Bloomberg: Farmland Reaps Bonanza for TIAA as Commodities Rise

It looks like a few more institutions have caught on to my thesis of farmland as fantastic investment opportunity, which I began proposing this winter [Jun 5: NYTimes: Farmland is Gold, So Billions Invested in Farming]. This is a sea change - hard assets having more value than stupid "financial innovations" of a debt laden, credit based society. We're going old school.

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.

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

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.

I continue to have the ideas - now I need the money....

• TIAA-CREF, the largest U.S. manager of retirement funds, bought $340 million of farmland in seven states in December.
  
• George Washington University plans to earmark $100 million for agricultural investments during the next year.
• From Iowa to South Dakota to Wyoming, gains in rural land prices have ranged from 78 percent to more than 200 percent, according to farmers and data from Farm Credit Services of America in Omaha, Nebraska.
• Farm values probably will rise at an annual rate of 6 percent to 10 percent in the next five years, said Murray Wise, the chief executive officer of Westchester Group Inc., a Champaign, Illinois-based manager of $550 million of global farm tracts.
• ``The land market has never been stronger. Never been stronger.''
• College endowments, pension funds and real estate fund managers are buying land even as U.S. homebuilders dump thousands of undeveloped parcels.
• ``There is a real transition from financial assets to real assets,'' said Don Lindsey, the chief investment officer of George Washington University's $1.1 billion endowment, in an interview earlier this week. ``Farmland is certainly one of them.''
• Westchester Group bought a 2,150-acre farm in December southwest of Springfield, Illinois, when farmland went for $5,000 to $6,000 an acre, said Randall Pope, the company's president. Now the market is at $6,500 to $7,000 an acre, he said.
• The average value of farmland has jumped by 220 percent in South Dakota and by 123 percent in Iowa during the past 10 years, according to a survey of benchmark farms conducted by Farm Credit Services of America. Values rose 78 percent in Nebraska and 118 percent in Wyoming.
• Prices in Iowa increased 22 percent last year to a record $3,908 an acre, according to data compiled by Iowa State University Extension in Ames.
• The surge in prices means the best investments may now be in Latin America, Eastern Europe and Australia, said Lindsey of George Washington University in Washington. (this is a point I've also made)
• Wiltsie Cretsinger, 49, of Coon Rapids, Iowa, has seen the value of his 633 acres rise 200 percent in the past 10 years, outstripping the 22 percent return of the Standard & Poor's 500 Index. His land is now worth about $1.8 million and he's not looking to sell. If prices fall, then ``I'm going to be hungry to buy'' more land, he said.
• Farmland prices plunged as much as 75 percent in the mid- 1980s, said Randy Hertz of Hertz Farm Management Inc. and Hertz Real Estate Services in Nevada, Iowa. An index of Indiana farm values compiled by Purdue University fell 56 percent from 1981 through 1987. It took 15 years for land prices to recover, said Good of the University of Illinois.
• Glenn Kreuder, 48, a farmer and investor in Garden Grove, Iowa, sold 70 acres of land in Wayne County, Iowa, for about $4,000 an acre. He held the land for about two years. ``It probably almost doubled in that period of time,'' said Kreuder

Or it all could just be a big bubble... for those who don't believe in a World of Shortages I suppose that would be the dominant view. Myself, if I were running a private equity or hedge fund - I'd be sending people out to Latin America and Eastern Europe to acquire arable land; in these type of markets consistent 15-20% gains are nothing to dismiss. It looks like the huge pools of capital are already bidding up US land - these are the type of dislocations only exaggerated by stupid policies (corn ethanol) and easy money central banks (all this liquidity needs to go somewhere), layered on top of true structural supply/demand issues. Yet no one in leadership looks into the mirror wondering if they could indeed be the nexis for many of the problems... it is quite obvious when you put the jigsaw puzzle together.

You're going to see a lot of fellas in overalls driving around in Porsche's the way things are going...

Fortune: Hot Commodities - Too Late to Buy?

Fortune asks - is it too late to invest in commodities? We've touched on this theme many times in the blog [Mar 22: Alert - Commodities are Dead] and my thesis is we'll have a long term upward move as too many humans want to live like Americans ("World of Shortages"), but it will be punctuated by moves (sometimes viciously) downward from time to time due to various factors. The most common one over the past year is the "strong dollar" myth. Another could be "China will implode post Olympics" or "crude is heading back to $60" or any number of reasons. Most of it is nonsense; unless the globe goes back to 90% of people living in abject poverty we are headed down this path, one way or the other. And Americans, ill prepared and still in denial, will be competing with this wave of upwardly mobile people for said resources. Expect a lot of Congressional hearings blaming the wrong people/things over the coming decade.

I'm not the only one on this horse ride, so in no way am I claiming exclusivity on the theme (in fact 2 of my favorites who agree with me are cited in this article), but after such strong moves in commodities I always like to forewarn readers or investors new to the thesis, since they are usually the first to throw in the towel at exactly the wrong time, usually at the tail end of a very healthy 20,30,40% correction. Knowing these ebbs and flows will happen, we'll try to be nimble to avoid the worst of the inevitable pullbacks. (I'm looking at you coal) But these are long term bull markets, plain and simple.

• Back in 2001, the executives running Australian mining giant BHP Billiton (BHP) sensed that China's economic growth was gaining critical mass. So they commissioned a study on how the country's rapid industrialization might affect the global markets for copper, coal, iron ore, oil - all the stuff that the company pulls out of the earth and sells.
• "The results were quite - well, 'outrageous' is probably the right word," CFO Alex Vanselow told me. "Because we didn't believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous."
• But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China's billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India's potential for growth - and its own billion-plus population - the numbers got even more extraordinary. (keep in mind, by mid century - or earlier - India will pass China in population due to the "1 child" rule in China)
• And when they factored in the industry's inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.
• You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you're paying 20% more for that box of pasta than you were a year ago.

• Isn't it too late? Aren't these markets way too volatile for investors planning for retirement anyway? And isn't investing in commodities too complicated for average investors? In short, the answers to those questions are: probably not, no, and no.
• Let's start with the biggest, scariest question: Is the commodities boom now like Cisco stock in 2000 or Miami Beach condos in 2006 - i.e., a bubble?
• Some of Wall Street's big brains seem to think so. In recent weeks strategists at Lehman Brothers, Citigroup, and Brown Brothers Harriman, among others, have volunteered the B-word and warned of a painful sell-off. The surging price of oil has prompted particular handwringing.
• One enlightened observer who's not worried about a commodities collapse is Jim Rogers. The maverick investor, author, and one-time partner of George Soros famously predicted the bull market in hard assets back in the late 1990s and began putting his money in resources when most of us were still enthralled by the dot-coms. According to Rogers, the current highs may represent a market top, but hardly the peak.
• "The bull market still has a long way to go," says Rogers. "Is it time for a short-term correction? I have no idea. And even if we are due for a pullback, that's not necessarily true for all commodities. Oil might be ready for a shock, but that doesn't mean that zinc is." (The price of zinc has, in fact, fallen by half over the past year because of a glut. Rogers says he's monitoring industrial metals for the right moment to buy more.)
• History is on Rogers's side. As he likes to point out, research shows that over the past 140 years the typical commodities bull market has lasted about 18 years. Rogers calculates that the current boom kicked off in early 1999, which means that if it conforms to precedent, we have almost another decade left.
• A second important reason to add commodities to your investment mix - one that's especially relevant to those approaching retirement age - is to offset inflation. Via Don Coxe "If you own agriculture and oil, then you put in a built-in hedge for yourself because you're now somewhat independent of rising food and fuel prices."
• If you're looking for a more specific commodities bet with big upside, the best place to invest right now, say many observers, is agriculture. While the prices of corn, rice, and wheat have spiked recently - and food shortages have sparked rioting in Egypt and other countries - they have only just begun to catch up with the rest of the resources world. (Boooyaaaah - ahem)
• But grain reserves worldwide are at lows not seen for decades. And new strain is causing increased volatility. Earlier this year the price of wheat shot up 61% before correcting. Again, the main driver is Asia's economic growth. "Billions of people are changing the way they eat, adding protein and calories to their diets," says analyst Sean Brodrick of Weiss Research. (nothing new for blog readers, we've been repeating these theories for a long time)

Thankfully, more and more people are coming around to the theme I've proposed since day 1 in the blog - "this" type of inflation is very different from the 1970s inflation everyone has been trained on. The "World of Shortages" (I really need to patent that) is a whole different ball game. And why, short of global recession it will be hard to see the inflation genie put back into the box for a very long period of time. But in the meantime, the government can continue to hide the truth behind their fiction reports - and I suppose that is the current "solution". Keep sheep ill informed, keep telling sheep what they see in every day life is really not happening, and keep assuring sheep to be happy with their 3% wage increases.

• For those struggling to deal with record gasoline and soaring food prices, there's bad news and more bad news. Economists think inflation is here to stay. And it's likely to get worse.
• A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.
• "We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."
• What's more, the Federal Reserve is relatively powerless to deal with many of these pressures. "The Fed can't control prices of commodities determined in a global market," said Rich Yamarone, director of economic research at Argus Research. "If it could, it would have done so already."
• But it's not just oil and food that are leading to higher prices for consumers. A separate inflation reading reported Thursday showed the price of imports, excluding oil, were up 6.6% in the 12 months ending in May. That's the highest increase in that measure in 20 years. (yes I remember one blogger talking about this. Did CNBC mention it? Probably for 20 seconds, after all retail sales were "better than expected" - have to focus on that)
• Rapid growth of manufacturing and services overseas has workers in developing economies such as China and India winning healthy wage increases. That also raises prices of those countries' exports. (long predicted on these virtual "pages" - hence why one day multinationals will be moving out of China and into places they can exploit cheap labor next - Africa, Vietnam, Indonesia - wherever) [Feb 28: China Raising Minimum Wage] & [Feb 21: Rising Factory Costs Erode China's Edge] & [Jan 28: India Facing a Shortage of... Workers?] & [Aug 19: Interesting China Article]
  
• Much of the weakness in the dollar has been laid at the feet of the Fed, which has slashed interest rates seven times since September. At the same time, central banks elsewhere have made only small cuts to their interest rates.
• Oil analyst Peter Beutel, president of Cameron Hanover, said he believes 90% of the rise in oil prices since last August was due to the Fed's rate cuts and the expectations of rate hikes in Europe. (if you plot the price of oil explosion its a direct correlation with the Federal reserve cuts, and flooding of liquidity - hmm, all starting in August 07 - what a coincidence - let's blame greedy oil executives instead of looking in the mirror!) "If the dollar was where it was last August, there's a very good chance we might never have seen $100 a barrel oil, maybe not even $90," he said.
• And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.
• "I think you'll see the Fed talk up a storm about the caustic nature of inflation, because that's all they can do now, at least until the election is over," said Yamarone. (agree)
• "The Fed is painted into a corner," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "They don't dare raise rates. The credit crisis is not even remotely behind us. So the Fed has limited options and there's only so much they can do." (agree)
  

[Apr 22: Don Coxe Offers Coxe Commodity Strategy Fund]
[Apr 8: More Jim Rogers]
[Feb 13: Jim Rogers on Commodities]

WSJ: Hedge Funds Gird for Withdrawels

Hmm, this is interesting - I thought with the 2 month spike in the market since April 1 that investors would be quite happy with their hedge funds. The Wall Street Journal thinks perhaps they might not be.

• Hedge funds, frequently at the mercy of antsy investors, are bracing for a wave of withdrawals at the end of the month.
• HBK Investments LP, which peaked last year with more than $14 billion in assets, is finding its doorstep awfully crowded with clients asking for their money back. Already, investors have sought to withdraw more than 30% of their capital this year, according to people familiar with the figures. Firm-wide assets have shrunk to $11.5 billion. When it comes to withdrawals, HBK isn't alone.
• "Investors speak to each other. Many will feel that if they might want to pull money, it's best to get in line in case there's a rush to the exits," said Jeff Vale, principal of Infinity Capital Partners in Atlanta, which invests clients' money in hedge funds and isn't an HBK client. "June 30 is going to be interesting. The biggest risk out there is liquidity."
• Dallas-based HBK, known for its traditionally steady, conservative investment style, tends to fly below the radar despite its size. Investing in everything from private equity and sovereign debt to stocks and convertible bonds, HBK produced 15% annualized returns over 16 years. That was before last year, when it misjudged the subprime market and finished barely positive, returning less than 1% in its Master Fund. It was the closest HBK has ever come to a negative year, so naturally clients were looking for stability in 2008. The Master Fund ended the first quarter roughly flat -- respectable compared with the markets and losses at hedge funds on average. (gosh 15% annualized for 16 years, and then 1 bad year, and the peasants get restless? No wonder these hedge funds stampede from 1 sector to another desperate to make profits and then completely flip flopping 24 hours later - 16 years get thrown out the window in 12 months)
  
• Against that backdrop, HBK wasn't the most obvious candidate for a stampede. But, these days, investors don't need a gut-wrenching loss to prompt them to pull their cash, and redemption requests have been piling up, reaching levels the firm hasn't seen in a decade.
• Investors have been cautious about putting money with many established hedge funds this year, too. Some instead have committed to new credit funds set up to buy mortgages and other distressed assets. As those funds make capital calls, investors have to send in their cash -- another factor in the redemption trend, hedge-fund managers say.
• Redemptions throughout the hedge-fund community could have ripple effects in the markets in coming weeks as managers raise cash by selling investments common to many portfolios. The selling could add to tumult in financial stocks, long a favorite of hedge funds.

Something to think about when you wonder why your favorite stock is losing 18% over a week for "no good reason" or people constantly ask "what is the news?" - sometimes there is a very good explanation but there are so many factors we will never know about - in fact most of us (including many smaller institutions or hedge funds) are just gnats on the big behind of huge pools of capital who dominate the day to day trading. Keep in mind these guys control upward of $1.5 Trillion of dollars... so if even medium sized firms need to liquidate a stake, the stock is going down.

Bookkeeping: 'Rising Tide' Performance Week 45

Week 45 performance of the mutual fund

Comments: Egads - yet another rally in the last 30 minutes of a session? What is this 6 of the past 10 sessions a magical rally appears in the same time frame, during a market trending quickly down? All random chance I'm sure. This was a very interesting week; after sucking some serious wind last week the indexes were down most of the week but with the help of magic in the last 30 minutes Friday went from being down nearly 1% for the week to flat. Magic. Get some. I need to start selling all my short exposure every day at 3:30 PM. However, under the surface a lot of damage was happening in individual names - essentially everything outside of commodities was being hit early in the first half of the week, with many stocks down 5-10%+. To wit, despite what looked ok on the surface, in my weekly screen of winners I don't even show 10 names in the entire market that returned at least 8% this week (market capitalization $2B+). That's usually the type of performance reserved for weeks the indexes are down 4-5%. The other way to notice the weakness are the advances versus decliners each day; many days this week it was 3:7 or 4:6 winners v losers even if the overall indexes were holding up. More and more of the indexes are now being consumed by energy names, so as they gain they have masked a lot of damage elsewhere - ironically we saw that play out exactly in our portfolio with 2 names being added to the S&P 500.

While this action will allow the Goldilocks crowd to chime in that everything is fine, it appears very unhealthy to me. Markets with such narrow leadership are not something you want to see over extended periods of time, but thankfully we hold many of the leaders (to wit 3 of the 9 stocks this week which gained 8%+ are fertilizer stocks) Further, if indeed we do have a more meaningful correction from here (which according to the charts we should), we now are approaching the tricky part of our correction pattern, that we outlined a few weeks ago. First to go would be the junk sectors (they've "gone") - the homebuilders, financials, retailers. Then we'd move on to non commodity sectors not directly correlated to the consumer (i.e. technology as an example) - that has been playing out much of this week. All that time the commodities would hold up and more and more buying power would be concentrated in those names - that has also played out. And then in the past corrective cycles, when the market finally gave in, the commodities would be the last to go and be taken to the cleaners.... just as people became complacent in these names. Lo and behold, around that time the junk would rally - and we'd sit here in the blog cursing. :) And this is the only reason I have not reloaded back up, especially in the fertilizer - which as I outlined last week were looking ready for a breakout. "The pattern" looks eerily familiar, and again - I don't want to get caught with my (Ultra) shorts down (literally?)

With Morgan Stanley (MS) and Goldman Sachs (GS) reporting next week (both rallied 7% Friday), we in fact could see such a pattern continue to play out as "hey its not as bad as we expected" drives these stocks up. The rumor mongers are back out again saying Goldman will report a writedown (which they have yet to do) - if they don't that could also key a rally - while it would drive up the entire sector (and probably take retailers and homebuilders with it), we still want to focus on the best of breed instead of buying the junk (which would rally the most only due to being beaten down the most). We saw hints of that Thursday when a lot of "poor sectors" rallied hard driven mostly by short covering in my eyes. To wit, while I still own Ultrashort Financial (SKF) and Ultrashort Consumer Services (SCC) I've ratcheted them back in case we get just this move... in previous corrective episodes not only would our commodity exposure fall hard towards the end of a correction but our shorts would also work against us (since our shorts were focused on the bad sectors which rallied towards the tail end of the corrections from very beaten down levels).

This market still appears complacent to me, any half decent number is clutched to the heart ... what's that 0.6% monthly inflation? That's only 7.2% annual if it continues at that rate for a year... great! If we strip out food and energy its only 0.2% or 2.4% annual which again shows we are the only country on the globe able to not have inflation (as long as you don't eat or consume energy!). Buy stocks. Etc. Any minor happy news and I see everyone flock into technology as well since supposedly its a magical sector that is not affected by higher commodity costs - this appears to be Wall Street's latest conventional wisdom. Apparently, most of technologies customers (i.e. corporations) are going to spend spend spend, even as commodity inflation rips many apart. Another theory that will be blown to pieces down the road but for now everyone is clutching to this one like they did "this is the kitchen sink quarter in financials" last October. Anyhow, we can watch the folly and admire it in its grand foolishness but to position for such folly is the important thing. If "the pattern" plays out in a larger correction, we want to be better positioned than the last few cycles down and cut down on some of the losses. So we'll remain in our hedged position but have a more balanced short exposure across many sectors instead of focusing on "worst of breed" sectors.

For the fund, considering how much damage our #1 position (going into the week) did to us (it will remain nameless but it rhymes with Meena Polar) I am very happy with the week's results. We actually entered the week with a 10% stake in Meena Polar, but thankfully we chopped off some as it fell below $44, (down to a 6%ish stake) and then the market took a lot of the stake down on its own, destroying another 1-1.5% of stake with the 20%ish loss suffered there. Bah and humbug - yes I see she tried to save face late Friday but elephant's have a long memory. After reviewing Meena Polar's next Q guidance it looks like they will push through another $3M in currency losses (on top of this quarter $4M ....again, while all their peers enjoy gains, the irony in it all) so that pretty much destroys any chance for a meaningful upside surprise which in the near term is what drives stocks. So instead of enjoying fruits of holding this name this Quarter, or even next Quarter, it probably is going to be 2 Quarters from now before the potential from underlying operations is seen. Sadly, I've been saying that for nearly a year now. Since time is money, we'll have to broaden into some other solar names in the meantime. It really is too bad but as I said, Meena Polar lost its chance for glory with its "non operational decision making" - they do like to stand out of a crowd and do things no one else in the sector does. To shareholders detriment; one day I'll learn as this is the 3rd time they've done this to me. Allright enough about that - our favorite stock and the future name of my first born helped to offset Meena Polar - thank you Mosaic (MOS). We also had some nice performances in Perfect World (PWRD) and Cummins Engine (CMI) and away we went.... again, considering the damage from 1 particular name this week, we can be content with the performance.

The fund performance versus the markets look a lot better at 3:30 PM Friday than it does at 4:00 PM Friday (market rallied 0.6% in 30 minutes) - with the invisible hand ... err random massive buying .... in the last 30 minutes Friday, the indexes rallied to end the week basically even (0.05% loss) in the S&P 500, and a 0.2% loss in the Russell 1000. Rising Tide Growth, despite a back stabbing (et tu, Meena Polar?) was able to still make up the betrayal through gains elsewhere and managed to survive with a 0.2% loss. So all in all, a nothing week - the market went nowhere, and we went nowhere. Same Bat time, same Bat channel next week, eh? Seven more weeks to go until year 1 is officially in the books.

I'll have an update Monday on pledges; 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: $12.156
Lifetime Performance to date (vs Aug 3, 2007): +21.56%

Comparable S&P 500: 1,360.0 (-7.18%)
Comparable Russell 1000: 746.9 (-6.19%)

Fund return vs S&P 500: +28.7%
Fund return vs Russell 1000: +27.8%

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: Closing New Oriental Education (EDU)

I am taking today's 6% rise in shares of New Oriental Education (EDU) as an opportunity to close out the remaining shares of this stock (0.5% stake) @ $66. We've had some ups and downs, in this very volatile name (see chart), but all in all, are leaving with a $3500 loss. This was one of our original positions started in early August.

When last we visited the name in late May, the stock was tanking for no apparent obvious reason. After the fact we came to find out analysts were raising concerns about disruptions to operations from the Chinese earthquake.

• A number of analysts said Friday they expect the Beijing Olympics to disrupt operations for New Oriental Education & Technology Group, a Beijing-based provider of private educational services in China.
• Looking at New Oriental, PiperJaffray analyst Mark A. Marostica, who rates the stock "Buy," expects the Olympics to somewhat disrupt its Beijing test prep business for out-of-area students because the Chinese government forbids students to stay in dorms past July 9 for security reasons.
• Overall, Marostica said the impact should be modest because New Oriental's Beijing locations will stay open during the Olympics, and parents are likely to keep kids enrolled in English classes, given the importance of learning the language.
• Meanwhile, Citi Investment Research analyst Catherine Leung expects the Sichuan earthquake to have a greater-than-expected impact, along with the Olympics, specifically because of class schedules in Beijing, school openings and dorm facilities.
• "Student enrollments across the country have softened noticeably since the quakes, especially during the mourning period, as many students and the broader community have focused their time and resources on quake relief efforts," Leung wrote in a client note.
• Leung said the earthquakes haven't significantly affected profit and sales in the fiscal fourth quarter, which ends in May, but expects the effect to show up in first-quarter revenue, as some students deferred enrollment.

The company gave its side of the story a few days later (note to Trina Solar - see, it is not a bad thing when a company communicates openly with its shareholders instead of surprising them every quarter - yes I'm bitter)

• China is currently dealing with its largest natural disaster in a generation, and the entire nation is mobilized in response to the earthquake in Sichuan and in preparation for the Beijing Olympics in August. New Oriental has received an unusually large number of inquiries from investors and analysts regarding the impact of these two events on the Company's business. These events have created a number of short-term challenges, but the Company remains confident in the long-term success of the business.
• New Oriental has twelve schools and learning centers in Sichuan province - six in Chengdu and six in Chongqing - which account for slightly less than three percent of the Company's revenues. The schools suffered minor damage and are expected to reopen next month
• With the nation's attention focused on the disaster in Sichuan, quake relief has taken priority over personal endeavors such as test preparation and studying. New Oriental, in the two weeks after the earthquake, has seen a noticeable nationwide decrease in the number of students enrolling in new classes compared to the Company's own internal estimates, a trend which was especially pronounced during the three days of official mourning from May 19 to 21, 2008. New Oriental is hopeful that the trend will reverse itself, and expects enrollments to recover in June as preliminary relief efforts are completed and the nation returns to a more normal state.
• The Company noted that there would be no material adverse financial impact from the Sichuan earthquake for the fourth quarter ended May 31, 2008. While the earthquake may affect enrollments in the coming months, the Company does not expect any long-term negative impact on its business as a result of the earthquake.
• The Beijing Olympic Games are scheduled to take place for two weeks from August 8 to 22, 2008. In an effort to reduce traffic congestion and pollution, the Beijing government will institute certain transportation restrictions starting in early July. During the Olympic Games, many roads in and around Olympic venues will have restricted access or will be closed to the public, making it less convenient for New Oriental students to attend classes.
• Additionally, college and university students in Beijing must vacate their dorms from July 9, 2008 until the end of summer as a security measure. Normally, students from both Beijing and outside of Beijing attend New Oriental summer programs during this period. The Company has begun marketing to students located outside of Beijing to encourage them to attend New Oriental programs in other Chinese cities such as Shanghai, Tianjin and Zhengzhou. The Company plans to increase capacities in those cities during the summer months. Beijing accounts for approximately 35 percent of New Oriental's revenue, and the summer quarter accounts for approximately 40 percent of annual revenues.

So first let me say, THANK YOU and I APPRECIATE IT when a company is open like this and addresses shareholders concerns... a few others could take note of this, especially if for example your name rhymed with Prina Molar. (did I mention I'm bitter?) With that said, I believe there is no change to the long term story here but risks in the near term story; it looks like the current quarter will be intact but the following quarter could see some revisions downward. I probably have more concern about the slowdown in Beijing (Olympics) than the earthquake situation. Not only is 1/3rd of their business in Beijing but 40% of their revenue comes in the summer. So it's not worth the risk for now. If EDU was a low PE stock that would be one thing but this is a very pricey stock and knowing how Americans panic like scalded chimps (thanks Macke) at even a hint of slowdown, this raises risks to our holdings. They won't care if its a 1 quarter or 2 quarter issue - that is as far out as most American investors ever look. That is the "long term" for this generation. So they panic, and cry, and whimper and most importantly - SELL and ask questions later (if ever). And at 54x forward earnings I am not going to have a good defense - this sort of valuation requires perfect execution and no excuses. Even valid ones.

So with the stock approaching a key resistance area I am going to take my ball and go home. We'll revisit this name in a quarter or two (in the current investing world that is referred to as "super long term") For now, this helps reduce risk, raise a small bit of cash, and keep our fund focused - as I've been hinting I have some "alternative energy" (non solar) I'd like to add to the portfolio if they'd ever pullback... so we'll have open slots for those.

Long Trina Solar in fund and personal account

Cabot Oil & Gas (COG) and Massey Energy (MEE) Added to S&P 500

One thing I've railed about is so many mutual funds are simply masquerading as index funds, with all the same tired old names, in various weightings; collecting a lot of assets and a lot of fees and happy to provide results near to whatever the market provides. Last night came news that 2 of our (50-55) long holdings will be added to the S&P 500.

So let it be known, we owned these before the S&P added them to their indexes, and we are not a closet index fund ;)

If you want to know an ironic fact, most people assume that when a stock gets added to the S&P 500 or any major index (say Russell 1000) that this is a boon to the stock price. The reason being that all these index funds who mimic the indexes (plus all those mutual funds who secretly nearly mimic the indexes but charge much higher fees to do so) have to buy these stocks. But a lot of academic studies show that in fact, the stocks that get kicked out of an index do far better than the ones going in. There are a lot of theories on this as to why but the one that makes sense to me is simply "reversion to mean". The index "deciders" are humans just like the rest of us; they tend to chase trends. For example, in the late 90s every index was getting stuffed with technology stocks - that worked out great - until about a year or two later. And the type of stuff they were kicking out tended to massively outperform in the years after. Just food for thought when you hear the conventional "wisdom" of how a stock must go up simply because the mutual funds must buy it, now that it has been added to an index...

With that said, I obviously believe these 2 will be exceptions for the foreseeable future ;)

Long Cabot Oil & Gas, Massey Energy in fund; no personal position

Bookkeeping: Selling off More Perfect World (PWRD) and Cummins Engine (CMI)

I am selling off some more winners here from stocks we've discussed this morning and yesterday.

First Perfect World (PWRD) which we just discussed - as we just wrote we'd look for mid $25s to lay off more shares

The stock is now trading back to the mid $24s range, up 13% - as I outlined in the previous post on this stock I'll continue to cut back on this name as it approached resistance which in this time frame means mid $25s or so.

....and we got them within an hour (stock has hit $25.59), so I am cutting the shares I bought just last Friday in the $23.70 (which I had sold in the $26.20s). So in a week we made 7.5% on this batch and as we said this morning on the smaller stake I bought in the $21s-$22s we made a quick 12-13%. In other words, this has been a terrible buy and hold stock, but a heck of a trading stock. So far. In time it will become a great stock to hold as well if it continues to execute. But we want to see the stock above $26 and then I'll be happy to stay in. I outlined this strategy here. So we'll keep buying on dips and flipping into resistance levels - and then one day when the stock breaks above resistance we will have to "pay up" (buy at a price higher than we sold) but until then we can generate gains trading it.

Perfect World is now down to a 0.4% stake.

On to Cummins Engine (CMI) which I wrote a piece just a few minutes after I read the news yesterday, wondering why it was up so strongly. Well after a flood of news reports yesterday, we got more clarification ... it sounds even more bullish than on first glance BUT this has been a huge move on something that helps the company in the long run so I am going to take a risk here and take Cummins down to a very small stake (holding position) on this huge 2 day run. The stock is now in the $73s/$74 range so I am flipping out most of what remains and going down to a 0.15% stake, and look to buy back on a pullback. This is a bit of a risky move because the stock could just continue to run ... but a 20% move in 2 days in a stock like Cummins is like a solar stock going up 50% in 2 days... it's normally a relatively calm stock, but this is definitely good news. However it's good in the long term, and the market is repricing the stock very strongly in the short term. Further, at $74 we are reaching highs a month ago and potentially forming another double top ;) Last, I am taking all these rallies in the market as opportunities to lighten up on positions that run, because until market technicals improve - all rallies must be doubted; even those based on fictitious government reporting. But I do like both these stocks a lot and hope to get them at lower prices to rebuild in the near future. However, I cannot turn down 15-20% type of gains in such short time periods in this type of market.

• However, Caterpillar will stop supplying engines to other North American manufacturers of these vehicles, starting with the introduction of engines designed to comply with 2010 U.S. clean-air rules.
• As a result, Caterpillar's archrival in the diesel engine space, Cummins Inc (CMI), now looks poised to capture more of the North American market in coming years, analysts said.
• That was widely seen as a victory for Cummins, because it leaves the Columbus, Indiana-based company "increasingly the sole independent engine provider to the U.S. truck engine market post 2010," according to a note from Citi Investment Research analyst David Raso.

Long both names in fund; neither in personal account

Perfect World (PWRD) Up 13% in Early Trading on Raised Guidance

Just a few weeks ago the stock of Perfect World (PWRD) sold off on fears of "lethargic guidance" after a stellar earnings report [May 19: Perfect World - Good Earnings, Light Guidance, Buying the Dip]

Perfect World (PWRD) reported very good numbers this morning but due to 'disappointing earnings' (some of it due to 3 day shutdown in China due to mourning period for the earthquake) the stock is down over 9% this AM.

I've been trading the stock since then, flipping in and out, and doing quite well considering the relatively poor action (almost straight down). I had re-entered a larger stake last Friday, and then have been adding in smaller pieces this week as the stock continued to be weak (and cheaper by the minute). Now this morning, only a few weeks after the last earnings report, the company is out with raised guidance, increase revenue projections from 0-5% growth to 10-15%. Perhaps this company lowballed due to the earthquake mourning period, and not expecting the market to trash the stock so thoroughly decided they should give a more realistic growth rate. Or perhaps business just became THAT much better in the past 3 weeks ;) This name remains dirt cheap relative to its growth prospects, so we'll continue to take advantage of the market missing this, even though it might cost us a bit in the near term.

The stock is now trading back to the mid $24s range, up 13% - as I outlined in the previous post on this stock I'll continue to cut back on this name as it approached resistance which in this time frame means mid $25s or so. Since I did buy some here in the $21s/$22s the past few sessions I am going to sell those shares for a quick 12-13% gain and then keep what I bought in the $23s. If/when it breaks over resistance ($26) we'll just put the seat belt on and remain in an upright position. Until then it remains a trading position... if the market continues to thrash it we'll buy back more in the lower $20s. And keep repeating until the market wakes up to the opportunity.

Perfect World is back down to a 1.1% stake after this morning's sales.

• Perfect World Co., Ltd. (Nasdaq: PWRD), a leading online game developer and operator in China, today announced that it expects revenue for the second quarter of 2008 to be between RMB333 million and RMB348 million, which represents a sequential increase of 10% to 15%. This compares to the previously announced guidance of a 0% to 5% increase in revenue.
• Despite the impact of the Sichuan earthquake, the Company is able to raise guidance due to stronger than expected results from the launch of new expansion packs in the domestic market and favorable results from recent marketing campaigns.

Long Perfect World in fund; no personal position

Petrobras (PBR) First Ethanol Mill / Pipeline Ready in 2009

Ken Heebner of CGM Funds was on CNBC again this morning, and again focused on Petrobras (PBR) which we are now both saying has a chance to become the largest company (by market capitalization) in the world. Once again sugar cane ethanol gives much more bang for the buck than lousy corn ethanol, so the export market for this product should be substantial. (note the US has very high tariffs on imported ethanol to PROTECT the corn ethanol business - another in countless bright ideas coming from D.C.)

I've been adding to this position of late in small increments as it pulls back to its 50 day moving average (mid $60s); but I wouldn't mind seeing a drop back down to the mid $50s to create a larger stake. Again, this is not a fast money type of stock but should deliver solid 15-20% type of growth for a decade or two in my opinion - hence why it should get to #1 in the world...

• Brazil's state-run oil company Petrobras said it will complete its first of two ethanol-only pipelines and first ethanol mill in 2009, a company official said on Thursday.
• It will be Petrobras' first step into ethanol production although the company for decades has been a leading player in Brazil's distribution and retail of the biofuel.
• Petrobras (PBR) said it signed its first contract in May with a local ethanol company to build a distillery that will come on line next year and produce biofuel that will be directed to the export market.
• The first one, to be concluded in 2009, would run between the center-west state of Goias and Paulinia, in Sao Paulo state. Petrobras also plans to build a second pipeline between the center-west state of Mato Grosso do Sul and Paranagua port, in the southern state of Parana.
• The pipelines aim to improve efficiency and reduce producers' costs in transporting ethanol to the ports from Brazil's countryside.
• Brazilian producers believe external sales will grow in coming years as more countries adopt the sugar cane-based biofuel as an alternative to fossil fuel.
• Petrobras has plans to export 4.7 billion liters of ethanol per year from 2012. To achieve this goal, the company intends to sign a total of 20 contracts with local ethanol groups and build several of distilleries in partnerships.
• About $200 million will be invested in the first plant, whose output is expected to reach 200 million liters per year.

[May 15: Petrobras Hordes the World's Deep Sea Oil Drillers]

Long Petrobras in fund; no personal position

Amazing Technology if True - First Hybrid Biofuel Solar Plant

These are exactly the type of technological breakthroughs that are going to help us offset 2.5 Billion new humans coming online in the next 40 years. It is so fantastic to see this coming to California - helping the American economy with an American company! What's that?? Oh nevermind - helping the American economy with a Portuguese company! We are still too busy funding corn ethanol and giving big oil subsidies - we can't be bothered with solar or wind subsidies or creating a Manhattan project for alternative energies - nope, instead we'll attach stupid windfall big oil taxes to bills that help stimulate those sort of initiatives so that they never stand a chance of passing. (I love how these people in Washington cannot put bills together that just focus on 1 thing at a time - instead they have to throw it all in 1 big bill and then spend months fighting over it, accomplishing nothing for Americans) Just for reference this bill was the one Democrats wanted to attach "suing OPEC" to. Both parties = stupidity.

• Senate Republicans thwarted Democratic-supported legislation that would increase windfall- profit taxes on oil companies such as Exxon Mobil Corp. as Democrats set their sights on tighter energy trading scrutiny.
• The proposal, announced last month, would have imposed a windfall profit tax of $10 billion to $12 billion this year on oil companies, according to Senate Democrats. (which would then be funneled back into pork for each Congressional district to help people win favor and get re-elected)
  
• Senate Republicans today also blocked debate on a tax measure to extend credits for wind, solar and other forms of renewable energy. Republicans objected to that legislation, which was 10 votes shy of the required 60, partly because of concern over the source of funding for the tax breaks. (for god sakes, spending has increased at a rate we've never seen the past 8 years and now you are getting religion on sources of funding?)
  

Anyhow let's see what those Portuguese have up their sleeve - it sounds too good to be true.

• California utility PG&E will buy 106.8 megawatts of electricity from a hybrid biofuel solar power plant to be built by a Portuguese firm in the state’s Central Valley.
• The hybrid technology will allow two 53.4 megawatt plants to tap the sun and agricultural waste produced in surrounding Fresno County to generate green energy around the clock For PG&E (PCG), 107 megawatts is just enough to keep the air conditioners running for some 75,000 homes.
• But if the biofuel solar hybrid performs as billed and can be scaled up, it’s a win-win - recycling ag waste - a huge and expensive problem in California - into electricity.
• The percentage of electricity to be produced by solar versus biofuel and other details of the project’s design are sketchy. Andrew Byrnes, an executive with Spinnaker Energy - the San Diego company developing the project for Martifer - told Fortune that such information is “confidential” as are images of what the hybrid plant will look like and the identifies of the company’s U.S. investors.

Here is how it works

• They will use long arrays of curved mirrors called solar troughs to focus the sun on liquid-filled tubes to produce steam that will drive electricity-generating turbines. That’s a standard solar technology currently operating in California and elsewhere. The biomass component of the plant will use agricultural waste, green waste and livestock manure to create heat that will generate steam.
• It appears the biofuel will be used to keep the plant running at night or on overcast days. “The technologies can run simultaneously,” said Byrnes in an e-mail. “And when a cloud passes overhead (and after the sun sets) the solar facility can still generate energy, since the generation process is dependent on heat rather than direct solar radiation.”
• Each power plant will each need 250,000 pounds of biomass a year to operate. Finding that fuel shouldn’t be a problem: Byrnes says a study shows that Fresno County alone produces nearly 2 million tons of ag waste annually.

Again, sounds almost too good to be true - I assume this is part of Obama or McCain's plan to create 5M new green collar jobs in Portugal? Or will it be in China? Or Germany? Spain? Because we are too busy fighting over who gets to sue OPEC first or how the whole run up in oil is due to "speculators" here in the U.S. So another thing we're going to need to outsource - green workers and technology... go team USA.

Plosser - a Realist, no Wonder he is not Fed Chief

Charles Plosser is one of the two Fed President's who has been dissenting the past 2 meetings on more rate cuts, fearing inflation. Gold stars on that point alone. Also he is extremely realistic about the issue of moral hazard (i.e. telling banks, no matter what stupidity you do, we will be here to help you out because you are too important to fail - so please go be stupid again in the future - we'll bail you out). Excellent interview this morning on CNBC, the first part (6 minutes) of which I was able to embed below and the second part (if interested) you can view here. Unfortunately, guys higher up the ladder like vice-chairman Donald Kohn feel its ok with him to allow inflation to rage for a while so as to pump up growth. That was the bedrock of thinking in the early to mid 70s too - didn't work out so well.

Now we do have to roll around and giggle at much of this - the market is getting so excited by Uncle Ben's "fight" against inflation. By "fight" it means "using strong language".... I never knew "words" could change economic cycles, but according to the traders of Wall Street, all the gods on Mount Olympus must do is utter language that inflation is a problem and *poof* said inflation is struck by a lightning bolt. So let's not get all excited until we see at least a minor bit of action, eh? Or how about a 1 point rate hike, right back to 3%ish? Then I'd actually think Uncle Ben is a bit serious. Until then we can listen hopefully to the Plossers and Lackers [Jun 5: Jeffrey Lacker - my New Favorite Federal Reserve Governor] of the world, and twiddle our thumbs waiting for this "war on inflation" (that does not exist of course) to begin. I still just cannot fathom anything other than a potentially "symbolic" 25 point rate hike before the elections; and even that is iffy. Now again, these guys are in a box - as we discussed in the fall (and it's coming true) by cutting rates they are going to stoke inflation; inflation which in many parts has more to do with a World of Shortages rather than traditional reasons. So short of pushing the world into a recession its going to be a tough beast to tame, this inflation...

And let's not forget tomorrow morning when the flock of lemmings will overreact one way or the other to a meaningless government report (CPI)... if its a "good number" everything being feared the past few weeks will be tossed out the window because of 1 number. And that folks, is the epitome of Wall Street. Pure logic at its best.

• The Federal Reserve's leading inflation hawk told CNBC that interest rates will have to rise soon in order to keep a lid on rising prices. "It is certainly clear that rates will have to rise. The question is when."
• Kohn said that when the economy is hit with an oil price shock as it has been this year, the "appropriate" Fed policy will permit -- temporarily -- both higher inflation and higher unemployment. (send this guy back to 1973 please)
• The Fed is hoping tough talk on inflation will do the job of moderating recent price increases, giving it room to avoid raising interest rates as the economy remains fragile. (isn't that an amazing theory - if we use big bad words, inflation will be defeated... economic cycles will be broken... etc etc - and these are our financial leaders)
• Plosser said the Fed has taken aggressive steps to counter both problems, but he urged continued vigilance, saying the base of inflation is broadening, and the Fed is in a unique position to act.
• Plosser feels the Fed mishandled inflation in the 1970s by acting too late, allowing a relative price shock in oil to translate into higher inflation.
• He also expressed reservations about government efforts to stimulate the economy through tax-rebate checks.

Bookkeeping: Starting a Beachhead in American Superconductor (AMSC)

We discussed this name earlier this week as a wind play... [Jun 10: American Superconductor (AMSC) with $450 Million Follow up Order from China]

Much like Energy Conversion Devices (ENER) (which I highlighted in early May in the upper $40s, and is now in the mid $60s) this has been a "hope" company for a long time - long on promise, but short on execution. [May 8: Energy Conversion Devices - Is the Turnaround Finally Here?] But we've seen how the ship has appeared to come in for ENER, and perhaps the ship is coming in for controversial AMSC as well. They received a huge follow up order today. This appears to be a 3 year contract for $450 million. Considering the company is only doing under $200 million in revenue in total this year, the magnitude of this contract is enormous for this size of company. The stock performance today reflects that. (congrats to the reader who owns this!)

So off that news the stock spiked from the mid $30s, to the low $40s and then up to the mid $40s. After 3 days, its now back down to $40 with a 9% correction today alone, so I am just beginning with a small stake (0.7% of fund) and I'll target pullbacks to $37, $35 and/or low $30s to add more. It's come a long way in a short time, so support is quite shaky up here in the stratosphere and putting a valuation on this is impossible as this is the first unprofitable company I own. I don't have a P/E ratio for you, but I think these type of companies are in the right place at the right time - I have a few other similar companies on my radar and waiting for pullbacks to add them to the portfolio.

With that said, if/when oil does pullback to a more natural $100-$110 (or even $120) I can see these stocks cratering but again that is short term and missing the forest for the trees - so we'll use those opportunities to buy stocks that will benefit from some sea changes in the energy complex over the coming 5-10-15 years.

Long American Superconductor in fund; no personal position

Bookkeeping: Taking a Bite of Apple (AAPL)

Again, I cannot short individual names but I would of liked to short Apple (AAPL) for the near term as I wrote a few days ago [Jun 9: Apple Buy the Rumor, Sell the News?]

Don't look now but this chart has all the makings of a double top. I can't short individual names, but this might be a short term short, at least until the $160-$170 range.... in lieu of that I have just cut back the long position, awaiting lower entry points to rebuy. We'll see if I get one.

We are down to the first support, 50 day moving average ($172) so I am beginning to rebuy, but only a bit here since this is definitely a double top we have formed. I'd much prefer the 200 day moving average of $161 (or lower - maybe low to mid $150s would be possible in a market plunge). So for now I am simply taking this from a 0.25% stake to a 1% stake. (as an aside, if I were shorting, I'd be holding onto my short as a hedge and cover down there somewhere in the lower $160s) This is the first scale in, but I want lower prices to add more. In a healthier market I'd be happy to load up more here, but not in this sick puppy of an environment.

As an aside it is sad to see all the focus on Steve Jobs' health, but with his history and the fact he is the face and genius of Apple (AAPL) I do understand. It is the #1 story on CBSMarketwatch.com today.

• But a strong undercurrent at the event focused on the emaciated appearance of co-founder and CEO Steve Jobs. While Jobs, 53, looked especially gaunt in his trademark black turtleneck and faded jeans, other Apple executives spent more time on the stage during his keynote address -- a notable move for an executive who typically spends much of his speech rallying the Mac faithful and introducing many products himself.

Long Apple in fund; no personal position

Yahoo (YHOO) and Microsoft (MSFT) Call off Talks - Anyone Else Sick of this Story?

Like 2 dinosaurs running to hug each other - just go away. Both of you. Gosh the media act as if this is a fertilizer and coal company or something sexy like that...

• Shares of Yahoo!(YHOO) slumped after reports that talks with Microsoft(MSFT - ) have not brought about any agreement, and instead Yahoo! will announce a search partnership later Thursday with Google(GOOG).
• The Wall Street Journal reported that Microsoft is saying it is no longer willing to buy Yahoo for $33 a share, and that talks between the two have ended without a deal.
• The blog TechCrunch, citing a "reliable source close to one of the companies" said an announcement coming from Yahoo! at 4:30 p.m. EDT likely involves "a search partnership between the two companies that outsources all or part of Yahoo search marketing, and possibly search itself, to Google."

Yawn.

Yahoo down 11%. Considering the original offer came in the low $30s when Yahoo was trading in the upper teens, CEO Yang should really resign. Inflated vision of self worth. Edit: Down 14%.

No positions

Import Prices Continue to Breach New Records

Each month everyone focuses on tomorrow's report, the CPI - while I focus on the monthly import report. After all as a country that makes very little its consumers actually consume in our new age "service economy", we import many/most of our goods. So the prices we pay for said imports are a true reflection of a good part of our inflation rate. For those interested I did a big review of this a month ago so I won't repeat [May 13: Import Prices Continue to be a Disaster]

Here is a general trend of what costs have been for things we import

November 07, the year over year import price increase was 11.4% [Dec 12: Real Inflation Showing in Reports not Called PPI/CPI]
January 08, the year over year import price increase was 13.7% [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis]
March 08, the year over year import price increase was 15% [Apr 11: GE Warning and Import Prices Show us Real Inflation]
April 08, the year over year import price increase was 15.4% [May 13: Import Prices Continue to be a Disaster]

Notice a trend? And what just came out this morning for May 08? Try 17.8% on for size. Even excluding petroleum (which none of us use, so therefore should not count in inflation) we are approaching 7% imported prices. But don't worry, inflation is benign, contained and somewhere around 3%. (even though the rest of the world is around 8%)

• Import prices soared 2.3% on a monthly basis in May, the Labor Department said Thursday, compared to April's 2.4% increase, which was revised up.
• Import prices swelled 17.8% from May 2007, the largest annual rise since the data were first published in September 1982.
• Petroleum import prices rose 7.8% last month compared to April and were up 68.8% on the year. Natural gas prices were up 5.4%, the eight-straight monthly increase.
• Excluding petroleum, import prices rose 0.5% and were up 6.6% on the year. Even excluding all fuels, prices rose 0.5% on a monthly basis and 6.1% on the year, the sharpest gain on record.
• Food prices rose 1% and were up almost 14% from last year, the biggest rise in 13 years.

The other issue I highlighted in this report since last fall is how we use to import deflation from China, and that worm was turning. That is another trend that is changing... and quickly.

• Prices of goods from China spiked 0.6% compared to April and rose 4.6% from a year ago, a fresh record, suggesting imports from China are no longer an offset to domestic price pressures and are even adding to them.
  

Keep in mind 30 days ago, prices from China were up 0.2% on a monthly basis, and 4.1% on a yearly basis. For those who don't follow these things, for years on end these percentages were negative... we were able to keep prices down by importing from China. Now they are helping to stoke inflation... we flagged this as a potential threat last September and it's coming true. [Sep 11: China Inflation Highest in 11 Years, Why do you Care?]

To close this entry let me get to today's great news, the "booming" retail sales. Just a week ago we saw the sorry state of retail - remember that huge Thursday rally because Walmart and Costco were doing good? Well we are rallying off the same news... retail sales increased 1.0%, as opposed to expectations of 0.5%. Hmm, I wonder why we even got that number. Could it be that when we borrow from our grandchildren (more debt), sending Treasuries to China in return for dollars, which we then send to the people, we can goose the numbers? Nah. :)

• The healthy increase in May sales suggested consumers were putting to work some money the government kicked back to them in a plan to stimulate the foundering economy.
• About $48 billion in payments were cut in May, Treasury Department numbers indicate.
• "I've noted for weeks that with retail sales running at a pace of $385 billion per month, it takes an increase of just $3.85 billion to push retail sales up a percentage point. That's a small sum in comparison to the $120 billion in tax rebate checks that the government has issued," said Tony Crescenzi of Miller Tabak & Co. "It's no wonder, then, that retail sales increased 1.0% in May overall and 1.2% excluding automobile sales."

Bottom line: Expect "better than expected" retail sales for a while, which the pundits can point to as a "recovering economy".... and remember your grandchildren (whom we're borrowing from/layering more debt on their shoulders) while the seals clap on Wall Street. Again, as economic conditions DEGRADE I expect yet another rebate check (more borrowing from your grandkids) to be announced later in the year. So we can goose some more numbers - and keep repeating. Until finally the economy one day actually recovers on its own volition. Apparently the business cycle is never going to be allowed to happen ever again as the nanny state wants to protect us from reality.

One more point I always make everytime we cheer a retail number. If inflation is rising 5% year over year, and sales are rising anything less than 5% year over year, you actually are going backwards on unit sales. Plug in any number you wish for inflation, but simply to keep up with the inflation rate, sales need to be higher than inflation for true "growth" to be occuring. Just as I said last Thursday, we cannot be bothered with small details like that on Wall Street, but for those living in the real world, it's the reality. The blog mascot chimed in on what he thinks of today's rally....

Midwest is Under Water - It's One thing to Read; It's Another to See

Until you really see just how bad the rain is...



You don't realize how much of an effect this is truly going to have



Continuing to add to Powershares DB Agriculture Fund (DBA) on pullbacks....

Long Powershares DB Agriculture Fund in fund; no personal position

Bookkeeping: Cummins Engine (CMI) up 14% on... ?

I have no idea why Cummins Engine (CMI) is up 14% this AM to the $72s; I do see a news event involving Caterpillar (CAT), and Navistar but fail to see a direct connection - I could be missing the forest for the trees. Either way I am going to use this opportunity to cut back my position from a 1.6% stake to 0.6% (I actually bought some yesterday as it spiked downward to its 50 day moving average, but not enough of a stake to mention, so sort of lucked out on those shares)

If anyone can decipher why that news is good for Cummins or if there is something else going on behind the scenes with this name, feel free to add a comment. We'll buy back on future pullbacks.

[Apr 30: Cummins Engine Excellent Report on Strong International Sales]

Investors Business Daily has a nice writeup as of last Friday as well... myself, I just love how far advanced they are in the developing world... I call this type of company a stealth international but its still considered a "U.S. company".

• The ongoing trend toward making things more earth-friendly doesn't leave out diesel engines. Stricter emission standards for diesels are hitting the U.S. and other countries.
• Engine maker Cummins (NYSE:CMI - News) knows how to control emissions, so it's thriving in this regulatory environment, according to some analysts.
• "It's not that they are unique and nobody else can do it," said Eli Lustgarten, an analyst at Longbow Research. "But they have really developed a more systematic approach and have been able to deliver products faster that meet the new standards."
• A Cummins spokesman points out that the company is unique in being the largest diesel engine manufacturer that doesn't produce vehicles. Mark Land, the spokesman, says this lets Cummins concentrate on engines and emission standards.
• In addition to growth tied to industry-leading technology, analysts expect big gains from the company's exposure to emerging markets. Columbus, Ind.-based Cummins has formed joint ventures or other partnerships with large automakers in these markets, including Tata (NYSE:TTM - News) in India, Dongfeng and Foton in China, and Kamaz in Russia.
• This international exposure is helping the company weather the recent U.S. slowdown, according to Brian Rayle, an analyst at FTN Midwest.
• Other analysts say few companies can top Cummins' worldwide reach. Credit Suisse analysts said in a recent note that Cummins is one of the best ways to "play the global infrastructure cycle." Credit Suisse does investment banking work for the engine maker.
• International sales became the majority of Cummins' total sales for the first time in 2005. Last year, about 54% of the company's $13 billion in revenue came from outside the U.S. About 19% of 2007 sales came from Asia and Australia, with 18% from Europe and Russia, 9% from Latin America, and 5% from Africa and the Middle East.
• Despite the U.S. weakness, Cummins says it increased its market share in the North American heavy- and medium-duty truck markets.
• "One longer-term concern is the fact that on the heavy truck side in North America and globally, you are going toward a more vertically integrated structure," said Rayle, the FTN Midwest analyst. "More of the truck manufacturers are building their own engines."
• "The biggest challenge is execution for the company. The company has positioned itself with lots of opportunity from the new products, but that involves a dramatic increase in capital spending for the next five years," Lustgarten said.
• Cummins expects that high gas prices and environmental concerns will help increase demand in the U.S. for light-duty diesel engines, which are about 30% more fuel efficient than gasoline engines.

Long Cummins Engine in fund; no personal position

Higher Inflation Expectations? Higher Mortgage Rates Coming

Speaking of higher inflation (see previous post) ... there are so many bad outcomes that could come from this especially in an economy which needs its life blood of "cheap money" to exist (solve problems).... I cannot even begin addressing all the myriad issues but let me throw one out - long term rates will be going up as inflation expectations pick up; and you know what is tied to long term rates - mortgages. So what happens to home prices when mortgage rates go up? They must go down - because higher rates means it costs more to own a home. Oh dear. Housing recovery of spring 2008, err summer 2008, err fall 2008, err spring 2009, here we come. But never fear the statistics show a "surprising increase in home sales" in certain areas - they forget to look behind the curtain and mention that these are in large part foreclosures - at prices that people who actually live in a home are not even close to offering. So yes we will see spikes of home sales here and there, especially in areas with huge foreclosure rates - but these are not transactions between human to human - they are bank to human. And with higher rates it only makes the process of market clearing prices, and inventory reduction take that much longer to play out.

• The Sacramento Association of Realtors says that a whopping 65.5% of 1,654 homes sold by Realtors in May were bank-owned, foreclosed, homes. The median sales price in Sacramento County and the City of West Sacramento May was $230,250, down 34.2% from a year ago.

• Realtor sales overall in Sacramento in May were up 76% from a year ago and up 14% from April, the local trade group said.

• But as housing economist Thomas Lawler pointed out in a recent research note, “non-distressed home sellers found little solace” in the Sacramento sales “boom.” The banks appear to be offering bargain basement prices that mom-and-pop home sellers can’t stomach.

• In Las Vegas, for example, about half of recent sales have been lender sales. according to The Greater Las Vegas Association of Realtors. The lenders are finding buyers there also. Sales of single-family homes in April were up 30% from a year earlier.

So let's remember this reality when the Kool Aid begins about how sales are "recovering" and the stock market skyrockets up on the news sometime later this summer or fall. When prices are 30,40,50% below what people who actually live in homes believe their home is worth, we are still not recovering - we need a functioning marketplace where buyers (humans) and sellers (humans) can agree a price is fair. We are currently in a market (in some states) where buyers (humans) are picking off inventory (to flip?) from sellers (banks) who just want out of inventory. Now the main problem is, each and every day new inventory (new foreclosures) are coming into the banks hands - and I believe in certain states will be doing so for at least another year, at an increasing pace. We're still in the 4th inning, not the 7th-8th inning of the housing bust. Yet another creation of unregulated banks, and easy money Federal Reserve. It's amazing how low prices must go when you don't use exotic mortgages.... it actually has to reflect a person's income (shocking).

In [Dec 6: What Should Median Housing Price be Today?] I calculated that to reach the traditional ratio of homes costing 2.6-3.0x median income, median home prices would need to fall to $135K. That would be down from the bubble $230K at the peak (summer 2006). We already had fallen to $208K by last October and now are in the $190Ks. As more and more foreclosures happen and people are able to buy product at prices they can afford, this will only be putting more pressure on those who have stubbornly stuck in their homes, wanting to sell but still expecting 2005 prices (they've finally come to the conclusion that they won't get 2006 prices).

Now with the credit markets still frozen for many, lending requirements swinging from "you have a pulse? Here is $600K" to "I want to know the color of your great grandfather's eyes before you even get $1 from my scrawny banker hand", and on top of that a potentially RISING rate environment for mortgages? Did I mention how expensive it is getting just to drive around on a Sunday looking at open houses? Did I mention how 3500 -4500 sq foot McMansions that were just dreamy in the era of $1.50 gas, and natural gas and coal prices 50% lower than they are now, are going to fall out of favor due to cost of keeping heated/cooled? Did I mention all the homes in the far off suburbs far from workplace are going to fall out of favor, also due to high gas? Did I mention that people still need to afford to eat while they are in said new home? Well, let's just say we could have a long way to go - those of you who got a mortgage in the 1970s will be able to relate to how "little" house one could buy at 11%, 12% mortgage rates. We've been at still historically low 6% mortgage rates, but now rising quickly as inflation pressures mount... 6.2-6.3% last I checked in past few weeks. If we do get to 7-8% type of mortgage rates, I'll have to move us BACK from the 4th inning of the housing correct, back to maybe the 3rd.

Conclusion: This is all priced in with market participants who have carefully thought out all the implications, and still come to the conclusion that the 2nd half recovery is alive and well; further their idea of long term is "next week" hence why the "long term" is always rosy for them. Buy stocks.

Long the first Kool Aid stock market rally on "better than expected" home sales data; coming to a theater near you (within months)

WSJ: Inflation's Bite Worsens Around World

We've only talked about this subject for about 150 posts in blog history; combine a World of Shortages with Western central banks who solve everything by injecting liquidity (paper money) into the system, sometimes at historic rates (thanks Uncle Ben!) and we were questioning why everyone was so happy with it (more rate cuts, more rate cuts!). No free lunches in the world, but the cruel reality is those who can afford it least (both in the US and worldwide) will be affected the most.

Again the good news for you Americans reading the blog, is we have very little inflation in America. This is a scourage that only affects the rest of the world (whew) As an aside most of the scuttlebutt of late is that the Federal Reserve has to raise rates - after all the futures market says so, so it must be. The same futures market DEMANDING Uncle Ben cut rates 3 months ago. Oh she is a fickle beast. Myself - I really doubt the POLITICALLY INDEPENDENT (ahem) Federal Reserve will raise rates ahead of the election. So if he does decide to pull a Volcker (increase rates into a slowing economy - err, no recession of course) it won't happen until after the election. If it happens before then... then you simply must say even the Federal Reserve does not believe the government's reports - which show little inflation ;).

• Inflation worries are heating up around the world and jolting financial markets in the process.
• On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation.
• Also Tuesday, officials in Vietnam effectively devalued their currency in a step aimed at easing market pressures related to soaring inflation rates.
• The price of the two year Treasury note, most sensitive to the Fed's moves, has fallen sharply (and its yield has risen) as investors grow convinced that the central bank may have to raise rates this autumn to contain inflation. On Tuesday, the two-year note's yield was 2.9%, up from 2.4% on Friday, marking a major jump in that rate.
• Meanwhile, the Bank of Canada surprised markets Tuesday by holding off on an expected interest-rate cut; the central bank said the risk of inflation, driven by high energy prices, had grown too great to allow for further rate cuts. The European Central Bank is also considering interest rate increases to fend off inflation.
• Developing economies -- some of which fought bruising battles to tame inflation in the 1980s and 1990s -- seem particularly vulnerable. Many economists started the year worried that the biggest threat facing these economies was weaker growth, in the wake of the U.S. slowdown. Instead, inflation is turning out to be a potentially thornier problem.
• A year ago, in a group of 24 large developing nations tracked by Bank of America, about three-quarters were either meeting or staying below their inflation targets. Today none of them are
• The typical way to fight inflation is to raise interest rates. But that tends to hurt economic growth and weighs on stock prices. It also complicates efforts by some developing markets to hold their currencies steady, an important mission because their economies tend to be export-driven.
• Skyrocketing energy and food prices are particularly acute for countries with large numbers of people living in poverty. But there are other inflationary forces at work which preceded the recent surge in commodity prices.
• Central banks across the developing world face a critical test. Many haven't taken aggressive steps to tighten monetary policy, say economists and investors, and have resorted to temporary measures like price controls on consumer goods such as flour and gasoline to tame inflation. Governments seeking to dial back costly subsidies risk angering their populaces.
• In several large emerging markets, double-digit inflation has already arrived or is expected shortly, including Russia, Turkey, South Africa, India, Indonesia, and the Philippines. In the last week alone, Russia, the Philippines, and Indonesia all raised their key interest rates. Even with the increases in interest rates, many governments -- especially those in Asia -- are still running policies that stimulate their economies. That's because their key policy rates are lower than inflation, which gives investors an incentive to borrow rather than to save.

Powershares DB Agriculture Fund (DBA) Starting to Pop

It's starting to feel a lot like early March around here - stock market falling, agriculture products skyrocketing. It can only be a matter of time before we hear about rice hoarding at Costco again, eh? As if the world consumer did not have enough problems... we are starting to see the predicted corn inflation [Mar 31: USDA Farm Report] I wrote

While weather will have be the determining factor on what actually is harvested, as I predicted last week [Cutting Back on Powershares DB Agriculture Fund - Focus on Fertilizers for Now] when I wrote With that said, no change to my long term view and I look forward to next week's crop report - my expectation is the exact reverse of what happened last year when farmers piled into corn due to the ethanol boondoggle. With the ridiculous rise in wheat, I expect a huge upswing in wheat plantings and ... *drumroll* a shortage in corn. Which will drive it up next fall/winter ;) And so the World of Shortages continues

Unfortunately for Americans corn has been so subsidized for ages that it literally permeates every part of our food chain. So in 6-12 months when corn begins a new leg up, you are going to be paying for this in a very large way. And it plays right into my prediction of a coming "meat" shortage as corn is a major input in feedstock for chickens/cattle/etc.

Well unfortunately this is happening even quicker than I thought; 2 months later and corn is skyrocketing, now at $7 - the weather we pointed out was causing issues in March [Mar 25: This Day in Agriculture] is continuing to be awful. Weather is so poor in the Midwest that even wheat and soybeans (the latter of which is something farmers would plant if corn is not possible due to weather) are popping. Remember, I kept typing through the fall and winter we needed to pray for perfect weather and our current agricultural policy is "hope for the best". Which ties in beautifully with our energy policy aka Dick Cheney meets in secret behind closed doors with oil executives and won't release minutes to the public, and everyone else "crosses fingers it all works out". But I digress!

Again my preference was to be long corn futures (they only trade in stock accounts in London) so we've been using Powershares DB Agriculture Fund (DBA) instead (corn, soybeans, wheat, sugar) and now that all most of these are moving upward together, it's beginning to take off. And once again, look for another round of price increases at your grocery aisle in the coming months/quarters. And don't forget the meat situation [May 27: Update on Corn and Livestock] So please ignore this post when your government tells you nothing to worry about on the inflation front come Friday morning. Agflation - it's alive and well.

This move has happened so quickly (the wheat and soybeans) that I have not had time to rebuild my stake - but now that the coast is clear, the hedge funds can now run into these commodity markets and do their thing, throwing billions of their dollars into tiny agriculture markets, causing havoc for consumers worldwide - yee haw. Oh and that corn ethanol boondoggle? Ugh - let's not even get started [Apr 28: States, CEO's Beginning to Snap back at Ethanol - the "Administration" Holds Firm]

• U.S. corn futures soared more than 4 percent to a fresh record high for the fifth consecutive trading session on Wednesday as flooding expanded in the U.S. Midwest, harming the 2008 corn crop.
• Corn prices on the Chicago Board of Trade have surged 80 percent over the past year, with nearly 17 percent of that tacked on just this month.
• Soybeans surged 3 percent and wheat leaped nearly 5 percent as those markets followed corn, but the historic rainfall and flooding in the United States also were beginning to hurt soy and wheat crop prospects.
• "There is definitely concern. There is way too much water and, even if it is drier next week, it won't matter now. It's too late to plant corn and even bean yields are being affected," Vic Lespinasse, an analyst for GrainAnalyst.com, said.
• By midday, U.S. corn for July 2008 (CN8) delivery was locked up the 30-cent limit at $7.03-1/4 per bushel.
• The U.S. Department of Agriculture this week slashed 5 bushels per acre from its estimate for U.S. corn yields because of excessive rainfall and flooding in key corn states, including top producers Illinois and Iowa.
• "The size of the corn crop is coming down, and maybe the wheat crop too," said Chicago cash merchant Glenn Hollander of Hollander-Feuerhaken.
• "If you look at corn prices, wheat can only rise. We can't have wheat cheaper than corn," a European trader said.

So what will our leadership do about this? Do they even know what is going on? Based on past performance we will see one of two things (or both) - they will sue US farmers (OPEC) or bring US farmers into Washington D.C. to grill them for price gouging (oil executives). But it won't happen until November 5, 2008 - after all we have voters to pander too. Farmers are voters. But once Nov 4 is done with; all bets off the table - let the lawsuits/grilling commence! (Of course the Congressmen should be suing and/or grilling themselves since they are the nexis for many of the problems, but since we largely elect people we'd like to have a beer with instead of people who understand the issues, that will never happen)

[Jan 18: One Lonely Voice Agrees with Me on Food Inflation]

Long Powershares DB Agriculture Fund in fund; no personal position

Market Continues to Trade like *BLEEP*

If you turned this chart upside down, it would be a beautiful upside breakout and we'd want to buy buy buy. Unfortunately, we have to look at the chart right side up. Here is my general game plan and the same thing I do at just about every inflection point. As discussed earlier the first natural place for the market to put a stand in (on S&P 500) are the April lows, 1325-1330. So I'll assume all the King's Horses and all the King's Men [Jan 9: An Amazing Blunt Commentary on the Plunge Protection Team] will use that level to try to put Humpty Dumpty together again. At that point I'll lighten up on the short exposure - assuming yet another bounce. (note: A lot of people say there is a lot of support at S&P 1340 - I don't see it myself but if all of Wall Street sees it, than it must be)



From there either the market will (a) bounce or (b) slice through S&P 1325 like a knife through hot butter - in either scenario I'll buy back short exposure. We'd actually prefer a bounce for best profit opportunities on the short side. Either way we want insurance. Could the market make a bounce off April lows and rush upward into a new bull market? Always possible but I find it improbable and I don't position myself for the improbable.

If we do break through S&P 1325, then the next major support level are March lows way down there in the mid/upper 1200s (round balling 1280 or so, although we had that spike down to 1260). That was the Bear Stearns bottom. We would apply the same logic there - assuming a bounce - and if you thought the Invisible Hand was trying to protect us now, I expect every force of nature to be applied at that level. Because if we break through that, all bets are off - institutions will be selling wholesale and running to the sideline. The PPT knows this, so they will protect this castle.

I continue to believe if all the true reality were discounted into the market we'd be substantially lower - this bounce off the Bear Stearns bottom is just the market players trying to convince themselves and each other the 2nd half rebound will save us all. The 2nd half rebound thesis, as we get closer by the day, is looking more silly by the moment.

Again, the piece of inflation fiction comes out this Friday. If its "better than expected" the market will use it as an excuse to rally... because food prices will be ignored, gasoline prices will be ignored, home heating/air conditioning will be ignored - everything will be ignored because a government reports says it is not happening. So we'll have to accept that for the near term. But if for some odd reason this report shows any inkling of truth - much like the unemployment report last Friday - the Pollyannas will be struck another blow - and we could have yet another very ugly Friday.

Once more, there is no reason to press bets. I won't be "medium term" bullish until I see people start to toss aside fertilizer and coal names in panic. Or, when we all feel like throwing up - that's another good sign its time to become more constructive. My stomach feels fine (except when I look at that evil Trina Solar P&L the past 3 days). Let me re-emphasize we won't be unaffected by any potential future selloff as I described above - our goal is to be "less affected" and then have some free cash around to take advantage of the bargains created. We will not nail the bottom, but as always the purchases we made as the market does what I call 'waterfall' selloffs are the ones that generate the most gains 2-3 months later, even if 2-3 days later or even 2-3 weeks later they cause losses.

Bookkeeping: Cutting Intrepid Potash (IPI) on Quick 25% Gain

I have to say this stock surpassed my expectations - after reviewing Interpid Potash's quarter, I had a general target of $3 EPS for 2008 (analysts at $2.18) x 20 PE ratio = $60 price target, when I added this stock a week ago Monday [Jun 2: Beginning Starter Position in Intrepid Potash]. I bought in the $48s and was hoping for $60 by sometime later in the year... that would of returned 25%. Well we got this in a week and a half, so I am booking profits and saying "wow". (I didn't get the $60, but sold around $59)

Can it keep going up? Certainly! Low share counts in recent IPOs allow for wild swings, but (a) I got my 6 month target in a week and a half and (b) I prefer the valuation in Mosaic so I'll just add more exposure there if need be, as my target for Mosaic in terms of price per share is much higher.

I have brought Intrepid Potash (IPI) back down to a very minor stake from 1.8% to 0.25%. We'll look to add shares on a pullback, and say thank you for for this nice quick gain.

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

Agrium (AGU) Lifts Guidance, Stock Surges

Agrium (AGU) the smallest of the 3 major potash producers in Canpotex is out this morning with increased guidance - expect the same from Mosaic (MOS) and Potash (POT). This is leading the sector higher with AGU up 9% in early trading - keep in mind unlike the other 2 names mentioned, Agrium has a large retail component. Essentially they've taken their own lowball guidance up by around 80 cents, and now are firmly over the analysts $2.50. Looks like analysts are *still* behind the curve even after making huge upward revisions the past 60-90 days, once they saw the writing on the wall - writing we were urging them to see last fall [Oct 23: Analysts Still Doubting the Fertilizer Stocks] I wrote

Folks, I am not a full time fertilizer analyst working for a major brokerage (in fact the closest I get to fertlizer is what the dog leaves on the lawn on a daily basis), and even I could see months ago the 'big picture' - by doing a little digging and seeing the contracts being signed and huge price increases - well you can see the obvious. Not sure what world the analysts live in aside from the 'err on caution' world.

I wrote in this week's position review that I was really liking the way the fertilizers were holding up and they looked poised to break out (although I am not at a full exposure due to the overall market) and thus far they have performed splendidly...

I really like the action in the fertilizer group right now - a nice period of consolidation, where the companies faded from the attention of CNBC and most daytraders/momentum traders. If the market were more stable I'd be increasing my exposure materially to this group right at this moment as it has all the markings of a new breakout - but it is simply hard to do that with the headwinds facing the market, and knowing if we do have a sustained move down, these "favored" groups sustain NASTY reversals, quite out of the blue.

• Canadian fertilizer maker Agrium Inc. on Wednesday raised its outlook for second-quarter earnings per share to a range of $2.80 and $3, due to strong retail and wholesale performance.
• The company previously forecast profit of $1.92 to $2.22 per share for the second quarter. The guidance excludes any additional stock-based compensation expense, gains from natural gas and currency hedging positions and contributions from the UAP acquisition.
• On average, analysts surveyed by Thomson Financial expect quarterly profit of $2.50 per share.
• "Our excellent results are due to strong performance from both our retail and wholesale operations, which is particularly impressive given that the North American spring application season has been hampered by excessively cold and wet weather this year," said Mike Wilson, Agrium president and chief executive. "Continued strong global crop prices have created unprecedented demand for crop inputs and we foresee an extended demand-driven cycle."

If you are an Agrium investor there is also some not so positive news on an Egyptian initiative but I don't follow the company that closely so I cannot comment on that piece of business.

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

WSJ: Food Crisis Forces New Look at Farming

We've been on this beat for a long time, but more and more the world is waking up to the crisis ahead. We need higher yields, immediately - worldwide. And will continue to need higher yields to support all these humans coming online, especially the ones moving to middle class. [Apr 30: Finally, a Year Late Fertilizer Hits the Front Page of the NYTimes]

... again, I state this planet is not well suited for 6.5 Billion people unless 4.5 Billion live in abject poverty. The more wealth in this world and the more people move from poverty to "middle class" (we wouldn't call it that necessarily in the US), the more strains on the globe. We will have crisis after crisis until/if/when technological breakthroughs happen... but I believe the next 1-10 years will be fraught with crisis after crisis as world governments (especially ours) are reactive, not anticipatory. Even in the longer run the technological breakthroughs are going to be like plugging holes in a dam waiting to burst...

The problems we are beginning to encounter are global in nature and require cross border cooperation. If I know human nature, we will turn into a much more protective and nationalistic globe, not cooperative as each nation serves to protect its own. We've already seen this in grains as country after country has restricted exports and/or slapped tariffs. Even mighty United States puts enormous tariffs on Brazilian sugar ethanol so it can protect its own corn producers. We're just in the pre game warm up of this thesis.... first pitch has yet to really be thrown out. And as for those 6.5 Billion humans? Well we are headed for 9 Billion by 2042. So we have to cram another 40%+ people onto this globe....

As an aside as we wrote back in the spring multiple times, corn is headed for a disaster [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop] Already up over 10% since early April. No easy way to directly play corn futures for US investors unfortunately - unless you have access to the London exchange or have a commodity trading account.

• Corn prices rose to record highs on Monday and looked set to climb further as torrential rains threatened to reduce further U.S. crop prospects in a market already facing tight supplies and surging demand.
• The lead July 2008 corn futures contract rose as high as $6.73 per bushel, up more than 3 percent and a record for a spot contract.
• "We've got some rain in the United States that could reduce some of the plantings and yields for corn. Combine that with the drive into ethanol and you can see why corn is going to spike up," said analyst David Hart of Fat Prophets.
• "I am still very bullish. I think $7, $8, $9 corn is well within reach," said Commerzbank analyst Edward Hands.

Back to the Wall Street Journal article...

• Leonid Eustache coaxes a small rice crop out of his tiny plot here, but he could use some help from his government. He can't afford fertilizer. His only tool is a hoe. And half of his crop rots because nearby drainage canals are filled with water hyacinth.
• Haiti is one of many developing nations where a global food crisis is causing both donors and recipients of anti-poverty aid to rethink doctrines about the role of agriculture -- and whether poor nations should grow their own food or rely on the world's trading system.
• For decades, poor nations were discouraged from investing too much in agriculture, which was seen as a problem rather than a solution to fighting poverty. Many free-market economists came to believe that the reason billions of people are poor is because they are shackled to subsistence farming. The economists' solution: find something else for them in manufacturing, tourism or services so that they can make money to buy food instead of growing it. (lesson, never trust rich countries or economists... and especially economists from rich countries!) :)
• Now, with grain stocks depleted, China and India gobbling food as never before and food prices soaring, many poor countries are turning their back on the old ideas and installing government programs designed to support local farmers. These include cash subsidies to poor consumers, increased efforts to improve local seed varieties, and government-sponsored handouts of fertilizer and seeds.
• The food crisis has also contributed to a major rethink among the advice givers. Institutions such as the World Bank and International Monetary Fund are once again treating investment in poor farmers as a promising development strategy. A growing number of World Bank economists are now convinced most poor nations need a healthy farm sector as the basis of a robust economy.
• For many nations, food security has become a matter of national security.
• Only recently has the World Bank acknowledged the damage caused by its advice.

PIMCO's Bill Gross with Scathing Review of America / Inflation Fantasy

Wow. Well one of two things are happening - either PIMCO's (biggest bond manager in America) Bill Gross has joined Warren Buffet in reading the blog [Feb 7: Buffet Reads my Blog!] or more and more prominent Americans are waking up to the global competition theme (for all things, including resources) that is happening and how behind the curve the US is in so many aspects (mostly due to our narcissism in my opinion - if it doesn't happen here, than it doesn't happen). Gross puts out a monthly letter (I have a link in the left margin of the blog) and this month's is a doozy, I'd recommend going there and reading the whole thing, but he sure does touch on many themes we've been discussing since day 1 - he does indeed keep harping on a theme he mentioned earlier [May 22: Bill Gross: Inflation Underplayed] - the fairy tales that are our government reports. [May 10: Finally Some Mainstream Reports are Figuring Out the Spin from Government]

Once again, as long as you keep telling the sheep everything is fine, the sheep (in America at least) seem to play along. In other countries, they riot in the streets. Its a striking contrast. And when you cannot jigger the reports any further - the other option is to simply take them away from public view [Apr 23: Barry Ritholtz on Disappearing Economic Indicators], using such excuses as "it's too expensive to maintain" (this from the government of $900 toilet seats). And you know Wall Street - in their earnest nature to find the silver lining in everything so they can rush stocks up, they take every positive data point as ultimate truth! Myself; my thesis has been only when the government data so strikingly differs from what many people on the ground are actually experiencing.... only then will the sheep start scratching their heads. We appears to finally be entering that stage.... so personally I hope this CPI figure this month shows deflation :) (Remember last month it showed gas prices going DOWN) :)

Anyhow, here are some highlights from a letter you should read, and then email/print and distribute. When it comes from me, it just sounds like some lunatic fringe blogger but now that more and more people of importance are daring to utter these things out loud, what can I say - I am loving it.

• What this country needs is either a good 5¢ cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” – “what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value.
• We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon.
• We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.
• It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow.
• Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands every year?
• We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies.
• Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
• I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control.

Then Gross shows 2 graphs, inflation composite for 24 other countries - and then US "inflation"

• Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S.
• These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. (it's the economic miracle of productivity - that only happens within US borders!)
  
• The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S. (cripes, just imagine what the real number must be - oh wait, we don't have to imagine; the import report shows 15% inflation in imported goods)
• This, dear reader, looks a mite suspicious. (remember, US border patrol does not allow inflation inside our country - hence no suspicion at all; this is the truth as it comes from government - so we can trust it)
• Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal.
• I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world?
• This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference.

Some more detail on a theme I touched on many times; long time blog readers will remember many posts on these topics but at this point I am just tired of writing about the same thing, so I just refer to it as our monthly work of fiction [Mar 16: A Picture is Worth a Thousand Words - Inflation] [Dec 12: Real Inflation Showing up in Reports not Called CPI/PPI] [Sep 28: Barry Ritholtz on Bloomberg Finally Seeing the Truth in CPI] [Sep 11: Chinese Inflation Hits Highest Level in 11 Years - Why do you Care?]

• The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution.
• The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing.
• It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.
• In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate.
• Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example.
• In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn’t really feel as good as the BLS did.
• In 2004, I claimed that these revised methodologies were understating CPI by perhaps 1% annually and therefore overstating real GDP growth by close to the same amount. Others have actually tracked the CPI that “would have been” based on the good old fashioned way of calculation. The results are not pretty

So what does all this mean to normal Americans? Here is the naked truth

• The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens
• But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.
• A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.

• Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.

So there it is folks. We, as sheep, continue along in our sheltered world, protected by nanny state from facing the reality. And if we can be so "fortunate" to get yet another in a long string of "better than expected" results this Friday, we can all cheer together (clap like seals) and buy stocks. Together. All for one. And fantasy for all.

Conclusion: Homeland Security's war against inflation crossing our borders is a raging success. Countless price increases have been stopped, whether via land or by sea. Buy stocks (while concurrently laughing at every other country on the globe who doesn't have half as good of a border patrol as us). Clench fist and prepare to thrust it upward in joy Friday at 8:30 AM when once again we see another victory against the ravages of inflation. Then go to a neighborhood in your town with average salary of $38K or less (should be easy to find, 50% of Americans are below that level) and share the good news with them too! :) Find your local Senior Citizen housing adobe and run through the halls shouting the good news about their fixed income cost of living adjustment. All together now!

Bookkeeping: Adding to Ctrip.com (CTRP)

Ctrip.com (CTRP) is an interesting thesis right here - one could make an arguement that as China slows so will travel, but it is all relative ("slowing" in China is a very different proposition than the US - i.e. GDP dropping from 12% growth to 6% growth would seem like a recession for them, while in the US we would dream for 6% growth). That said a major risk would be the post Olympics removal of energy subsidies which would put a serious crimp in the growth story there. We shall see how it plays out. All I know is for nearly 5 years, when I buy Ctrip.com on dips I am always rewarded over time - even though it is ALWAYS expensive on a P/E basis. Much like the DryShips purchase I don't expect any huge rebound anytime soon, and thus I am (as always) incrementally adding to this stake as it falters.

On May 27th this was one of the names I cut back as it approached a technical resistance area (50 day moving average) right below $58. Not 2 weeks later it is trading in the $49s, so we can get our position back for a 15% price reduction. (and it is down 30% from its peak in early May) That doesn't mean this train stops at $49, and in fact this is one ugly chart - but we are now nearing lows seen in mid March ($48s) so it's as good of a spot as any to begin rebuilding. If things get really hairy around here, we should look to January 2008 lows of low $40s. Today's purchase takes us back to a 1.4% stake; if we get a low $40s price point, I'll be adding in a more material fashion.

We'll continue this identical strategy in other names, as we are finally starting to see pockets in weakness in everything that is not a commodity... I have my list, and I'm checking it twice (ok maybe thrice)

[Feb 28: Ctrip.com Continues to Impress]
[Jan 5: Zachstocks on Ctrip.com]

Long Ctrip.com in fund; no personal position

Bookkeeping: Adding to DryShips (DRYS)

In this environment, unlike most of the past 2 months we have to pick spots and assume our purchases (as we layer in) will lose money in the near term. This is different than when we buy a pullback in a market that is generally in an uptrend (mid March to late May) - where when you make a purchase on a pullback, you expect a quick bounce. So with that in mind, I am continuing to rebuild a position in DryShips (DRYS), the dry bulk shipper (with deep sea drilling thrown in); but not expecting any sustained move up in the near term. But my first buy target has been reached, so I am executing a purchase.

Now, as the rest of Wall Street joins my thesis (eventually) of a global slowdown these stocks could take it on the chin from a perception point of view, but the reality is there is no way China cannot keep importing energy (coal) or fertilizer, lest its people go without heat or food. But perception is everything so as the global slowdown thesis picks up, we could see these stocks unfairly take a hit.

If I were interested in expanding the portfolio I'd also add Excel Maritime (EXM) here right below $44 as its lost 18% in 4 sessions, but instead of building a mini basket of names in the sector I am just sticking with DryShips as it pulls back to its 50 day moving average of $85. The 200 day moving average is right below at $82, but this is one volatile stock where moving average really don't mean much. If the market falls out of favor this could be a $65 stock in a heartbeat, so I won't be applying the same discipline in this name as I usually do (i.e. cut it back severely if it fells below $82) We'll just look to make this a more material position if it does indeed take a serious haircut. Today's purchase takes this back up to a 1.75% stake in the fund. Remember, with this name we have the future deep sea oil drilling bunny as a bonus. [May 22: DryShips - Earnings Growth Continues & Potential Deep Sea Oil Drilling Play]

If we do get a more serious pullback ($60-$65 range) I'd like to take this to a 3-4% stake. But in case the market stages a nonsense rally, at least we have something material in the stock. Again I am throwing in a few buys on the long side here or there, but not with any urgency since I believe we are prone to more downside.

Long DryShips in fund; no personal position

American Superconductor (AMSC) with $450 Million Follow Up Order from China

I've been doing a lot of work the past month on finding alternative energy plays that are not having to do with solar, and I found a few names and now have a new watchlist. Most of these stocks are much smaller than the standard fare I buy, so I am being cautious and waiting for some of these stocks to pullback in price, but they have been extraordinarily strong even with these selloffs 2 of the past 3 weeks. American Superconductor (AMSC) is actually a name a reader brought up to me a month or so ago when we were asking for some new ideas... this is not a new name to me but after watching the stock I had to take another look. Much like Energy Conversion Devices (ENER) (which I highlighted in early May in the upper $40s, and is now in the mid $60s) this has been a "hope" company for a long time - long on promise, but short on execution. [May 8: Energy Conversion Devices - Is the Turnaround Finally Here?] But we've seen how the ship has appeared to come in for ENER, and perhaps the ship is coming in for controversial AMSC as well. They received a huge follow up order today. This appears to be a 3 year contract for $450 million. Considering the company is only doing under $200 million in revenue in total this year, the magnitude of this contract is enormous for this size of company. The stock performance today reflects that. (congrats to the reader who owns this!)

• American Superconductor Corporation (NASDAQ: AMSC - News), a leading energy technologies company, today announced that it has received a $450 million order from Beijing-based Sinovel Wind Corporation Limited for core electrical components for 1.5 megawatt (MW) wind turbines.
  
• The contract calls for shipments to begin in January 2009 and increase in amount year-over-year through the contract’s completion in December 2011.
• AMSC’s wind turbine electrical systems and core electrical components include the company's proprietary PowerModule™ power converters. They enable reliable, high-performance wind turbine operation by controlling power flows, regulating voltage, monitoring system performance and controlling the pitch of wind turbine blades to maximize efficiency.
• “Sinovel is the epitome of business success in China and is one of the fastest growing wind turbine manufacturers in the world,” said Greg Yurek, founder and chief executive officer of AMSC. “The core electrical components covered under this contract will be used to support more than 10 gigawatts of wind power capacity, nearly double China’s total wind power installed base at the end of 2007. It is invigorating to see Sinovel’s success in bringing much needed electrical generation capacity to the Chinese power market at a crucial time in that country’s expansion. We are proud to work in tandem with Sinovel on this important endeavor.”

Again there are some tertiary "wind" plays that people are hyping, but I am familiar with most of them, and they generally are either not pure plays or don't exactly have the type of management you can trust to execute. So I've been digging deeper to find some more ideas and have a handful now - I just would prefer the stock prices falter so I can get better prices. Maybe the next time oil "implodes" to $120 ;).

Specific to American Superconductor - again this has been a long time "hope" stock, full of promises... I remember it even from the late 90s when it spiked along with the rest of the "hope" stocks (Fuelcell Energy (FCEL) anyone?). But maybe for some of these names, the rising tide is finally creating the backdrop and their time has come.

AMSC is a leading energy technologies company offering an array of solutions based on two proprietary technologies: programmable power electronic converters and high temperature superconductor (HTS) wires. The company's products, services and system-level solutions enable cleaner, more efficient and more reliable generation, delivery and use of electric power. AMSC is a leader in alternative energy, offering grid interconnection solutions as well as licensed wind energy designs and electrical systems.

No position but wishing I had bought the darn ENER

XTO Energy (XTO) Increases Production Targets and Makes (Another) Acquisition

XTO Energy (XTO) is one of the more acquisitive companies in the natural gas space; they have announced another meaningful one this morning - while increasing future production targets (a very good thing) So we not only get higher prices in natural gas but we have the type of companies that can expand output; exactly what we want to see. (Note: I still think commodities are overdue for a pullback, but this is positive long term news)

• XTO Energy Inc. (XTO) announced today that the Company is increasing its 2008 production growth target to 28 - 30% based on recently announced agreements to acquire Hunt Petroleum Corporation and Bakken Shale producing properties from Headington Oil Company
• Based on volume projections for next year, the Company is also establishing an annual production growth target of 20% for 2009.
• In order to achieve this production growth, a preliminary 2009 development budget of $4.0 - $4.5 billion utilizing 110 to 120 operated drilling rigs is anticipated.
• "Given XTO's significant acquisitions and expanding shale basin presence, we have now assimilated the best property base for growth in the Company's history," stated Bob R. Simpson, Chairman and Chief Executive Officer.
• "With acquisitions and our planned development work, we are targeting a production volume increase in 2009 of about 450 million cubic feet equivalent above the average rate in 2008. This significant growth can be delivered with about 50% to 55% of the estimated cash flow at the current commodity price outlook."

Acquisition of Hunt Petroleum

• XTO Energy says it is acquiring privately held Hunt Petroleum Corp. for $4.19 billion in cash and stock.
• XTO Energy Inc. says the deal includes $2.6 billion in cash and 23.5 million shares of XTO stock. The stock portion of the deal is valued at about $1.6 billion, or $67.50 per share.
• Fort Worth, Texas-based XTO estimates Hunt's properties' proved reserves total about 1.052 trillion cubic feet of natural gas equivalent. About 70 percent of the properties are in East Texas, Central and Northern Louisiana.

XTO Energy Inc. is a domestic natural gas producer engaged in the acquisition, exploitation and development of quality, long-lived oil and natural gas properties in the United States. Its properties are concentrated in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana, Mississippi and Montana.

Long XTO Energy in fund; no personal position

Cold War II? Some Harsh Criticism from Russia

Some very harsh rhetoric coming out of the newly elected Russian President. I guess our financial innovation did not go over so well with other countries... ahem. Should be an interesting era we enter next - in the "World of Shortages" scenario each country will have their natural resource strengths and if true scarcity develops it will be very interesting to see how cross border trade develops. One advantage for both Russia and America is their natural topography - worst case scenario if things really turn bad globally (lack of serious technological breakthroughs to compensate for 2.5 billion more humans by 2050) both countries enjoy abundant agricultural production. Then again you need fresh water for said agricultural production, but that's a worry for another day. We can always invade Canada for water anyhow, I mean we outnumber than 10:1. ;)

Russia has their oil and natural gas, we have our coal and natural gas - could be some interesting showdowns in the decades ahead. Again folks, I am talking 10, 15, 20 years out, not 6 months. In fact in the near term, I could see a very plausible case for some serious corrections in certain commodities (I'm looking at you crude) sometime in the back half of 08. But not yet.

• Dmitry Medvedev delivered the most Anti-American speech of his 1 month presidency when he claimed that US selfishness had led the world into its worst financial crisis since the Great Depression. (but Dmitry, Fox Business told me that lightly regulated free markets solve everything - corporations do work for the greater good and are not just a massive transfer of wealth from the many to the few - didn't you get the memo? What are you? Communist? Uhh... check that, nevermind)
  
• Addressing a grandiose conference designed to show off Russia's financial resurgence, the new president said that America's "economic egoism" and Western protectionism had triggered a global economic slowdown. (I like that Dmitry - economic egoism - I might have to steal that one for the blog)
• Western chief executives who came to St Petersburg hoping for hear reassurances from a leader whose liberal credentials have been widely touted instead found a president who often sounded like a clone of his aggressive predecessor, Vladimir Putin.
• Slamming the World Bank and the International Monetary Fund for their failure to end the world's problems, Mr Medvedev suggested that Russia should instead take charge of redirecting global economic policy. (uhh, not so much)
• He announced that a conference to address major issues like the credit crunch and rising food prices would be held in Russia later this year. (we're having a conference on such global crisis as steroids in baseball - would you like to attend?)
• ...the forum in St Petersburg was intended as a brash display of the country's newly acquired wealth. Fleets of black limousines brought Russia's rich to an event that organizers claim could soon supplant the World Economic Forum in Davos. (on a serious note - speaking of concentration on wealth - the uber rich in Russia now own hordes of real estate in Europe - esp London, and are certainly growing in power)
• Yet, for all its confidence, the conference served as a metaphor for the underlying economic weaknesses that the Kremlin likes to claim are either non-existent or not an issue. Behind the grandeur, the Soviet-era venue that played host to the conference – which replaced a similar forum in London last year after Britain fell out of favour in the Kremlin – creaked badly. Sound systems wobbled, western executives looked on in occasional bafflement as translation devices periodically failed, some delegates went hungry due to a shortage of food points and security officers behaved at their thuggish worst. (nice)

Reuters chipped in as well

• "Failure by the biggest financial firms in the world to adequately take risk into account, coupled with the aggressive financial policies of the biggest economy in the world, have led not only to corporate losses," Medvedev told Russia's main annual event for international investors in St Petersburg. "Most people on the planet have become poorer." (I wish I could disagree; but it appears Dmitry's economists must be reading my blog)
• The Kremlin leader also attacked big bonuses paid out in the financial world, saying regulators needed to ensure that incentives promoted "rational behavior based on a balanced evaluation of risks and rewards". (no, we much prefer heads we win, tails we still win executive compensation - that way the CEO's get to keep their 8th and 9th homes during tough times. Dmitry please think of the struggles of these CEOs and have a heart, will ya? Some of them have had to take a pay cut from $18 million to $14 million - how will their kids go to college?)
  
• Russia is the world's biggest gas producer and its second-biggest oil exporter.

WSJ: Where Will U.S. Banks Beg Next?

This is an amusing story from today's Wall Street Journal; but before we go through it let's review 2 specific type of "conventional wisdom" that was shoved down our throat by pundits in the late fall through winter - the "follow the smart money" thesis. We've had call after call after call (after call) about "it's time to load up financials since it cannot get worse and the bottom is in"' this started last summer in fact. All those pundits have frankly destroyed their clients accounts. They have used multiple reasons over the quarters. but one flavor of the day was "smart money is buying, so you should to".... smart money being mostly Arab money (but some Asian money as well). In fact after a sell off in November 2007, we set the stage for a December rally when Citibank sold a stake (at terrible terms) to Abu Dhabi [Nov 27: Citibank (C) Sells Stake to Abu Dhabi] I wrote

You can tell how desperate the situation is because if this were 2 years ago, people would be raising a fuss, and worried about those "darn foreigners" buying our assets. Now, we are greeting this with hero worship - thank god, someone showed up to buy our crap.

I recall people SCREAMING this marked the bottom in financials (2 months before emergency cuts by the Federal Reserve, 4 months before the Bear Stearns bailout) Not so much, in fact we saw a continued stream of capital injections [Dec 31: Merrill Lynch Tapped Singapore - Next China and Middle East] I wrote

One of the themes I have been mentioning lately is the mainstream press clamor for how this must be the bottom for the financials because the 'smart money' is in... by smart money they mean mostly people sitting on eons of dead dinosaurs. I actually make the argument that the more money you have the more risk you can take, because heck, if you blow a few billion here or there - well there are more dead dinosaurs producing petrodollars tomorrow, and the next day, and the next. As for China, well that trade surplus is not going anywhere soon... so if you blow a few billion, US consumers will send you a few more billion next week. So in fact 'smart money' doesn't have to nail bottoms or tops very accurately. It is people with limited capital that actually have to be a lot more careful.

Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money is through no work of your own. We've seen many people (think Paul Allen of Microsoft fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that smart money? Are heirs of fortunes from their parents "smart money"? Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly "schrewd"? That's the talking points we are handed by the financial media. I'd rather listen to Buffet myself. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be "early" or "buy high" for the "very very long term". For the rest of us, we don't have those benefits, so we need to invest accordingly.

In February I mentioned that as one type of "smart money" was piling in, another type of "smart money" was piling out of financials [Feb 18: Eddie Lampart Selling Out of Citigroup While Arabs/Asians Piling In] I wrote

Now in an interesting twist it appears we have smart US money selling to smart foreign money as hedge fund king Eddie Lampert was selling a third of his stake of Citigroup (at a severe loss), most likely at nearly the exact same time the foreigners began piling in. So which smart money do you follow? ;) What is interesting about the Lampert move is one of the conventional wisdom themes that I do believe in... cut your losses. Eddie was buying in mid $40s to mid $50s and was selling large stakes somewhere in the $30s. Citigroup today? mid $20s. So in the short run it at least saved him from some more losses, even if he locked in some very bad results.

But back to Citigroup and the financials, is if an imminent rebound is coming by "2nd half 2008" why would Lampert not sit and wait out for the return of the roaring good times everyone is talking about by this summer/fall? Food for thought. Lampert has had a bad time of things lately but since the late 80s he has been one of the best in the business, so I'll still take his mind over those who benefit from sitting on dead dinosaurs or huge trade surpluses. And Buffet is not buying anything but stocks he has already been in, Wells Fargo (WF) and USB. I don't see any picking of carcasses there either. Strange considering we are going to be booming by 2nd half 2008.

And need I say anything about the "smart money" buying Bear Stearns? [Mar 13: "Smart Money" is Buying, So Should You!] I wrote

One of the propagandas constantly offered by the financial media is "you should buy because smart money is buying". We heard this throughout the fall in the financials as Arabs/Asians were buying stakes... just do a search for "dinosaurs" on the blog for earlier posts about how dangerous this line of thinking is to your portfolio. Even non Arabs/Asians are being blown up by the financials. Back in September 07, Joseph Lewis, a billionaire was adding to a huge stake (now nearly 10%) in Bear Stearns (BSC). The stock was trading $105-$120 or so at the time, down from a 52 week high of $160. Trumpets blaring, the financial media (and many investor managers who appears as pundits in these outlets) told us "the bottom is in", "kitchen sink quarter" and "smart money is buying" financials - so should you!

Conclusion: Oops. Bear is down to nearly $50 today on solvency fears. Ouch. Now if you are a billionaire with a nearly 10% stake, this stinks, but you still have your 8 houses, 3 yachts and private jet. Life will go on. If you are a regular Joe investor and you listened to the hype - well you just took a bath that is going to take a long time to recover from. Now in today's era you could call your government representative and ask for a bailout of your stock losses as it's the "in thing" to do nowadays, but I digress.

So now that we've had the benefit of time, we can look back to see just how silly these calls were - even though they were advanced by just about every "expert" they paraded on financial TV (not to mention throughout the print press). The apologists will now revert to the time old tradition of saying "we didn't mean things would get better in 3 months, 6 months, 9 months, we meant 5 years". Tell that to your account which has been pummeled... or tell that to the Arabs and Asians.... so now we wonder where we will go next? Here is the article but the last phrase sums it up, beggars can't be choosers - and that's the state of our financial system... a bunch of beggars.

• An all-star lineup of private-equity and sovereign-wealth funds opened their wallets when U.S. financial institutions needed capital during the early throes of the credit crunch. Who's going to help next?
• The pummeling Friday of National City and Washington Mutual shares knocked the respective investments of U.S. private-equity firms Corsair Capital and TPG well below the discounted prices at which they bought in.
• They're just the latest examples on a long list of high-profile bets that don't look as if they're working so far. Last December, Singapore's Temasek Holdings said it would invest $4.4 billion in Merrill Lynch at $48 a share, with an option to buy an additional $600 million. Friday, Merrill shares closed at $39.02.
• The Abu Dhabi Investment Authority struck a convertible-stock deal with Citigroup in November to pump $7.5 billion into the bank when Citi shares were trading above $30 a share. Now they're treading water at $20.
• China Investment Corp.'s $5 billion investment in Morgan Stanley last December in exchange for a nearly 10% stake is also out of the money; the shares are off nearly 20% this year.
• Then there was Warburg Pincus's bet on beleaguered bond-insurer MBIA. Even with its purchase of shares in January at around $12 designed to "average down" its initial investment at $31 a share, Warburg's investors are now proud owners of MBIA shares valued at $5.44 each, with a couple of board seats added in for good measure.
• Private-equity and government funds argue that they're long-term investors who've successfully weathered rocky periods before. At a conference last week, TPG co-founder Jim Coulter analogized such wagers to renovating a home, saying that however long you think it will take for your investment to recover, it will take "double the time, double the money." (Rationalization 101)
• Given the performance of these investments so far, how much worse does it have to get before pension trustees and university endowments and the top-tier private-equity firms they back ask whether it makes sense to keep doing this? How long before rich overseas funds stop giving cash to Wall Street firms that lose their money?
• Wall Street could bang its cups in dicier places. State investment funds are taking root in places like Algeria, Angola, Libya and Zimbabwe. Kazakhstan has a National Fund, bulking up thanks to soaring oil and gas revenue. (I'd have to laugh if US banks turned to flipping Zimbabwe, which has inflation at oh, 1 million %? Kazakhstan? Perhaps we'll fly Borat in to close the deal?)
• Selling stakes to funds of authoritarian or unstable regimes in frontier markets doesn't quite mesh with Wall Street's lofty image of itself. But it created this mess, and beggars can't be choosers.

Market Action Bodes Poorly for Consumers

Looking over all my watch lists... both today and Friday, it's almost a carbon copy - if it's a commodity stock it's almost universally up, especially energy related. If it's anything else you pretty much are down. It's a scary pattern in terms of what it reflects in the real economy globally, especially for consumers worldwide.

This just looks like a market to me where we can lose 2% in the blink of an eye.

As stated in last week's review

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.

Amazingly this almost worked out to perfection - we drifted to S&P 1370... 1375 was the old support, now turned resistance. So as stated, on that sort of bounce I'd re-establish short exposure, which I did throughout the morning. (much of what I bought back was sold off into the Friday damage) I was hoping for a little bit of a stronger bounce so I'd get cheaper prices on the Ultrashort buys, but that appears to be all she's got Captain....

The commodities are holding up, but we still want to look for the old pattern - everything falls but commodities, and then last to fall will be the generals. Just from a gut call, this market has a worrisome tone to it. This appears to be another period to distrust the rallies as suckers bets, as those who were buying this AM quickly found out.

The Consumer Price Index is out this Friday so we'll see what that piece of fiction says this month; with the focus moving from the credit worries (which still abound) to inflation (which does not exist in the US of course), this report, if like the employment report, begins to reflect a hint of reality - could be yet another "wake up" call for market participants. We shall see; 40% of this report is rental rates (housing costs) which might show decreases (deflation) so it might offset all the increases to consumer and remain subdued. Unfortunately I cannot put rental rates into my car gas tank, or heat/air condition my house with it, or eat it.

It remains time to continue down a cautious path; twiddling thumbs and making buying lists with price targets is the best course of action for now.

Bookkeeping: Starting Slow Rebuild of Mercadolibre (MELI)

Latin America internet player Mercadolibre (MELI) is one volatile stock... every time it weakens we get commentary about a coming secondary (which they tried to price in the past, but withdrew) - eventually I assume it will happen. But for now, we just like to layer in on dips, and layer out on strength. The chart is quite poor as the stock has broken all major key support levels but with the stock down 15% from its peak Friday (and 30% from its peak), I made some purchases this morning in the $40s/$41s, taking the stake up from 0.7% to 1.5% of the portfolio. Due to the bipolar nature of this stock it is hard to tuck this away as a buy and hold; not to mention a very pricey multiple. So we'll pick our spots and when some of our holdings, especially ones we've cut back on severely show these price contractions we will begin to rebuild the stake. There is good support there in the mid $30s so we'll look to load up in larger scale if/when we reach that level.

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

Long Mercadolibre in fund; no personal position

Bookkeeping: Trina Solar (TSL) Missed It's Chance for Glory

I am really gritting my teeth at this missed opportunity for Trina Solar (TSL) management to finally reward its shareholders... some of which have been sticking with (or around) them since last summer, only to be disappointed time after time. My long term thesis on this name has not changed, and I believe the 2nd half of the year will be explosive. It still trades at a huge discount to the group, which most likely is (a) management discount - a leadership team that loves to surprise us with new adventures that no one else in the group embarks upon - Wall Street however hates surprises and (b) potential dilutive equity offering to fund 2009 operations coming later in the year. While most people would be more concerned with (b), I am more concerned with (a). Last year they surprised the Street with a big annual bonus to management that knocked the earnings per share off kilter mid year and we are approaching the same time frame next quarter - so that could be the next "surprise".

This one really has me conflicted - I could see this as a triple digit stock by early 2009 (or earlier if the management would stop pulling these surprises and let the momentum sheep jump onto the back of this story), but the solar sector is one of those groups that will not hold up if the market sells off, and Trina's huge discount to the group won't matter much; it will sell off with peers.

So this is my game plan for now, and I'll let technicals guide me more than anything. 200 day moving average = $45, 50 day moving average = $42. (exponential on both, simple shows different numbers) We just broke through the 200 day moving average so if the stock does not rebound by late in the day, we have a negative situation. If we break that $42 level, then it gets much more negative in the near term, and I'll have to cut back more, awaiting a sign of strength. The problem with this sector is when it falls out of favor, the stocks do not drop 6%, they drop 26% - and it can happen in 2 sessions. Valuation be damned. If Trina Solar drops to $40 or below it will start getting comical, forward PE ratio of 10 for 100% growth. But no one said the market was logical...

So for now I'm cutting this stake back (it remains as #1 position) from 10% to 6.1%, with sales here in the low $44s. This reverses my purchase from Friday in the $45s/$46s (plus a bit more) - yes I flip flopped. Most of my purchases are in the low to mid $40s so overall it's ok - basically we've just given away all our gains as the stock peeked its head into the low $50s last Thursday, but we should of had a $60+ stock if management hadn't decided it is time to play the forex game. So our unrealized gains all washed away into the ether. If we break below that $42 we'll be forced to cut back a bit further. One day we'll look back at this and laugh but right now (and for the past 4 quarters) this company has simply been an exercise in frustration - especially considering the rocket moves in some of its peers. I don't want 10% of my portfolio weighted to a management team who apparently doesn't have consideration for communication with its investors or analysts (unless the chart tells us otherwise). This is yet another quarter where they missed their chance - that's 3 out of the last 4.

Long Trina Solar in fund and personal account; short the "innovative" management team

Apple (AAPL) Buy the Rumor, Sell the News?

Let me preface this by saying I'm a big fan of Apple (AAPL) as a stock and innovator. But I am wondering if we are setting up for the classic buy the rumor, sell the news with the Apple developers conference beginning today and the anticipated introduction of the 3G iPhone.

• June has arrived and for Apple Inc fans and investors that means just one thing -- a new iPhone. The encore to the original iPhone, which launched nearly a year ago amid unprecedented industry buzz, is widely expected to be the main attraction when Chief Executive Steve Jobs takes the stage at Apple's developers' conference on Monday.
• The new iPhone will be accompanied by support for corporate e-mail and a slate of new programs that could help boost sales of the devices, which sport a touch-sensitive screen, wireless Internet access and iPod-style media functions.
• Apple has declined to comment on what Jobs will announce, but analysts are betting he will show off a long-rumored phone running on a so-called 3G, or third-generation, network.
• There is also speculation Apple could bow to a cellphone industry practice and offer a subsidized iPhone, an arrangement where AT&T could kick in a couple hundred dollars to make the devices more affordable. AT&T already gives Apple a slice of the monthly service fees it gets from iPhone subscribers.
• "We think that actually Apple could talk about a very disruptive business model, or a change in their business model, embracing subsidies where necessary, multiple carriers to help get the iPhone into more hands," Lehman Brothers analyst Ben Reitzes told a conference call last week.

Don't look now but this chart has all the makings of a double top. I can't short individual names, but this might be a short term short, at least until the $160-$170 range.... in lieu of that I have just cut back the long position, awaiting lower entry points to rebuy. We'll see if I get one.

[Apr 23: Apple Nice Solid Result]

Long Apple in fund; no personal position

Visa (V), Mastercard (MA) See Gold in PrePaid

Interesting story on TheStreet.com today; we continue to love near monopolies... multiple ways to win here - as the "pooring of America" continues, cash strapped Americans will turn more to credit (before defaulting in some cases), and much of the rest of the world has yet to see their first credit card...

• Visa's strategy -- one shared by rival MasterCard MA -- of capitalizing on consumers' increasing reliance on plastic to pay for everyday purchases, rather than simply big-ticket items. Now, the two companies are looking to prepaid cards as another potential growth area, as they attempt to continue strong growth inside the U.S. and -- more important -- globally.
• "The big vision is that ... people talk about prepaid in the same way they talk about credit and debit," says Elizabeth Buse, Visa's global head of product, in an interview with TheStreet.com. "If we're talking a few years from now, my vision would be we're not talking about prepaid as an innovation, we're talking about prepaid as the third mainstream consumer product."
• The companies also do not extend credit to consumers, instead issuing their cards through bank partners and collecting a fee on each transaction. As U.S. consumers struggle to pay their bills, loan delinquencies and defaults have taken a bite out of earnings at other card-based companies such as American Express AXP and Discover Financial Services DFS, which do hold consumer debt. (key point if you're new to the blog and have not been following this theme)
• Prepaid cards are often thought of as simply travel and gift cards, which include a set amount and expire once the amount is fully used. But their potential extends far beyond that, the companies say. Both Visa and MasterCard are tapping into traditionally cash- and check-based markets like employer payroll systems, federal and state government disbursements -- such as child care benefits and unemployment funds -- health care services and rebates. (nice... very nice)
• The latest trend is "reloadable" prepaid cards, in which customers can replenish card funds instead of having a set amount.
• U.S. Bancorp USB has taken an interest in general, reloadable cards, which could be attractive to a huge, largely untapped market: Low-income or immigrant customers and others, such as teenagers, who do not have traditional checking or savings accounts. Such spenders typically turn to check-cashing services, payday lenders, money orders and tax refund anticipation loans in order to get cash -- often at high fees, according to Celent.
• According to a December report by Celent, the so-called unbanked population in the U.S. alone is roughly 36 million, representing $260 billion in aggregate income.
• Looking outside the U.S., the potential for these cards is enormous, others say. "We believe that there will be rapid adoption of prepaid in these emerging [countries] alongside debit," Buse says. "Debit grew so substantially in the U.S. because we all had checking accounts. In these emerging economies today they don't usually have an electronic payment relationship." (remember this every time these stocks sell off due to "the weak US consumer")

[Apr 29: Mastercard Continues to Impress]

Lehman Brothers (LEH) Posts first Loss since 94 IPO and Raises $6 Billion

Analysts miss another one; worst case was assumed to be a $300M loss and of course we were assured Lehman Brothers (LEH) did not need to raise capital - even now the "spin" is we are only doing this to appease investors, we don't really even need the money. *poof* $6 Billion more raised today. This is the problem with almost the entire financial universe at this point - people were clapping like seals when these companies continuously raise funds during the heart of the credit crisis P.B. (Pre-Fed Bailout), but "raising funds" means you issue more equity. Which cripples your earnings PER share (as floods of new shares are now part of the equation). So even when.... one day, things return to normal - the same amount of profits will be spread over so many more shares. This goes for many stocks in this sector - and the capital raising is not done yet... again, we have not even BEGUN the recession yet. Most of the damage thus far has been focused in the investment banks and huge money center banks - the next wave will come from the banks more tied to the local economies - the regional banks. Some of which won't be going concerns in 12-18 months. Anyhow, from my count this is the 3rd (or 4th) kitchen sink quarter? I cannot even keep track anymore. The bottom must be in, because they threw everything they could as a write off in this quarter (again).

If not for the Federal Reserve implicit backstopping of these investment banks with your tax dollars (free markets and all) we probably would be going down the path where after Bear, went Lehman - after Lehman went Merrill, and in the end we'd have 2 investment banks. But since we now live in a socialized market where risk is taken by the people to support the financial system, most likely we'll see a much smaller, weakened Lehman which will be part of a larger organization down the road. Too much of their business is in the new fangled brilliant credit instruments; some of which won't be coming back for a long time aka until a new generation of suckers is born - give it 10 years.

• Lehman Brothers(LEH) on Monday warned it would post a $2.8 billion second-quarter loss and said it would raise $6 million through common and preferred stock offerings.
• The loss comes to $5.14 per diluted common share, vs. a profit of $1.3 billion, or $2.21 per diluted common share, in the second quarter of last year. Analysts polled by Thomson Reuters had expected a loss of 22 cents a share in the second quarter.
• The firm expects negative revenue of $700 million, compared to positive revenue of $5.5 billion in the year-ago period. Analysts had expected revenue of $2.62 billion. The second-quarter results reflect negative mark-to-market adjustments and principal trading losses, as well as rising debt liabilities. Lehman also said it incurred losses on hedges this quarter "more than offset" gains from some hedging activity.
• Moody's Investors Service responded by lowering Lehman's outlook to negative form stable.
• The firm did not provide many details about its plans to raise capital. The preferred shares will be converted to common stock after three years, with cash provided in lieu of fractional shares. The firm said it had not yet determined the non-cumulative dividend rate, conversion rate and other terms.
• Lehman's shares have plummeted about 50% in 2008 as investors have grown concerned about its financial health and the extent of its exposure to toxic subprime mortgages.

The terms of the capital raise have not been announced yet so we'll see just how desperate they were once those are out. I expect similar negative surprises from all the investment banks, but frankly in the end the bigger ones will be strengthened as their smaller peers are weakened. So once again, in the end (although the near term could be rocky for them as well) Goldman Sachs (GS) will win. Goldman Sachs always wins.

Long Goldman Sachs in fund; no personal position

Newsweek: Why It's Worse than you Think

Thanks to a reader for sending me this article from Newsweek; other than Fareed Zakaria [May 4: Weekend Reading], I don't really follow this magazine much. Essentially it touches on many of the themes I've been mocking for the better part of 10 months... it is good to see more and more mainstream media sources tell Americans what is really going on. One day it might even filter down to Wall Street. Until then, we'll keep pointing out the reality of what is going on in the "real economy" while ignoring (other than for obvious effect on our portfolio) the nonsense filtering out of the "official data". Remember folks, the highly paid, highly educated expert analyst community (who in general follow a small subset of companies and should know them inside and out) is still forecasting Quarter 4 2008 earnings as 60% HIGHER over Quarter 4 2007 - this verges on criminal in its stupidity. So either this upcoming quarter or the one after (October) we're going to see a bevy of slashed earnings estimates. Did someone say October? We don't like October.... bad things happen in October.

Unfortunately most of our economic leaders are cut from the same cloth - they constantly reassured us that as the US economy slowed, inflation would go away - like magic. (not that there is any inflation anyhow). This is still the 1980s narcissistic, the world revolves around the United States of Suprime ("if it doesn't happen on our soil, than it simply does not matter"). I typed almost daily at the time, how the World of Shortages has brought an age of global competition for resources - and in fact inflation will be rising due to structural shortages; in fact this is just step 1 of a multi decade situation. But unfortunately that requires a global view which apparently none of the higher ups has. If we're too poor to buy something, other players in the world economy will step up - especially those siphoning our money (and assets) off left and right to fund such outlays. As the greatest debtor nation the globe has ever seen, we're cool like that. I looked like an outlier at that ime, and even today we're pointing to "speculators" for rises in commodities across the board - the first part of fixing a problem is getting past denial - we're still in denial stage. So what our Federal Reserve has done is (not cause) but thrown gasoline onto a fire of structural deficits in natural resources, inflating money supply, and exaggerating trends that were already playing out slowly but surely. But frankly they had to do it, to bailout our entire financial system which has grown (as Bill Gross used the term) into a "shadow banking system" full of unchecked, and largely unregulated players and systems. A system derived from policies that said "regulation is evil" and stoked by a Federal Reserve that believed creating easy credit and masses of paper money was the fix to all problems. So it was either sacrifice the banking system, or sacrifice the lower and middle class to the throes of rampant inflation over and beyond where it was already going. That was an easy choice - and here we are now enjoying the after effects. I was typing this thesis during the first of the Federal Reserve band aid programs (cuts) and I'm typing it now. Only then I was proposing a theory and looked like some "conspiracy theorist" nutjob; and now my theory looks plainly obvious with evidence everywhere. Unfortunately, short of a serious global slowdown, I don't see how the genie gets put back into the bottle. And even then, it will be a temporary respite - because in 2-3 years China will still be creating 1000 new automotive customers a day (in Beijing alone). As long as leadership believes the U.S. is the axis of the world and no one else matters, we'll continue to NOT understand what is happening TO and AROUND us...

• For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.
• Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. (Folks, we can make the economy grow at any rate you want if you misstate certain numbers - say for example one government agency reports inflation at 4%, but the one calculating GDP says, nah we'll make up a figure, say 2.4% instead and ta da - positive GDP!) [May 1: Was it an Official Recession? NY Post Says it Should Be]
  
• Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) (Yun is one of my personal favorites - after I fell off the chair laughing at some earlier predictions which I outlined how ridiculous they were in retrospect I've totally ignored every word coming from this industry paid "economist" - [Nov 14 2007: Housing Will be Flat next Year - Whew!]
  
• Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year." (this from the guy who told us in spring 2007 that subprime is contained)
  
• But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months.
• As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food, and steel.
• While the treatment of the current malaise has been essentially identical to the reaction to the 2001 slump—aggressive Federal Reserve rate cuts and tax rebates—the symptoms are quite different. In 2001, an implosion in the technology sector and a slump in business investment pushed the economy over the edge. Even though some 3 million jobs were shed between 2001 and 2003, consumers soldiered on through the downturn. "We had a massive reduction in both long- and short-term interest rates, which set off the housing and consumption boom," says Ian Morris, chief U.S. economist at HSBC. (Remember zero-percent car loans?) This time, it's the opposite. While businesses—especially those that export—are holding up, the economy is being dragged down by the cement shoes of a freaked-out consumer and a punk housing market. (I type this often; almost everyone under the age of 50 on Wall Street has been conditioned to 1 thing; a business led recession which fixes itself in short duration - they simply do not entertain the thought of a potential of a consumer led recession which has led to very very long periods of stagnation - hence we get these hopeful rallies in "early cycle" sectors every 7-8 weeks, because Pavlov's dog has taught them that in the early 90s and early 00s you buy "half way" through a recession and we're fine 6 months from then - well this is not the early 90s or early 00s - the consumer has been on a 25 year binge, and the last 8 have been excessive; it is finally time to pay the piper in consumer land - but the conditioning remains in the traders)
• The fall (in housing) has also removed an important source of support for consumer spending, as Americans who grew accustomed to borrowing against rising home equity to finance car purchases or vacations now find themselves bereft.
• Despite repeated claims that the damage has been contained ("the bottom is in, in finacials" repeated every 4 weeks for your enjoyment on CNBC since August 2007 - "it's the kitchen sink quarter - no we promise this time"), the banks that recklessly financed the housing boom—and then traded mortgage debt even more recklessly—are still cleaning up the mess. But it turns out (surprise!) the same sort of clouded judgment led banks to excesses in commercial lending, and in loans to private-equity firms. (I also wrote this in the fall when everyone pointed to subprime and said once we get through subprime we are off to the races - no its EVERY loan problem - in mortgages, we need to get through subprime, then alt A loans, then up to prime loans - almost everyone buying from 2006-2008 is going to be underwater in home value in 80% of the country by Dec 31, 2008 - then in 2009 will start hitting people who bought in 2005; then we have car loans, then student loans, then home equity lines of credit, then credit cards, then 401k loans, then commercial loans - it's all coming - in fact the one thing we HAVE worked most through or will by end of year is suprime loans - first in, first out - now we have to work through everything else)
• Economists say it generally takes nine to 12 months for Federal Reserve interest-rate cuts to work their way into the system. By contrast, sending checks to consumers tends to produce quick results. Some retailers have reported a surge of business spurred by the tax rebates. But consumers are shopping for necessities, not discretionary items. Sales at Wal-Mart and Costco were up in May, while sales at Kohl's and Nordstrom were down.
• The rebate checks will total about $120 billion. Studies suggest that about 40 percent of that total, or about $48 billion, will be spent in short order; the rest will be saved or spent later. Rosenberg reckons that higher energy costs—crude-oil prices are up 40 percent so far in 2008—are draining about $30 billion out of household cash flow per quarter, and that food inflation, running at a 9 percent annualized rate, drains another $20 billion per quarter. "So instead of the stimulus being filtered into real economic activity, it's being diverted into the checkout counter at Albertson's and the gas station," he says.
• Historically, or at least since the end of World War II, if the U.S. sneezed, the world caught a cold. When we used more gas, oil prices rose, and when we used less gas, oil prices fell. As GM vice chairman Bob Lutz points out, "Usually petroleum prices were the first to react to a severe U.S. slowdown." In the past it would have been unthinkable for oil to spike if Americans were cutting back.
• But at root, $4-per-gallon gasoline and $20-per-pound steaks are largely a function of the changing economic geography, and the diminished stature of the U.S. The world is growing without us.
• The realization that the U.S. no longer controls its economic destiny is contributing to the widespread feeling of unease and crisis of confidence. Economically speaking, the 1990s belonged to the U.S. and New York and Silicon Valley. But as this decade motors toward its close, it seems powered by China, and Russia, and Dubai and Mumbai. It's as though we're home watching reruns while everybody else is out partying.
• It's not all doom and gloom. Businesses that thrive on a weak dollar are holding up nicely. (as shown by the earnings prowess of multinationals last quarter where daily I was writing "US sales stunk, but hey things overseas are booming")

Conclusion: Buy stocks. This is all priced in, and frankly who needs Americans anymore - certainly not multinationals. And even if we did need Americans, they'll be back in 3 weeks as July 1, 2008 marks day 1 of the "2nd half recovery" thesis I've been hearing for 6 months now. I cannot wait.

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

Long time blog readers will know we've been hammering all these points home; and at times watched aghast as the market trudged higher ignoring reality. That's the problem with being early - if you think 2-3 steps ahead on Wall Street the bulls will trample you since they struggle looking even 1 step ahead. As long as government reports assure them that their Pavlov dog way of doing things is correct and the boom starts "within 6 months" they feast on stocks like greedy pigs at the trough (note the record highs in equities in October 2007 as we just began into the credit and housing crisis)

I'm hoping to write a similar view outlining thoughts for the next 6-9 months ahead as I did in August and December 2007 (see bottom of post) but I have so many thoughts to collect in 1 spot, it might take a full weekend just to get them all sorted out... but let me summarize by saying not only will 2nd half 2008 be an epic struggle, first half 2009 is not looking too positive in my cloudy crystal ball. If the globe goes into recession and crude drops back to $80 and housing prices drop another 30% by next spring/summer - then I'll actually be bullish (on America), because the Americans will actually be able to afford their lifestyle again (however the distribution of their income will still be heavily towards food and energy but at that point far less towards housing). Or if corporations suddenly become generous and return to 1970s thinking and start doling out 12% pay increases to compensate for 15% inflation (in things we need) I can also change to bullish on America - but with the government insisting inflation is tame, while Kimberly Clark raises prices twice in the span of 3 months, and Procter & Gamble increases prices for "essentials" and Dow Chemical raises prices 20% (which will be passed down to you in 6-9 months), with home heating prices next winter and the winter after moving to levels that will shock many - I still think you're going to be stuck with your 3% wage increases (since the gov't says inflation barely exists) and you will need to find a way to stretch it 10x to Sunday. This is the ultimate killer for the US consumer - in the 70s it was acknowledged by all parties that inflation was real and companies compensated employees as such. Nowadays? Inflation is just in your imagination - no need to give you raises to compensate for it, and if you complain your job is going to China anyhow. So quiet down and stretch your US peso farther - make it work, harder, longer, tougher - go go go! (did I mention buy stocks? - they are so cheap on 2008 estimates)

[Reviewing August 2007's Roadmap & Views]

[Et tu, 1st half 2008? Predictions for the Coming 6 Months]

Bookkeeping: Weekly Changes to Fund Positions Week 44

Week 44 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: 31.3% (vs 31.9% last week)
51 long bias: 59.4% (vs 47.2% last week)
9 short bias: 12.2% (vs 20.9% last week)

60 positions (vs 59 last week)
Additions: Intrepid Potash (IPI)
Removals: N/A

Top 10 positions = 31.4% of fund (vs 28.2% last week)
31 of the 60 positions are at least 1% of the fund's overall holdings (52%)

Major changes and weekly thoughts
As we near the beginning of the 2nd half recovery (only 3 weeks away) the market faltered under the clouds of "no 2nd half recovery" - irony is a wonderful thing. As always, the news flow today or this week is not very different from what it was 4 weeks ago or 2 weeks ago or 6 weeks ago, but sometimes bad news is cheered, and sometimes bad news is feared; this week bad news was mostly feared. The dollar's nascent "recovery" (ahem) was torpedoed by our friendly European central banker who declared he'd pull a Volcker and actually potentially raise rates into a slowing European economy. Making things more complicated for him is he oversees 15 economies, all at different parts in the cycle. Not a fun job, but inflation control is the sole mandate for the ECB, so from that perspective one could understand.

After pulling back to the low $120s, crude staged a staggering 2 day rally of $17. We've been saying for a few weeks now that we see a lot more risk in Asia as we saw the potential for demand destruction finally coming there when/if the Asian economies started cutting back their subsidization of energy; at some price point it just becomes too expensive for every country not named China. In short order from that point, the smaller Asian economies buckled and this week India buckled. These still are not full scale subsidy removals, just incremental increases and even that set off (lightly/not reported in US) drama in the streets of India.

• Angry consumers blocked rail tracks and roads and shut down businesses in several parts of India for a second day Friday, protesting a hike in fuel prices by the government.
• The federal and state governments scrambled to contain the protests. India's federal petroleum minister canceled a trip to Japan for the G-8 summit, The Press Trust of India news agency reported.
• The Indian government hiked gasoline prices by 5 rupees (US$0.13) a liter and diesel prices 3 rupees (US$0.08) a liter on Wednesday to partially offset soaring international oil prices. Fuel prices vary between states, which also impose their own taxes. Price of cooking gas went up by 50 rupees (US$1.25) per 14 kilogram (30.8 pound) cylinder.
• Some 300 million of India's population of around 1.1 billion live on less then a dollar a day and millions of others living on the state-set minimum daily wage of about 66 rupees (about US$1.6) cannot afford cooking gas at all.

Also not reported/lightly reported in the US are protests in England, Spain and France (to name a few) - fisherman, truck drivers, et al. Again folks as you now - if it doesn't happen in the United States it pretty much does not matter to the US press (short of a tsunami or historic earthquake - and then we can get back to Brad and Angelina news). But the ingredient that greases the skids of the world economy is causing major havoc worldwide. Just imagine the plight of said fishermen who is paying double the cost for petrol, and getting just a small uptick in fish prices to offset that. What happens? They eventually go out of business, and stop fishing. What happens next? Shortages in that product. ("thankfully" we still have big corporate fish farmers to offset it to some degree) But just apply that example to... everything. Almost everything must be transported. If oil does indeed get to $150+ and stays there we are pointing ourselves to global recession (except in the US where of course our government will show positive GDP) :) But the rest of the world, too bad for you...

• Belgium: Fishermen from France and Italy demonstrated against soaring fuel prices on Wednesday. French fishermen say they will go broke unless they can buy diesel at half the market rate.
• Britain: Hundreds of truck drivers blocked London roads on May 28, causing chaos. Almost a week later fishermen's groups massed in the capital to demand urgent government aid to ease rising fuel costs.
• Bulgaria: More than 150 truck drivers and dozens of bus drivers converged in a convoy on the capital Sofia on May 28, saying high fuel prices meant they were operating at a loss.
• Chile: Thousands of Chilean drivers parked their trucks along national highways last week to protest soaring fuel prices and diesel taxes in a tacit rejection of the Government's US$1 billion cash subsidy on consumer fuel prices. They lifted the strike on Friday.
• Italy: Commercial fishermen went on strike on May 30, closing down the industry on both coasts.
• France: Lorries and taxis blocked a major motorway in Paris and called for low-cost diesel. Fishermen, truckers and farmers have staged numerous protests over the past month to pressure the Government into helping them after oil costs doubled in a year.
• Spain: Almost the entire Spanish fleet, Europe's biggest, stayed in port on May 30, calling for the Government action to lower fuel prices.

And so we go in the US markets, relatively oblivious to what is happening in the rest of the world, trusting and holding dear the information that the government provides us while ignoring all the anecdotal stories that pile up (to the roof) of people struggling to deal with the rising cost of life, combating it with 3.5% wage gains. All will be well... in the 2nd half, so who really cares what is going on in the real world - the imaginary 2nd half recovery world lies right ahead of us (so buy stocks). If oil dares to put on another $10 spurt Monday or Tuesday, I can only imagine the spinmeisters giving us the Goldilocks economy spin.... "hey we STILL see growth in the GDP figures, why is everyone up in arms - just read the reports - everything is fine".

For the fund, we remain in high cash position - let me reiterate now since we have a lot of new readers of late - I'm not a hedge fund that will be going 70% short even if I think the market is in trouble. I am comparing myself to the mutual fund industry which is long biased in nature - I will be long biased in nature. But in turbulent times I will have a meaningful short exposure, and heavy cash exposure. We will still suffer along with the rest, but hopefully less than the rest (over time). Again I don't see much different in the news flow today, that has been in the past few weeks/months - so we never know when the market is in "ignore the news" mode versus "fear the news" mode, so timing these things is nearly impossible. But technically we are in precarious position, so I'll mostly just be sitting and monitoring until some of our favorite names begin to break down and then we'll begin to layer in more on the long side. My goal, if this sell off does continue (no guarantee it does, remember everything is fine starting in 3 weeks as the 2nd half recovery begins), is to have some cash waiting there at that moment we all hit when the market does the type of dip where we want to toss our (long) cookies. Usually purchases done at or near that point, while the most painful to execute and follow through on, yield the best gains over time. Unfortunately (or fortunately) most of the names I want to purchase have yet to see any meaningful selloff... so until we see price weakness we won't begin layering into the long side in a heavy manner.



As far as a technical game plan, I will assume the medium term is now down, after our 7 weeks of happiness from the "Bear Stearns" bottom in mid March. Using the S&P 500, we are at 1360 - the 50 day moving average (exponential) is at 1375. Any bounce to that level I'll be adding some short exposure I let go on the Friday selloff. Could we bounce off this 1360 level (no man's land) and go straight up? It would not follow any textbook but frankly "anything" is possible is our new and exciting managed markets where things seem to go the Invisible Hand's way more often than not. But I'm still playing by the old fashioned handbook that worked 20 years previous to the Invisible Hand's prominent display of pre-market buying (I think futures have turned positive to flat between 8:30 AM and 9:30 AM almost every session but 4-5 since the Bear Market bottom) and last 30 minutes buying (3 times last week we had miraculous buying to keep us over the 50 day moving average, twice on quite negative down days). So we just never know, and hazarding a guess is even more difficult with a cornered Invisible Hand :) If normal patterns were allowed to play out we'd look first for that mid April low in 1320s and then off we go to revisit March lows. Ironically most of my short exposure is actually in stuff that has held up well, because if past patterns repeat the strongest sectors are the last to go... so again I am following the old patterns and we'll see how it works out. I continue to believe if this market were registering any sort of logic to what the plight really is out there in middle America (ex farmers, ex miners, ex oil industry, ex railroad) we'd be materially lower on all indexes. But $1.3 trillion thrown into the market from central banks does have a way of helping the market stay propped up.

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, I mentioned the solid quarter from Intrepid Potash (IPI) and the potential upside to full year estimates based on guidance given from the company. Later in the day I began a starter position in the $48s range. I really like the action in the fertilizer group right now - a nice period of consolidation, where the companies faded from the attention of CNBC and most daytraders/momentum traders. If the market were more stable I'd be increasing my exposure materially to this group right at this moment as it has all the markings of a new breakout - but it is simply hard to do that with the headwinds facing the market, and knowing if we do have a sustained move down, these "favored" groups sustain NASTY reversals, quite out of the blue. I continue to use coal and fertilizer (and natural gas) as the "leadership groups" - when they go, we should be in the heart of a nasty time frame for the markets. But so far they have held up. We'll see if they can survive this week.
2. To that end, on Tuesday I had increased my exposure to all my 3 previously held fertilizer names, as they bounced smartly from last week's "dip". I also increased exposure to Brazilian homebuilder Gafisa (GFA) on it's pullback.
3. I started to slowly rebuild positions in my mini basket of Indian banks - I had really cut this position back a while back and have been watching the group get pummeled; while the charts are awful the pullbacks have been severe so we will begin buying now and build up these positions on continued pullbacks.
4. Wednesday, I took profits in Chinese hog producer Zhongpin (HOGS) on a large spike in the shares - this stock acted very well through the end of the week, and I still find the valuation to be very low but this is a thinly traded stock that can move 5-7% in a heartbeat. We'll see how it acts if the market continues to be weak.
   
5. I cut back Chinese gaming company Perfect World (PWRD) in the $26.20s as the stock approached multiple resistance levels; saying I'd buy back if it cleared these levels and or pulled back to the lower to mid $20s. I got my wish within 24 hours as PWRD fell to the $23.70s Friday, so I bought back what I sold. While I really like this name for the long run, the next quarter could be dicey as investors fear some fallout from the 3 day shutdown from the period of mourning (earthquake).
6. Thursday morning I mentioned the week's performance would be tied to Trina Solar (TSL) earnings report Friday; the stock went on to put on a 10% gain Thursday and was all set for rocket take off, if it had just reported a nice solid 10-15 cent beat of analysts 48 cents. Well it beat allright - it beat its shareholders in the gut... the company decided it was time to move to US dollars instead of Chinese Renminbim so a 67 cent quarter was lost, and instead we were handed a 51 cent quarter. And our Energy Conversion Device (ENER) type run was lost in the ether due to management at TSL. Thursday's gain was completely erased and we reverted back to Wednesday's levels. I did buy more in the $45s-$46s BUT when this sector sells off all its participants generally get whacked, so despite a huge chasm in valuation versus peers, if solar goes, so will Trina Solar.
7. Friday, I began adding to holding positions in the 2 investment banks and 2 housing stocks - these have been battered the past few weeks, and if past patterns hold - just about the time commodity stocks start selling off, hedge funds will pile into these names, driving them up with some huge 1 day spikes. The question is, from that level... I still think they go lower first, so we're taking a very slow as you go approach. If we see more carnage in this group this week, I'll be adding more.

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.