34 Stocks Returning 7% this Week

As I wrote a week ago, something was squirrely (sp?) - the markets (thanks to a last minute push up 0.6% in the closing minutes) was flat for the week but very few stocks were making large moves, in fact only 21 made 8%+ last week. I wrote

this week was deceiving - the market ended flat due to miraculous buying in the last 30 minutes, but the underlying action was quite poor. This is showcased by the low number of big winners this week. I count only 21 names which returned 8%+ this week which is more apt for weeks the market is down 3-4%.

To highlight my suspicion of last week's "funny trading" in the indexes (ahem, hello Mr. Hand), this week the indexes were down 3%ish and we had more stocks (barely) returning 8%+ this week - 27. So as I said, last week was good for the talk shows but for anyone actually owning stocks and not indexes it was not a good week. I've lowered the % gain threshold this week to 7%, but its still a sparse group (understandably considering the bad week in the markets) - what can I say - fertilizer, coal, and natural gas (and/or oil exploration) continue to dominate. This is not a bipolar market.... this is plainly an incredibly narrow market where you have to be in teeny slivers of subsectors to make any money. It's harsh out there.

My gut (just a hunch) tells me this could be one of the last (if not last) weeks these same groups will be on this list ... if the 'rotational' selloff does in fact continue per previous patterns. Some of these stocks in the "blessed sectors" are nowhere near even minor support levels, so there are some major "air pockets" below if they do begin to sell off. We shall see (this would require the market to continue to selloff - and in fact it might get a oversold bounce in the near term). Let's see if this list is dominated by retail, financial, technology, or homebuilder type of names sometime in the next 1-3 weeks.

Criteria as always

1. Market capitalization $2B+
2. Average trading volume 100K+
3. Stock price $10+
4. Returns 7%+

Green we own, blue we have owned or discuss in the blog. One new group that has been long dormant are a few gold related stocks... strangely gold has been trading poorly while inflation ramps worldwide - I do believe oil has seemingly replaced gold as the "inflation" hedge, but gold might be the "Armageddon" hedge it always has been. Polycom (PLCM) is a proxy high oil play - its actually a "technology" company that dominates the teleconferencing business - so when its too expensive to fly somewhere to meet business associates - the play here is you teleconference. Research in Motion (RIMM) reports next week...

Symbol	Company Name	% Price Change 1 Week
ELN	Elan Depository Receipt	25.4
ESI	ITT Educational Services Inc	22.2
CRK	Comstock Resources Inc	15.4
HK	Petrohawk Energy Corp	14.8
ENER	Energy Conversion Devices Inc	14.4
SQM	Sociedad Quimica y Minera de Chile	13.8
FCL	Foundation Coal Holdings Inc	13.1
XCO	EXCO Resources Inc	12.8
IPI	Intrepid Potash Inc	12.8
DNR	Denbury Resources Inc	12.2
OSG	Overseas Shipholding Group Inc	11.2
FRO	Frontline Ltd	10.6
MYGN	Myriad Genetics Inc	10.4
WYE	Wyeth Ord Shs	10.2
IHS	Information Handling Services Inc	9.6
HP	Helmerich & Payne Inc	9.5
CZZ	Cosan Ltd	9.2
MEE	Massey Energy Co	9.2
VIV	Vivo Participacoes SA ADR	9.0
FSUMF	Fortescue Metals Group Ltd	9.0
TRA	Terra Industries Ord Shs	8.9
RIMM	RESEARCH IN MOTION LIMITED	8.7
PVA	Penn Virginia Corp	8.6
KGC	KINROSS GOLD CORP	8.4
TS	Tenaris ADR	8.4
WAB	Wabtec Corp	8.0
BEAV	BE Aerospace Inc	8.0
GDP	Goodrich Petro Ord Shs	7.9
WEN	Wendy's International Inc	7.9
CHK	Chesapeake Energy Ord Shs	7.9
PLCM	Polycom Inc	7.7
CF	CF Industries Holdings Inc	7.5
GOLD	Randgold Resources ADR	7.4
AAUK	Anglo American ADR	7.0

The Slow Death of Suburbs?

I've proposed in the past that if we do indeed move to a higher energy cost cycle, the living habits of Americans are going to change quite drastically. In short, we are going to look a lot like Europe - concentrated urban centers, and closer to the city (or job centers in satellite smaller towns) will be much more attractive. Smaller homes, smaller cars, etc. I wrote in [Apr 22: Euro hits $1.60 as ECB Hints at Rate Hikes] when gas was "only" mid $3s...

When do we start hearing stories of people quitting work because its too expensive to get to their low paying "service job" that politicians say are "great for America" as we gut the production capability over the past 2 decades.

And for you eager real estate investors? Here is a trend I'm giving you first... smaller homes... in inner ring suburbs. With heating costs and A/C costs killing people on top of gasoline prices - those outer suburb McMansions are going to be ghost towns left for the truly well off. The middle class will be moving closer to work, in homes they can afford to pay the utilities. Start scouting those type of homes - thats where the next real estate boom will be (2011). Or buy a farm.

Now 3 months later - the mainstream press has caught on....

Now, I do believe this is our path: the cure for higher prices is higher prices. Unfortunately we are in a global competition for resources so to truly bring down prices for a sustained period of time, we need something akin to a global slowdown. Judging by the rampant inflation in emerging markets, along with slow growth in Western countries - we seem on our way. And what will happen? Lower energy prices. For a time; looking further out - I see an era of higher prices, combated by technological innovation and mass adaptation of alternative energies; but that is a very long term trend. The global economy, after retrenching will pick up again, and even if/when we see a pullback in energy prices - we will be in the same boat we are in now, in the future (if its 6 months, 18 months or 30 months I do not know, but we will be back here).

What I do wonder is how quickly Americans will fall back into bad habits if/when energy retreats - i.e. if oil gets back to $100 will people go back to their SUV ways? *IF* wage increases were keeping up with true inflation I'd say yes - but since large swaths of the middle and lower class (and parts of lower upper class) have fallen so far behind true cost of living changes, and I don't see food inflation abating anytime soon, I think perhaps they will not go back to the "old ways". But we'll see - Americans are famous for short memories. But once we hit pain levels, we also are very good at adapting - let's pick up on some stories showing how life is quickly changing - the Europization of America if you will. As you read these also keep in mind how this is going to affect the housing "rebound" everyone is touting - we have some major headwinds coming our way now - higher inflation means long term interest rates go up (which is what mortgages are based on), higher fuel costs makes that lazy Sunday afternoon drive perusing open houses a non-starter for many in the lower and middle class, and homes too far from working centers or mass transit (95% of America has no means to mass transit) are just not going to be on anyone's list (except the very well off - and they really will not be wanting to live in those tiny 2800 sq foot homes we overbuilt on a mass scale the past half decade). These are all stories one might quickly glance over as curious sidebars, but by analyzing these macro trends we can help make specific investing decisions. (or if you are a real estate investor, you can see today where to invest for greatest gains in the long run)

WSJ: Suburbs a Mile too Far for Some

• Pasadena, CA - Abandoning grueling freeway commutes and the ennui of San Fernando Valley suburbs, Mike Boseman recently found residential refuge in this Southern California city. His apartment building straddles a light-rail line, which the 25-year-old insurance broker rides to and from work in Los Angeles.
• Richard Wells is more than a generation older but was similarly attracted to the Pasadena apartment building. The British-born scientist retains what he calls a European preference for public transportation despite his nearly 30 years in California.
• Messrs. Boseman and Wells embody trends that are dovetailing to potentially reshape a half-century-long pattern of how and where Americans live: The driveable suburb -- that bedrock of post-World War II society -- is for many a mile too far.
• Today, the subprime-mortgage crisis and $4-a-gallon gasoline are delivering further gut punches by blighting remote subdivisions nationwide and rendering long commutes untenable for middle-class Americans.
• "All these things are piling up, and there are fundamental changes occurring in demand for housing in most parts of the country."
• hristopher Leinberger, a visiting fellow at the Brookings Institution and a developer of walkable areas that combine housing and commercial space, describes the structural shift as the "beginning of the end of sprawl."
• While baby boomers may be looking to downsize their homes and simplify their lives in urban condominiums, millennials often look to cities as a way of rebelling against the suburban cul-de-sac culture that pervaded their youth.
• Even families who sought the suburbs or were priced out of cities now have an economic imperative to find their way back closer to town. Transportation is the second-biggest household expense, after housing, and suburban families face a relatively greater gas burden.
  
• At the same time, distant suburbs, or exurbs, where housing growth was predicated on cheap gas, have experienced the biggest declines in home values in the past year.
• The demand for housing near urban centers isn't going to snuff out suburbs overnight. Several satellite towns around cities continue to lure jobs and are reinventing themselves with their own city centers.
• The challenges for cities are considerable, from investing in public-transportation systems to creating incentives for developers to accommodate the new urban housing demand.

Speaking of those challenges - high prices are a tax on all things (consumers/producers) - even police departments - let me introduce you to the traffic ticket fuel surcharge! Remember folks, our whole government (local/state) revenue system is based on home price taxes - that's the bedrock - as we have written in the past this housing slump is really going to hit home in 2009/2010. But it is already starting - we are just early on this story. [May 7: Vallejo California Votes for Bankruptcy] Schools, public services, the whole system is going to be affected. Someone needs to pay the bills, so do you think these governments are going to really cut costs? (hah) More revenue! New sources! American consumers will be beset with higher charges/taxes from their local governments JUST as they are suffering through inflation from global forces. Meanwhile Wall Street can cheer because unlike the 1970s workers cannot go to employers and ask for cost of living wage increases 10-12-14%. Nope, because government reports show 2.4% inflation. :) See it all ties together in one very ugly picture - Welcome to the jungle. The American consumer is going to be staggered for a long while.

• Some cash-strapped US municipalities are resorting to slapping fuel surcharges onto tickets issued to speeding drivers in order to fill dwindling city coffers hit hard by skyrocketing gas prices.
• "The hike in gas prices seriously hurts our ability to patrol," said Clarence Martin, the Atlanta city council member who proposed the measure.

But let's look at a broader picture - NYTimes: Fuel Costs, Pinch Cities - Mayors Push Mass Transit

• Higher fuel prices are forcing cities across the country to cut public services, limit driving by employees and expand public transportation in what has become a sprawling movement to conserve energy.
• A survey of 132 cities, released Friday here at a meeting of the United States Conference of Mayors, found that 90 percent were altering operations because of fuel costs.
• They are pushing City Council members, whether they get along or not, to car-pool. They are telling housing inspectors to arrange site visits in clusters so they stop criss-crossing neighborhoods. And, even as many of them still use S.U.V.’s, the mayors are asking nearly everyone to do a little more walking.
• Coinciding with a real estate meltdown, rising energy costs have wreaked havoc because many city budgets were passed months ago with the assumption that gasoline would cost $2 a gallon. Now mayors are finding themselves squeezed by rising costs, declining revenues and increased demands for public transportation.
• Mr. Hannemann said the federal government needed to give cities more money to expand their offerings. “We’re starting a ferry system, and making more bike lanes, more opportunities for people to walk,” he said. “And the federal government can help us immeasurably.” (and where would this money come from? the federal government is broke? aha - from the grandchildren)
• But he said the gains for most cities would be limited because the nation had relied heavily on cars for decades. “We have waited until we are at a crisis point to address transportation,” Mr. Smith said. (American the reactive, not proactive - this is a theme we talk about each and every week)

One more to finish the entry. AP: Home Buying Practices Adjust to Higher Gas Prices

• Stroud was looking in Elk Grove., Calif. -- about 85 miles away from his job in the San Francisco Bay Area -- because homes there are more affordable. But with gas at $4.50 and a car that gets about 22 miles per gallon, Stroud would be pumping $560 a month into his tank. So instead he made an offer on a home near the train station in Davis, which will shave $160 off his commuting costs.
• "I wouldn't even be able to consider doing it without that Amtrak possibility," said Stroud, 45, who also telecommutes one day a week to his job in software quality assurance.
• Stroud's choice represents a fundamental shift in the way more Americans are approaching home buying in this era of ballooning gas prices. Real estate agents, transportation officials and industry surveys indicate that home buyers are placing more importance on cutting their gas bills and commute times than they have since the oil shocks of the 1970s.
• And there are some early indications that homes near urban centers, and subway, train and bus stops are often selling faster and at better prices than those in the distant suburbs.
• ...a survey of 900 Coldwell Banker agents showed a remarkable 96 percent said that rising gas prices were a concern to their clients, and 78 percent said higher fuel costs are increasing their desire for city living. (but the Federal Reserve insists that inflation risks are anchored, fancy wording to mean consumers do not believe there will be more inflation in the future - anything to excuse themselves from their misguided policy of banking out the banking system run amock and throwing the middle and lower to class under the Amtrak)
• A grueling commute by car into the city is the main reason why Mark Bulkeley wants to move closer to his job in Tysons Corner, Va., near downtown Washington D.C. He is selling his home in Haymarket, Va., which is 30 miles from work, and has signed a contract on a home in Great Falls, Va., that's just 6 miles from the office. "When we decided that we were going to make a move we basically put a dot in the middle of the map where my office is and said, `We are not going to live farther than essentially a 20-minute circle around that,'" Bulkeley said.
• In Atlanta, agent Mike Wright with Prudential Georgia Realty notes that real estate brokerages within the city perimeter have been selling better than those outside the city, reflecting an area trend of people moving "closer-in."
• In Florida, real estate professor Bill Weaver sees this as possibly the beginnings a shift to a more European approach to finding homes.
• "Transportation costs in Europe have been so high for so long that they already take transportation into account when they buy a home," Weaver said. "We've just been behind on that. In that regard, you might look at high gas prices as sort of a silver lining."

Once again can I stress that inflation is benign when you strip out the "tiny" part of consumption that is food and energy. I mean, this "tiny" part of consumption is not causing whole scale demographic changes, or anything like that so it is correct to eliminate it from the conversation. Yep.

Telegraph UK: Money Managers Pulling Away from China / India - Sticking with Russia / Brazil

Even the BRIC (Brazil, Russia, India, China) countries are decoupling? For those who have not been paying attention to the carnage that is the Shanghai market, it is down well over 50% in under 3/4 of a year. I was predicting in late summer/early fall China's domestic shares would implode...[Aug 28: China "A" Shares Bubble] [Sep 1: The Growing Bubble in the Shanghai Index]

By October when "everything China" peaked (always look for obvious signs like a company in China worth $1 trillion, double the largest value in the US market) [Nov 1: PetroChina the 1 Trillion Dollar Company? Is *this the top?] - news articles and financial magazines were touting how you must be in China - every CNBC story began with the lead in ... "China"... and we had sure sign things were getting obnoxiously ridiculous. (today we can replace "China" with the word "oil" and this is why I believe we are going to have a serious correction coming in the 2nd half of 08 in that frothy market as well) After something goes up annualized 30% a year for 5 years, it's really a bit much to ask for that to continue (China or oil); things revert to a mean. [Apr 3: To See a Stock Market Bubble Bursting, Look at Shanghai] That said, articles like this make me a bit more bullish on China and India net net ;) even though I agree with the thesis that inflation is wrecking havoc... but that goes for every country, not just these 2. As I wrote a while back, China is like an out of control Ferrari driving on a mountain road full of oil slicks. You know eventually bad things are going to happen.

As I've been repeating for months, inflation is a tax on all things - producers and consumers. Steel costs are impeding projects and causing issues for industries such as autos, ship building, various construction - energy costs are hindering growth across the industry spectrum, etc. The higher inflation goes the more likely a global recession begins. Seems improbable? Keep in mind in 2006, I believe something like 152 countries showed positive GDP growth (much of it based on easy credit era) - so there is no reason the opposite cannot happen. That said, by "slowdown" in China we might be talking +5-6% GDP growth, as opposed to +10-12%. But many other countries could be facing negative growth.... those whose governments accurately report GDP (Gross Domestic Product) that is. Wouldn't it be a miracle if the one country that is the nexis of both the housing bust and the credit bust was able to never show a negative GDP quarter, while the rest of the globe suffered? haha. Yes a "miracle". [May 1: Is it an Official Recession? NY Post Says it Should Be]

• The world's fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade. (reversion to mean)
• The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.
• But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom.
• The vast majority of fund managers think earnings forecasts have lost touch with reality. (thank you, money managers for getting on my boat)
• The exodus from China reached fever pitch this month as investors slashed their net "weighting" position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October. The fund managers have been slow to sense the danger.
• India fell to -63 as investors took fright at the country's budget and trade deficits. There is concern over a relapse towards Nehru-era policies after Delhi halted trading in a range of commodity futures and restricted rice exports.
• The survey of 204 fund managers worldwide suggests that the love affair with emerging markets is going cold. The net weighting was -63 for Chile, -47 for Taiwan, -37 for Korea and -32 for Poland.
• Mr Bowers said investors no longer believe that the bloc has a grip on inflation. They are discriminating between the commodity producers and those that rely on imports of oil, minerals and food.
• Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62pc are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60). (those that have hard assets will win in the end)
• Karen Olney, Merrill's European equity strategist, said oil is nearing its cycle peak. "Is the trade too crowded? Probably. As long as fundamentals remain strong, we retain our overweight stance," she said.
• A record number (net 29pc) are now underweight on European equities; many have switched into cash as they wait for the European Central Bank to inflict punishment - ever more likely after eurozone inflation reached an all-time high of 3.7pc in May.
• Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.
• Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off "civil protest" in Argentina, Indonesia, South Africa and the Gulf states.
• As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street - despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001. (ah, the irony in it all)

Once we get through "this", however long "this" is or how painful "it" is, China and India should be setting up for another great buying opportunity. Demographics are destiny. But the question is will we be waiting months, quarters, or years to catch the next bottom?

[Jun 2: China Leads Asia Retreat from Inflation Battle]

Bookkeeping: 'Rising Tide' Performance Week 46

Week 46 performance of the mutual fund

Comments: Our furry friend to the right, after taking a week off, made a return to the markets this week. Nothing new really surfaced this week in terms of bad news, aside from a few earnings blowups of some smaller companies and about the 97th warning in a row by FedEx (FDX) - of which the first 96 occurances the pundits told you, nevermind that; government reports show no technical recession - buy stocks. "Good" results (aka better than very bad expectations) by Best Buy (BBY) and Goldman Sachs (GS) Tuesday failed to rally their respective sectors (retail/financial) which is always a bad sign - we've seen these groups rally on terrible news in the past (it's not the news, but the reaction to the news that matters) so the fact the sectors acted poorly on the fact of relatively positive reports was a signal that good times were not ahead. The consumer continues to struggle under the "non recession" and "low unemployment" and "low inflation" situation. Strange - you'd think he would be doing wonderful in such conditions. Rebate checks (aka borrowing money from your grandchildren) should be spent out by end of July and then away we go, relying on tapped out consumers to spend again to keep up 70% of the economy. Weather continues to plague the Midwest, and I suppose the only bad thing missing was pestilence. Maybe next week?

Next week we have the Federal Reserve meeting and for the first time since last summer, bulls can't cry, whine, and beg for a rate cut. All the cuts they whined for so that their accounts could go up 1.2% more on news of the event, are now showing their ill effects worldwide. Inflation is hitting every country hard (except the U.S. of course - source: government reports) - and away we go. Thankfully the "2nd half recovery" is 2 weeks away so as long we survive the next 10 sessions the land of unicorns, mermaids, and butterflies dancing on rainbows awaits us. Did I mention buckets of Kool Aid in leprechaun pots? Or will it just be more US dollars printed by Uncle Ben in those pots? Everywhere I look there is new currency being dropped from helicopters - err, fairies.

Anyhow, we stayed conservative in the fund and it served us well this week after leading to some frustrating moments during May. June has been stellar so far, with the markets down around 6% and Rising Tide Growth up a touch. We've been calling for a rotational correction to mimic the past major corrections since last summer and thus far it has almost played out textbook. The 2nd to last stage is when everything goes down but the commodity generals (in this version it appears to be natural gas, coal, and fertilizer), and people grit their teeth and give in and buy those stocks as safe havens when everything else is crumbling around them. ("Look at me, I own Potash! I'm bulletproof!") Then those people are quickly disemboweled - I am speaking from experience. :) (see our chart in January - in 2 horrid weeks we gave back months of outperformance) And that would lead us to the last stage - the generals are shot. ("Potash is the worst stock ever - I hate it!") Again, it does *not* have to play out that way, but when a pattern is set you keep playing it, until it stops working. Either way I don't want to repeat January 2008 if I don't have to, so I'd rather miss another start of a run in these "bullet proof" groups and leave the risk off to someone else. The worst that happens is you give up some gains. Better safe than sorry - we already are smashing the market for the year so no need to take outsized risks. It does appear that it will require the "cookie tossing" type of selloff for people to part with the generals. Which makes sense since they have the best fundamentals.

However don't we see this scenario developing almost identical to the last Federal Reserve meeting? Uncle Ben changed 3 words in his statement which send the dollar rocketing up 0.00005% and CNBC anchors into a tizzy about how inflation is now going to be fought tooth and nail? (in the 2 months since the last time they told us that, it's worked out real well hasn't it?) The dollar will be defended and after all, commodities are nothing except a hedge against the weak dollar. Yawn. Commodities tanked last time around as hedge funds did a jig over to financials and retailers. That lasted all of 2 weeks and created one of the best buying opportunities in the past few years. Repeat? Don't put it past these traders (and their computers) - they have very short memories. Can we only be half a week away from the first breathless talk by Maria or Erin about how serious Ben is about slaying the inflation beast? Laughable - but we'll play along. If/when crude every does take a break (say $120?) then we can also hear about how gas $3.75 instead of gas $4.15 is going to mean the consumer will be piling into the malls. Crude $100? Gas $3.25? Time to buy airlines! SUV makers! Hurry! Expect a lot of "funny" commentary that is meant for you to give people your assets so they can pile into "undervalued" financials. :) Again, we have reduced our "global growth" exposure but if there is a true commodities correction in the week(s) to come, we will still suffer over and above the market - but hopefully some of our hedging will help to alleviate that. We've navigated the first half? (third? two thirds?) of this correction quite well - so hopefully the back portion does not take back these gains to a huge degree.

There was no victory lap by the Invisible Hand in the last 30 minutes of the week this time around and the S&P 500 finished with a 3.1% loss; the Russell 1000 which has been strangely outperforming of late was down 2.9%. Rising Tide Growth was able to churn out a 0.9% gain, which I can only describe as very satisfying. However, after weeks like this where we outperform to such a degree, I always expect the following week to be a reversion to mean. We are now at double our unofficial goal of beating the indexes by 15%/year (which is ambitious in itself) Hence again, why there is no reason to take outsized risk, to catch "the bottom" as we are 6 weeks away from the end of our year 1.

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: $12.270
Lifetime Performance to date (vs Aug 3, 2007): +22.70%

Comparable S&P 500: 1,317.9 (-10.05%)
Comparable Russell 1000: 725.2 (-8.92%)

Fund return vs S&P 500: +32.8%
Fund return vs Russell 1000: +31.6%

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

Bad.

Looks like our open question from yesterday was answered in very short order [Double Bottom Forming? Or Just a Pit Stop on the Way Down?] Bear Stearns (March 2008) bottom appears to be broken. (S&P 1325)

Other than some short covering in the last hour or Plunge Protection Team action it doesn't look good for the bulls...

Adding back some short exposure here that I had lightened up on midweek expecting some cursory bounce... we got just a few pathetic attempts. Still focusing short on the strongest stuff in a very contrary move...

Commodities STILL holding up... if we wash down, I think that finally ends, as people start fleeing to the sidelines. That would fit our "pattern" rotational correction to the tee. It seems too good to be true if it plays out that way - but here is to hoping ;) We'll keep the watch - I just think its easier to be short the stuff that is extended than the stuff that has been hammered relentlessly for 3 weeks in a row.

Time to buy? No. Generals (strongest groups) have not been shot and/or I don't feel like heaving. Both of those would signal a better time to buy. We won't catch the very bottom but we want to start layering in when we are looking in the general direction of a garbage can to deposit our lunch....

The "2nd half recovery" is just weeks away. Somehow the stock market lost the message that the pundits have been pounding into the table for 6+ months. 1325 is key. Perhaps Uncle Ben can soothe the market next week with his magic wand. After all he will be 'fighting inflation' with 2 new sentences in the Federal Reserve statement. Those better be some powerful words...

Note: We can never rule out a crazy last 30 minute rally courtesy of the Invisible Hand - for those with short memories remember that 0.6% index spike last week in the closing minutes Friday? (which was of course negated by the free market in the first hours Monday) Free market versus socialized market - we shall see who wins out, but to make appearances look "better" than they are - always be open to something crazy happening. In a free market, I'd expect panic selling into the close as people fear Monday morning - but this has not been our market for a long time.... we'll be open to any conclusion to the day and be surprised by nothing. It would serve us all better if "they" just allowed the market to settle where it belongs, washes out the pain in a quick fashion - instead we get this band aid ripped out over and over...

Short pundits; short all the US pesos we devalued just to keep this from happening sooner and inflating every asset in the world in the meantime; pummeling middle and lower class worldwide.

Bookkeeping: Adding Tech Exposure with Ciena (CIEN)

The current market thesis, which I also believe will be proven wrong in time, is technology is a safe place to hide since it (a) does not have exposure to petrol in large part and (b) is more tied to corporate instead of consumer. So therefore its magic. That was the same thesis advanced last December (2007) when technology went on a tear, and then summarily was destroyed January - March 2008. But Wall Street is great at recycling old trash. I find the thesis inane but the relative outperformance of the NASDAQ is not to be argued with. So when 10,000 hedge fund computers say "this is the thesis" I am not going to argue with them.

I find very little growth in technology (hence struggle to find positions to add to the fund), and the irony is the main huge growers are indeed more tied to consumer (Apple (AAPL), Google (GOOG), and to a degree Research in Motion (RIMM)) than corporate. (exactly opposite of the current "thesis" by NYC traders) But somehow Wall Street believes a slowing consumer will not lead to a slowing corporate. That's Wall Street logic 101. Anyhow, I digress - let me just say I disagree with the logic but understand why it is happening... so if we do indeed get any rotation out of energy/commodities (folks, nothing straight up - this is coming from a major bull in the space) we need to have something working in our barbell approach.

I asked readers in early June what is your best tech idea [Jun 4: Readers - What is your 4th Best Technology Stock and Why?] since we could see the relative outperformance of technology and I wanted some more exposure over and above the names we already own. First, thanks for all your suggestions - I looked over the vast majority and most were names I already knew (or already suggested in the past) I was hoping for some magical bullet stock I had never heard of.

I was going to put a buy in yesterday in Broadcom (BRCM) a former holding in the fund [Oct 23: Broadcom Implodes After Hours], but the stock ripped 7% higher yesterday so I believed I missed a large part of the move I was hoping for... I was considering Akamai Technologies (AKAM) also a former fund holding [Oct 5: News Flow Just Never Gets Better at Akamai Technologies], but still am worried about the competition level. I was looking at Marvel Technology (MRVL) and Qualcomm (QCOM) - both are nice charts so they are promising and still potential names to add. I liked Dolby (DLB) but it didn't bounce yesterday with the NASDAQ boom (not sure if its considered a 'tech stock'), nor did Google (GOOG). But I decided for a perhaps a 3-5 week holding period to try Ciena (CIEN) which is a stock that brought us great success in 2007, and has been beaten with an ugly stick for no good reason. (also considering Juniper Networks (JNPR) for similar reasons)

Ciena is a "network" stock if you will (optical) - and as it has been in the past it has been punished for doing the unthinkable - spending on Research and Development. This is one of my pet peeves on Wall Street - they punish stocks for putting money towards their future because it might hurt results the next quarter. It's ludicrous, short sighted, and speaks to everything that Wall Street is. But it has happened (specific to Ciena more than once). The company reported a very nice earnings report June 5th, but has been hammered since.

• Communications equipment maker Ciena Corp (CIEN) posted better-than-expected quarterly profit, but its shares slipped 5 percent amid concerns about increased spending and lower margins.
• Net profit for Ciena, whose bigger rivals include Nortel Networks Corp (NT) and Alcatel-Lucent, was $23.8 million, or 23 cents a share for the fiscal second quarter ended April 30. That is up from $13.0 million, or 14 cents per share, a year earlier.
• Excluding special items, profit was 40 cents a share, beating analysts' average forecast of 37 cents, according to Reuters Estimates.
• Second quarter revenue rose 25 percent to $242.2 million.
• Looking ahead, Ciena remains optimistic about the full year and stood by its forecast for revenue growth of up to 27 percent. The company was comfortable with the average Wall Street analysts' forecast for third quarter revenue of about $253 million.
• However, it sees third quarter gross margin, adjusted for items, in "the low 50s" percentage range -- below the second quarter level of 54 percent.
• In addition, it expects to spend more on research and development for the remainder of 2008, and will likely exceed its targeted investment range of 12.5 to 15.5 percent of revenue. (the horror, spending goes up to keep technological innovation going - sell that stock!)
• Analysts on the call voiced concern about the company's spending plans and fluctuations in margins, given overall worries from the slowing economy and questions about the behavior of individual clients.
• Chief Technology Officer Steve Alexander pointed to the increasing importance of software in the company's portfolio. "We see lots of opportunities and we want to invest in them appropriately," he said.
• We have delivered more than that in the last few quarters," he said. "The company is growing very quickly -- faster than the market -- and we intend to continue to invest in a disciplined way. I don't know any other company around our space that is growing at 27 percent and delivering this kind of financial performance."

I've been watching with one eye, and the stock seemed to bottom yesterday, but I was hoping to get it at a bit of a lower price - it has seemed to reverse today in a very bad tape so I am going in... again, I find the reason for the sell off to be quite ridiculous but it's happened to me in the past in other technology stocks. I also like the fact that the earnings are out of the way, and the punishment has been administered - other technology stocks that the market is running to, still have to report in the coming month.

I bought a 2.2% stake in Ciena (CIEN) here near $26; short of a market waterfall selloff - upside to $29 should be achievable in the medium term. (11.5% gain) The stock was in the mid $30s a month ago (down 25% in 4 weeks). Downside should be near $24 which were January 2008 lows (aside from 1 or 2 days of panic selling) so I'll add there - I was hoping it would fall there yesterday :). The stock now trades at 16x October 2008 end of year earnings, for solid 15-20-25%ish growth.

Again let me reiterate I think the "tech is safe" trade is a hoax - but I'm just a minnow in a sea of hedge fund computers. So when/if commodities do ultimately break I want something to be working on our side. I don't know how long I'll hold Ciena, I see it more as a trade (for now) than an investment but we shall see how it plays out.

As for the market as a whole, we are now at March lows (S&P 1325) - if this breaks we should see real fear return to the market. So I am still not really buying much... again, our expectation is the technical buyers make a defense at these levels and we see some bounce. Unless that little party yesterday afternoon was "the bounce". Still no fear out there - this is what we need... too many hopeful bulls buying these dips to trust this is a good bottom...

[Mar 7: Ciena Continues to Execute]
[Jan 8: Closing Ciena]

Long Ciena in fund and personal account
Long Apple, Research Motion in fund; no personal positions

Bookkeeping: Adding to Blackrock (BLK) Slowly - as Wall Street Wakes up to Regional Bank Problems

You know a financial selloff is getting hot and heavy when they get around to beating down the best and brightest - namely the Blackrock-s (BLK) of the world. So this is when we want to take advantage of the sale prices and begin to rebuild a position. I'm in no rush but since the regional banks are finally taking serious damage, we are seeing some widespread damage in the financials. First we had the investment banks, and large money center banks hit the worst in the first stage of the credit crisis last summer/fall/winter, and now we are on the next stage - major damage in the regional banks. Remember as I wrote in this week's summary I felt the Federal Reserve will allow some of these to go under because they are smaller and they want to put up a front that they are allowing free markets to work. That's a lie - they are basically supporting a series of banks that should of gone under by now.

• But today Fifth Third and other regional banks across the nation are being shaken to the core by a 21st century financial crisis. For many of them, things are going from bad to worse.
• Home mortgages and other loans that the banks made in good times are souring so fast that many of the lenders are scrambling to prop themselves up. If the pain worsens — and many analysts say it will — some of these banks, like Fifth Third’s predecessors, may eventually seek out suitors, most likely large national rivals.
• “Everybody is trying to figure out where the bottom is,” said Jennifer Thompson, a regional bank analyst for Portales Partners in New York. “Every time a bank reports another capital raise or reports that things are worse than they anticipated, there is another round of selling.”
• But Wednesday was just one more bad day in what has been a horrible year for small and midsize banks. Their descent in the stock market has been remorseless, reflecting the economic pain in their own backyards. Weakening housing and construction markets in regions like the Midwest, Southeast and Southwest have hit lenders in those areas hard.
• But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.
• But more than anything, the problems confronting regional banks underscore the extent to which the housing crisis has spread throughout the country. In the Southeast, Regions and SunTrust are reeling from loosely underwritten mortgages now that real estate values are plummeting in the region. (wait, everyone tells me the problems in housing are only in CA, FL, MI, NV, AZ, and OH?)
  

I wrote this fall when everyone on CNBC was saying that first round of writeoffs was the "kitchen sink" and "subprime is the issue, don't worry about anything else".... I was saying that's complete nonsense and that subprime is the tip of the proverbial iceberg. (keep in mind last summer/fall, almost no one was calling for recession either) Just in mortgages alone we had to work through subprime, then Alt A (no document), then prime mortgages (just because you were a prime credit doesn't mean you did not buy way too much home than you could afford). Then we had to go through consumer debt - cars, credit cards, personal loans (these are things hit by recession). Then we had to go through commercial loans (also hit by recession). We were just getting started... but the Kool Aid drinkers were saying, it was already over... in August. Then September. Then October. And so on. One day they will be correct. The irony is, most of the subprime damage is probably close to being over (within next 1-2 quarters) but as the recession (err, slowdown) builds all those other loans are going to see serious delinquency rates. You will be seeing many Americans defaulting on many types of loans as their wages are not keeping up with the costs of life - no matter what the government says the cost of life is. That is just starting to register with the NYC crowd. [Dec 4: Et tu, 1st half 2008? Predictions for the Coming 6 Months]

Anyhow Blackrock is an asset manager, and the best one at that, so they will be picking among the carcasses from the side of the road (just like Goldman) and be one of the ultimate winners from the blanket stupidity of 90% of our "we will regulate ourselves, just trust us" financial system. The stock has retreated very nicely to its 200 day moving average of $196, down from a peak of $228 just three weeks ago, so this is a nice 14% discount. Could we get much cheaper fare elsewhere in this space? Of course - but I don't want to deal with that junk, even if it will rebound with a greater % return - can't trust what those other players are doing or what they have on the balance sheet.

Today's purchases in $195s/$196s takes Blackrock from a 0.2% stake to 1.2% stake. If we get something in the $170s I'd like to add more there.

[May 8: Blackrock is Fix It Firm to Manage Risky Assets of Others in Distress]

Long Blackrock in fund; no personal position

Sohu.com (SOHU) Sees Ad Revenue Slowing in 2009

Sohu.com (SOHU) is weak this morning on news it sees ad revenue slowing to 20-30% in 2009; but frankly this company has been booming off its gaming business anyhow. That hasn't stopped the stock from being punished this morning to the tune of 7%. I've cut this name back severely on this tremendous run up (too early in fact), but I'd like to add some in the lower $70s but we have that daunting gap in the chart in the low to mid $60s as well...

• Chinese media firm Sohu.com (SOHU) expects core advertising revenue to grow up to 45 percent this year as corporations vie for consumers during the Beijing Olympics, but it warned on Friday growth may taper off to about 20 to 30 percent in 2009.
• "The Olympic Games is the major driver for growth in online advertising," Wang said.
• Given Sohu is the biggest Internet firm on the mainland, our advantage of strong content will enable the company to achieve a 40 percent or more year-on-year growth in advertising revenue."
• The firm, which also vies with Baidu.com (BIDU), accounts for advertising revenue in two parts: so-called brand advertising, which is more than 90 percent of total online ad sales, and ad revenue from its search engine business.
• Wang said a three-day suspension of its online games service, in memory of victims of the May 12 earthquake in Sichuan that was the country's deadliest disaster in decades, would not affect second-quarter revenue much.
• It maintained guidance on online gaming revenue of up to $45 million and for advertising at up to $41 million. uidance for total revenue in the second quarter, including other revenue sources, was maintained at up to $96 million, she said.

[Apr 28: Sohu.com Crushes Estimates - Up 15%]
[Feb 5: Initiating Sohu.com Starter Position]
[Feb 4: Sohu.com Also Impressive]

Long Sohu.com, Baidu.com in fund; no personal position

AP: China Fuel Price Hike May not Sap Demand

Just so you have the "other side" of the story (opposite to my view), here is a thesis (that we see in other sources at well) that somehow by increasing costs, that will increase Chinese demand for energy. Aside from going against Economics 101, you just have to remember everyone is talking their book and with so much institutional money now betting on ever higher prices - every theory out there will be thrown out to support prices. While I can "see" the case outlined in this story, the fact that Western countries have been seeing demand destruction now in earnest for 3-4 months, and Asian countries now are decreasing subsidies, which will cause demand destruction there as well (ex-China at least), I find it hard to believe that 1 country which consumes 10% of the world's petrol can be the cause of a spike of this nature. The main thing is, unlike in certain political circles, is to listen to both sides of the argument and then make your own judgement (which could be right or wrong). But to ignore the opposite side of the argument is folly.

Again, logic means very little in the market, and standing in front of a freight train is risky business... this move in petrol will end when it ends, not when logic dictates it will end. Perception is reality. So even though logic would dictate prices should be going down in relatively short order, we have to be cognizant of trends, especially with computers (with no emotion) doing 70%+ of all trading nowadays - and they have shown us to be the most diligent momentum traders of any era. In the end it's all about perception - if perception is the end is near, all these "long and strong" oil traders will flee en masse. But until then.... ?

One important note in China - retail motorists (say car owners) are but a small portion of their energy demand... much of it is transit, industrial use, and the like.

• The jump in China's state-controlled fuel prices will inevitably squeeze consumers at both filling stations and grocery stores. But analysts say the hike is unlikely to make an immediate or huge dent in the country's hunger for oil.
• China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent up consumer demand in a country of 1.3 bilion where per capita energy consumption is still far below wealthier countries.
• Also, the price hike of up to 18 percent is likely to prompt refiners to boost production of crude oil, gasoline and other refined products. Previously, they had held back because they were losing money on the wide gap between global crude oil prices and state-set retail prices, which had created widespread fuel shortages.
• "Do not expect an immediate fall in China's oil imports -- the price effect on demand will work in China as well, but it will take some time to work through," Wang Tao, an economist for UBS Securities, said in a report issued Friday.
• Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue. "Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on-line to satisfy China's voracious appetite, remains to be seen," said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.
• The government has been paying billions of dollars in subsidies to the country's two big state-owned refiners to make up for the losses. Many smaller loss-making refiners had shut down or cut back their operations.
• The government hiked fuel prices by about 11 percent in November but had kept them frozen at that level, seeking to avoid adding to inflation, which has touched 12-year highs since the beginning of the year.
• The hike raised the price of gasoline by 1,000 yuan ($145) per ton to 6,980 yuan ($1,015) -- more than 16 percent -- and diesel by the same amount per ton to 6,520 yuan ($949) per ton -- an 18 percent hike.
• To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.
• Residential housing and farming and fertilizer industries will be exempt from a 0.025 yuan (0.0036 U.S. cents) per kilowatt increase in electricity rates for most businesses, the planning agency said.
• The hikes "will be quickly passed on to consumers through other channels, especially food prices in urban areas," said Vivian Chiu, an analyst at Merrill Lynch, said in a report.
• Despite surging oil costs, the country's imports of both crude oil and oil products have surged to unprecedented levels as it builds up national stockpiles, while exports have plunged. Crude oil imports rose to 59.8 million barrels in January-April, up 10 percent from a year earlier.
• Gasoline imports skyrocketed by nearly 20 times to 554,000 tons in January-May while imports of diesel jumped by more than nine times, to 2.9 million tons.
• Despite the surge in overall demand, China still consumes far less energy per each of its 1.3 billion people than the U.S. or other wealthy countries. Streets are dimly lit, apartment buildings often are illuminated by lights triggered only by movement or sound and ownership of private cars, though growing quickly, remains relatively low.
• Pinched by surging costs for labor, land and materials -- as well as energy -- Chinese industries are finally beginning to cut back on the waste that has made them far more extravagant energy consumers than private citizens. (free markets are a beautiful thing)
  

All in all it sounds like the Chinese government is trying to put this added cost onto businesses, and not consumers. But the logic is shaky - as if businesses won't pass costs onto consumers in the end... ? Interesting nonetheless.

Steel Nabs Another one - Lindsay Corporation (LNN)

As we've outlined in the past, there are a lot of concerns on MY end (not Wall Street's apparently) on the rising input costs and the effect on margins in the coming quarters (i.e. note crunching sounds to profits). It appears steel [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects] nabbed another one [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] in Lindsay Corporation (LNN) - which has turned into yet another tangental "agriculture play" - they have 2 main lines of business but the sexy one everyone was jumping on was the large scale irrigation systems.

Once again, someone needs to eat higher costs - producer or consumer. I did not even think the earnings report was that bad (in fact for a normal stock it would of been great), but a small reduction in gross margin set off a firestorm - but I suppose when your stock has moved to such an extent and trades at such a high multiple you need perfection. The stock dumped from $130 to $90s in 1 day... ouch. But frankly this is the fate of every high multiple stock sooner or later - once you achieve that premium valuation you need to nail home runs to justify it.

• Lindsay Corp (LNN), a maker of irrigation equipment, infrastructure and road safety products, posted a lower-than-expected third-quarter profit as infrastructure and irrigation product margins were crippled by higher costs.
• Third-quarter gross margin at the company, which is grappling with record high steel prices, was 25.8 percent compared with 26.2 percent a year earlier.
• "It is a high multiple stock where expectations for margin expansion in earnings are obviously set very high and the company did not deliver on those expectations," said Joe Giamichael of Rodman & Renshaw Inc.
• Shares of Lindsay, which makes irrigation systems, corrosion resistant pipelines, chemical injectors and soil moisture sensors, trade at more than 31 times forward earnings. (whodda thunk an irrigation maker would be trading at 30x+ forward estimates a few years ago?)

So why do we care, and what can we take from this? First, as always I am usually early but as I wrote in April

I sold my agriculture equipment makers to focus on fertilizer back in January 2008. Just easier to play the same trend in a more focused manner with the fertilizer. Input costs are rising for the equipment makers with costs of their raw goods rising.

And so we are now starting to see that. I still don't think Wall Street gets it, or is even close to getting this trend. Hence we are going to see some ugly surprises in the next few quarters as companies who have exposure to any petrol based product (there are a lot of them) and steel report some disappointing numbers. And we know what happens to stock when they disappoint. So we need to be cautious, and respect a trend we see developing.

Think it does not matter? A rising tide lifts all boats? Well it does - relatively speaking. BUT, we want to find the best boats (stocks) even if the tide is rising. Bespoke blog has an interesting look at an ETF for agriculture that we highlighted as a no nonsense easy way to play agriculture if you were so inclined [Sep 7: This MOO for You? An ETF to Play the Global Agriculture Boom] I much prefer (in most cases) to pick specific stocks rather than go to an ETF, but if you don't have an aspiring mutual fund manager running your money - than an ETF is a good choice. But instead we focused mostly on fertilizer, and dropped even the equipment exposure early this year. Good choice? Looks like it, per Bespoke. Below are MOO's holdings, and in the far right are the year to date returns. Note MOO itself is doing great in a very tough market - up 14% YTD.

(click to enlarge)


Takeaway? The fertilizer producers we own have been the top performers - Mosaic (MOS) #1 @ +67%, Potash (POT) #2 @ +64% and tied for third is CF Industries (CF) @ +52%. How are the equipment guys doing? Deere (DE) -15%, Agco (AG) -14%, CNH Global (CNH) -36%; not so good after a very nice 2007 for these names.

Conclusion: It's important to get the sector right (the rising tide) i.e. agriculture, but to get maximum effect you want to the speedboats and not the pontoons. Case in point, my decisions in solar have been ALL pontoons, no speedboats - even though I have the sector correct. If I had even 1 speedboat from solar and enjoyed one of these crazy 60% gain in 3 weeks type of moves, our performance would be that much more sterling. Ah, the pursuit of perfection....

Keep in mind, one day these fertilizer stocks are going to disappoint as well - they too have rising costs (but not to the degree of the equipment makers), but at some point analysts who have missed the boat the past 2 years are going to raise estimates to a point where these companies miss, and all hell will break through because if you make $4.32 instead of analysts expected $4.33 you know what that means? Your stock is trash. ;) Or so it is on Wall Street.

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

World Population to Hit 7 Billion by 2012

We're on our way to 9 Billion humans by 2042. (I use 2050 as a nice round number, but that figure actually should be coming nearly a decade earlier than I reference) The affects of this are many, and we are seeing on the bleeding edge of this coming "World of Shortages" and I do believe a permanently higher inflation rate. But I say we blame the speculators...

Today we sit at 6.7 Billion and the latest projections have us on course for 7 Billion within 5 years. That's 300 million more people, or a bit less than the entire United States coming online by 2012. Remember for all the hubub around China, they have a "1 child" law, so in due time India will surpass them in total population. Again folks it is not just the number of people, but the number of people who are now acting like "poor Americans" - we call them middle class in other countries - they dare do things like consume energy and not farm for themselves - hence they strain the world economy. It would be far better for us Americans if 95% of those people were continuing to live in abject poverty - then we could go on consuming 25% of all the world's resources.

Interesting somewhat scientific/somewhat guesswork stat of the day: If every human on the planet consumed resources like 300M Americans, we'd need 6 Earths.

• The world's population will reach 7 billion in 2012, even as the global community struggles to satisfy its appetite for natural resources, according to a new government projection.
• There are 6.7 billion people in the world today. The United States ranks third, with 304 million, behind China and India, according to projections released Thursday by the Census Bureau.
• The world's population surpassed 6 billion in 1999, meaning it will take only 13 years to add a billion people. (that's alarming)
• By comparison, the number of people didn't reach 1 billion until 1800, said Carl Haub, a demographer at the Population Reference Bureau. It didn't reach 2 billion until 130 years later.
• Haub said that medical and nutritional advances in developing countries led to a population explosion following World War II. Cultural changes are slowly catching up, with more women in developing countries going to school and joining the work force. That is slowing the growth rate, though it is still high in many countries.
• The global population is growing by about 1.2 percent per year. The Census Bureau projects the growth rate will decline to 0.5 percent by 2050.
• There is no consensus on how many people the Earth can sustain, said William Frey, a demographer at the Brookings Institution, a Washington think tank. He said it depends on how well people manage the Earth's resources.
• There are countries in Africa, Asia and the Middle East where the average woman has more than six children in her lifetime. In Mali and Niger, two African nations, women average more than seven children.

So obviously the problem is women who stay at home, not speculators. If Senator Lieberman would only outlaw women that stay at home (force them to work), than obviously prices for food and oil would drop. Even better if he forced that on women worldwide because that appears to be the culprit... stay at home moms. And that folks is the current logic of Washington D.C. today.

Just keep your eye on the prize if in fact commodities correct as they are WELL OVERDUE to do, and everyone points to the end of the bull run... it almost sounds believable but this "truth" they roll out every 2-3 months about commodities, is coming from the same people who brought you the "kitchen sink quarter in financials" last fall, the "subprime is contained" in spring 2007, and "housing is only 4.5% of GDP so what's all the fuss" in summer 2007. We'll be adding "it appears the Federal Reserve is VERY aggressive on inflation" next week because they'll add 2 sentences into their statement - because as we all know, words defeat world population trends. At least in CNBC world.

[Mar 24: New Limits to Growth Revive Malthusian Fears]
[Mar 22: The Long Term in Commodities]

Mechel (MTL) Could Raise $2 Billion in Private Placement Offering

Mechel (MTL) continues to grow, grow, grow - more money, less problems... ;) (those of you above age 35 ... that probably went over your heads) This news could be the source of the recent weakness (some dilution after all)

• Mechel (MTL), Russia's largest coking coal miner, could raise over $2 billion in a preferred share placement in Frankfurt and Moscow that will price by July 22, a source close to the placement said on Thursday.
• New York-listed Mechel, also Russia's sixth-largest steel maker, will launch a roadshow on July 2 after announcing the placement on June 23 or June 24
• The source said the placement would raise over $2 billion were Mechel to place its entire allocation of preferred shares, more than the $1.5 billion quoted in April by a banking source as the company's ordinary stock has risen in value since.
• Mechel, controlled by billionaire Igor Zyuzin, last year acquired substantial coal assets in the Russian Far East, including the country's largest untapped coal field.
• Mechel also plans to spin off its mining assets and sell a stake of at least 20 percent in a new company valued by Zyuzin at $20 billion compared to Mechel's current market value of $17.1 billion. The firm has not said when, or on which bourse, this initial public offering would take place.

Someone at Motley Fool has finally jumped on the Mechel bandwagon....

• Lately, the world's leading steel companies have dealt with the sharp rise in costs for raw materials, which has squeezed margins despite the robust global demand for steel. Meanwhile, shares of Russia's Mechel (NYSE: MTL) have more than quintupled during the past year. The secret to Mechel's success is in the legacy of U.S. Steel (NYSE: X), whose pioneers recognized the importance of sourcing their own iron ore to ensure competitive steel pricing.
• Steel companies that didn't adopt this model have struggled more than some others, and now POSCO (NYSE: PKX) and ArcelorMittal (NYSE: MT) are both making moves to develop mining projects. Brazilian steelmaker Companhia Siderurgica (NYSE: SID) impressed me back in March with large surpluses from its iron-ore mining operation that added substantial sales profits beyond the cost savings of the integration. Mechel takes this idea to the next level, with its massive diversified mining segment generating huge profits, in addition to producing everything needed for production, including coal, iron ore, nickel, and limestone.
• As an example, let's look at coal, which is the focal point of Mechel's mining segment. Prices for the coking coal used in steel production have risen sharply as experts predict a growing shortfall of global supply. After completing the acquisition of Russia's largest coking coal producer, Yakutugol, Mechel's mining segment is able to supply most of the coking coal needed for its own production, while selling the surplus to a very eager global market. Furthermore, the company's own ports and rail lines help with the trip to market.

I continue to believe this ignored stock will be talked about in the mainstream financial media quite often in about 1-2 years as a dominant powerhouse. Management appears to be aggressive, the government is behind them (in Russia - and China - this is a huge advantage), and I could see them going out into the open market and competing with the "big 3" in mining for assets worldwide over the coming 5-10 years - or versus ArcelorMittal (MT) on the steel side. The mining IPO, which we pointed out in December 2007, could be enormous. Much like other stocks of similar ilk, I really don't keep up with the day to day in this name - in the end those with hard assets will win, in a "World of Shortages"... Mechel (MTL) is positioned perfectly, and getting better by the month it seems.

[May 29: Mechel Earnings]
[Apr 9: Mechel Continues to Acquire Most of Eastern Europe]
[Dec 12: Mechel Reports Earnings, Considers Mining IPO]
[Nov 5: Two New Foreign Positions Added Today]

Long Mechel in fund and personal account

Tent Cities Sprout Up Across Southern California

Quite a surreal post from Mish's website - above is one video, he has 5 clips on his site.

http://globaleconomicanalysis.blogspot.com/2008/06/tent-city-usa.html

Surely there have always been homeless but there appears to be a new upswing of displaced renters/owners... most traditional homeless don't have campers.

Thankfully, we are not in a technical recession per government reporting.

******

Mish writes....

In the wake of the housing crash, "tent cities" have been springing up in several places in California. The story is not that new. However, it has not received much mainstream press. Therefore, many are unaware this is even happening.

The quality of some of the videos is not that good. Two of the better ones are from international writers. By the way, if you have not yet seen any of these, you may be in for a shock. Let's take a look.

*******

"It took on a life of its own," Mayor Paul Leon said. "It didn't occur to us it would grow to this size this fast, which reflects the need." The area, just west of L.A./Ontario International Airport, was created in July as a haven for the city's homeless. It has grown to include 300 to 400 people from throughout the region.

Bookkeeping: Increasing Hedges in Energy and Basic Materials

Taking Ultrashort Basic Materials (SMN) up to 4.1% of fund
Taking Ultrashort Oil - Gas (DUG) up to 4.3% of fund

The China news might finally be the catalyst to break the trend - we'll see. This is a market (energy) trading more on emotion and momentum, rather than the underlying fundamentals at this stage of the move in my opinion. And when 1 commodity sells off the hedge funds sell off everything no matter the fundamentals. So I'll just increase these insurance policies (hedges).

So far the "insurance" policy in the Basic Materials has been a big loser for us

(ouch)



....but the Oil - Gas position has actually worked very well, since we entered at an opportune time. [May 21: Oil Looking Toppy to Me - Starting Ultrashort Oil & Gas]

(not bad from late May)



Politicians meddling might hurt near term psychology as well - parabolic markets are generally built on psychology first and foremost. [Danger - Politicians Ahead]

If a sell off would ensue from here, this means that our rotational correction thesis has played out... yet again - about the 5th time in a row since last summer. Still up for debate if that is indeed how it plays out as freight trains like this are a dangerous thing to stand in front of. If we're wrong, we'll ratchet down these positions quickly.

Long both positions in fund and personal account

Double Bottom Forming? Or Just a Pit Stop on the Way Down?

Too early to tell but an interesting juncture in the near term at least... we are now at last week's low point - one could make the case a mini double bottom has formed (off S&P 500 level 1330), from which the market would traditionally bounce. Or it could simply be the market marking time, before a larger move down.

Either way our trading range is narrowing and we should know soon which way the next move is... a move above 50 day moving average (now below 1370) would make us short term bullish, and a break down below S&P 1320 would make us short term bearish. We've navigated this downturn very well this week, so I've lightened up short exposure here and simply moved much of it too cash. Anything between 1330 and 1370 is simply white noise to me at this point (3% range) - until we make a clear move out of this range its just random trading. My gut says, some order of bounce is due here since things have been quite negative for a while and things don't move in a straight line up, or down. If there is a failure for even a cursory bounce from here, that would be quite bearish...

I'm still thinking of a rotational correction to follow past patterns - looking for any signs of strength in retail, financials, and homebuilding... the latter has at least seemed to stop going down. Or I guess coal fertilizer and natural gas can go up every day for the next 120 days. ;) We'll see how it goes. Currently swimming in US Pesos at 28.5% of fund, awaiting clarity.

You expert technicians out there - feel free to add your viewpoint in comments... I'm an amateur technician (at best) ;)

Alert - China Begins to Increase Fuel Prices

This is what we've been looking for.... earlier than anticipated; I don't know the "degree" of this yet in terms of a percent increase... still looking into it.

• U.S. crude futures tumbled sharply after news that China will raise gasoline and diesel prices.
• China will boost retail gasoline and diesel prices by 1,000 yuan ($145.5) per tonne from Friday, the first increase in eight months, industry sources told Reuters.

EDIT: Readers emailing me this is about a 20% increase - so this puts China at around $3.00ish on gas so roughly 30% below America and "a lot more" below various European countries.

This makes us incrementally bearish on "energy" complex for the medium term. Once this energy trend reverses, I do believe the correction could be quite nasty. The higher we go the more painful the reversion will be... (but energy is going up in the "long" term) - just believe at this time it's ahead of itself. Still believe China will be buying crude on open market to store up for Olympics but Chinese consumers finally should begin to see some demand destruction. Enjoy your new cars fellas!?

Long Ultrashort Oil & Gas (DUG) in fund and personal account

American - the Land of Never Addressing Anything Until its a Full Blown Emergency

Folks, if you think this food and energy thing is bad, just wait 10-15 years out when we actually have to address Medicare and Medicaid. [May 23: David Walker on CNBC this Morning] Would the fixes be painful now? Yes. Will they be many more times painful in a decade's time? Yes. But until the wheels begin to fall off, we won't address it because its politically inconvenient....

Case in point - now we have both McCain and Bush calling for offshore drilling.... hmm, interesting concept; sounds very good to get on this bandwagon at crude $135 instead of say crude $40. (these are people who are STILL fighting off solar and wind subsidies even these past few weeks, while coming to the public and saying we feel your empathy about higher prices - hypocrites) Much better to get on our knees and kiss the behind of Saudi Princes I say ...

• President Bush urged Congress on Wednesday to end a federal ban on offshore oil drilling and open a portion of the Arctic National Wildlife Refuge for oil exploration, asserting that those steps and others would lower gasoline prices and “strengthen our national security.”
• Mr. Bush sought to take full political advantage of soaring fuel prices by portraying Republican lawmakers as imaginative and forward-looking and the Democratic majority in Congress as obstructionists on energy policy. (lol - sick really, from the administration who developed energy policy behind closed doors with oil company CEOs, and would not allow the minutes to be released)
• Mr. Bush said. “Now that their opposition has helped drive gas prices to record levels, I ask them to reconsider their positions. If Congressional leaders leave for the Fourth of July recess without taking action, they will need to explain why $4-a-gallon gasoline is not enough incentive for them to act.” (hurry up January 2009, hurry up)
• The president’s move to end the ban on offshore drilling reverses his longstanding position on the issue. (oh, was that in the speech? I thought it was the Democrats opposition that caused all the issues? Shouldn't he have started the speech with 'My own opposition has helped contribute to these issues...')
  
• The party’s presumptive presidential nominee, Senator John McCain of Arizona, used a speech in Houston on Tuesday to say he now favors offshore drilling, an announcement that infuriated environmentalists who had long viewed him as an ally. Florida’s Republican governor, Charlie Crist, immediately joined Mr. McCain, saying that he, too, now wants an end to the ban.

Now before I go any further, let me make it clear to newer readers I don't favor either party - they both are full of (unflattering term here) interspersed with a few good souls who get lost in the morass. Please drill away but please could we have a friggin solar subsidy so we can move from 10 years behind Germany to say... 8? Manhattan Project for Energy? Wind farms? Solar farms? Nuclear? Geothermal? Stop boondoggles of ethanol? Please? Sell to Republicans as a "national security issue" and sell to Democrats as an "environmental issue". Please? Work together to solve anything in this country? Try?

Anyhow, the problem when you are a decade behind a problem, is the rest of the world with progressive governments has moved on. See there is a global competition for resources - even man made resources - say oil rigs to do said offshore drilling. Even Mighty Petrobras (PBR) is stalling on some projects due to a lack of deep sea oil rigs [May 15: Petrobras Hordes the World's Deep Sea Water Drillers] So we are going to show up out of the blue and like magic drillers will be available to us. Got it! And oh yeah, it's going to take 5 to 7 years to really ramp up any serious production if we started today. And we won't be starting today - we will argue about it for another election cycle. So look for meaningful results... in a decade. As opposed to if we started a decade ago - and we'd be bearing the fruits now (right Brazil?) Meanwhile, we'll all suffer from the charade that is the political system. NYTimes weighs in on the deep sea oil driller shortage:

• As President Bush considers repealing a ban on drilling off most of the coast of the United States, a shortage of ships used for such drilling promises to impede any rapid turnaround in oil exploration. Slow growth in oil supplies has been a major factor in the spike in oil and gasoline prices.
• In recent years, a global shortage of drill-ships has created a critical bottleneck, frustrating energy company executives and constraining their ability to exploit known reserves or find new ones, at a time of soaring demand.
• The world’s drill-ships are booked solid for the next five years. Some oil companies have been forced to postpone exploration while waiting for a drilling rig, executives and analysts said.
• Demand is so high that shipbuilders, the biggest of whom are in Asia, have raised prices since last year by as much as $100 million a vessel to about half a billion dollars. (ouch - remember the steel shortage we talk about every week as well; costs through the roof to build anything to do with steel)
• “The crunch on rigs is everywhere,” said Alberto Guimaraes, a senior executive in charge of developments in the Gulf of Mexico at Petrobras, the Brazilian oil company that has discovered some of the most promising offshore oil but has been unable to get at it.
• As a result, drilling costs for some of the newest deepwater rigs in the Gulf of Mexico — the nation’s top source of domestic oil and natural gas supplies — have reached about $600,000 a day, compared with $150,000 a day in 2002.
• Already, 16 new drill-ships are scheduled to be delivered to oil companies this year — more than double the number delivered over the last six years combined. In fact, 75 ultra-deepwater rigs should be delivered from 2008 to 2011, according to ODS-Petrodata, a firm that tracks drilling rigs.
• Robert L. Long, the chief executive office of Transocean, the world’s largest drilling company, said he has nine deepwater rigs under construction, eight of which are already under contract for periods ranging from four to seven years once they leave the shipyards. He expects to receive the ships between the beginning of 2009 and the end of 2010.
• Transocean believes the deepwater market will continue to be constrained until at least 2012. Over three-quarters of the drill-ships currently under construction have already been contracted to oil companies eager to benefit from triple-digit oil prices, Mr. Long said.
• Petrobras, whose full name is Petróleo Brasileiro, is expected to drive much of the growth in the booming new market. The company has outlined an aggressive program to increase its drilling capacity, and plans to contract or build 69 deepwater drill-ships by 2017.
• Petrobras has only three rigs capable of drilling in waters that exceed 6,500 feet, like the sites of the new fields
• But drilling constraints are not the only problem facing international oil companies, which are seeking to expand at a furious pace after a decade of underinvestment in the 1990s. They have also had to contend with a doubling of development costs across the industry in the last five years, more acute competition for energy resources, shortages in steel, engineering and manufacturing capacity, and pressures posed by an aging work force.
• Most new orders for drill-ships have gone to Asian shipyards. Companies in Singapore and China have benefited, but South Korea’s big three shipbuilders — Samsung Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Hyundai Heavy Industries — have gotten the bulk of orders for the most complex and expensive types of vessels. (sounds like some good investments if we could get to them) “The market for offshore exploration is now the hottest sector in the global shipbuilding industry,” said Lee Jae-kyu, shipbuilding analyst at Mirae Asset Securities in Seoul.
• A big challenge in deep-sea drilling is to stay over the same spot on the sea floor even as the vessel is buffeted by strong winds, currents and waves. Because water depths can reach up to 10,000 feet, far too deep for traditional rigs that are moored to the seafloor, ships like the West Polaris rely on high-speed computers that use global-positioning satellites to control an array of six swiveling propellers on the hull’s bottom.
• Last month, Samsung announced it had received a $942 million contract to build an even hardier type of drill-ship made specifically for Arctic conditions. The vessel, ordered by Stena Offshore, a Swedish company, will have a hull strong enough to break through ice, withstand 50-foot waves and insulate the men and machinery inside from outside temperatures as low as 40 degrees below zero. Samsung’s sales of all types of offshore drilling vessels jumped to $7.8 billion last year, up from $1.5 billion in 2005.

So again, in about 2 years after the haggling is done we are going to waltz into this market and say 'hello, we are ready to deep sea drill - who has some ships for us?" :) Ah, America.

As consumers we hate shortages - but as investors we love shortages... 2012 eh? Sort of the same timeline for the potash shortage. We're still looking at you kids - Diamond Offshore Drilling (DO), Transocean (RIG), Pride International (PDE), et al. Oh yeh, our stealth deep sea oil driller? DryShips (DRYS) [May 22: DryShips - Earnings Growth Continues & Potential Deep Sea Oil Drilling Play]

[May 2: Restarting Pride International as Takeover Bait]
[May 7: More Energy Sector Earnings - Transocean (RIG)]

Long Petrobras, Pride International, DryShips in fund; no personal position

Health Care Costs to Rise 10% in 2008 - Uncle Ben Says it's an Issue but Thankfully it does NOT Show in Inflation

Whew! Another catastrophe avoided - I was worried when I read that health care costs are rising 10% this year, and 2009. You see, the government reports show this not to be the case - therefore it is not really happening, just a figment of our imagination. Thank god. (as an aside I just love when stories like this use verbiage like "more than double the inflation rate" - no its probably BELOW the inflation rate)

• Employer health care costs are poised to rise almost 10 percent in 2008 -- more than double the annual inflation rate -- and nearly that much again in 2009, according to an industry report released Tuesday.
• The study by PriceWaterhouseCoopers predicts that medical costs will increase 9.9 percent in 2008 and an additional 9.6 percent in 2009.
• "Health care providers, insurers and employers will have to monitor medical costs carefully if we are to avoid a resurgence of the double-digit annual increases seen in the past," said Dr. David Chin, leader of the Health Research Institute at PriceWaterhouseCoopers.
• Two key factors...
• (1) A hospital building boom, as hospitals replace facilities and add private rooms and centers for outpatient treatment.
• An increase in the expenses those with insurance are paying for those without. Cost-shifting from the uninsured, Medicare and Medicaid will account for nearly one in every five dollars spent by private insurers in 2009, according to the study, as the federal government underfunds public insurance programs and the number of people with private insurance continues to decrease.

See that last point? Expect that only to increase - when emergency rooms are the primary care giver for 47M uninsured Americans (and growing each year) - this is what happens. Remember, each month during the useless unemployment report we note how there are 2 main drivers of American jobs in this new age service economy ripped bare of financial and home building jobs. Government jobs and health care jobs. Both driving up costs for all Americans.

What does Uncle Ben have to say? Much like other intellectuals he is in a room staring against a wall, warning the politicians about the impending doom - completely ignored. As with all things in America we will address it when it becomes a crisis situation - so give it 7-10 years.

• US Federal Reserve chairman Ben Bernanke says rising healthcare spending may strain public finances and harm the US economy. (may?)
  
• He told delegates at a Senate Finance Committee meeting on healthcare the government may have to help households meet rising medical costs. (damn socialist)
• Mr Bernanke said that lower income households would be hardest hit as doctors bills and insurance fees rise. (I don't believe these people fund election campaigns - therefore it really doesn't matter so please Ben, let's not talk about them - lets talk about the upper 1/3rd - the people who matter! Focus Ben!)
• Healthcare spending makes up more than 15% of US gross domestic product. (going to 25% baby)
• Mr Bernanke said: "Higher government spending on healthcare, will of necessity, require reductions in other government programmes, higher taxes or larger budget deficits." (and you can guess which of these 3 will be the choice - because when all else fails - print more money. Did someone say something about the stronger dollar? Oh yes - CNBC)
• "Soon it will begin to have effects on interest rates, it will have effects on economic growth, and on stability," he said. "It's not just balancing the federal budget; it's really a much broader question of the stability and strength of our economy over a longer period of time." (thoughtful points - but did anyone listen Ben?)
• Bernanke noted that currently, government spending on its two major health-care programs, Medicare for retirees and Medicaid for those of limited means, consumes 23% of federal spending that is not for interest payments, up from 6% in 1975. Due to an aging population and rising costs, their share of government spending is expected to grow to 35% by 2025 if nothing is done to curb the trend.
• Morici pointed out that Americans essentially pay 50% more for health care than the French and Germans, who have high-quality coverage. He said the principal differences in their systems and that of the U.S. are that the French and Germans have meaningful price controls and rationing while the United States does not.
  

Last, let's look at what young Americans are doing to try to survive in this dog eat dog world, where you are on your own (1/3rd do not have health insurance) - healthcare is for those who 'work hard', not a right ... in the 'richest' country in the world.

• This year, 1.4 million graduates are tossing their mortarboard caps into the sky and receiving bachelor's degrees. Almost immediately, many will face another rite of passage: getting dropped from their parents' health insurance.
• But with the economy weakening, and entry-level jobs that offer health coverage harder to find, some recent graduates are coming up with creative ways to protect themselves.
• ... So the 22-year-old came up with an idea to get back on his parent's plan -- going back to college without ever setting foot in a classroom. Even though he had a bachelor's degree, Mr. Ngo enrolled as an online student at his hometown City College of San Francisco, a two-year college. Two days later, he presented proof of enrollment and a class schedule to his father's insurance company, which put him back on the plan.
• Young adults are the fastest-growing group of the uninsured, according to 2006 U.S. Census data. And one in three -- or 13.7 million -- Americans aged 19 to 29 lacks health insurance, according to the Commonwealth Fund.
• "I don't even make enough money to move out of my parents' house, let alone afford health insurance," Ms. Todd says.
• "I'm going to stay self-employed," she says. "And [health insurance] is not suddenly going to become affordable."

All in all, sounds like a prescription (pardon the pun) for prosperity!

Long disgust

Danger: Politicians Ahead

Joe Lieberman wants to stop speculation in commodities....

Funny thing - commodities that have no futures market (hence no speculators) are rising at same rate as commodities with a futures market. I guess that's just an anomaly - guys, look (a) globally (b) at yourself (c) at Uncle Ben's printing presses/helicopters and the $500 Billion of new paper from Europe. Hello? Global competition for resources, along with governments subsidizing consumption stimulating demand over and above where it should be, along with stupid ideas like putting our food supply into SUVs, along with Uncle Ben inflating the money supply so fiat money chases hard assets the world over - why don't we work on those things as issues? Ah, because it would require a mirror. Another bright idea from your leadership, who continues to live with their head in the sand... 1980s sand at that. So predictable... and these "commodity markets" would move to London, Signapore, or Dubai... way to go team. They still live in a closed system where the entire universe revolves around the United States of Subprime.

• The head of the Senate's government affairs committee Wednesday unveiled a series of restrictive proposals aimed at financial speculators in commodities, including one that would place an outright ban on big pension funds buying agricultural and energy futures.
• The three legislative ideas from Connecticut's Joe Lieberman, which the independent senator plans to discuss at a hearing June 24, count as the most drastic efforts yet from lawmakers targeting potential culprits behind high oil and grain prices.
• The most severe would prohibit private and public pension funds with more than $500 million in assets from investing in agricultural and energy commodities traded on a U.S. futures exchange, foreign exchange or over the counter, according to materials provided by Lieberman's office.
• A second plan would direct the Commodities Futures Trading Commission to establish total limits on the share of the commodity market held by financial investors.
• A third proposal would direct the futures regulator to impose speculative-position limits on any stakes not related to real hedging activities, an action that could limit the commodities-swaps activities of big investment banks such as Goldman Sachs Group
• "We are not, as some continue to argue, witnessing the ebb and flow of natural market forces at work. We are instead seeing excessive market speculation at work and that is why our government must step in with new laws to protect our economy and our consumers," said Lieberman in a statement.
• Investment banks and pension funds aren't waiting for that forum to make their anxiety about Lieberman's proposals known. A statement penned by six influential trade groups, including the Securities Industry and Financial Markets Association, the Financial Services Roundtable and the Investment Company Institute, warned that efforts to bar financial investors from commodities markets could "substantially harm the ability of Americans to protect themselves against inflation."
• Some investors and exchanges, including the CME Group (CME) and Nymex (NMX) New York Mercantile Exchange, however, have warned that more restrictions could drive investors to overseas or less-regulated markets -- and could even inflate prices further. (Bingo!)

Remember, free markets in good times, socialism in bad times. The US has really turned on its head the last 12 months... amazing to watch the hypocrisy of "free market capitalism" that we attempt to force on every other country.

The Ultimate Shortage -> Water

I get an email almost every week about my thoughts on water. As I've outlined since blog inception, I am a proponent of the Malthusian view that we are approaching the point in the coming decade(s) of too many humans on too little planet. A must read if you weren't reading the blog in March [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears] My version of this is simply stated as a "World of Shortages".

Now I do believe technological innovation will help curtail some of the issues, but it will be like a trout swimming upstream. And as I've outlined since early in the blog life is, the ultimate shortage will be fresh water. We are already seeing a lot of US specific issues both in the West and more recently in the Southeast. I do believe, in a generation or so, the wars will be fought over water as opposed to oil (err, weapons of mass destruction... err, to bring democracy to the good people of Iraq). At their core humans are really not much different than their ancestors - the inbred quest for territory and resources shall continue, only this time it will be exaggerated by necessity. Now that sounds like an outlier view, and I truly hope I am wrong on this one.

But as for investments - well water is a lot like wind - very limited investment arenas and most are "slow money". But we're starting to hear the drumbeat, and I caught two stories this past week - one the cover story of BusinessWeek (who else but Boone Pickens who is also delving into wind power in a huge way, after becoming rich off oil mind you) along with a story in the Toronto Globe & Mail. Let's take a look shall we?

**BusinessWeek

• Roberts County is a neat square in a remote corner of the Texas Panhandle... The county encompasses 924 square miles and is home to fewer than 900 people. One of them is T. Boone Pickens, the oilman and corporate raider, who first bought some property here in 1971 to hunt quail. He's now the largest landowner in the county: His Mesa Vista ranch sprawls across some 68,000 acres. Pickens has also bought up the rights to a considerable amount of water that lies below this part of the High Plains in a vast aquifer that came into existence millions of years ago.
• If water is the new oil, T. Boone Pickens is a modern-day John D. Rockefeller. Pickens owns more water than any other individual in the U.S. and is looking to control even more. He hopes to sell the water he already has, some 65 billion gallons a year, to Dallas, transporting it over 250 miles, 11 counties, and about 650 tracts of private property. The electricity generated by an enormous wind farm he is setting up in the Panhandle would also flow along that corridor.
  
• As far as Pickens is concerned, he could be selling wind, water, natural gas, or uranium; it's all a matter of supply and demand. "There are people who will buy the water when they need it. And the people who have the water want to sell it. That's the blood, guts, and feathers of the thing," he says.
• In the coming decades, as growing numbers of people live in urban areas and climate change makes some regions much more prone to drought, water—or what many are calling "blue gold"—will become an increasingly scarce resource.
• By 2030 nearly half of the world's population will inhabit areas with severe water stress, according to the Organization for Economic Cooperation & Development.
• The rush to control water resources is gathering speed around the planet.
• "The idea that water can be sold for private gain is still considered unconscionable by many," says James M. Olson, one of America's preeminent attorneys specializing in water- and land-use law. "But the scarcity of water and the extraordinary profits that can be made may overwhelm ordinary public sensibilities."

(it's a long story from there if you are interested - specific to Boone Pickens history and his master plan)

**Toronto Globe & Mail

• Looking to jump into an investment in a scarce resource with lots of upside potential? There's a clear case to be made for water.
• water has much the same imbalance between supply and demand as traditional resources. The investment dealer Goldman Sachs recently described water as the “the petroleum for the next century.”
• The one certainty is that water stocks haven't yet enjoyed anywhere near the rally that energy, metal and fertilizer stocks have.
• The basic argument for investing in water is scarcity, starting with the fact that just 2.5 per cent of the world's water is fresh. Goldman Sachs says consumption of fresh water is doubling every 20 years. The World Water Council says about 1.1 billion people lack access to clean drinking water, and 2.6 billion lack adequate sanitation.
• Here in North America, the council says we use about 350 litres of water a day per capita in residential areas, compared with 200 litres in Europe and 10 to 20 litres in sub-Saharan Africa. (sort of like oil, eh?)
  
• Meanwhile, the North American water infrastructure is decaying. The American Water Works Association says much of the water network in the United States will need to be replaced in the next 30 years, and the estimated cost of replacing old pipes comes in between $280-billion (U.S.) and $400-billion. (instead we borrow $160 billion from the Chinese to send to you, so you can put it into your gasoline tank and call it a stimulus plan - instead of putting people to work on infrastructure projects.... but I digress)
• One thousand litres of water are needed to produce a kilogram of wheat, while an equivalent amount of beef requires 13,000 litres. (so as the global demand for wheats, corn, biofuels, meat products rise... so does the need for water)
  
• But while water ETFs have done well lately, it's probably not wise to invest in them with a quick score in mind. “It's more of a long-term theme, separate from the other commodities.”
• Companies in the water business can be broken down into the following sectors: utilities, which are regulated suppliers of water to homes and business; treatment, which focuses on producing clean, drinkable water; distribution, which refers to companies that supply pipes, pumps and valves; monitoring, or water analysis; and resource management, which includes consulting and engineering firms that specialize in water projects.
• Several stocks can be found in most of the various water funds and ETFs, including Veolia Environmental, a French conglomerate that gets about one-third of its revenue from water treatment. Veolia was mentioned in a recent Forbes magazine column by Ken Fisher that was headlined: “A stock for eco-nuts; If you are a greenie, buy Veolia Environment. If you aren't, buy it anyway.” Other water stalwarts include Itron Inc., which supplies water meters, and Danaher, a diversified U.S. industrial firm with expertise in water purification.

Bookkeeping: Not Impressed with Morgan Stanley (MS) Results so Closing it Out

After picking through some of the news reports from Morgan Stanley (MS) earnings (keep in mind these are black boxes so its hard to really analyze the data as you would a normal widget maker), I have to say I came away unimpressed, especially in light of what Goldman Sachs (GS) did. Now I did not expect them to repeat Goldman's performance but they did not even appear to come close. A bet against energy as the cherry on top?

• Morgan Stanley (NYSE:MS - News) on Wednesday said quarterly earnings dropped by more than 50 percent on trading losses and a slowdown in investment banking, even after the investment bank realized $1.43 billion of pretax gains from asset sales.
• Morgan Stanley's shares dropped as much as 7.8 percent as analysts questioned the sustainability of the bank's earnings, which came mainly from selling businesses.
• The second-largest U.S. investment bank reported income from continuing operations of $1.03 billion, or 95 cents a share, for its fiscal second quarter, ended May 31, down from $2.36 billion, or $2.45 a share, a year earlier.
• Net revenue fell 38 percent to $6.5 billion from the same quarter last year, dragged lower in part by a contrarian bet on energy that didn't pan out and actions by a London trader that violated company policy.
• Some analysts said the investment bank's core earnings were just a few pennies per share, falling far short of average analyst expectations of 92 cents. (and that's the main problem) Most of the company's earnings came from two one-time items: a $698 million pretax gain from the sale of its Spanish wealth management business and a $732 million pretax gain from the sale of part of its stake in MSCI Inc=. (not good)
• Gains from asset sales helped offset $245 million of severance related to job cuts, $436 million of losses from proprietary mortgage trades and $519 million of net losses on leveraged loans.
• Revenue dropped in almost every business. Investment banking fees fell by half. Fixed income trading net revenue sank by 85 percent, reflecting the mortgage losses as well as reductions in other markets.
• "Not only was Morgan Stanley's result far below that of Goldman, even Lehman did better in the client franchise," wrote David Trone and Ivy De Dianous. (ouch)
  

There are two ways to go with this position - first, it's part of a barbell strategy which means it should not have much correlation with the more "global growth" type of companies we own, so we want to have some exposure to that part of the market.... also it's been hit pretty hard of late, and when the "early cycle" stocks do rebound it could put on a serious move as it's fallen quite a bit; or second - just stick to the best of breed even though the best of breed has not fallen nearly as much and hence could offer less upside on a "worst of breed" rally.

Although I think Morgan Stanley might in fact bounce more than Goldman does on a rally since it's been hit far harder, I've just decided to stick to Goldman, and we're going to sell Morgan Stanley. The variance in the two reports is simply too much; relying so much on things like asset sales is simply not a long term business plan. I thought they'd benefit more from the damage at Bear Stearns but it appears almost all of that business fled to Goldman instead....

Again, when the hedge funds do pile back into financials the "worst of breed" or "stocks that have fallen the most" will in fact most likely rebound the most, but even with this barbell approach I still want to stick with the stronger companies. I'll just add to Goldman on future dips so I can keep my exposure to this part of the market relatively constant.

I am closing a 1.4% stake in Morgan Stanley, with about a $2500 loss. No big deal. After opening under $38 this morning the stock has trended up all day ("not as bad as expected! buying"), so we'll exit here near $40. Probably with some patience we could get a mid $40s price point to sell, but I'd rather just have the cash and look elsewhere. I bought MS in mid April, and at the time the chart was actually the best among the foursome of major investment banks - now it's just another of the pack. We'll revisit this name in maybe 6 months, after another 2 quarters under their belt and see if they are rebuilding the business without turning to asset sales as the main driver of growth.

Long Goldman Sachs in fund; no personal position

Royal Bank of Scotland Puts a Scare into the Market?

As we always say the news flow is really not that much different week to week, or month to month - it's just what the market wishes to ignore and what the market wishes to recognize. We've seen some high profile earnings blowups this week in smaller stocks, and the creep of inflation is starting to hit some other names, ala Fedex (FDX) a name we've always used as an economic tell.

• FedEx Corp. reported a fourth-quarter loss Wednesday and offered a gloomy outlook as it wrestles with a slumping U.S. economy beset by soaring fuel costs and falling prices for homes.
• FedEx, considered a bellwether for the broader U.S. economy, predicted 2009 earnings of $4.75 to $5.25 per share, well below Wall Street expectations of $5.92 a share.
• "Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate," chief financial officer Alan Graf said in a conference call with market analysts.
• FedEx customers pay fuel surcharges, but that does not cover all of the increases. The company's fuel costs for the quarter were 54 percent higher than for the same period last year, Ortwerth said, while the surcharges were up less than 30 percent. The fuel surcharges, which are added to the company's basic shipping rates, were 28 percent for June and will increase to 32.5 percent in July, Hatfield said. (no inflation there)
  

But frankly Fedex has warned (multiple times) in the past few quarters, and other than a 1 day blip the market didn't care most of the time - after all it was "backward looking" and "the 2nd half recovery is imminent". As I said almost every day of the "1st half", the "2nd half recovery" is a bowl of Kool Aid wrapped in an enigma of nonsense ... or something like that. I simply await the calls for "1st half 2009 recovery" that are sure to be the Kool Aid of choice soon, offered to you by the same people who last fall were offering the "1st half 2008 recovery". Of COURSE you should be buying NOW to take advantage of the recovery in early 2009 since the market is forward looking. Oh yes, those comments are only from the people who acknowledge there is any slowdown at all - many still cling to the government reports which show "no technical recession".

I'll keep repeating this until I'm blue in the (?) fingertips - inflation is a tax on all things - producers and consumers. Someone needs to eat it. Uncle Ben won't be killing inflation by "words" (which CNBC will get in a froth about next week when "strong language" that shows "the Federal Reserve is serious about fighting inflation" comes in the statement - that is so laughable but it will be told to you) And unless producers can pass it all along to consumers - they will be eating a lot of it and their profit margins will be hampered. This was plainly obvious to anyone who does not use government inflation reports... but since almost all of Wall Street clings to those as "truth", as these earnings reports begin to trickle out this quarter and next showcasing inflation is actually a real thing, and earnings are being crunched, stocks will react like wise. And it will make the typical mine field of earnings season that much worse since expectations are so unrealistic. Again folks, I cannot stress what a crime "2nd half" earnings estimates are - as a whole analysts say fourth quarter 2008 is going to grow 60% year over year, over fourth quarter 2007. Second half recovery and all.

Did I mention the whole housing debacle? And credit market debacle? I know, I know - that's all in the past - look forward young man, it will all be fixed in the grandeur of the 2nd half recovery.... Royal Bank of Scotland seems to disagree....

• The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
• A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. Such a slide on world bourses would amount to one of the worst bear markets over the last century.
• "Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
• "Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
• US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit. The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. (oh yes they can, in fact they HAVE in the United States of Subprime - so please don't put the Fed in the same sentence with the ECB who have approached this issue from completely different angles)
  
• "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said. (that's what I've been saying for a long while now)
  
• "The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.
• Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
• Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year. (I have to agree with that one as well)

What does Morgan Stanley think? Not such great things either. Would someone please pass long some of this data to the pundits clapping like seals to "buy stocks, they're cheap and everything is fine!"

• The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.
• "We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.
• Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, (that's how we solve everything, print more wortheless US pesos and make sure the fat cats get bailed out from their stupidity - then we wonder why the fat cats do the same stupidity every 6-8 years) while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.
• The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.

The news is really not every different than it has been for months... most of the past year really. But the market is ever hopeful - always trying to pounce on every sliver of data to reassure themselves that it is time to buy. Instead of taking 10 steps back and looking at a quite dark big picture. Because that would require actual thinking and analytical ability. Instead of just being hand fed data from the government about how everything is just fine, thank you. The Plunge Protection Team could be in store for a very busy summer and fall....

Conclusion: This is all priced in and setting up beautifully for that 2nd half recovery to start in 2 weeks. Drink Kool Aid, and buy stocks. Everything will be fine soon.

CNBC: No Inflation Here

Ok to be fair since I'm constantly harassing the powers that be for understating inflation, CNBC has an article about things that are going down in price. (I'm trying to be fair and balanced - surely there is good news somewhere out there!) Remember, this era is different from the 70s in a few ways. One of them is the loss of ability for wage earners (read: you, workers) to demand higher wages. The world is flat and too many other Americans are unemployed. (and no it's not only 5.5% of Americans). Frankly, I was not old enough at the time to be aware of this, but I am curious how people in the late 70s were able to go to companies and ask for 10-15% wage increases, just because food, oil, etc was rising so much. It just seems like a totally alien concept for those of us brought up into adulthood in more recent decades. I can only imagine the laughter that would emanate from the offices as today's worker walks in and demands a 14% wage increase? Remember, this is "good" for the economy (according to pundits) - the total inability for Americans to ask for wage increases (thus falling farther and farther behind the cost of living increases) is somehow "good". Only on Wall Street and D.C. (The Federal Reserve love sit because it helps to defeat inflation!)

But today I start a new blog category - DEFLATION. Because one effect of the inability for wages to rise, is there is a fixed amount of money that can be used to buy products. So as more and more of that slowly growing pie is used for food and energy that leaves less for everything else - hence deflation in other parts of the system. How that is "good" for producers who produce these items is beyond me, but somehow Wall Street can twist it into a reason to buy buy buy. So let's see what is on sale!

• Inflation may be climbing faster than the humidity level, but there are still some things that actually cost less than they did a year ago.
• Friday's report on the consumer price index confirmed the predicted rise in gasoline and food costs, but core prices remained relatively flat. While financial markets cheered the results, they didn't give much comfort to consumers. The latest snapshot of consumer sentiment on Friday showed that it plunged to a 28-year low in June.
• With that in mind, here's a look at a few of those things that aren't pinching your wallet.
• Electronics - The average price of a point-and-shoot digital camera has fallen $28 from a year ago, to| $178, according to the NPD Group, a consumer tracking service. The cost of LCD flat-panel TVs is also expected to drop $18 this year, to an average $848, while notebook computers are forecast to fall 9 percent, to $775, according to the Consumer Electronics Association.
• Women's Clothing - Another area to spot savings is women’s apparel, even though the price for men’s and children’s clothing is on the rise, according to the CPI’s April 2008 report. If a female consumer went to a clothing store today, she would pay at least 4 percent less than she did a year ago for a pair of pants/slacks, which have an average price of $19.07, according to NPD.
• Hotel Rooms - There’s more good news. For travelers left sulking about increasing flight costs, the average daily rate for hotel lodging decreased in the month of April, down from $109.44 to $108.07, according to Smith Travel Research, of Hendersonville, Tenn.
• Theme Parks - And if lower hotel prices inspire consumers to take a vacation, it might include a trip to a theme park, where prices are also falling. Six Flags (NYSE:SIX - News) cut $10 off entry prices at the majority of their 19 parks in April, setting admission at $34.99 for its St. Louis park and $24.99 for the Texas-based Hurricane Harbor water park. "People just aren’t going out as much," Glassman said. "People are getting squeezed, and they’re starting to push back."
• Toys - The severe competition in this industry, paired with cheap overseas production costs, caused this steady 5.3 percent year-on-year decrease, Glassman said.
• Dinnerware - Household goods brought more price cuts, particularly in dinnerware, according to NPD. Although prices didn’t decline for every product in this category, the price of formal, fine dinnerware, which NPD defines as bone china or porcelain with a metal accent band, decreased about 6 percent, falling from $39.58 to $37.10.

Realizing most of the blog readers are men, I have come to this conclusion....

Those of you who choose to drive to your vacation destination (instead of flying) near an amusement park (stay-cations are for losers who need to eat) , with your new dinnerware in the trunk so you can eat in the hotel room, not paying much attention because you have your iPod ear buds in, arriving at a mid priced hotel, but more than happy to retreat after a day of fun to play Monopoly in the comfort/privacy of said hotel room, in the comfort of your cross dressing clothing... well you are living the high life and probably sneer at my daily rantings against inflation. You don't see it. Life is good. (inflation free)

The rest of you? You live a more traditional lifestyle... and are suffering. ;) But it's important for us who are suffering to hear the great news about how the other half are living.

Will Encore Acquisition (EAC) be Bought Out?

There are so many exploration and production companies in the oil and natural gas space (most have some mix of both oil and natural gas, but are heavily weighted towards one or the other), that it is near impossible to keep track of them all unless it was your full time job. That said, one name that keeps popping on my screens is $4 Billion market cap Encore Acquisition (EAC), aka the artist formerly known as $2 Billion market cap Encore Acquisition.... 3 months ago. As they say, a picture is worth a thousand words; this is a 100% gain in under 90 days.



Now for the 1000 words ... ;)

Why do I highlight this name at this point since the horse is FAR out of the barn? Well even after this 100% gain, the company believes its assets are undervalued and potentially could be putting itself up for sale. (this news is from late May)

• Onshore oil and natural gas exploration company Encore Acquisition Co (EAC) said on Wednesday it was exploring strategic alternatives, including a possible sale.
• The Fort Worth company, which has acreage in the Bakken, Haynesville and Tuscaloosa Marine shale plays, said Lehman Brothers Inc has been hired as adviser.
• "It is our belief that Encore's current share price is not reflective of our record operating results and our ability to efficiently fund these projects through our upstream master limited partnership, Encore Energy Partners," Encore Chief Executive Jon Brumley said in a statement.

Judging from the acquisition activity in this space, and their still relative small size (very similar in size to an acquisition XTO Energy (XTO) made in the natural gas space), they could be a nice bolt on addition for a host of companies.

• Encore Acquisition Co (EAC), an oil and gas exploration company which put itself up for sale this week, is likely to draw interest from both big and small suitors whose coffers are full of cash, thanks to record crude prices, analysts said.
• Encore, which owns oil and gas properties in the Permian Basin in west Texas, the Haynesville shale in northern Louisiana and the U.S. Rockies, said on Wednesday it was exploring strategic options because the market is undervaluing its shares.
• "A number of exploration and production companies could pull off this acquisition," Pavel Molchanov, analyst with Raymond James said, noting that Encore's market capitalization is a modest $3 billion. (note, this article was written in late May, the company has increased another $800 million in valuation since!)
• "Even if oil prices were well below where we are today the acquisition of Encore would be significantly accretive to any purchasers, given that incredible strength in oil and gas prices," he said.
• Companies with complementary oil and gas assets that may be interested in acquiring Encore include Occidental Petroleum Corp (OXY), Noble Energy Inc (NBL) and Anadarko Petroleum Corp (APC), Raymond James' Molchanov, said. For example, Occidental has operations in the Permian basin and the U.S. Rocky Mountains, while Noble and Anadarko both have properties in the Rockies.
• Another energy company that may be interested in some of Encore's assets rather than the entire company is Chesapeake Energy Corp (CHK), Phil Weiss, analyst at Argus Research. "If they were to split up the assets and the price were reasonable, I could see Chesapeake being interested in the Haynesville part," Weiss said.
• The announcement surprised some investors because the company's stock is up more than 90 percent so far this year, not a typical performance for an unvalued stock. Still, some analysts said they see room for upside.
• "With Encore's discounted valuation versus its peers and upside to net asset value, we believe this announcement will yield continued outperformance," investment bank Simmons & Co told clients on Thursday.
• And if buyers for Encore do emerge, then the odds of oil-driven deal frenzy go up, David Heikkinen, head of exploration and production research at Tudor, Pickering Holt & Co Securities, said.
• Potential takeover targets include Arena Resources (ARD), Brigham Exploration Co (BEXP), Berry Petroleum Co (BRY), Concho Resources Inc (CXO) and Rex Energy Corp (REXX), Tudor Pickering, said. (a lot of these names have been showing up on my weekly "top performer" lists, especially CXO)

So all things being equal, we might develop a thesis here, that it might be sensible to build in exposure in smaller E&P companies with the carrot of potential takeouts. The typical market cap of the names above is $1 to $3 Billion.

That said, worst case scenario if you don't get a buyout if that one would be stuck with a company whose estimates are exploding upward as analysts have completely understated earnings potential - something I expect to see across the board in this sector. After Encore's last earnings report, in which they produced a $1.08 vs analysts $0.87, the full year estimate for 2008 jumped from $4.33 to $5.14. 30 days earlier it was $3.24. Similar situation in 2009, but again earnings results for these type of companies are very tied to the pricing of crude and natural gas; I do expect to see some weakness at least in the former sometime in the 2nd half of 2008. Oh yes, one more bonus, Encore bought back 1.2M shares (for about $39M) at an average cost of $33. Not a bad investment, and it reduced shares outstanding by 2% to boot.

So this is one to think about on a pullback...

Long XTO Energy in fund; no personal position

Goldman Sachs (GS) Earnings

Unlike widget makers or commodity stocks, there is very little analysis I can do with an investment bank - they are opaque black boxes with moving parts we will never know about. But in Goldman we trust, one way or the other they always find a way to profit. Best of breed in a very lousy neighborhood. 10% year over year profit drop is nothing compared to peers in the financial world - heck that would be considered "high growth" to most.

• Goldman Sachs Group Inc., the world's largest investment bank, on Tuesday said second-quarter earnings fell about 10 percent, but still easily beat lowered Wall Street expectations on higher fees from asset management and stock underwriting.
• The company reported a profit of $2.05 billion, or $4.58 per share, for the three months ended May 30 compared to $2.29 billion, or $4.93 per share a year earlier. Revenue fell 7 percent to $9.42 billion from $10.18 billion a year earlier. The latest results easily surpassed Wall Street expectations for a profit of $3.42 per share on $8.74 billion of revenue
  
• Goldman benefited from a $725 million gain during the quarter from its own investments, including a $214 million gain from its stake in Industrial and Commercial Bank of China Ltd. Revenue for all of Goldman's trading and principal investments fell 16 percent to $5.59 billion.
• But, it wasn't entirely smooth sailing for the investment bank, which had $775 million of write-downs from credit market losses. That caused revenue from its fixed-income business to fall 29 percent versus a year ago.
• The higher price of energy and other commodities pushed that business "to a near record," Viniar said. Goldman does not break out how much its commodities business made.
• Equity underwriting produced quarterly net revenues of $616 million, its second best quarter and highest in eight years. Securities services -- which includes the firm's prime brokerage business -- posted record quarter revenue of $985 million. (these are the types of businesses that I am sure they are taking away from their weakened competitors)
• Goldman reported that revenue from its investment banking business fell 2 percent to $1.69 billion. However, its financial advisory business posted revenue of $800 million -- 13 percent higher due to robust trading during the quarter.
• Revenue from Goldman's asset management business surge 18 percent to $2.15 billion. Goldman said the increase was due to "market appreciation in equity assets' and inflows into money market and fixed-income products.
• Rumors that the firm was preparing big writedowns to leveraged loans hit the stock last week, but the losses did not materialize. Reports did surface on Tuesday that the firm is close to bailing out a $7 billion structured investment vehicle, or SIV, which may have weighed on the stock. The SIV was run by British hedge fund Cheyne Capital.
• Richard Bove, analyst at Ladenburg Thalmann, said earlier today on CNBC that Goldman "may be the only firm in the world that really understands risk." Explaining his statement to TheStreet.com, Bove said Goldman spends more on its computer systems, has more historical data and dedicates more resources to the task of creating and analyzing computer models that assess risk. "They've got more IT people than they do traders," he said. (risk - what a concept; it's been long lost in the greed of the US financial system)

Well now we hope Morgan Stanley (MS) which reports today falls somewhere between Goldman Sachs (GS) and Lehman Brothers (LEH); hopefully landing a lot closer to Goldman.

Long Goldman Sachs, Morgan Stanley in fund; no personal position

Reader Investment Pledges mid June Update

Monthly update time. An excellent month as new and previous investors committed a whopping $901K this past month. This compares to $421K last month, which in and of itself was double my projected run rate of $200-$225K new dollars each month. So essentially we did 4 months of my projection in this 1 month alone - that's amazing. Total dollars is now over $2.5 million. As mentioned in the past, my goal was to get to $7M in assets by the end of the first year of actual existence but starting at around $4M by the time the fund is actually open for business. So $1.5M away from that $4M goal.

Frequently Asked Questions can be found here.

A couple of other notes/updates: due to various technical "back office" reasons with the people I'm working with to get started (along with the large upswing in pledged dollars) I can put a more probable time frame on launch of the actual fund; at this time it is looking like a range of November 2008 through January 2009 is where we are aiming for. Again, wonderful to see (and in some fashion surreal) - part of this lag is due to SEC review which is an open ended process but should run from 90 to 120 days.

Next, I guess I am old school but I didn't realize how many people buy mutual funds through their online brokers now. I myself have been devoted solely to stocks for so long, I just assumed almost everyone was doing it the old fashioned way (see example here), like I used to buy funds in the late 80s or early 90s - where you get the prospectus, fill out an application and then mail it in, and have a stand alone account. Just to make sure everyone is on the same page since I've gotten some email questions about this, the fund won't be available via brokerages at the beginning - one it needs to be up and running, and two it needs a history of some length before it would even be accepted on such a platform (with extra fees of course to be on said platform). So at the beginning we'll have a website with .pdf files for applications, prospectus and the like and/or you will have a 800 number to call to request such documentation mailed to you, but it will be a stand alone account. This is a standard practice for all funds. Hopefully within a year it will be able to be launched on brokerage platforms. As I wrote in my FAQ, the fund supermarkets from Fidelity and Schwab or an entirely different animal as well - with a substantial fee attached to get started there, so that will come in time but not at the beginning.

I'll start updating things on a state by state basis each month, as I outlined in [Investment Pledges by State] As we wrote, to make it cost effective to register in any state we need about $40-$45K coming in from that state. The good news is if you are not in a registered state, once the amount is breached, its a matter of 24 hours, and a fund can be open for business in any state. So if someone shows up in 6 months from a state that is not registered, they can be added almost instantly.

So far we have 12 states where threshold is met and we'll be registered if we started today: WA, CA, MI, AR, NJ, TX, GA, IL, NY, MA, OH, and FL

Another 8 states we are well on the way and hopefully get a bit more before end of the year to get them registered ($20K+ pledged): CT, NE, KS, AZ, TN, MD, IA, NC

Just getting started in these states with first pledges: MN, WI, LA, OR, NH, PA, AL

SC, ID I need to double check on since it's based on 1 large investor, and other states nothing in yet

As for countries we landed investors from Canada, Costa Rica, Germany, and New Zealand (nice)

As for web traffic we are now averaging 2400-2600 visits on most weekdays (every 30 days this seems to go up by 300-400 visits), and about 600 readers via email (not sure if its the same people or not who come to the actual site).

Again as I always say - thank you for the trust; it's quite an adventure on this side to learn all the mechanics of launching but it's exciting. As always any questions shoot me an email but I hope I addressed most via the FAQ.

Any time day or night, you can see how I am doing by verified independent 3rd party metric here: 'Rising Tide Growth' performance

To future investors, as always, if you change your mind and want to rescind an investment pledge and/or change (up or down) the amount, please let me know since I simply want know where I stand in this process. Thanks.

The original post on the purpose of the blog can be found here [Jan 7: Readers 'Pledges' Towards Mutual Fund Launch] Feel free to add a comment to that post or send an email if you'd like to join in.

Totals
January 7, 2008 = $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008 (click here for full post): $1.19M raised
May 15, 2008 (click here for full post): $1.61M raised
June 17, 2008 $2.51M raised

Amount	Who	Where
$75,000	Self	MI
$2,500	Michael D	Oceanside, CA
$7,500	Oth	Parts Unknown
$10,000	Dean D	San Jose, CA
$2,500	Oza P	MA
$20,000	Oren L	Chicago
$10,000	Rob T	NYC
$5,000	Ryan	Seattle, WA
$7,500	Ted	Sunnyvale, CA
$2,500	Brian P	Cerritos, CA
$50,000	David B	Middlesex, NJ
$50,000	Ian M	San Antonio, TX
$40,000	"LiquidWindows"	Deep in heart of TX
$5,000	Jonson	LA, CA
$5,000	Jimidean	Birmingham, AL
$5,000	Brooks R	Baton Rouge, LA
$50,000	Zlatanscores	New Jersey
$3,000	Ben S	Portland, OR
$20,000	Sheng S	Omaha, NE
$10,000	msuberri	NJ
$5,000	David W	Houston, TX
$10,000	Ryan T	NJ
$3,000	NandaK	Nashua, NH
$10,000	WaltF	Louisberg, KS
$2,500	Joe	Scranton, PA (email)
$2,500	Todd	Nashville, TN (email)
$250,000	David R	South Carolina (email)
$100,000	A.F.	Los Altos, CA (email)
$50,000	Satya	Temple City, CA (email)
$15,000	Bobby L	San Jose, CA
$200,000	Ganesh S	Bellevue, WA
$2,500	Michael A	Charleston, SC (email)
$2,500	TJP	Sterling, IL (email)
$75,000	Bob B	VanBuren, AR (email)
$10,000	Pat L	Tuscon, AZ (email)
$37,500	Art H	Auburn, CA (email)
$5,000	Dan D	Augusta, GA (email)
$5,000	Jeffrey H	Greensboro, NC (email)
$37,500	Tom L	San Fran, CA (email)
$10,000	Wesley W	San Jose, CA (email)
$10,000	Tom S (daKat)	Minneapolis, MN
$5,000	Dan W	Mentor, OH (email)
$10,000	Jim G	Marana, AZ (email)
$5,000	Andrey G	Baltimore, MD
$20,000	Doug M	San Fran, CA (email)
$75,000	"Skooker"	Boise, ID (email)
$3,750	Brian C	Milwaukee, WI (email)
$2,500	Jason F	Big Apple, NY
$3,000	Chung W	San Jose, CA (email)
$3,000	Mac	Bellevue, WA
$10,000	BMW	Bay Area, CA (email)
$10,000	"steelelana"	NY
$10,000	"Jpassana"	TX
$5,000	Brian J	Racine, WI (email)
$5,000	Ceferino J	Parts Unknown (email)
$10,000	Link M	Knoxville, TN
$5,000	Pankaj	Forest Park, OH
$20,000	Alex A	Big Apple, NY
$100,000	D.K.	Los Altos Hills, CA (email)
$20,000	Roger B	Arlington TX
$20,000	Rohit S	Chicago, IL
$5,000	Praveen K	Atchison, KS
$25,000	Robert D	Niantic, CT (email - IRA)
$25,000	Scott R	Longbranch, WA (email)
$7,500	Roy S	Knoxville, TN (email)
$50,000	Douglas D	Atlanta, GA (email)
$10,000	Mahender B	Crofton, MD (email)
$15,000	Joon K	NYC (email)
$15,000	Linda A	Houston, TX (email)
$5,000	Bob M	Atlanta, GA
$3,000	Kiran A	Atlanta, GA (email)
$5,000	Alven	LA, CA (email)
$75,000	Vijay K	New Jersey (email)
$3,000	Tyler	CA (email)
$20,000	Jeff M	Cedar Rapids, IA (email)
$50,000	Will W	CA (email)
$10,000	Burt B	Venica, CA (email)
$4,000	Kathy A	Deland, FL (email)
$10,000	Nate W	Novi, MI
$5,000	Tom R	Canada (email)
$20,000	Anurag V	Germany (email)
$200,000	S D	Costa Rica (email)
$5,000	Behrouz F	Ottawa, Canada (email)
$20,000	Hong H	Hamilton, Canada
$15,000	Jeff F	Calgary, Canada (email)
$2,500	Hamish E	Queenstown, New Zealand
$25,000	George L	North Carolina (email)
$4,500	Satyakee S	Houston, TX
$2,500	"madhatter"	TX (email)
$30,000	Rich P	Concord, CA (email)
$50,000	Rich T	S. Yarmouth, MA (email)
$5,000	Xiang X	Salem, MA
$25,000	Shane V	Houston, TX
$100,000	Dave K	Downey, CA (email)
$10,000	Bill H	Boston, MA (email)
$20,000	Kurt C	LA, CA (email)
$20,000	Charles L	San Mateo, CA (email)
$5,000	Troyhouse	Chicago, IL
$10,000	Darin P	Corvallis, OR
$10,000	Adam M	Columbus, OH (email)
$15,000	Justin K	Columbus, OH
$5,000	Adam S	CA (email)
$5,000	Mike M	Atlanta, GA
$2,512,750	Total

Bookkeeping: Replace Powershares DB Agriculture Fund (DBA) with Powershares DB Agriculture Double Long ETN (DAG)

I will edit this post later when I have more time but just want to quickly mention, following yesterday's thoughts on replacing Powershares DB Agriculture (DBA) with another instrument [Corn Rocks but We've been Frozen Out]; I've decided to go with what is essentially an Ultra long in the agriculture commodities - Powershares DB Agriculture Double Long (DAG). This is essentially the same index as DBA, but twice the return. (either up or down)

Since I will have a lot more volatility with this investment vehicle since it will exaggerate the moves of DBA by a factor of two, I have not bought as much of it since I get the same movement for half the exposure. [Apr 17: Four New Agriculture ETNs]

So I completely sold my 3.2% stake in DBA and am replacing it with a about 60% the exposure in DAG (about a 1.8% stake). I'd like to buy more on dips since its had a huge run of late, but we'll see how deep the dips are.

Folks, everyone is talking about crude oil - I do believe demand destruction from the developed countries and eventually developing countries as they cut back subsidies will help alleviate that into the 2nd half of 2008. A slowing globe will also do the trick. I do however now believe the food crisis which a few of us have been talking about for many many months, will be the story of the 2nd half of the year - recent weather in the Midwest took a very bad situation and took it to critical. I don't think Wall Street understands that yet. So replace "food" with "oil" and keep the same hysteria you are hearing everyday on TV and in the news going for another year. And realize people can demand destruct energy much easier than food.

I'll write more on this subject later but if you are new to the blog, just click on food crisis tag below and you'll see months of history on the subject. There is also a story in the Wall Street Journal today and as we all know, until the Wall Street Journal puts information in front of the traders they are usually oblivious to it. So I think awareness of this subject will be skyrocketing by later summer/early fall.

Last, stock up your freezer with what you can... as I've been saying for many months. You'll be paying a lot more in the future for everything. Even though there is little inflation in the United States (source: government)

EDIT - here are some news reports, highlighting what appears to be a coming emergency...

• The flood tides enveloping the Midwest will crest across the nation in the form of higher prices in just the places where households have been hit the hardest -- food and fuel.
• Floodwaters have spread across the Corn Belt, preventing farmers from planting soybeans and damaging a corn crop just starting to emerge from the ground. Analysts estimate that flooded Iowa and Illinois and the other corn states might produce 15% less of the grain than last year. Some believe the shortfall will be larger.
• That pushed corn prices to near $8 a bushel Monday and sparked fears of another jump in food inflation. Already, the cost of food is increasing at its fastest pace in 18 years.
• "This is a pretty big train wreck developing," said Steve Meyer of Paragon Economics in Adel, Iowa.
• Corn is one of the economy's essential commodities. It feeds cattle and dairy cows, it's cooked into breakfast cereal, it sweetens soda pop and it creates ethanol. The developing shortage is expected only to increase competition for corn among farmers, food companies, ethanol refiners and exporters. (my favorite word, ahem - shortage)
• For now, cattle ranchers, pork farmers, dairies and other food producers will take the largest hit, said Michael Swanson, a Wells Fargo & Co. agricultural economist. "We have record prices for hogs and for cattle, but these prices aren't going to be high enough for the farmers to make any money because the price of corn is so high," he said. (and so it begins...) Barring a sudden turnaround in the corn markets, shoppers should expect to see the price of meat rise as farmers reduce the size of their herds to save money on feed.
• He said chicken prices would start to increase first, as poultry supplies tighten. That would be followed by pork and then beef. (I await, patiently... see COW)
• Hog farmers in South Dakota are starting to liquidate their herds and get out of the business, said Jeremy Lehrman, executive director of the South Dakota Pork Producers Council.
• Earlier this month, the U.S. Department of Agriculture estimated demand for corn in the coming year at 12.5 billion bushels. About 5 billion would be used for feed, 4 billion consumed by ethanol production, 2 billion sold overseas and the rest put to other food, seed and industrial uses. The nation was on schedule to produce just 11.7 billion. The shortfall would be made up by corn grown in previous years and stored. (uhh, that's a problem - we don't exactly have booming stockpiles)
• But because of the soggy plants near Boland's farm and across the Midwest, analysts now think corn production could fall to about 11 billion bushels, draining supplies to precariously low levels.
• "Our ethanol policy requires perfect weather, and not surprisingly, we aren't getting it," said Michelle Perez, senior agriculture analyst with the Environmental Working Group in Washington. (boondoggle)
• "We have farmers that have had to plant the same fields two, three, four times," White said. "Even before all this flooding, we can't get the crops in. The land's just too wet."
• The floods also have disrupted the movement of goods across the heartland as roads and rail lines have been submerged. Union Pacific Corp. has closed off parts of the east-west main line across Iowa. Cresting floodwaters in nearby states have limited the railway's ability to reroute cargo. Union Pacific won't see the full extent of the damage to its tracks until the water recedes.

Long Powershares DB Agriculture Double Long ETN in fund and personal account; long iPath Livestock ETN in fund

Bookkeeping: Cutting ICICI Bank (IBN) Exposure

When last we looked at the Indian banks, I was buying these gosh awful charts that had completely broken down, hoping we'd have some "double bottoms" in place. [Jun 3: Starting to Build up Indian Banks]

I normally do not buy charts like this; I like to buy strength most times, not weakness. But I am hoping a double bottom is being formed with mid March lows in both these names. Further, in the "No Indian Bank Left Behind" program, I am almost obliged to throw these guys a bone. I've not treated these 2 stocks as buy and holds, but more of trading vehicles and the layer in/out approach has actually worked wonders with these two since we have nice profits.

So far this trade has worked out for one of the 2 names; ICICI Bank (IBN) which I had added in the low $35s - it then proceeded to fall another 2 days, down to $33s - I added some more (smaller purchases). Now in 2 weeks we've seen a nice rebound to the low $38s so I am going to cut back this position with about a 9% trading gain, and see how it reacts from here. This is a technical call, although it might be early - using exponential moving averages resistance is right here near $39. Using simple moving averages, the resistance is at $41. So we might be early, but a profit is a profit. I took IBN down to a 0.2% "holding" position, awaiting further clues of near term movement.

As always when we cut back a position as it approaches a resistance, it could either (a) push right through or (b) fall back. We are encouraged when things push through because that signifies strength, even though it means we gave up some profit. There is no shame in just buying the position back, as this sort of breakout would signify some strength ahead. I'm funneling some of this money into HDFC Bank (HDB) to keep my "India" exposure somewhat intact - this name has not really bounced much and sits here in the mid $80s (no clear resistance til about $100). However, I continue to have some fundamental worries about global inflation and its impact on economies worldwide - so I am a lot more cautious on India (and the greater Asian story) at this time because unlike our central bank, the rest of the world is trying to fight inflation and that means higher rates - which usually does not bode well for stocks. Especially those of the financial sort.

I do realize the party continues on in the commodity stocks (it just appears the entire hedge fund community is now a momo trader chasing community) but as I've been repeating at some point this turns from a cute story to a major drag on the global economy. I believe we're here - despite the propaganda coming out of Washington that inflation is nearly nowhere to be found - hell, women's shoes and iPods are available for a song! If things play out in a traditional economic sense - we should be seeing some serious demand destruction in the 2nd half of 2008 globally (the quicker Asian subsidies go, the quicker it will happen) - which will finally lead to lower commodity prices. When that train does turn, I suspect it will be vicious. But for now, we'll keep riding...

Long both names in fund; long neither in personal account

Energy Conversion Devices (ENER) now Trades at Par with First Solar (FSLR) Valuation

It looks like today is going to be solar day...

Just wanted to write a quick follow up on Energy Conversion Devices (ENER) a stock we highlighted on May 8, after an excellent earnings report [May 8: Energy Conversion Devices - is the Turnaround Finally Here?] I wrote

Energy Conversion Devices (ENER) is an interesting tale - this has been for many many years a "hope" stock i.e. more promise than execution - I remember the hoopla surrounding it at the turn of the century ... the last time people were all hyped up about alternative energies (at the time the big fuss was about new wave car batteries and the like). This company has morphed over the years with a confusing array of business lines (trying to decide what it wanted to "be"), but recently has added a newer and more business savvy executive team, and while they still have a few business lines .... the excitement is their solar business, which has turned into the dominant line at the company.

Much like First Solar (FSLR), ENER has a thin film process so by staying away from the polysilicon shortage issue they have some potential to sidestep some issues currently facing the rest of the industry. This is a name I've been keeping 1 eye on, but with results like this it's time to put both eyes here.... another quarter like this and you'll get Cramer talking about how this is the next First Solar.

We'll be interested on a pullback, although the hype on a name like this could carry this one very far in a quick time.

So that pullback I was looking for? Never showed up. Sometimes you just have to jump on board and ride the freight train but my conservative nature sometimes makes me miss these rides, even though I point out the story....

After jumping from mid $30s to mid $40s on the earnings report, 6 weeks later we are talking about a stock in the mid $70s. I hope someone out there got on board; I certainly did not. (also I would like to quickly add congrats to some people who have owned this stock for MANY years - it is nice to see some very patient folks finally get rewarded)

I was tossing around the thought (keep in mind ENER is projected to make roughly $0.00 EPS in 2008 before spiking to $1.50ish in 2009) that if ENER got the First Solar (FSLR) thin film hype it could trade into the stratosphere, which seems to have played out. [Apr 30: First Solar Keeps Doing Enough to Satisfy Shareholders]

If you believe the $1.50 EPS for 2009 for ENER at $75 this stock trades 50x 2009 estimates. Thats not 2008 estimates. Thats 2009!

If you believe $1.50 is a joke and they will smash it and do $2.50 (meaning analysts are off by a factor of 67%) it still trades at a forward PE ratio of 30. (I do think the $1.50 will be surpassed quite easily in 2009; not sure if it will get to $2.50 but certainly $1.50 is conservative)

For comparison, thin film giant First Solar now trades at 96x 2008 estimates, and 49x 2009. So Energy Conversion Devices has now reached a "First Solar" type of valuation. After being left for dead on the side of the road for many years. Amazing how quickly things can change.

Meanwhile stocks like... well I won't mention its name, trade at 12-13x forward estimates. The difference? The market believes thin film technology is magic. Here is the kicker which I outlined earlier today - polysilicon has been the big stumbling block (shortages created massive price increases) in the traditional photovoltaic technology (non thin film). To put it in perspective polysilicon used to (pre solar days) go for about $40/kg. In under 5 years it had peaked at $500/kg (on the spot market). Now that's inflation. But we're now seeing reports of it falling back to $400ish. And with all the new capacity coming online in China (takes about 2 years to get a plant up and running due to relative complexity of process) we should be seeing $300s (or lower) in 6+ months. And only down from there. The main input for polysilicon? Sand. No shortage of that. So that worm is beginning to turn.

Then from there this "magic" of thin film technology (which has protected these companies from any exposure to the high polysilicon prices) begins to matter less and less. So either their PE multiples need to fall for the "magic" companies (whose efficiency is many times half that of traditional photovoltaic) or the photovoltaic companies PE ratios need to expand - or they meet somewhere in the middle. But as we know, "long term" on Wall Street is a few weeks out so none of this matters and we see this huge discrepancy. But if things play out as I expect, and this cost gap is sharply reduced in the next 18-24 months we should see a major narrowing of the valuation metrics from 1 technology to another. And the potential for some serious price wars (2-4 years out). But again that is the long run, for now Energy Conversion Devices (ENER) is even able to do convertible offerings and the stock still goes up. Now that's a hot stock.

• Energy Conversion Devices just keeps looking better. By the end of trading on Monday shares of the Rochester Hills, Mich.-based solar company gained 14.7%, or $9.87, to close at $76.86. While the major indexes have slipped since the beginning of 2008, Energy Conversion Devices (nasdaq: ENER - news - people ) has gained no less than 128.4%. The lion's share of that growth has come since the company reported stellar third quarter results in early-May.
• Monday's rise though comes in the wake of the Intersolar 2008 in Munich, the world's largest solar technology trade show. "It was apparent that demand for their products is doing very well," said Rob Stone, an analyst at Cowen and Company. Unlike standard solar panels, which are attached to rooftops, Energy Conversion Devices' solar laminates function as building material.
• Energy Conversion Devices has historically struggled to obtain profitability. Since Chief Executive Mark Morelli took the helm in September of 2007, the company has turned its focus to commercialization rather than research.
• "They've been managing the business in a more detailed way, and have been managing towards profit rather than technology development," Colin Rusch of Broadpoint Capital noted after the company reported its third quarter results. "For example they've been doing things like tracking the production process on a daily rather than quarterly or monthly basis, and cutting costs on the operation side."
• Increased product demand and manufacturing efficiency is coupled by the company's scale expansion. Energy Conversion Devices looks to increase its capacity to 300 mega watts by the end of its fiscal 2010 year. Stone expects that to translate to sales of $690.0 million, well ahead of the $113.6 million reported at the end of 2007. By 2012 the company expects to produce one gigawatt worth of material. (this would still put them as a relatively small player in the big picture)
• "Customers are saying they're happy to buy more of the product," Stone said, "backlog has increased significantly in the last couple of weeks and should go up more. They're increasing their capacity and the profit from that capacity will be materially higher."
• In an indication of Wall Street's confidence in the company's future, Monday's rise comes only a few days after the company announced on Thursday that it would be offering 4.7 million shares and $225.0 million worth of debt. Although this kind of offering would usually lead to a drop in share price, the market demonstrating that it believes the growth in sales and margins will overwhelm the dilution.

Not long and not thrilled about that fact

Canadian Solar (CSIQ) Raises Guidance

Rarely do I try to let emotion get involved (that will kill you as an investor or trader) but I am ultimately frustrated with the solar sector right now. After the Trina Solar (TSL) debacle my next two candidates to add/replace the position I had sold down in Trina so as to keep the sector weighting consistent were Canadian Solar (CSIQ) and Solarfun Power (SOLF). Canadian Solar was the 2nd cheapest stock in the space after Trina (so it still appeals to my growth at a reasonable price tendency), and Solarfun is essentially the people's champ (where traders flock to everytime the sector gets hot) And unlike Trina, both are trading above both key moving averages (50 and 200 day) - hence the reallocation of money I wanted to do into either (or both) of these names.

1. The 50 day moving average on CSIQ was in the $32s last week so I was poised with a large buy waiting there; but the stock only fell to $35. 5 sessions later it just hit $48. From $35 that's a 37% gain.
   
2. The 50 day moving average on SOLF was just below $18 last week, but I was greedy and was hoping to see it fall to its 200 day moving average in the $16s to layer in a large buy. 5 sessions later it hit $23. From $18 that's a 28% gain.

Instead I have Trina Solar smiling up at me. (yes its up 15% from its lowest point but after losing an arm and a leg the prior few sessions) I believe this type of performance will continue as the uncertainties overhanging the stock will persist for a while. So while this sector moves together, you have outperformers and underperformers. We know where our puppy falls in that spectrum.

Anyhow, because Canadian Solar (CSIQ) decided it was not going to become a forex trader, they were able to raise guidance substantially today. Also a move into the US market. Must be nice to have a management that just sticks to a simple game plan.

• Canadian Solar Inc. ("the Company'', ''CSI'' or ''we'') (Nasdaq: CSIQ - News) today announced that it will increase its 2008 annual revenue and output guidance to reflect the sales of its e-Module products. These sales will be realized in H2 of this year.
• The Company announced that it has commenced delivery of e-Modules to Pro Solar Solarstrom GmbH and Iliotec Solar GmbH of Germany. The companies signed annual supply agreements with CSI in early 2008. The total shipments to these two companies are estimated at 24.5 MW before the end of 2008. As of today, CSI's total committed sales of e-Modules in 2008 is 35 MW, with approximately another 20 MW of firm interest from additional customers.
• The company is accordingly raising its annual guidance for 2008 from 200 - 220 MW to 230 - 260 MW in output and its estimated annual revenue from $650 - $750 million to $750 - $870 million. The company estimates that it will ship approximately 10 - 12 MW of e-Modules to USA and South Korea in 2008, thus making these two countries significant markets for CSI.
• Based on robust market demand for our products, the Company plans to increase its annual ingot and wafer capacity from the previous target of 40 - 60 MW to 150 - 200 MW; to increase our internal cell capacity from the previous target of 250 MW to 400 MW and to increase module capacity to 800 MW. We expect to have the above new capacity fully commissioned at the beginning of 2009.

I try not to post about missed opportunities because frankly we could have a post like this every week, but since this one was so sharp and really shows the relative outperformance from being in the "right" stock versus the "wrong" one, even within a generally rising sector - it was worth pointing out. Now off to kick the proverbial dog.

Long Trina Solar in fund and personal account

Titan Machinery (TITN) - Cramer's on Board Now that It's Up 70%

Classic Jim Cramer - yesterday afternoon he was pumping Titan Machinery (TITN) (it's "sizzlin"), after a nice 11% pop for the day, and 70% increase in 7 weeks. You just have to love him for his momentum chasing ways...

This is a name one of our readers had brought up in a comment last week, and John over at Real Deal blog, has been high on since February (this was a recent IPO). This is basically a tangental play on the global agriculture boom - they are basically the retail end for selling agriculture equipment. Not necessarily my cup of tea but the stock performance speaks for itself - but unlike Cramer who is now pumping it at 35 x FORWARD estimates (for a retailer mind you), I'd rather listen to people like John who climbed aboard at 20 x estimates. It appears from my cursory glances at the company that it deals with CNH Global (CNH) product, but the stock of Agco (AG) was flying today, perhaps due to this news but also a positive analyst report on the group, which has been lagging severely of late. If one were to play this space, Agco (AG) is definitely my favorite. [Apr 29: Agco Unfairly Hit on its Guidance]

• Meanwhile, farm equipment companies got a boost on Monday after Wachovia Capital Markets analyst Andrew Casey said long-term demand for agricultural equipment remains strong. He said North American demand for the machines continues to outpace supply and most manufactures are sold out for this year. This is because of soaring corn prices, which currently sit at about $7.32 per bushel.
• At the same time, the companies have been able to pass along rising steel and shipping costs to their customers and used equipment prices remain strong.
• Casey upgraded Duluth, Ga.-based Agco (nyse: AG) to “outperform” from “market perform” and boosted his valuation range to $63 to $66 from $60 to $63, citing a recent pull back in the company's share price and the long-term crop price outlook.

The line I highlighted above is key, because one concern for me - and why I've been focusing on the fertilizer over equipment is the rising input costs causing potential margin squeezes. [May 17: Fast Rising Steel Prices Set Back Big Projects] I still think at some point this happens, but it appears that for now farmers (at least in North America) are continuing to absorb the higher priced product without pushing back...[May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] Again, I must ask when company after company is citing cost inflation in their inputs, and some have been passing them along to the end customers - how can there not be more inflation in the government reports? Ah, I know the answer to that; I am simply asking a rhetorical question.

Back to Titan Machinery (TITN) - not to be mixed up with Titan International (TWI) [another stock we like, which also was up strongly yesterday - I am sure some people bought the wrong stock], a quick review of earnings/guidance. Despite relatively low gross margins of 16%ish (they are a retailer after all) the key is, analysts missed the boat - and when that happens, your stock goes up.

• Titan Machinery Inc (TITN), posted quarterly results that topped Wall Street's targets, boosted by higher sales of farm equipment, and it raised its full-year outlook, sending its shares to a lifetime high.
• The company, which owns and operates agricultural and construction equipment stores, reported a four-fold rise in first-quarter profit to $3.4 million, or 24 cents a share, from $800,000, or 12 cents a share, a year earlier.
• Revenue nearly doubled to $152.6 million. (keep in mind they are rolling up mom and pop shops so this figure is a bit deceiving - its not 100% organic growth by any means)
  
• Analysts were expecting earnings of 13 cents a share, before special items, on revenue of $119.5 million, according to Reuters estimates.
• Equipment sales, which chip in about 80 percent of the company's total revenue, also rose two-fold to $120.9 million.
• "A delayed planting season due to rain may have allowed customers to increase their equipment, parts and services purchases as opposed to a more normal quarter," Chief Financial Officer Peter Christianson said in a conference call.
• "Weather helped benefit this quarter, which probably means that there is less of a benefit from equipment sales in the future quarters," analyst Robert Evans from Craig Hallum Capital said by phone.
• Titan expects full-year earnings of 86 cents to 91 cents a share, compared with its prior view of 77 cents to 82 cents a share.
• The company, which went public in December last year, now sees revenue of $575 million to $625 million for the year. It had previously forecast revenue of $550 million to $600 million.
• Even with the general economy facing a slowdown, farmers are able to spend more on agricultural equipment to get the highest yield, Evans added.

And to make this post a full circle, as our national TV pundit says - there is always a bull market somewhere. But all these price increases have to be eaten by someone... and it is inflationary.

No positions other than enjoying the general agriculture halo

Intel (INTC) Creates a Solar Company Spin-Off

Ignore the bashers who say solar power is hype - they, much like the Federal Reserve and our government leaders still live in the 1970s/1980s. [Jun 7: As Energy Costs Soar, US Looks to Solar] With or without government, pure economics is going to drag the United States of Subprime into the new era, right about the same time China jumps in full scale... (note of oil falls to $40 by Halloween this post will be deleted and I'll disavow any knowledge of solar) Granted, it would be healthier for us all if the government actually helped instead of hindered, but that's asking too much - you'll have to move to a socialist European country for such crazy ideas.

That said, as I've warned multiple times - while the trend is clear for the industry, ultimate winners and the marketplace holds many uncertainties [Jan 3: The Long Term in Solar] I wrote

Let me preface this post by saying I am a long term bull on solar, and in fact was an 'early adopter' among the investor class, that is I was invested over a year ago in my personal account. So I am not a Johnnie Come lately to this area. With that said, I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue] In fact Jeffries analyst even thinks this is going to start happening next year [More Concerns about Solar ASP Pricing]. It is not a matter of if, it's just a matter of when ... but "when" is the key to investing in this space. (one can make a lot of money, before having to face the music)

We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone. This will shake out much like the semiconductor industry and in the long run I believe there will be 5-7 major giants who will be quite profitable companies. But where does that leave the other 50-70-90 (and more coming each quarter online?)

Yesterday's announcement by Intel (INTC) highlights these "long term" risks - as did the foray by Applied Materials (AMAT). Solar dreamers will tell you there is room for many many winners because the opportunity is so huge. I do agree the opportunity is huge, but I've never seen any business sector where there are 30 or 40 winners. In the end this will be a high volume, low margin business - almost equivalent to the semiconductor business unless/until a different technology breakthrough comes down the road. Price wars will be rampant. So there will be great shakeouts - and the ultimate winners in a decade could be names we haven't even heard of yet. But as we always say, the "long term" on Wall Street is next month, so we'll just keep our investing dollars focused on the next 6-12 months, while ignoring the blithe frothing at the mouth from people who believe 100+ companies are going to be ultimate winners because solar is just 0.0000001% of today's energy use.

I would say JA Solar (JASO) is a key solar cell supplier so this move by Intel, onto what appears to be their turf could be a danger sign. Now, at this point in the solar cycle - when any 1 company reports something good, they all trade together as if competitors doing well is a great thing. I've been fascinated to watch this, but over the medium term people will begin to realize these are competitors and great news for company A means company B has more stress. But watching this sector for 2 years now, I expect no one over at JA Solar to care about Intel potentially invading their turf - buy buy buy. One more positive? Jim Cramer can now tout Intel (INTC) as the great next solar company like he does with Applied Material (AMAT) and First Solar (FSLR) ;) (he actually calls First Solar the Intel of Solar - so what will he now call Intel?)

• Intel(INTC) is joining the growing ranks of chipmakers with solar energy aspirations, announcing the spinoff of its key photovoltaic assets into a new standalone company Monday.
• Intel's investment arm, Intel Capital, will lead a $50 million funding round in the new company, to be called SpectraWatt. Goldman Sachs subsidiary Cogentrix Energy will also pitch in on the deal, along with a couple of other investors.
• The company is expected to begin shipping products by mid-2009, with construction of a new manufacturing facility in Oregon slated for later this year.
• Earlier Monday, IBM(IBM) announced a partnership with Japan's Tokyo Ohka Kogyo, a semiconductor manufacturing equipment firm, to develop low-cost methods for producing solar energy products.
• Applied Materials(AMAT), the world's No.1 maker of semiconductor manufacturing tools, is pouring resources into a new business group dedicated to building and maintaining solar panel factories.
• Intel said that SpectraWatt will manufacture and supply photovoltaic cells to "solar module makers," while focusing on manufacturing improvements that lower the cost of solar energy generation.

Pathetic stat of the day - the market capitalization of First Solar is higher than all the Chinese publicly traded solar companies put together. Now that's Cramer power for you. We'll see how that looks a year from now when polysilicon prices begin to really drop (which have been holding down gross margins), and these companies which have been stifled by the high prices can go head to head on product pricing. It will be interesting indeed - somehow I see that halo around First Solar being knocked off a bit, if not in 1 year, certainly within two.

Long none mentioned; I only own solar stocks that pull surprises at their earnings call every 90 days.

Mozilla Firefox 3 Launches Tomorrow

I'm not really a "technology" guy per se, at least when it comes to computing but I just want to let those of you living in the Microsoft Internet Explorer world about the release of Mozilla's Firefox 3 browser, coming out tomorrow. After all, I always root for the little guy (this is what this blog is all about, eh?)

(Apple guys, I know you have Safari so ignore the following message)

Just from a practical viewpoint, I've been using Firefox for a long time - and the few times I switch over to Internet Explorer just to see how something looks or for a quirk I forget HOW SLOW it is. Further, if your computer locks up or the power goes out or something happens, your entire session in Firefox is locked into memory and on reboot, you just have to restart session and all your windows are re-opened. Now maybe most of you read 1 window at a time, but I have multi windows open with multi tabs so for me this is a life saver. (in fact Firefox was the one who brought tabbed browsing to the masses, which of course Microsoft copied) I am probably missing a lot of other cool features since I don't use all the bells and whistles and add ons, but I've also read countless times the security features on Firefox are superior. But I'd encourage everyone to try it at least once - I doubt you will go back. (I also do believe they are a non profit?)

It should be ready to be downloaded here tomorrow.

• It has been an event 34 months in the making, but tomorrow is the official release date of Mozilla’s open source web browser Firefox 3. The company had been holding out on eager Firefox users until it deemed the software ready and as that time nears, excitement is reaching a fever pitch. Mozilla is making the most out of its release date, including world-wide parties and the now infamous attempt at setting a new Guinness World Record for most software downloads in one day.
• One thing that Mozilla is most proud of is the enhanced speed and efficiency of Firefox 3, claiming to be nine times faster than rival Microsoft’s Internet Explorer 7, and two to four times faster than previous version Firefox 2. But while I was taking the software for a test drive, I can’t say that I noticed any considerable differences in how fast my pages loaded, or how fast I could download files. That could be, however, that I, like most children of technology, are so accustomed to speed that it has now become expected.
• There were a few things I did notice, however. One of the best new features is the enhanced security. Firefox 3 keeps track of all reported malware and phishing sites and prevents the pages from loading when the sites are visited. These blocks can be overridden, but this is a big change from Firefox 2 which used to just warn users of potential threats. Another change is renaming the Bookmark Organizer to the Library. Three new features include Bookmark Stars, which allow you to bookmark a page with a single click, Bookmark Tabs, which allow you to include extra information to go along with your bookmarks, and Smart Bookmark Folders, which are saved searches that automatically update themselves.

Pensions & Investments Says Barry Ritholtz has the Best Financial Blog

I must say maintaining a blog is quite a taxing and time consuming endeavor - I would hazard a guess that the great majority of people who create any sort of blog (financial or not) probably drop out within 6 months. Creating new (hopefully interesting) content and making the time to outline thoughts and ideas is a lot more work than one would think. I've written in just under a year nearly 2000 posts - that's a bit scary when you step back and think about it. :) I know even from my own experience, I've had to cut back some reading of some resources or other blogs, simply because last I checked their were only 24 hours in a day. But one blog I've been reading for a long while and continue to try to skim over, at least once a week is Barry Ritholtz's "The Big Picture". While there is little direct individual stock talk, the economic overviews in an easy to read manner, along with "truth telling" about the myriad lies and propaganda is absolutely essential to know (Barry has been pounding the table on the misinformation that is government inflation data for a long time). Plus the occasional dripping sarcasm reminds me of a certain blogger I know...

Anyhow congrats to Barry for winning top spot in the Pension & Investments Best Financial Blog. Paul Kedrosky's Infectious Greed placed in the 2nd spot, and just about the most sarcastic blog of all time Dealbreaker.com (aka Wall Street's Tabloid) placed 3rd. If you've ever read The Onion, that is basically what Dealbreaker.com is most like, except with a financial bent.

Somehow Fund my Mutual Fund blog was not nominated, a clerical error I am sure. ;) I'm always curious about who is on the other end of the blog - the backgrounds of my readership which is something it appears most of these bloggers do know through surveys - i.e. about 10% of my readers are from NY/NJ/CT so I assume some must manage money, like the blogs mentioned in this survey. Maybe one day I'll ask.

Here is an overview for those interested in some background on each of the blogs nominated (wait, what am I doing - showing readers other blogs to go read??)

• With the blogosphere expanding even faster than the hedge fund universe, the editors of Pensions & Investments decided to take a look at some of the most popular blogs in the finance, money management and pension industries to see how they stack up.
• Blogs were ranked on criteria such as how often they are updated, how engaging the writing is, whether actionable information is offered, whether links to other relevant sources are provided and whether the blog is entertaining.

And a little more analysis on the financial blogosphere.....

• Barry Ritholtz hit it big as a blogger when he reported an associate's account of being in the World Trade Center on Sept. 11. A week and 50,000 page views later, Mr. Ritholtz' eyes had been opened. “I came away with a sense that you can publish directly to the investing public,” he said in a recent telephone interview. That blog, which he casually published for clients and co-workers, showed him what blogs could do: get news out fast and immediately receive comments in response. “It kind of took off,” he said.
• Now Mr. Ritholtz publishes “The Big Picture”, a blog on economics, trading and digital media read by more than 460,000 people each month. One in five readers manages $1 million to $10 million in assets, while 17% manage more than $10 million, Mr. Ritholtz said, citing a readership survey.
• “One of the things I've tried to do is cut through” the BS, said Mr. Ritholtz.
• P&I's judges reviewed more than two dozen financial blogs, rating them on timeliness of postings, quality of writing and insight, use of pictures and video, success at generating comments from readers and whether the blog is fun.
• But beyond ranking blogs, P&I sought to find out whether money managers — news junkies rarely without their BlackBerry — use blogs. Turns out some tout the virtues of having fresh and sometimes entertaining voices and unique perspectives not found in typical Wall Street research, while others eschew blogs as unnecessary.
• At The Big Picture, Mr. Ritholtz writes the blog largely for himself. Borrowing a quote from Daniel J. Boorstin, noted author and long-time Librarian of Congress, he said, “I write to figure out what I think.” And there's the practicality of the blog as “indexer”: “I post (a news story or research paper) here ... and I can find it anytime I want.”
• Some money managers find those thoughts and postings helpful. Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc., Cincinnati, said he looks for things that stand out while reading every day. Good blogs will condense the valuable points from mainstream media. “It's like Cliffs Notes,” he said.
• Some see blogs as complementing — if not competing with — Wall Street research
• But as with any sources of information, sound judgment is needed to vet the content, managers said. “You have to consider the source and approach the information with the requisite skepticism that you would have with anything else,” Mr. Miller said.
• But others say blogs can be skipped. “Most financial blogs are not very useful to me,” said Jonathan Naimon, co-founder and president of Light Green Advisors LLC, Seattle, an asset management firm with $58.9 million under management that specializes in environmentally sustainable investing. “The financial ones seem to be touting whatever stock they bought that day,” (yo, buy Mosaic)
• Managers spend a lot of time reading news. But in the crowded market of ideas and writing, time becomes a limiting factor. “There's so much information available. I'm not saying it's all good information,” said Andrew Harding, chief investment officer for fixed income at Allegiant. “Part of it is screening what's valuable and what's going to make a difference in your business.”
• Paul Kedrosky spends a few hours every morning writing “Infectious Greed”. Recognizing that financial executives have “disastrous ADD (attention deficit disorder) and no time,” he tries to keep his analysis short and offbeat (note to self, stop writing posts mirroring chapters in War and Peace)
  
• “Generally speaking, in the world of financial blogs, there's a right answer and a wrong answer, unless you have a flaky readership,” he said. “With financial blogs, people stop reading you if you're wrong all the time.”
• That makes blogs “more democratic” than traditional media, said Mr. McCormick, the portfolio manager at Bahl & Gaynor. Only the strong will survive, and “I think these people will give institutional researchers a run for their money.”

Corn Rocks - but We've been Frozen Out & Best Performing Commodity ETFs/ETNs Year to Date

A reader emailed me about potentially switching out from Powershares DB Agriculture Fund (DBA) and into iPath DJ GrainsETN (JJG) which is a potential option. The main difference in the 2 vehicles is the former includes sugar as a weighting whereas the latter focuses solely on the corn, soybeans, and wheat. Both have similar year to date performance, but in the past few months JJG has pulled ahead a bit on a relative basis. Frankly I have been wanting to be in corn alone since wheat spiked (March-ish) but we cannot do that in the US short of having a commodities trading account - in London one could buy the corn ETF (CORN), which is up 43% the past 6 months. How frustrating to not be able to access something like that here, especially when we called it ahead of time...

We mentioned in the spring that after the historic rise in wheat [Feb 8: Wheat is the new Corn], farmers would be planting a ton of this product in 2008 to take advantage of those prices, and moving away from corn. [Mar 31: USDA Crop Report] That's exactly how things played out [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop]... and wheat prices dipped (dipped is being kind, it's more like shellacked) on expectations of a huge crop later this year. Since both ETFs/ETNs above have wheat and soybeans in their holdings they have returned only 7-8% in the trailing 6 month period (mostly due to the pain from wheat since its spike). So 43%.... vs 7-8%. That makes a huge difference.

With that said, wheat has been cut nearly in half from its "bubble" highs and really is it that hard to guess whats going to happen next spring? After the historic prices we are going to see in corn by this fall, NEXT year's crop is going to be corn heavy - causing a shortage in... yeh you guessed it... wheat. So maybe buying here with a year time frame on the wheat side would not be such a bad thing. And so we'll go year after year, as too many humans want to eat well, and too much farmland is being devoted to such things as new homes and apartments, the world over.

The frightening thing is that while in more developed countries with mature capital markets, farmers can hedge their sale prices in the futures markets and borrow against that to buy the necessary seed, fertilizer, equipment - that is NOT the case in developing markets. So some farmers are simply unable to pay for fertilizers (which are now priced on a global scale), petrol is making running equipment too expensive, and some are simply walking away from farming. And that only creates more shortages. I guess some of the poor 2nd/3rd world farmers can go back to inefficient use of farm animals, but you still need to feed said animals and well... it's all circular - they're expensive to feed as prices go up on food! So there is no escaping it. Inflation is pure evil. These are the type of things that make me stare at the ceiling in the deep of the night and worry... not a good situation at all.

Below is a list of the major commodity ETFs/ETNs ranked by Year to Date performance, courtesy of Richard Shaw's blog. Note, this list is not exhaustive - we've seen a flurry of commodity ETFs hit the market the past 3-6 months [Apr 17: Four New Agriculture ETNs] but this list does show you where the gains have been. Aside from corn (which is not on this list since we don't have the investment vehicle available in the US) all the usual energy suspects are showing, headed by natural gas.

(click to enlarge)

Low Expectations for Investment Banks

Goldman Sachs (GS) reports tomorrow and Morgan Stanley (MS) Wednesday. I own both these stocks as a "barbell" approach to the market - owning some things in places I am not really that positive on - knowing that they can rally at times the rest of the portfolio might dip (which has been the pattern many times since last summer). [Jun 6: Starting to Buy Stuff I Don't Like] That said, combined these 2 make up less than 2.5% of the fund at current time, so it's not much of a barbell. These 2 are the best of an awful bunch - the open question is, as the easy credit days disappear like memories of tech stocks doubling in 2 weeks - what will their eventual business model be?

Myself, I do think there are a lot of international opportunities available (fertile ground) for investment banking in the years to come, and eventually a new generation of suckers will fall for the products these guys like to sell. Further, as their peers fall one by one (shrink or get absorbed into larger organizations but in a shell of its former self), the remaining pie can be divvied up by fewer strong players. Specific to Goldman Sachs, they literally have people placed in most high reaches of government and industry - so they are the pre-eminent mover and shaker... another bonus. Last, expectations are very low - and these are the type of situations that make ratty retail stocks rally 20% on a very bad earnings report, simply because it "beat expectations". Unfortunately, and this is a problem for our entire financial industry is, the lack of transparency in balance sheets - everyone is guessing what everyone owns and since it's impossible to ascertain (some believe many CFOs don't even realize what they own since many of the instruments are so illiquid and haven't traded for months on end, hence cannot be priced) - so unlike a widget maker it's impossible to have a clue on what earnings might be. [Oct 16: Goldman's "Blowout" Quarter]

Thanks to reader msb, for highlighting this specific article via Fortune. I was writing back in September how these investment banks are black boxes and how it is impossible to gauge what exactly is going on as they have so many levers to pull and push - how could we really tell how they are doing?

I did not realize the depth of level 3 pricing which in layman's terms means stuff that is so illiquid (meaning there is no true market for it), that "computer models" from within the firm actually determine their price. So there is no conflict of interest there and no 'fudging' I am sure. Further, I did not realize that UNREALIZED gains could be counted in a quarter? So if I have paper gains in my stock account for quarter 2, I can count those against my losses? Hmmm, that doesn't really work too well in my Ameritrade account because the next day those gains could evaporate - but I guess it works for Wall Street.

WSJ: Wall Street Goes from Sweet to Sour

• Goldman Sachs Group and Morgan Stanley look like the last two kids on the tour of Willie Wonka's chocolate factory. The investment banks are due to report fiscal-second-quarter earnings this week, and they'll have less company than usual. Historically, four bulge-bracket firms have reported in mid-June, with Merrill Lynch coming a month later. This week, only Goldman and Morgan offer meaningful reports.
• Their numbers are dwindling like the children in the Roald Dahl story and later movies. The kids succumb to the temptations of candy and pay a price. For the investment banks, it was credit.
• Analysts expect Goldman -- the beloved Charlie Bucket of the bunch -- to report earnings of $3.42 a share, down 31% from a year ago. Morgan Stanley is expected to earn 92 cents a share, down 59% from last year. Analysts have for weeks slashed estimates for both firms, citing the same problems that dogged Lehman, including lousy trading revenue and fire sales of assets to reduce leverage.
• Write-downs will likely keep coming as firms keep selling assets, giving bean-counters fresh price tags for what's still on the books, and as the housing downturn and sluggish economy hurt other loans. That could mean more capital-raising, possibly including stock sales that dilute existing shares.
• Meantime, the lucrative structured-finance business is on life support. Deal-making and stock-underwriting aren't feeling much better. All will recover eventually to one degree or another, but until they do brokerage profits will suffer.
• The recovery could be slowed if regulators force investment banks to hold more capital -- a likely consequence of getting access to Federal Reserve loans.

Reuters: Analysts See Lower Q2 Earnings at Investment Banks

• Wall Street analysts have forecast a huge drop in second-quarter earnings for Goldman Sachs Group Inc (NYSE:GS - News) and Morgan Stanley (NYSE:MS - News), while Lehman Brothers Holdings Inc (NYSE:LEH - News) is expected to post its first-ever quarterly loss, mainly on hedging losses.
• "Business conditions appear to be among the worst in several years, bulk asset sales have provided price transparency that should trigger more asset write-downs, and hedging was noticeably less effective," David Trone, an analyst at Fox-Pitt Kelton, said in note last week. (but other than that, things are going swimmingly)
  
• "In the current quarter, it appears that the brokers have not judged risk appropriately once again," Ladenburg, Thalmann & Co analyst Richard Bove said. "The hedge is not working," wrote Bove, who had nearly a year ago recommended that investors sell financial stocks as credit market problems began.
• In the second quarter, investment banks are also expected to incur further losses on "Alt-A" paper, even as writedowns across all other asset classes are projected to be lesser than those in the past quarters. "Alt-A" loans are usually given to those with clean credit histories but who have limited income documentation. (wait, I though 3 quarters ago we were talking about the kitchen sink quarter and it was all up from here? Or was that 2 quarters ago? Or last quarter? I can't keep track anymore, because CNBC and associated pundits have been insisting the bottom is in financials so many times it all begins to blend together)

[Apr 24: Initiating Goldman Sachs]

Long Goldman Sachs, Morgan Stanley in fund; no personal position

Bookkeeping: Taking Some Solar Exposure off the Table

It is always tricky trading solar stocks on technicals, because much like the dry bulk shippers they don't seem to trade on technicals much, but simply on macro viewpoints and sentiment. Many times you will sell a solar stock at a traditional resistance point and the whole sector gets into favor and stocks rally 30% in the following 2 weeks. Or vice versa. Perhaps this is why my style of investing falters in the solar sector.

With that said, both Yingli Green Energy (YGE) and Trina Solar (TSL) have been beaten with the ugly stick of late, but have enjoyed a couple of days of rebound. In many ways these charts are identical - both stocks fell below both the 50 and 200 day moving averages, and now have rebounded to approach the first resistance level of the 50 day moving average - approximately $20 for Yingli and $41 for Trina. So I am going to cut back both here, and re-assess - obviously if crude continues to levitate sentiment for the group will turn more positive (even though solar is more of a direct competitor with coal or natural gas).

Simply for technical reasons, and nothing else I am cutting these stakes - Yingli Green Energy down to 0.8% of fund and Trina Solar down to 2.4% of fund. As always, if the stocks power through these resistance levels, we'll change course and have to pay up for the positions we just sold off. But these appear to be dead cat bounces to me, and the aggressive investor would in fact short these type of charts as oversold stocks bounce into a resistance area like this...

Long both names in fund; long Trina Solar in personal account

Vale (RIO) Raising $15 Billion - More Acquisitions on the Way?

Vale (RIO), the Brazilian mining giant, is back in the market raising a new round of capital via shares. After stepping away from a huge acquisition earlier this year [Mar 26: CVRD Pulls Out of Xstrata Deal] is Vale sniffing around at new prospects? Freeport-McMoran Copper (FCX), a former fund holding, would be an interesting fit to round out the portfolio with its heavy copper exposure, and Anglo American is a quite diversified co with strengths in areas Vale does not dominate (although that would just be an enormous purchase). I'd not be so hot on the Alcoa purchase if that is the target. But in a World of Shortages, those who own the hard assets will win in the end.

• Brazilian mining giant Vale said on Tuesday it would sell up to $15 billion in shares to help finance growth in its existing businesses and potential acquisitions, but denied it was in takeover talks. It said it would use the proceeds from the offering to finance growth in its existing businesses, often called organic growth, and potential acquisitions, as stipulated in its current $59 billion investment plan.
• The announcement was made on the same day that O Estado de S.Paulo newspaper reported that Vale (RIO) was working on a bid of more than $30 billion for one of the world's largest mining companies.
• The report, citing unnamed sources close to the company, said Vale would issue shares to finance the acquisition. The newspaper named three potential takeover targets: Anglo American, U.S.-based Freeport-McMoRan Copper and Gold (FCX), and U.S. aluminum giant Alcoa Inc (AA).
• Vale stressed, however, that it was not currently negotiating any "strategic acquisitions."
  
• Vale, already the world's largest producer and exporter of iron ore, has been aggressively branching out into other metals in recent years to diversify its revenue base.
• Since Roger Agnelli took over as chief executive in 2001, Vale has completed 14 acquisitions, including the $18 billion takeover of Canadian nickel producer Inco in 2006.
• Anglo American's market value is almost $85 billion, Alcoa's is nearly $32 billion and Freeport is worth just over $44 billion, according to Reuters company data.
• "Freeport makes sense," said Charles Bradford, a mining analyst with Bradford Research/Soleil. "It is in line with what Vale has been saying it wants."
  

Long Vale in fund; no personal position

[note CVRD is the label tag for Vale as I've known it as Companhia Vale do Rio Doce]

Bookkeeping: Weekly Changes to Fund Positions Week 45

Week 45 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: 15.6% (vs 31.3% last week)
51 long bias: 58.3% (vs 59.4% last week)
9 short bias: 26.1% (vs 12.2% last week)

60 positions (vs 60 last week)
Additions: American Superconductor (AMSC)
Removals: New Oriental Education (EDU)

Top 10 positions = 30.9% of fund (vs 31.4% last week)
38 of the 60 positions are at least 1% of the fund's overall holdings (63%)

Major changes and weekly thoughts
We've just exited a week which was a lot more positive on the averages than in individual names. An interesting week lies ahead - 3 of the remaining 4 independent investment banks report this week which will affect confidence in the sector but we certainly could see "it's not as bad as we thought" type of action in this group which has been beaten hard the past few weeks. The indexes rebounded on a support level that I plainly cannot see (S&P 1340) but since many other market commentators used that level, these sort of technical levels become self reinforcing - i.e. if everyone believes S&P 1340 is a support area, traders will buy as we bounce off it. This seemed to happen, but now resistance lies ahead just 10 points from here at S&P 1370. Last, we have another inflation data point - this one which seems to be somewhat reflecting the stresses in the system - the Producer Price Index on Tuesday. The higher this number goes, the more costs producers are taking on - which they must either eat (lower profits) or pass onto already stressed consumers (not good for an economy 70% based on consumer spending).



The more I think about the implications of what is happening in many parts of the globe, the more I am worried about the intermediate term outlook. That said the market is not the economy and anything can happen day to day, and week to week. So we'll take the market as it is; I do find incredulous some of the data coming out from government and how it completely is in contrast to data that comes from companies (I always listen to companies). Retail sales stink ("better than expected" only means we expected very terrible things and we only got bad things), but if you look year over year outside of Walmart (WMT), Costco (COST), Big Lots (BIG) and that cohort you see serious weakness. A week later the government comes out with a report contradicting that and the markets rejoice. Aside from the obvious price rises in food and energy, we hear about the Kimberly Clarks and Procter & Gambles raising prices significantly on "must haves" - yet when you get data from the government it insists that is not happening and women's shoes and iPod prices are falling so inflation is almost nil. And the markets rejoice. Import prices including oil are increasing nearly 20% year over year, and 7%ish even excluding oil and yet we go with the 2.4% inflation rate provided to us by our friendly neighbors in D.C. Etc. Our Federal Reserve head insists the economy will rebound in the 2nd half, and inflation will go away like magic ... even though inflation going away is due to a weakening economy. So which is it? Strong economy in 2nd half or weak economy that drives down inflation? It doesn't matter - whatever is uttered the holy gospel according to Ben is worshiped and the markets rejoice. Note - this is the same person who told us in spring 2007 the fallout from housing would be contained. So now we're supposed to believe the forecasting skills? And away we go....

The reality is inflation is raging in many key overseas markets, and "real returns" are negative. Real returns are what you earn in reality - not on paper; i.e. if inflation is 8% and you earn 6% on your CD - well you just lost 2% in "real returns" even if you're told you earned 6%. If inflation is higher than interest payments you are losing money. That is happening everywhere - including the U.S. We are making a few % of interest while inflation is 8 to14% errr 4.2% err 3% err 2.4%. So as people see their buying power deflate they inherently act in a cogent manner - spending the money instead of saving because whats the point in saving an asset that is degrading by the minute? Inflation is a tax on all things - for producers and consumers. Either producers have to eat it (and suffer lower margins = lower profits) or they will try to pass it along the consumer (weakening his spending ability). Neither is good. On the other hand, another reason to rally is the "strong dollar". The strong dollar mavericks should be careful what they wish for - the weak dollar is the one thing holding the economy up (the export business). What happens if the dollar does indeed rally 10%? 15%? Suddenly all those currency gains on the books for every US multinationals begin to erode and "earnings beats" turn into "earnings misses".

The weather in the Midwest is making an already problematic supply/demand equation turn even more dire. Agflation is going to kick into another gear later this year. I have kidded that you will need a mortgage payment to pay for that BBQ on Labor Day. But these floods are creating a more systematic issue - corn is in everything in the U.S. supply chain; not just the food supply - we've built a daisy chain of commerce around corn to help support the industry over the past few decades. Now that input cost is going to be off the charts. This will hit us in the 2nd half of the year and into 2009. By "hit us" I mean for normal Americans doing normal shopping. It won't hit any government report. :)

The regional banks continue to look poor - it appears now that the game plan by the Federal Reserve (just one man's view) is to prove they are "tough" they are going to allow some of the smaller regional banks to go out of business... while providing a backstop to the names we all know and "love"... especially the big money center banks. So as the American consumer weakens and all sorts of loans begin to default, along with the commercial loan business - I expect the regionals to take the brunt as the Federal Reserve appears to have set their mind to bail out the bigger banks but to offset moral hazard it appears they are going to sacrifice some of the smaller. Just my theory.

So the economic backdrop is not rosy, I have not even touched on housing which continues in a freefall in many areas and the foreclosure rate which people expected to begin to fall by now - only continues to spike. I think we have a whole slew more of these to come... for the fund we remain in a cautious mode, but respect the fact if the animal spirits say up, we'll go up. Whistling past the graveyard is common place. We'll continue to monitor our playbook and see if the rotational correction continues as in the past (first goes the junk, then the non consumer related/non commodities, and last commodities) If so, retail/banks/homebuilders would rally in short order (next 1-2 weeks), and commodities would be set to fall. This is not pre-ordained, but simply the past pattern - and again this would require the market to continue to falter. For all we know the market puts on a 10-15% rally in the next few weeks. But my short exposure is placed to play this "playbook", with overweights in the spots that have held up the best. Sort of counterintuitive so we'll see how it plays out. I've been picking up some long exposure in many stocks that have fallen in this undertow of correction hidden by the indexes - buying product that has been down 15-20-25% the past few weeks, and selling off some of the winners and commodity exposure to keep at about a 60% long exposure. With the market rallying hard into the week end, I re-upped some short exposure late in the day Friday so we sit at a high level there. We'll re-assess if the market breaks above 1375-1380 or so since that would be a sign of short term strength.

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 Apple (AAPL) as a buy the rumor, sell the fact (iPhone 3G) type of story, which played out quite perfectly... I had culled my position severely and we began to pick up some shares later in the week for a 7-8% type of discount. I still would not be surprised to see more weakness in this name. I'd like to pick up some at a lower price point.
2. Trina Solar (TSL) - where do I even start... a fantastic operational result (exceeding my aggressive targets) was ruined by a management decision to deliver a currency change surprise. Without rehashing the past, the stock began selling off immediately this week and I took the position down from 10% to 6% as the stock began breaking support levels in the $44s. I cut a bit more as it broke $42 (200 day moving average) and then a bit more on the rebound Friday to $39. It traded as low as $36 this week (from low $50s late last week). At this price valuations are a complete joke so for the patient investor accumulating shares here would be prudent - we have one problem however. Just as they posted a $4M currency loss last quarter, they are poised to report another $3M one this quarter. This will suppress the ability to provide a material upside surprise in my book and thats what solar investors want - they could care less about a 12-15 forward PE ratio on 100% growth, as shown the stock's death spiral. So we could be talking a few more months of basing, moving with the group as a whole (solar tends to trade in a pack) but lagging its peers (again) for months on end. So for now we've cut it back and we'll probably expand solar exposure into other names looked more favorably by the market, until Trina is ready to not pull any surprises and let its operations shine through in the back half of 2008 (which won't be reported until December 2008 and April 2009) It is still the cheapest stock in the sector by a country mile, but now appears to have both a management discount and equity dilution discount built in (the co is hinting it will do an offering to raise money for 2009) So it's a conundrum stock - so cheap you don't want to sell, but with some near term roadblocks that could limit upside potential v peers.
   
3. I started to rebuild a position in Latin America e-commerce name Mercadolibre (MELI) in $40/$41 range as well as upper $30s. This is a highly volatile name that can rise/fall 20% in a week - just have to understand that when walking into this type of position.
4. I began rebuilding dry bulk shipper DryShips (DRYS) Tuesday near $85 noting (ironically) that this name could be at $65 in a heartbeat. Well it almost got there by Thursday trading in the low $70s where I added a bit more. It didn't quite get to my target price so I did not fully load what I wanted. Will a world slowdown (if it happens) hurt shipping rates? Most likely. Will fertilizer, coal, iron ore suddenly not be needed - no. But its a perception game on Wall Street and if perception is there is a slowdown than the stocks will react as such in the near term. This hits the dry bulk sector from time to time.
5. I bought back a stake in Ctrip.com (CTRP) which I had sold just 2 weeks earlier, 15% higher. This was enough of a discount to get me started back in a more meaningful way in this name.
6. Intrepid Potash (IPI) reached my mental price target of $60 somewhere in "the 2nd half" within a few weeks of buying the name; Agrium (AGU) provided this week's incentive for the group which I was very bullish on last week as a breakout candidate group. So I cut this position back severely and offset that with buys in Mosaic (MOS) and Potash (POT) to try to keep sector exposure relatively constant. While my playbook says these groups could be hit next in a more serious downturn, we don't know if a serious downturn will happen so hence the move. Note I am hedged further in this group with Ultrashort Basic Materials (SMN) - so far a big loser for the fund but frankly its an insurance policy which I wrote when I first bought, that if it loses money than it means our long commodity stakes should be doing well.
   
7. After a long period of drifting down, we noted on Wednesday that Powershares DB Agriculture Fund (DBA) rocketed as crop prices begin to strike upward (ex corn which has been in pure rally mode for months). I missed the move because it was so sudden but I did purchase on pullbacks later in the week. I expect similar action for iPath DJ Livestock ETN (COW) later in the year - a long base building and then a sudden movement upward... we just don't know when.
8. Thursday, Cummins Engine (CMI) rallied 14% on news of a competitor exiting one of their markets - I took the opportunity to reduce the stake from 1.6% of fund to 0.6% of fund - I further cut this position Friday to just a holding position on a follow up 6% rally in the name.
9. I started a new position in controversial hope stock American Semiconductor (AMSC) after a pullback from a large run inspired by a large order out of China. Some people have doubts if this order could be true, but some of the biggest funds at Fidelity also own this name so if this is a total fraud, we'll go down with the Fidelity funds. I would like to see lower prices to add more.
10. After being hammered post earnings (despite stellar results) on "guidance stunk", Perfect World (PWRD) upped guidance which seemed to soothe the marketplace. The stock rocketed so we took the chance to cut the name in 2 episodes, in the mid $24s and mid $25s. This is actually a very easy chart read - we've now cut this stake sharply as it hits resistance. If it breaks above resistance, we'll pay up a bit to get back our position and away we go. Or, if the stock pulls back to the lower $20s we will also rebuy our stake.
    
11. We ended the week closing a long held position in New Oriental Education (EDU) - we have some near term risks (over next 60-120 days) and since investors nowadays consider that to be "the long run", I'd rather not open up to risk of lemmings jumping off a bridge together is there is any sort of earnings guidance that is softer than expected. Because, unfortunately, they'd take us with them.

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.

21 Stocks Returning 8% this Week

As discussed in the weekly fund performance post, this week was deceiving - the market ended flat due to miraculous buying in the last 30 minutes, but the underlying action was quite poor. This is showcased by the low number of big winners this week. I count only 21 names which returned 8%+ this week which is more apt for weeks the market is down 3-4%. Coal and fertilizer continue to dominate this list.

Criteria as always

1. Market capitalization $2B+
2. Average trading volume 100K+
3. Stock price $10+
4. Returns 8%+

Green we own, blue we have owned or discuss in the blog.

Symbol	Company Name	% Price Change 1 Week
NT	Nortel Networks	31.2
MOS	Mosaic Co	15.0
BZP	BPZ Resources Inc	12.1
AGU	AGRIUM INC	12.1
FDP	Fresh Del Monte Produce Inc	12.0
IPI	Intrepid Potash Inc	11.9
ARLP	Alliance Resource Partners LP	11.6
MEE	Massey Energy Co	11.5
AW	Allied Waste Ind Ord Shs	11.1
SM	St Mary Land & Exploration Co	10.8
CPX	Complete Production Services Inc	10.4
BIG	Big Lots Inc	10.3
PCX	Patriot Coal Corp	9.8
SPLS	Staples Inc	9.7
TRA	Terra Industries Ord Shs	9.4
APOL	Apollo Group Inc	9.4
BAK	Braskem ADR	9.3
RYAAY	Ryanair Hldgs ADR	9.0
FCN	FTI Consulting Inc	8.6
ANR	Alpha Natural Resources Inc	8.4
SLM	SLM Ord Shs	8.1

LA Times: Even the Chinese Expect Subsidy Decreases post Olympics

We've been developing a thesis regarding a global slowdown caused by rising prices everywhere - steel is causing it, crude is causing it [Jun 2: China Leads Asia in Retreat from Inflation Battle], etc. Inflation is a tax on all things, consumers and producers. (except in the US where there is little to no inflation of course). The economic cycle elsewhere has not stopped happening but the overreaching power of 1 economy is truly buffering the cycle.

China remains the inflection point of almost every major bull market at this point; thus we must monitor this Ferrari going at 165 mph down a careening oil slick mountain road. Recall, we are already seeing smaller Asian governments buckle under the global commodity price boom [May 23: Smaller Asian Countries Begin to Buckle Under Oil] and we are seeing the impact of steel [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects] Just speaking from a local perspective the impact on automotive of this steel issue is simply untenable. Hot rolled steel prices have risen from $830 metric ton in April to $1035 in mid May. Folks, thats in 6 weeks; this product was $500 a few years ago (and $150-$200 a few years in the early part of the decade).

Since those posts even India has begun to buckle [Jun 3: India Warns they too Cannot Subsidize Energy Costs Forever]. The open question is when/if China would buckle - when it does, a lot of investing thesis that have caused the most pleasure will see damage in the near term. Throw a "strong dollar" on top of it, and the pleasure from US multinationals deriving huge gains from currency dislocations goes away (be careful what you wish for, strong dollar advocates) along with "huge growth in developing markets". So we could have a rocky road ahead of us in the markets - since if there is a true correction (all it takes is a sentiment shift for stocks to be bludgeoned) in items tied to China engulfing every product worldwide at any price, finding areas to hide in the stock market will be tough. You'll be stuck with financials, retailers, or technology I suppose. Again it won't change the long term story one iota, but stocks and the emotional human beings buying and selling said stocks won't care to hear about the long term in the middle of a correction...

Again China is so flush with cash they could in theory subsidize for a long while (whats $30 Billion to them? a month or two of Americans buying Chinese products at Walmart?), but it appears even the citizenry of China are expecting some level of subsidisation to be stripped away post Olympics. Stay tuned - this will get very interesting.

• The lines are getting longer, and Tang Yao is finding fewer gasoline stations open in his neighborhood here. But the 48-year-old motorist has no gripes about the price at the pump. While consumers in much of the world have been reeling from spiraling fuel costs, the Chinese government has kept the retail price of gasoline at about $2.60 a gallon, up just 9% from January 2007.
• During that same period, average gas prices in the U.S. have surged nearly 80%, to about $4 a gallon.
• But Tang and millions of other Chinese are bracing for a big jump in pump prices. The day of reckoning? Everybody believes it's coming right after the Summer Olympics in Beijing conclude in late August.
• The reason, as most see it, is that the central government doesn't want to risk doing anything that could upset the populace before the Games, which open Aug. 8. China is already grappling with inflation running at an annual pace of more than 8%, mostly because of higher food costs.
• "Before the Olympics, stability is paramount," said He Jun, an oil analyst at Beijing Anbound Consulting Co.
• Other countries that subsidize fuel costs have boosted prices recently, in some cases stirring unrest. Protests flared late last week in India, where the government upped prices by about 10%, and there were calls for mass rallies in Malaysia after gasoline prices jumped 41% overnight.
• China is the world's second-largest consumer of petroleum, behind the U.S.
• China relies on imports for roughly half its oil use, which is growing at about 7% annually.
• China raised pump prices only once in the last year, in November, by a little more than 9%.
• Refined-oil prices in China are half of international levels, leaving Beijing to shell out about $30 billion in subsidies in 2007 (that was at $70, $80, $90 oil)
• But even worse than their draining effect on government coffers, China's price controls create market distortions and disincentives for consumers and businesses to reduce consumption and conserve energy, many analysts have long argued.
• The transportation industry uses about half of the gasoline and diesel in China, while ordinary motorists accounted for 7% of gas consumption in 2006, according to China International Capital. But the number of car owners is growing rapidly. ("only" 7%, 2006, for ordinary motorists is scary when you consider in Beijing alone 1000 new cars are sold... a day)
• Farmers, who are a major user of diesel, say they're struggling to buy fuel for their trucks, tractors and harvesting equipment. Some complain that the government's price control amounts to a subsidy for the rich who can afford to buy a car. Why not subsidize farmers directly, they wonder.
• "We want to hoard some diesel too if possible," said Wang, who grows wheat, soybeans, corn and sweet potatoes. "But in order to do that, you have to have some connections. And we don't."

Keep in mind folks, in a World of Shortages we are in competition with emerging powers that be for resources. You can see now just a small sample of potential suffering - that great sucking sound Ross Perot talked about is US dollars flooding into coffers in the Middle East and China. And that money is being used against us in this competition. This is what a massive debtor nation faces, in much larger magnitude in the decades to come. This episode is just a preview of things to come - a world of both heightened inter country and intra country (rich v poor) social strife is sure to be the ultimate path. An interesting opinion piece to finish off this entry.

• Can China afford its own oil subsidies at a time when it is spending billions on post-earthquake reconstruction?
• The short answer is yes, because China is blessed with both large trade account and fiscal surpluses. (The U.S. has neither of course) The reconstruction cost is projected to amount to about 1 percent of China's gross domestic product, while the fuel subsidies account for another 1 percent, JP Morgan estimates.
• Remember that China had a fiscal surplus of 0.7 percent of GDP last year, or $174 billion. So even if spending on post-earthquake rebuilding and fuel subsidies were to cause a 1 percent fiscal deficit, that would still be very manageable. (this is why I openly wonder if they will even bother to cut subsidies at all - they don't have to in a fiscal sense)
• But here's a more important question: Why should China keep domestic fuel prices at about half of the global average?
• What's more, a worsening fiscal situation might put downward pressure on the yuan. Fuel subsidies have exaggerated inflation in the developed world, while understating inflation in the developing world. China's inflation could well hit 15 percent if Beijing were to free up caps on energy prices.
• "If China is not able to take away the subsidy and cut down its demand, it will have huge implications for the world," said Shikha Jha, a senior economist at Asian Development Bank.
• While the West is critical of China's energy policy, there is little outcry for change within the country, except for complaints from two loss-making refineries.
• "The people need to wonder, who pays for the subsidies?" said Louis Vincent Gave, chief executive of research and asset management firm GaveKal. "Most Asian countries are printing money to pay for them." (goodie, more inflation as more paper currency chases fixed amounts of hard goods)
• Morgan Stanley expects some emerging market currencies to face downward pressure, probably for the first time in a decade, as those countries unwind their fuel subsidies and domestic inflation shoots up.
• "Giving out subsidies is an easy and popular thing to do," said Bill Belchere, an economist with Macquarie Securities. "But getting rid of it is like hell."

Interesting times indeed.