buying gold, silver, industrial metals, and all kinds of stocks. My main theme is the global economy will survive and the U.S. economy is a disaster. Everything is about how you benefit from the increased purchasing power and rising standard of living in the rest of the world.

OK, where are the best non-U.S. markets this year?
I still like Singapore, Hong Kong. Asian markets are the place to be. I like resource markets like Scandinavia. I'm spreading my chips around the world. I'm just avoiding the United States.

What are your best or worst calls through this downturn?
I've been bearish on bonds. U.S. bonds have lost a lot of real value but not nominal value. I still think that's going to be proven to be correct. While the housing bubble was inflating, I was telling people to rent. I was telling people to get out of tech stocks in 1998 and 1999. They kept rising, but then they collapsed, and I turned out to be right. The reality is I don't think I've been wrong on anything. (lol)

Most people disagree with that sort of pessimism. If you're staying in the United States, how do you invest?
If you want to be in U.S markets, you avoid anything connected with the American economy. You avoid retailers, the home builders, the financials—anything having to do with consumers buying something or paying back the money they borrowed. If you want to invest in U.S. markets, stick with exporters and resource companies. I've been saying that for five or six years; I haven't gotten anything wrong. We shorted subprime mortgages. I have clients that made 10 times their money. We've never sold an oil stock. We've never sold a gold stock.

Why don't you think soaring oil, grains, or commodities prices are the next bubble?
These prices do not constitute bubbles. They simply constitute the repricing of goods to reflect the diminished value of our money. The way you can tell there's not a bubble is that these markets are clearing. People are buying food and eating it. They're buying gasoline and using it. Speculators aren't buying gasoline and warehousing it in big facilities because they think the price is going to go up. At the same time, we've increased the supply of money dramatically, and the Fed is increasing it even faster now to deal with the bursting of the housing bubble. The only thing that can happen is for prices of commodities to rise to reflect the equilibrium of a greater supply of money. It's not even that oil prices are going up. Oil prices are staying the same. What's happening is the value of money is diminishing, so we need more units of currency to buy the same amount of oil or wheat or corn or whatever.

How about some predictions?
• I think the stock market is headed lower. Gold is going to be $1,200 to $1,500 by the end of the year. That puts the Dow at a less-than-10-to-1 price ratio to gold. Right now, it's about 13 to 1. That's another 30 percent drop in the real value of stocks by the end of the year if you price them in gold. The Dow was worth 43 ounces of gold in 2000. It'll get to 10 by the end of the year and continue to fall from there.

• Oil prices had a pretty big run and might not make more headway by the end of the year. But we could see $150 to $200 next year. I don't think oil will hit $250 because there will be enough destruction of demand in the United States to keep it from doubling. The big problem for us is if the Chinese substantially allow their currency to rise. It could increase at least fivefold against the dollar over the span of a year or two. That reduces the price of oil by 80 percent for 1.3 billion Chinese. Consumption would go through the roof, and that will drive prices through the roof for us.

• At a minimum, the dollar will lose another 40 to 50 percent of its value. I'm confident that by next year we'll see more aggressive movements to abandon the dollar by the [Persian] Gulf region and by the Asian bloc. That's where the stuff really hits the fan.

You're a Ron Paul adviser. He's out of contention, so who wins the election, and what happens then?
The Obama presidency will be like the Jimmy Carter presidency on steroids. I'm pretty sure it's Obama because the economy will be so bad into the election that as damaged a candidate as the guy is, I don't think a Republican could beat him. I think Ron Paul could've had a slim chance because he was different enough.

So how bad do you think this economy will get?
The other problem we'll have during those years is civil [unrest]. There will be a big increase in crime. People are going to be hungry. People are going to be cold. There's a sense of entitlement in this country, and when a lot of people used to having things suddenly don't, everybody looks for someone to blame.

Really?
We're going through a very rough period in our history. In many ways, it's going to be worse than the Depression.

Bookkeeping: Weekly Changes to Fund Positions Week 43

Week 43 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: 31.9% (vs 22.8% last week)
50 long bias: 47.2% (vs 49.3% last week)
9 short bias: 20.9% (vs 27.9% last week)

59 positions (vs 61 last week)
Additions: N/A
Removals: FTI Consulting (FCN), Consol Energy (CNX)

Top 10 positions = 28.2% of fund (vs 33.2% last week)
28 of the 59 positions are at least 1% of the fund's overall holdings (47%)

Major changes and weekly thoughts
Much of the same this week as many in the past, and I believe many in the future. Continued deteriorating economic conditions but "not as bad as expected" so we continue to muddle along. Remember, as long as the conventional wisdom is things will be better "in 6 months" (they never really tell us which 6 months) we can continue this type of action for a long time. Along the way I expect a few periods where bad news overwhelms and the market takes a dip, but it appears it will take a lot of bad news in a short span to trigger this and with the parody that are government reports, "better than expected" can be seen on the economic front "forever"? :) At it's basis the stock market should be a value of future earnings; we've already outlined the case that currently fourth quarter 2008 earnings are showing to be 60% higher than fourth quarter 2007. If this comes through, than I'll be the first to say I underestimate the roaring come back of October - December 2008. It seems a bit fanciful to me, but on the basis of that set of earnings one could say the market is a decent value. That appears to be the current mood, and with light volume we can be moved quite easily in any direction on a day to day basis.

Right now, the conversation has moved from the "credit crisis" to "oil". What is funny (to me) is many times the market would rally WITH oil rising, as energy stocks have come to dominate more and more of the S&P 500. So that was a "good thing". Now the same people giving us that thesis say the market should rally with oil falling as well, because that will help put a lid on inflation/help the consumer. So once again it's the "have it both way" pundits - when oil is up, it's good because it helps stocks in the S&P 500, and when oil is down it's good because it helps consumers and producers avoid ever higher prices. Conclusion: No matter what the news, it's a good thing. That's unfortunately, how Wall Street seems to think, which is why those of you who are right brained will constantly be frustrated ;) I myself am right brained, but try to revert back to 4th grade level thinking when trying to explain why the stock market can rationalize everything. It serves me well; along with my heavy drinking of Kool Aid. But on a serious note - this is one of those periods where I feel I don't have any near term advantage - most stocks I like best have made huge runs with no meaningful correction, and stocks that could benefit from the "2nd half recovery" are based on a thesis I find completely baseless. I've been typing this for a few weeks now, so I'll continue down that path and remain patient, waiting for juicier pitches to hit.

For the fund while we mentioned last week it was possible that the market would make a bounce after a very heavy selloff, I mistakenly assumed the charts would dictate a further move down. I also ran out of Kool Aid last week which also weakened my rational thinking skills, and turned me too bearish. Now with stocks restored, I can see the market should (and deserves) to go up 50 of every 52 weeks even in the worst credit and housing crisis since the Great Depression. ;) So we took a hit, and since this is one of those periods I have no good feel on the near term direction of the market I have raised cash to a high level, but also lowered short exposure since we are in the middle of a trading range on the S&P 500; 1380 on downside, 1430 on the top side. That entire range is only 3.5% so we should know sooner rather than later which way the next move is. I am not doing much these days, other than adjusting short vs cash allocations as we wait to see how things play out.

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 of the blog under archives.
Some of the larger changes (chronologically) to the fund below:

1. Monday, we BBQ'd - enjoying the last time it won't cost a mortgage payment to do so.
   
2. Tuesday, we began to rebuild a position in dry bulk shipper DryShips (DRYS) after the stock fell 27% in 6 days to the mid $80s.
3. We closed a position in consultant FTI Consulting (FCN) - a high quality company that I still like the long term positioning of, but I am trying to narrow the portfolio even further and can see more upside in other areas.
4. I cut back 4 positions for technical reasons (breaking key support level), all but 1 proceeded to disobey the technical condition and bounce back the next day - nothing works all the time.
   
5. Wednesday, a few names in the natural gas area pulled back to nice support area - so we added to both. I did not buy the 3rd name, Cabot Oil & Gas (COG) hoping to see it hit $57... which it did later in the week but I was not at the computer at the time or apparently not paying attention when it happened so missed opportunity there.
6. Thursday, we began rebuilding a stake in Chinese educator New Oriental Education (EDU) on a breakdown to support on "no news". We gave some speculation but it appears with time since, the news is that the earthquake will effect future results. Makes sense but doesn't change the business for the long run.
7. Late Thursday, I took out my last layer (I still hold a 1% stake which I won't sell) of Alpha Natural Resources (ANR) after a 60%+ 1 month run. Amazing. Friday, I decided to winnow my coal exposure to concentrate on 3 names instead of 4 (I might go back to 4 at a later date), and of the 2 names more focused on thermal coal I decided to stick with Arch Coal (ACI) and eliminate Consol Energy (CNX). I like every name in this sector for the same fundamental reasons - just trying to find some relative outperformance - Arch Coal has had a good month but at this point after some other names have had such huge runs it has become a more compelling valuation versus the group; so I moved some of my Consol Energy sales directly into Arch Coal.

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.

AP: Heating Oil Sticker Shock to Hit New England

We've been discussing for quite a while the lag effects of inflation on the consumer - while many are complaining about their costs today, much of it has yet to really hit the consumer. This is part of the reason why I find any second half recovery almost criminal in nature to sell to the public - that said the stock market MIGHT go up, we never know - but it won't be an economic recovery in the 2nd half. One area that inflation has not even begun to be seen is home heating - for those of you following along we've been heavily into coal (since early last fall) and natural gas (since late in the winter). As we've explained in the past, air conditioning rates will go up this summer but due to long term contracts the real hit will be NEXT summer. Same goes for winter - we didn't feel almost any of the pass through costs this winter. Those of you in the north, start budgeting - your next winter's bills are going to begin to show "inflation" (and they won't fully discount the increase either because of the regulation in the industry).

Now, the company line is, and has been "inflation will abate in the 2nd half as the economy slows" - almost every pundit and Federal Reserve official whispers these sweet nothings in our ears. I'm going to take the other side of that trade (as I have since blog inception) and say, inflation is going to whack you along the head in the 2nd half and 1st half 2009 (except there will be no inflation in houses, iPods and flat panel TVs - none of which you can eat or use for energy; ok maybe you can burn them for some short term heating) So therefore the government reports will show only minor inflation. [News of the Day - Inflation]

So we can look forward to another year of government statistics telling us, since home prices are going down, and electronics continue to hold steady - inflation is steady as she goes. Meanwhile the few of you out there who are forced to buy non essentials like "food", "toilet paper" or "home heating" are going to see a different story. But don't you worry, you can buy a SUV for 8% less than last year. I'll be officially striking all government reports for the next year (err, decade), including this Friday's jobs report - for a truth check have some fun with [Employment Reports and More Fed Actions] - keep in mind, this is a government that somehow told us that the economy added 45,000 construction jobs last month in their "estimation" :) Nice! Nothing like a nice steamed brew of Kool Aid on a Friday morning. But let's get back to those poor suckers in the northern 2/3rds of America. And readers, let's count down the days until Congress trots out those utility CEO's so they can berate them publicly in the "Congressional Oversight Meeting into Predatory Pricing of Utilities". Instead of said Congressmen/women looking into the mirror to see the major culprit.

• While people in most of the country may be worried about their summer air conditioning bills, many residents in the Northeast are way beyond that: They're already thinking ahead to next winter's heating bills. And what those who heat their houses with oil are seeing is giving them sticker shock.
• Retail heating oil prices have risen to more than $4.50 a gallon, nearly double what they were last year at this time.
• Consumers -- already on edge with rising gasoline and food prices -- will probably be outraged when they calculate their oil bills for next winter, said Jamie Py, president of the Maine Oil Dealers Association. (oh they will be so outraged, thankfully the 2nd half recovery will make them a bit less outraged)
• The angst over heating oil prices is particularly acute in New England, where a higher proportion of people use oil as their primary heating source than any other region, ranging from more than 75 percent in Maine to about 40 percent in Massachusetts.
• "If prices still keep going up, they're going to find people frozen to death next winter because they won't have the money to buy oil," Foss said.
• Bangor-based Webber Energy Fuels, which operates across Maine and parts of New Hampshire, has been selling fixed-price programs at $4.70 to $4.80 a gallon for next winter, said President Mike Shea. Last year at this time, the price was $2.50 to $2.60.
• The residential price of heating oil rose 59 percent from the first quarter of 2007 to the same period this year. (thats a tad higher than the government inflation but not to worry, you can buy Tshirts for 1% higher than last year - buy Tshirts, burn them to heat your home and hence you have no inflation)

Again this is just home heating oil - the pass through effects of coal and natural gas will take much longer to filter through the system due to contracts and regulation. But we can look forward to years... and years... of higher energy costs. Let's all cheer for that global recession so we can save a few bucks this winter. And let's keep voting down solar, wind, and any other alternatives - go team Congress!

This Week's Poll Results - Should Exxon be Forced to go Green?

I did not want to voice my opinion on this week's poll [May 28: What's your Opinion? Should Exxon go Green?] since I don't want to have any influence on the results, but I have to say I was surprised by the results.

With 117 votes, "No, their job is to make money at their core business - nothing else" won with a 63% majority but "Yes, they should branch out and be working to the greater good" had a much stronger showing than I expected with 37% of the votes.

Myself, I agreed with the majority - I consider that to be the 'conservative' stance (libertarian?), while working for the greater good would be the more liberal stance. Business is business - either government or companies who choose alternative energy as a profit making venture can go down the path of "green"; an oil business is just that - an oil business. The one gray area is one could argue they should go green to help balance out their long term business in case "green energies" do take over in 25 years, but if they believe the best profit opportunity is to stay solely on the current path, then they seem to have made that decision - the core business is where the dinero is. If their judgement is incorrect; than Exxon will be out of business in 30-40 years. Unfortunately CEO's lifespans are much shorter than that, so this makes the arguement - do managers really manage for 15, 25+ years out? Or just long enough to maximize profits during their tenure? Somehow I feel the latter in most of America. Contrast that with say, a Toyota Motors (TM) which has a 25 year business plan.

Anyhow interesting results to take the 'pulse' of the readership.

58 Stocks Returning 8%+ this Week

Despite a bounce back week in the market, there were not a lot of individual moves that were too impressive. Below is a list of 58 stocks that fit the following criteria

1. Market capitalization >$2 Billion
2. Stock price $10+
3. Average volume 100K+
4. Weekly gain of 8%+

As always green we own, and blue we've owned or discussed in the blog. This was another good week for Brazil, and some of our biggest winners continue to roll on and on.. (and on). Even I am getting tired of seeing them make this list week after week. ;) Indian IT/outsourcing names (darlings of 2005/2006) made some earnings related moves, and a few Chinese names also made the list. In America, it's pretty much beaten down tech shares or "pooring of America" retailers - the exception being Polo which benefited mostly from "overseas sales" - what else.

I do like creating this list each week because sometimes it signals movement in stocks I have one (lazy) eye watching and/or a brand new names. In this category this week 2 names perked my interest - EnergySolutions (ES) is a name I have never heard of which came public in November 2007; my first thought is the market is running up any company, regardless of quality with the name "Energy" or having any business line related to it, so it's most likely just hype. But ES looks sort of interesting as there are very few ways to trade the nuclear story, and this company specializes in removal of nuclear waste. A growth story? Certainly could be if the world begins to move down the path France has taken (80% of energy from nuclear) Now with that said it takes MANY years from planning to building to getting a nuclear plant up and running so it's not exactly 'fast money', but all it takes in the market is the right story, in the right sector and a stock can go from unknown to Jim Cramer fame (and up 50%) in a matter of minutes. This is exactly the type of name he would hype. With that said, it had a pretty good quarter so we'll keep it on the radar.

The other name for you natural gas junkies, and Chesapeake Energy (CHK) fans [May 1: Today's Interesting Reads -> Meet Mr. Gas] is Sandridge Energy (SD), which I've heard of from a couple of places now. First one of our readers, "Madhatter" has a blog where he breaks down some large hedge funds holdings and this name came up when he was analyzing Lone Pine Capital's (Steven Mandel's) holdings, so that perked my attention since I'm on the lookout for interesting natural gas plays. Then the Motley Fool reports the CEO was the cofounder of CHK, so in this type of business you want management who has this level of experience. [May 12: A Chip off the Old Chesapeake] CHK's CEO is infamous for buying stock, he does it in good times or bad which shareholders just have to love - and it looks like Sandridge's CEO Ward is of the same cloth.

So these are just example of how we continue to build watch lists for potential future buys and/or one company can lead to another... you just never know where you will find a new idea.

Symbol	Company Name	% Price Change 1 Week
FL	Foot Locker Inc	20.9
MRVL	Marvell Technology Group Ltd	20.8
HXL	Hexcel Corp	17.4
ENER	Energy Conversion Devices Inc	17.1
RL	Polo Ralph Lauren Corp	16.9
ES	Energy Solutions Inc	16.7
PVA	Penn Virginia Corp	15.7
BIG	Big Lots Inc	15.0
GFA	Gafisa ADR	14.1
CTSH	Cognizant Technology Solutions Corp	13.8
CLF	Cleveland Cliffs Ord Shs	13.5
ANR	Alpha Natural Resources Inc	13.0
MTL	Mechel ADR Rep 3 Ord Shs	12.8
GA	Giant Interactive Group Inc	12.7
SOHU	Sohu.com Inc	12.5
SAY	Satyam Computer Services ADR	12.4
SDA	Sadia ADR Rep 3 Pref Shs	12.3
IMA	Inverness Medical Innovations Ord Shs	12.2
BYI	Bally Technologies Inc	12.1
MR	Mindray Medical International Ltd	12.1
PCX	Patriot Coal Corp	11.9
SD	SandRidge Energy Ord Shs	11.9
MA	MasterCard Inc	11.9
DLTR	Dollar Tree Inc	11.8
V	Visa Inc	11.7
BRCM	Broadcom Class A Ord Shs	11.6
ANSS	Ansys Inc	11.3
TRMB	Trimble Navigation Ltd	11.3
FLS	Flowserve Corp	11.3
ITU	Banco Itau Holding Financeira ADR	11.2
DCI	Donaldson Company, Inc	11.1
INFY	Infosys Technologies Ltd	11.1
BRP	Brasil Telecom Participacoes ADR	11.0
NBG	National Bank of Greece ADR	10.9
BLK	Blackrock Inc	10.6
CN	China Netcom Depository Receipt	10.5
DELL	Dell Inc	10.4
CA	CA Inc	9.8
BUCY	Bucyrus International Inc	9.7
HK	Petrohawk Energy Corp	9.6
UBB	Unibanco Depository Receipt	9.5
JBL	Jabil Circuit Inc	9.4
PCL	Plum Creek Timber Co Inc	9.4
ACN	Accenture Ltd	9.4
CREE	Cree Inc	9.3
BUD	Anheuser-Busch Companies Inc	9.3
EQIX	Equinix Inc	9.1
CRM	salesforce.com inc	9.1
BBY	Best BUY Co Inc	9.1
JOYG	Joy Global Inc	8.7
CHU	China Unicom Depository Receipt	8.7
FDO	Family Dollar Stores Inc	8.6
TRA	Terra Industries Ord Shs	8.6
APOL	Apollo Group Inc	8.6
ETN	Eaton Corp	8.5
SNP	China Petroleum and Chemical (Sinopec) ADR	8.4
EXPE	Expedia Inc	8.2
FFIV	F5 Networks Inc	8.1