How are the Dow Components Doing this Year?

The Dow Jones Industrial Index (DJIA) is the most widely followed index, holding our 30 most dear and near corporations - the names everyone knows. It actually has a very convoluted methodology which gives weight to the stocks within the indix by PRICE instead of market capitalization like most indexes. Hence the higher the stock price (which is quite an arbitrary thing, since if a stock splits 2:1 it should not matter to its "importance" in an index) the more it affects the DJIA. If you are interested in the morbid details (you engineering types) you can read here. Essentially most of us who are around a while use more broad indexes such as the S&P 500, or Russell 2000.

More interesting to look at is how they are doing for the year, courtesy of BeSpoke Blog. Let's couch it this way - thank god for Walmart (WMT). Even the large oil integrated stocks (which I don't like) are not really helping much.

(click to enlarge)

Weekend Stuff for Political Junkies

For any of you political junkies out there - here is an interesting site with analysis and compilations of all the polling - fivethirtyeight.com. Some good stuff.

Back when the blog started, and everyone was still talking about Iraq as "the issue" last summer and recession / inflation were laughable concepts in the mainstream, I predicted whomever came out of the Democratic side (at the time it was looking like a Hillary Clinton / Rudy Giuliani contest) would win in a landslide because by the time we got "here" to today, the economy would be degrading badly, and move to be the first, second, and third top issues. So it has become - Republicans, aside from Mike Huckabee, were not even addressing the economic "issues" of the middle class / lower class in the primaries until the last few debates.

With that said, John McCain is the least like the other Republicans so just from his "maverick" stance, if any Republican would have a chance - it would be him (ironic considering the "base" tried everything in their power to make sure he was not the candidate). I think if the Republicans threw out their typical candidate it would of been a 65-35% type of election. But since anyone within 10,000 yards of George W is affected by the association, short of a terrorist attack on US soil in the summer/fall - I just don't think McCain has a chance because this country is so desperate to try anything, something, to change directions (they seem to forget Democrats have been running the Congress the past 2 years, accomplishing nothing - just like their predecesors). Not that change for change sake helps much - and the main problem is the structure of politics which won't be changing. But what else can people try - if door #1 fails them, they will go to door #2. Then 8 years later that will fail them, and away we go.. :) By the time we get to November, the economy will be in worse shape than it is now - only helping Obama further.

According to the site Barack Obama is one pace to win 310 of the electoral vote to John McCain's 228. (the electoral college is so outdated) The popular vote is projected at 49.8% to 46.2% for Obama. In my view, and this site there are the 4 key swing states - Michigan, Florida, Ohio, and Pennsylvania. Three of those states are suffering from a major recession either through manufacturing or housing or a combination of the two. At least PA has the natural gas exposure, but it is not exactly surging through an expansion ;) According to this site, they give FL to McCain and the other 3 to Obama. I think Obama could win all 4 as things degrade - although I would not be surprised to see McCain take on Florida Governor Charlie Crist as VP, and that would swing the state to him. On the website, they give Florida to McCain but recent polls show a very close race.

I will be very interested to see what way Obama goes with his VP - I think the safest choice but it won't win him a state is an ex general, since that eliminates the #1 criticism that Republicans can bring against him - national defense. That's one reason Jim Webb from Virginia (while not an ex general) is very much in the VP conversation. But conventional wisdowm is to take someone who will win a state for you. All 3 of the remaining 4 swing states have Democratic governors - although Michigan's is ineligible since she could not take over the Presidency being a non US born. (along with helping to run our state into the ground) Interestingly both the OH governor Strickland and the PA governor Rendell are big Hillary supporters so that would be quite the scenario if he took one of them on.

Total wildcards for Obama would be a Mike Bloomberg (who in theory could solve McCain's "lack of economic knowledge" weakness as well), and then the guy who I wish was running for President - Chuck Hagel. To reach across the aisle to tab a Republican would create scowls from Democrats but by gosh could there be any other better sign of trying to truly cooperate to solve our growing by the day problems? Well I can dream - but Hagel *is* lavishing praise on Obama.

"If you engage a world power or a rival, it doesn't mean you agree with them or subscribe with what they believe or you support them in any way," he said. "What it does tell you is that you've got a problem you need to resolve. And you've got to understand the other side and the other side has got to understand you." - Chuck Hagel

Note 1 - I'm for neither side and in fact believe there should be a lot more than '2 sides'. Government is by and large completely broken and far too big - I just hope for pragmatic worldy leaders who I could care less if I'd like to have a beer with, but who can actually solve problems. But I'm not holding my breath. Whoever gets elected has quite possibly the biggest mess ever - quite like our friend Uncle Ben inhereted from Uncle Alan G.

Note 2 - I get all my politicial information from The Daily Show ;)

35 Stocks Returning 7%+ this Week

Another small list of names, and a familiar lineup of stocks. The big change was the flight into precious metals - gold and silver which we outlined in last week's list as the potential new group of strength, and our old gold holding was the 2nd best stock in the market (in the criteria group we use) [Gold. Back from the Dead?]

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. Goodrich is a natural gas play which has been attracting attention due to its Haynesville exposure - what a chart. But any market being led by gold is one we want to remain fearful of. We discussed Atwood Oceanics (ATW) and Cleveland Cliffs (CLF) in posts this week. Simply put, not many places to hide this week if you are not a gold bug. In the sub $2 Billion market cap area - WuXi PharmaTech (WX), another of our holdings was the top returner @ 18% after months of underperformance.

Symbol	Company Name	% Price Change 1 Week
GDP	Goodrich Petro Ord Shs	23.0
KGC	KINROSS GOLD CORP	18.9
EK	Eastman Kodak Co	16.9
PAAS	PAN AMERICAN SILVER CORP	15.0
GOLD	Randgold Resources ADR	14.8
CTL	CenturyTel Ord Shs	14.3
AEM	Agnico Eagle Ord Shs	13.9
ATW	Atwood Oceanics Inc	13.9
GG	GOLDCORP INC	13.4
CPO	Corn Products International Inc	13.2
AUY	Yamana Gold Inc	12.6
GFI	Gold Fields ADR Reptg 1 Ord Shs	12.5
FSUMF	Fortescue Metals Group Ltd	12.3
ABX	BARRICK GOLD CORPORATION	11.3
BZP	BPZ Resources Inc	10.9
CLF	Cleveland Cliffs Ord Shs	10.9
HMY	Harmony Gold Mining ADR	10.8
AU	AngloGold Ashanti ADR	10.4
BRL	Barr Pharmaceuticals Inc	9.3
FCN	FTI Consulting Inc	9.3
LIHR	Lihir Gold Sponsored ADR	9.0
CPX	Complete Production Services Inc	8.9
JBL	Jabil Circuit Inc	8.5
CCJ	CAMECO CORPORATION	8.5
ANR	Alpha Natural Resources Inc	8.5
WFT	Weatherford International Ltd	8.4
SLW	Silver Wheaton Corp	8.3
HK	Petrohawk Energy Corp	8.2
WLT	Walter Industries Inc	8.1
HERO	Hercules Offshre Ord Shs	8.0
NEM	Newmont Mining Ord Shs	7.6
RS	Reliance Steel & Aluminum Co	7.6
DRYS	DryShips Inc	7.3
ELP	Companhia Paranaense de Energia ADR	7.1
MUR	Murphy Oil Corp	7.1

NYTimes: U.S. Freezes Solar Projects on Public Land for 2 Years

Watch what they do (this) versus what they say ("we feel so much empathy for the American people, we need to find ways to bring down the price of energy!").

Environmental impact? Of "renewable" energy? Are they serious? So much for my mandate for a Manhattan Project of Energy, which included taking huge pieces of public land in sun drenched southwest and putting solar farms all over. Have to study the impact on the environment first. And "two" years, really means "four" years.

• Faced with a surge in the number of proposed solar power plants, the federal government has placed a moratorium on new solar projects on public land until it studies their environmental impact, which is expected to take about two years.
• The Bureau of Land Management says an extensive environmental study is needed to determine how large solar plants might affect millions of acres it oversees in six Western states — Arizona, California, Colorado, Nevada, New Mexico and Utah.
• But the decision to freeze new solar proposals temporarily, reached late last month, has caused widespread concern in the alternative-energy industry, as fledgling solar companies must wait to see if they can realize their hopes of harnessing power from swaths of sun-baked public land, just as the demand for viable alternative energy is accelerating.
• “It doesn’t make any sense,” said Holly Gordon, vice president for legislative and regulatory affairs for Ausra, a solar thermal energy company in Palo Alto, Calif. “The Bureau of Land Management land has some of the best solar resources in the world. This could completely stunt the growth of the industry.”
• Much of the 119 million surface acres of federally administered land in the West is ideal for solar energy, particularly in Arizona, Nevada and Southern California, where sunlight drenches vast, flat desert tracts.
• Galvanized by the national demand for clean energy development, solar companies have filed more than 130 proposals with the Bureau of Land Management since 2005. They center on the companies’ desires to lease public land to build solar plants and then sell the energy to utilities.
• According to the bureau, the applications, which cover more than one million acres, are for projects that have the potential to power more than 20 million homes.
• All involve two types of solar plants, concentrating and photovoltaic. Concentrating solar plants use mirrors to direct sunlight toward a synthetic fluid, which powers a steam turbine that produces electricity. Photovoltaic plants use solar panels to convert sunlight into electric energy.
• The manager of the Bureau of Land Management’s environmental impact study, Linda Resseguie, said that many factors must be considered when deciding whether to allow solar projects on the scale being proposed, among them the impact of construction and transmission lines on native vegetation and wildlife. In California, for example, solar developers often hire environmental experts to assess the effects of construction on the desert tortoise and Mojave ground squirrel.
• “Reclamation is another big issue,” Ms. Resseguie said. “These plants potentially have a 20- to 30-year life span. How to restore that land is a big question for us.”
• The industry is already concerned over the fate of federal solar investment tax credits, which are set to expire at the end of the year unless Congress renews them. The moratorium, combined with an end to tax credits, would deal a double blow to an industry that, solar advocates say, has experienced significant growth without major environmental problems.

Par for the course.

Bookkeeping: 'Rising Tide' Performance Week 47

Week 47 performance of the mutual fund

Comments: Back again so soon my toothy friend? After a stifling 3% loss last week, the markets followed that up with... well another 3% loss this week. It's been a rough month for the markets - that is putting it lightly. We have 1 more day in the month and barring a huge gusher upward Monday, the "market" (as designated by the Dow I assume) is on track for the worst June since 1930. Folks, that was the beginning of the Great Depression. Now I am not intimating anything of the sort - in fact in our low unemployment (ahem), low inflation (ahem), positive GDP (ahem) economy - we are not even facing recession not to mention depression. On the positive side - there is only 1 more market day left and (trumpets blaring) the "2nd half recovery" we've been hearing about for half a year begins Tuesday. Goodness, I cannot wait. This has been a very long week, and trying to stay afloat must be akin to what I imagine wrestling a oiled up hog must be like. (those of you who have indeed wrestled an oiled up hog, please do not email me with details, or send a picture depicting the act). One last bright spot - next week is a 3 and a half day work week; I have checked with my sources and indeed there is no way we can lose money in our stock accounts during the day and a half the market is closed. Whew!

After a devastating week punctuated by another mistaken (in)action by the Fed Wednesday, we tested the all important S&P 1275 level Friday and lo and behold, no one could of have predicted this (hand raised) but we were able to pull off a miracle and not fall through. Granted it was one weak bounce but a bounce it was. "Mission Accomplished" as those in power like to say - you could almost hear the high 5's in Washington D.C. from here. Yet we remain standing at the cliff and it's tricky to predict where we go next - an oversold bounce would be the more probable scenario after a 6% two week hammering, but who will show up next week into the vacation week? It is going to be light trading and anything can happen - and we cannot read into anything next week. We get auto sales next Tuesday which will be frightening and even more so the monthly unemployment report Thursday (which we summarily ignore for its fiction) on a "get away" day where the only people trading will be people like us! Everyone else in the Hamptons. Boy oh boy - that should be a doozy. For the fund, everything not energy related lost - except solar which is energy related but seems to fall into "technology" since they were decimated as well. Again this is not a tale of 2 markets - its a tale of 1 market versus about 30 stocks. I feel bad for the 98% of people not buried up to their nose in those 30 stocks... it's ugly otherwise.

Frankly the indexes do not show the real damage going on underneath the surface because energy stocks are quickly becoming more and more of a weighting in the major indexes. Only on Thursday was the damage apparent and that's because that was the only day "every sector" was hit. That complex and it's tangental themes are all that is working at this time. There was a lot of carnage and it has spread from the usual suspects to larger parts of the economy. It is quite worrisome in fact - if stock prices are any indication the federal government (read: you) is going to have to pony up for some airline bailouts, some auto company bailouts, and judging from today's action some hog/chicken/and beef producer bailouts (more on that this weekend). On top of the 2nd "stimulus plan" (it's coming folks, trust me). Amazingly it all ties back to the (a) ethanol boondoggle plus (b) easy money policies of cheap and easily printable US pesos that both continue to this day. I am becoming more Libertarian by the hour after watching the disaster these leaders are imparting on us, while pointing fingers anywhere from OPEC to Chindia. Look in the mirror guys - the villians are there.

The S&P 500 continued pace with last week losing another 3.0%; the Russell 1000 (more tied to the US economy) which for some gosh reason has been outperforming the big multinationals finally was weaker and closed down 3.1%. Rising Tide Growth, all things considered, had quite a good week with only a 1.1% loss - our hedging (cash/shorts) along with our remaining 'energy' positions (I've sold off much of this complex anticipating a rotation that Ben stole from us Wednesday) kept us smartly ahead of the markets. After the huge week versus the indexes last time around, I expected to give some back this week but we continue to separate from the indexes. At some point the grim reaper will be coming for us and exact it's toll - perhaps next week; we can't hide forever. But we've built up a huge cushion so we are ok with that. 5 weeks to go to close out the year.

As always if interested in pledging an investment when fund is ready to launch (shooting for late 2008) please attach a comment here, or send me an email (need your state please). We have now breached >$3 million pledged - great news and thank you.

Price of Rising Tide Growth: $12.139
Lifetime Performance to date (vs Aug 3, 2007): +21.39%

Comparable S&P 500: 1278.4 (-12.75%)
Comparable Russell 1000: 702.7 (-11.74%)

Fund return vs S&P 500: +34.1%
Fund return vs Russell 1000: +33.1%

Last week's results here.

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

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

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

Please click here: fund performance for previous updates

Bookkeeping: New Position in A-Power Energy Generation Systems (APWR) to Create Alternative Energy Mini Basket

I am trying to build a 3 position basket of "alternative energy" (non solar) names. I started this basket with a small stake in American Superconductor (AMSC) which I actually added a bit to here as it pulls back to $36 and fills a gap from June 9th. [Jun 12: Starting a Beachhead in American Superconductor (AMSC)]



Today I am adding A-Power Energy Generation Systems (APWR). Here is a generalized description

A-Power Energy Generation Systems, Ltd., formerly Chardan South China Acquisition Corp., through its PRC operating subsidiaries, is the largest provider of distributed power generation systems in China and will enter into China’s wind energy market in 2008. The Company is also focused on developing and commercializing additional renewable energy technologies

This company moved to the NASDAQ Global market on Jun 2, 2008, and is actually followed by a few smaller brokerage houses; therefore I can conclude it's not a complete scam ;) .. something I worry about with any tiny far flung Chinese name. At a market capitalization of about $800M at today's prices its far smaller than our average fare and I believe either the 2nd or 3rd smallest current holding.

This company has a fast growing baseline business in China (and expanding to other Southeast Asian markets) but the kicker is the potential wind business which is just beginning. Please note there are a lot of over the counter Chinese "wind plays" being touted just about everywhere - I don't do over the counter unless it's a Nintendo or something of that nature. And unlike certain small cap wind stories that a certain financial TV personality likes to tout, APWR actually has a profitable base to work off of (i.e. positive earnings) while it grows out its new wind business. So the wind business is the ultimate reason to own the name, but not a contributor (yet). But in a year or two I expect (despite being low margins) it will attract most of the attention. But the old business is not too shabby either - let's take a quick look at the last earnings report. The numbers are small in total, but very nice in terms of percentage growth.

• For the three months ended March 31, 2008, A-Power’s revenue was $32.3 million, an increase of 85.0% from $17.5 million in Q1 2007. The increase was due to continued growth in the Company’s core distributed power generation business and the relatively larger size of projects under construction in Q1 2008 compared with Q1 2007.
• Due to the stage of certain contracts being performed in Q1 2008, gross margins were 11.9%, a decrease from 13.9% in the first quarter of 2007, but an increase of 0.7% from 11.2% in the fourth quarter of 2007.
• On an annualized basis for all of 2008, management expects gross margins on its distributed power generation business will be approximately 13.5%, similar to its gross margins in 2007.
• Net income for the first three months of 2008 amounted to $2.9 million, an increase by $1.3 million or 79.1% compared to $1.6 million for the first three months of 2007. This increase was attributable primarily to the growth in revenue and operating income and an increased number of larger distributed power generation contracts.

Some commentary on their core business

• Compared to the rest of the year, the first quarter has always been a slow quarter for A-Power due to the harsh seasonal weather in Northern China, where a majority of our projects are based. This harsh weather causes the construction on most of our projects to be halted in January and for a majority, if not all, of February.
• “During the first quarter of 2008 we made great progress in not only obtaining new contracts in China, but also in expanding our operations into Southeast Asia. As previously announced, we signed a $150 million distributed power contract in Thailand and began working on this project in May. We are in discussions with a number of other potential customers throughout China and Southeast Asia and expect to announce new major contracts over the next few months.

Some commentary on their future wind business

• “For an update on the wind business, we have made encouraging progress sourcing the necessary wind turbine components from China and abroad and are on-track to complete the first phase of our wind turbine production facility this month. This first phase includes a 180,000 square foot wind turbine assembly facility with the capacity to produce 420 of the 750kW wind turbines and 300 of the 2.5 MW wind turbines each year.
  
• We expect to begin producing wind turbines at this new facility in the third quarter of this year and look forward to becoming one of the major providers of wind turbines in China.

Backlog of core business increased from $400M to $700M which we always like. That is over a year's worth of business The company is debt free - we like that; should mean no new equity dilution anytime soon. Despite a low margin business, they only have 32.7M shares outstanding so net income is spread over just a relatively few amount of shares - always like that. Earnings for 2008 are projected @ $1.15 and for 2009 @ $1.47, and I do believe this does not include any of the wind business which probably will take some time to really ramp up. The company has guided to $1.04 to $1.34 for 2008. But at today's $24.70, and using the analysts $1.15, we are paying a forward PE of 21x 2008 estimates versus the folks who 5 days ago were paying 28x when it peaked just under $32.

Another plus - I understand the CEO's English which is always a bonus when listening to conference calls and he has even appeared on CNBC in April of this year - not "extremely" informative but you can view it here.

We have a nice SEC presentation filed here, very good viewing. So that takes care of name 2 of the 3 stock mini basket - I'd really like to add this name into a larger scale if we get a further pullback, but it's now retraced much of its "hey we're a wind play" hype move. I generally prefer much higher margin business models, but with the growth potential, wind potential, and location in the fastest growing energy market in the world - we can live with it.



The third name acts like a coal stock - it never pulls back :) I might just have to bite the bullet one of these days and buy it as its up 68% in the 6 weeks I've been watching it. And that's after a huge gap up post earnings. Grrr...

All these are speculative so as a basket I'll probably limit them to 5%ish of the portfolio, in case one implodes or is more hype than reality.

Today's purchase in American Superconductor pushes it up to a 1.65% stake.

Today's purchase in A-Power Energy Generation Systems establishes a 1.65% stake and comes after a 5 session pullback of 22%. I bought today's stake in the $24.70s and hope to add down at $23 and if so lucky, down at $21.

Long American Superconductor, A-Power Energy in fund; long A-Power Energy in personal account

Here we are - S&P 1275

Do or die time for the bulls [Ugly. Ugly. Ugly]. Still VIX at 23.

Natural Gas 75% Gain Speeds Horizontal Drilling at Devon Energy (DVN), Range Resources (RRC)

Nothing interesting to add that has not been said before, but an interesting read if you are unfamiliar with natural gas. It all feels toppy to me, but standing in front of 10,000 hedge fund computers furiously buying month after month is a painful exercise. As with all euphoria/bubblicious moves - it will end when it will end. Not a moment before. Nat gas is creating entire boom towns such as Fort Worth, Texas and making serious money for normal Americans who happen to have bought land in the right random place in certain states (PA has been hot lately)

• U.S. natural-gas producers are drilling wells previously deemed too costly and resurrecting abandoned fields from Appalachia to the Rockies, spurred by the biggest rally in fuel prices in eight years.
• Devon Energy Corp. (DVN) and Range Resources Corp. (RRC) are drilling horizontal wells that cost three times as much as traditional vertical shafts to unlock gas from rock formations that were unprofitable to exploit before this year's 75 percent gain by gas futures.
• The number of active U.S. gas rigs rose to a nine- month high last week, according to a survey by Baker Hughes Inc.
• The rise in gas futures in New York this year exceeded the 45 percent surge in oil and all commodities besides coal. U.S. gas demand probably will grow 4 percent this year, double the rate of new supply
• An index of independent energy producers in the Standard & Poor's 500 climbed 29 percent this year, led by gains of more than 60 percent at Southwestern Energy Co. (SWN) and Chesapeake Energy Corp. (CHK)
• New drilling projects will boost U.S. gas supplies in 2009 by 3.6 percent, the biggest increase since 1994, Read said.
  
• Gas is the most widely used U.S. furnace fuel and the third-largest source of power generation, according to the Energy Department.
• The U.S. Bureau of Land Management, which oversees energy exploration on federal property, issued 7,124 permits to drill in the fiscal year ended Oct. 1, 5.7 percent more than fiscal 2006. Nine out of 10 of those permits were issued for projects in Wyoming, New Mexico, Utah and Colorado. (note to self: start buying random parcels of land in these 4 states and wait for natural gas company to knock on door to lease or buy me out)
• Range Resources, based in Fort Worth, Texas, increased its capital budget 40 percent this year to $1.27 billion to sink more wells in the Barnett Shale in Texas and the Marcellus Shale in Pennsylvania and West Virginia. (these are 2 of the "hottest" spots in the U.S. for nat gas)
• Drilling horizontal wells in deep, hard deposits such as the Barnett Shale costs about $3 million each, compared with $1 million to $1.5 million for a vertical well. Horizontal drilling is costlier because it requires more sophisticated rigs with more powerful motors. Horizontal drilling is the only way to tap formations that otherwise won't give up their gas, Ventura said.
• Competition for drilling equipment and rig crews is escalating costs for producers, said Pine Brook's McMahon.

No positions

Global Millionaires - the Shift from West to East

In October we discussed the Global Millionaire Boom [Oct 18: The Global Millionaire Boom] highlighting the growing concentration of worldwide wealth into fewer and fewer hands - the "Americanization" of the world if you will. What's good for the goose... ?

"What these number disguise is the globalization of inequality everywhere in the world," says Charles Derber, professor of sociology at Boston College and author of Corporation Nation. "This is the phenomenon of the rich getting richer. And it's not a phenomenon to be happy about—that's my reaction."

We truly have entered a gilded age of the haves and the have nots (excellent CNBC special last night by the way - "Untold Wealth - the Rise of the Super Rich")

According to new Internal Revenue Service data announced last week, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004, while the bottom 50% of wage earners earned 12.8% that year, down from 13.4% a year earlier.

But even within that dynamic, the US share of global millionaires is slowing as the emerging economies mint the newly wealthy.Reverse Colonization 101

• The U.S. is losing its market share of global millionaires.
• The population of millionaires grew five times as fast in emerging markets as it did in the U.S. last year, according to a survey released Tuesday. That was the largest divergence between the U.S. and the big emerging markets since the comparisons were first published in 2003.
• The number of millionaires in Brazil, Russia, India and China jumped 19% in 2007, compared with growth of 3.7% in the U.S., its slowest growth since 2002.
• The U.S. still dominates the millionaire economy world-wide. It has more than three million financial millionaires, defined as those with investable assets of $1 million or more. That's up 100,000 from 2006.
• Yet emerging markets captured the bulk of the millionaire growth last year, with Brazil, China, India and Russia adding 133,000 new millionaires, for an 817,000 total. India's millionaire population grew 23% last year, the fastest in the world.
• Indians already hold four of the top eight slots on the Forbes billionaire list, while Mexico's Carlos Slim has surpassed Bill Gates to claim the No. 2 spot. Warren Buffett is No. 1; Mr. Gates is No. 3.
• Mega-yacht makers, once devoted largely to the U.S. and Europe, are now doing a brisk business in Russia, India and Brazil. Burgess, the yacht-brokerage firm, said that emerging markets will probably account for half of its business in five years, compared with about a third today.

• The numbers point to an economic reality: Tomorrow's rich are more likely to come from the East than the West.
• The surge in oil and commodity prices, the shift in financial flows to faster-growing emerging markets, the higher savings rates abroad and the decline in the dollar have all fueled a boom in new millionaires and billionaires in countries once known for their extreme poverty.
• At the same time, America's wealth-creation machine is sputtering because of the financial crisis, debt crunch and decline in real-estate prices.

• According to the World Wealth Report, wealth is becoming concentrated increasingly among the rich -- especially the superrich. The population of the superrich, or those with $30 million or more in investable assets, increased 8.8% last year globally, while their fortunes grew by a disproportionate 14.5%.

If you are going to invest in the consumer, look overseas ... or find someone catering to the upper 0.5% in the globe. Stress and social acrimony will only exaggerate as global competition among the world's poor and middle class, for resources, will only intensify. Hopefully the ultra rich bless us from behind their walls with some crumbs in the decades to come :)

Go East young man!

Atwood Oceanics (ATW) - a Beautiful Breakout

I highlighted Atwood Oceanics (ATW) new contract earlier this week [Jun 25: Atwood Oceanics Announces New Contract] - the stock has been on fire since, and looks like the name got an upgrade yesterday

• Shares of oil drilling contractor Atwood Oceanics Inc. set an all-time high Thursday, as the price of oil soared and after a Credit Suisse analyst upgraded the stock a day earlier.
• On Wednesday, shares of Atwood were upgraded by Credit Suisse analyst Arun Jayaram to "Neutral" from "Underperform" following news of a contract.
• "We believe Atwood's growth rate will be the highest in the industry for the offshore drillers," Jayaram wrote in a client note.
• Jayaram's price target is now $120, compared with $97 previously (errr, gee thanks)

If you are a technical trader - this chart is like the Holy Grail of breakouts. I added a touch today despite my "for gosh sakes, will commodities ever sell off?" stance. Maybe my crumbling to the will of the market will cause a top to form? ;)

Long Atwood Oceanics in fund; no personal position

Bookkeeping: Morning Transactions

Tricky market right now - very oversold ("worst June since the Great Depression") and prone for some bounce but not doing so (I find that bearish). Sort of seems like a market where a lot of people would be willing to jump in, if it showed any real strength... but everyone is looking around the room waiting for someone else to go first. It certainly is not going to be me.

A few quick transactions

1. Buy in Research in Motion (RIMM) - I had this as a 0.1% stake going into the week and bought a small splotch yesterday to get it to 0.4% but was targetting $120 to add anymore, but today it gapped down yet again to the upper teens, so I added a little bigger stake in $117s. This looks destined for the 200 day moving average of $113. Still going slow and only up to 0.7% stake.
2. Buy in Lennar (LEN) - this homebuilder is now at 2007 lows, so I bought in low $12.00s. I am hoping this huge double bottom formation holds, and we can make a nice flip trade out like we did in DR Horton - so far this position has not worked for us as well as DHI. Shamefully this has moved into the top long position at 2.6% of fund. Breaking below $12.00 would be a very bad thing in this name - so we'd cut back what we bought today if that happened.
   
3. Sell in EOG Resources (EOG) - I added some natural gas exposure earlier this week and simply am hording a bit of cash here. The stock is building a very nice base from which it should make a nice move, but it keeps flailing over and below the 50 day moving average. ($130ish) So I am selling just below that number and reducing this to a 0.5% stake. With the weakest chart in the basket of 4 I own, I decided to cut back for now but my sector exposure is about the same that I entered the week since I added elsewhere.

I almost added to my solar basket with 2 new purchases in former holdings - LDK Solar (LDK) and Solarfun Power (SOLF) this morning, former near $40 and latter near $18. However, in a continued market sell off these type of names will be sacrificed on the alter since they are dominated by retail investors. I'm willing to miss some upside for now on a dead cat market bounce to conserve cash, and try to keep losses contained. Judging from the action in the portfolio today I have a lot of stocks doing far more poorly than the indexes. So the index shorts are not that effective here on days like this; somehow we are managing to lose more money on a day like today with the market up, then yesterday with market down 3% (hedges sort of useless today thus far). Bah.

The "generals" continue to be impervious to sell offs - and we haven't tested S&P 1275 so it is hard to really get too constructive on the long side, other than some dead cat bounce opportunities. I continue to believe we don't put a bottom in until people give up in natural gas, fertilizer, and coal. It appears all the institutional money is hording in the same 25 commodity stocks. I am amazed there has been no rotation at all for weeks on end. I'll be curious after quarter end Monday, if these big pools of money rotate away to new pastures, since they can show their clients "hey look at us, we're brilliant we held these best performing stocks all quarter" :) I never understood window dressing - say your fund is down 6% for the quarter but in the last week you loaded up on the big winners so that when your holdings on June 30, 2008 are made public you look smart. Wouldn't anyone question that? How did you lose 6% when you had the biggest winners in the market all quarter? I guess not because that seems to be a popular strategy for managers to bamboozle their investors. Anyhow, I digress...

Oil spiked $5 in the last 30 minutes of trading yesterday - once again Ben - a measly 25 basis points and you could of changed the whole psychology and not made people feel bullet proof buying crude day after day. The world won't be any different at 2.25% versus 2.00% - other than psychology. Oil spiked $11 in the day and a half since Wednesday 2:15 PM. Psychology is everything in the short run - another misstep.

Long Research in Motion, Lennar, DR Horton, EOG Resources in fund; long Lennar in personal account

AP: Fishing Industry Reeling from Leaping Fuel Prices

We touched a few weeks ago on all the protests going on in Europe due to high fuel prices - especially prevalent were truckers and fishermen in country after country. Yet here in the U.S. - nothing. We are good soldiers who take our pain quietly I guess. Or maybe we accept the slow growth (but no recession), low unemployment, low inflation reports shoved down our throats constantly and pundits who blame the media for "creating angst among the public, where there is none to be had". Anyhow it's all an interesting farce and I continue to wonder how much longer it can go on.

I repeat weekly, and have for months on end, inflation is a tax on all things - producers and consumers. The 2nd and 3rd wave effects are many and not considered by most, certainly not in the hallowed halls of NYC. The irony is how vicious it can be in certain subsectors.... inflation in one item will cause pullbacks, which in turn will cause 2nd and 3rd wave inflation in another area. For example, inflation in energy costs cause fishermen to go out of business, which causes shortages of fish, which ultimately leads to ... inflation in fish. Or less fish on the market which leads to more demand for meats which drives up prices for a limited amount of meats. It is a vicious cycle.

Yet Wall Street cheered and clapped every Fed cut all fall and winter (flood us with cheap money, flood us - ohhhhh feels so good) so they could get that crack like high from seeing their accounts bounce up 1.2% that day. And they cheered $90 oil, $100 oil, $110 oil, $120 oil, $130 oil - it's all good I mean it's just a bunch of numbers on my trading screen anyhow. The real economy does not matter to us - we live in a parallel universe! Then finally around crude $135 they seemed to realize ever higher oil is not a great thing after all... but now we have this Frankenstein let loose on the world. Sadly, oil is truly the grease for the world economy - and as it sprints ever higher the ultimate effect is very clear --> global slowdown - the only "cure". And even then it will be a temprorary one as creditor nations, post slowdown, ramp up demand for fuels to grow their economies... while we sit in 5th gear sueing OPEC, and fighting off solar and wind legislation.

But back to the fishermen, and why I say food will be the next wave of inflation - because even if/when oil does begin to drop in response to global slowdown it will be too late for many small truckers put out of business, many fishermen, many ranchers, etc - and the shortages left in their wake will be causing agflation far after crude begins to drop. Inflation is indeed, the cruelest tax.

• Leaping fuel prices are sinking the fortunes of America's commercial fishermen, some of whom may soon call it quits for good.
• In Alaska, boats that typically haul in rockfish and perch sit docked for prolonged periods. In Texas, shrimpers are traveling to Mexico just to buy cheaper diesel. And along the East Coast, lobstermen are making fewer trips to their traps.
• Unlike shippers, commercial airlines and other industries that pass higher fuel costs along to customers, fishermen don't have the same flexibility. Not only does fresh fish have a short shelf life, but U.S. families can easily substitute their diets with less expensive chicken, pork and beef -- even at time when the cost of meat is on the rise.
• "Fishermen can't come in and say, 'My costs just went up, so you're going to have to pay me more,'" said Bill Adler, executive director for the Massachusetts Lobstermen's Association. Instead, the dealer offers a price and it's "take it or leave it. He knows you got a product that has to be alive. He knows you've got to get rid of them."
• U.S. fishermen have in recent years faced increasing pressure to keep prices down because of low-cost imports and farmed fish. The 64 percent rise in the cost of diesel over the past year -- with spikes of as much as 75 percent in some parts of Alaska -- means already-tight profit margins are being stretched even further, leaving less take-home pay for captains and crews.
• "It's as bad as I've ever seen, and I've been at it 45 years," said Jimmie Ruhle, president of the trade group Commercial Fishermen of America and a third generation fisherman out of Wanchese, N.C
• While fishermen in Europe and Asia have staged disruptive protests over the financial damage high fuel prices are causing, their counterparts in the U.S. are hopeful that communications with Congress will lead lawmakers to take action. (ah such an idealistic bunch - relying on this era of Congress for real solutions... a noble thought - but it's not the 1950s fellas)
• "We haven't resorted to blocking our ports in protest like France and Spain. We're not asking for handouts," said Sara Stoner, a Petersburg, Alaska, boat captain who sent a petition to Congress seeking federal assistance with tax relief or low-interest loans.
• ... "in the short-run people will go out of business," said Knapp.
• ...fisherman Jeff Scott. Instead of being out on the sea gathering perch or rockfish, a 42 percent increase in the cost of diesel in the last six months prompted him to tie up his boat for nearly two months. "We are rapidly coming up on breaking point," said Scott, who sounded desperate after a brief trip to sea this week.
• There's very little wiggle room for this federally regulated industry. Boat owners and captains say they are already hamstrung by rules aimed at keeping the fish stocks healthy: mandated quotas, trip limits, even prescribed seasons.
• "It won't take much more of this to put a lot of people out of business."

The first part of tackling a problem is admitting you have one. We amazingly remain the only country in the globe with little inflation. Lucky us.

Survival Day

Obviously we're focused on the long run results, but cognizant that on a day like today (many?) everyone will run @ 4 PM to check to see how their stocks, and mutual funds did here are our results.

(click to enlarge)


I'll call this another survival day and considering we are 60%ish long, very pleased - we've handled this correction much better than August 07, November 07, January 08, or March 08 (gosh 5 "corrections" since I got started - we should all be so lucky). So far we've weathered this putrid month well - however the longer it goes, the more "long" we'll be getting (and less "short" i.e. insured) which means we'll start taking some hits. Impossible to call the bottom, but we've avoided the first 5? 6? 7? innings of this correction - soon we have to get somewhat bullish. We're just trying to avoid this guy's fate for as long as possible :) ----->>>>>

I hope these darn commodities take a bath here soon, so I can start to catch up to this Heebner fella - he is the last guy standing in front of me and hard to catch! ;)

Bookkeeping: Cutting Ultrashort Financial (SKF) to nearly 0

I usually don't break out the Ultrashort moves since they are very frequent (probably 50%+) of trades as I hedge against this incredibly difficult market, but since this is significant I am going to break it out.... and be contrary again and say, I am cutting Ultrashort Financial (SKF) to nearly 0. (keeping 5 shares)

I know the financials are the bane of the market. But here we are approaching January 2008 and March 2008 highs in the chart. In fact if I didn't know better this looks like a chart for a coal stock since early May. ;) 55% gain since that time - it's been a good ride and a wonderful hedge - and this does not mean it cannot continue going up. I just think this is nearly played out for this "cycle" and/or risk/reward stops being in my favor. Just following previous correction playbooks - when SKF reversed on me in the past it caused a lot of dislocation (fancy word for losses) in our portfolio. By ignoring the serial bottom callers on TV since last summer re: "time to buy financials!" we've made this our 2nd biggest winner in the fund, now approaching +$40,000 in gains (akin to nearly 4% of our entire fund performance since last August)



For a short term trade only (I reserve up to about 10% of the fund for shorter term actions) I'm eying Ultra (long) Financial (UYG) - but not yet.

I've cut back Ultrashort Real Estate (SRS) to about a 0.6% stake as well.

I'm keeping the hedges in the parts of the market everyone loves...

[Mar 19: Alt A Mortgages Beginning to Break Down; Ultrashort Financial Not as Cool as it Used to Be]

Long Ultrashorts mentioned in fund; no personal position

Ugly. Ugly. Ugly.

Ugly. But still not fearful. Below is a chart of the Volatility Index or what cool guys on TV call the VIX. It's, in theory, an indicator of fear. (notice how complacent we were a month ago - I mean the 2nd half recovery Kool Aid was everywhere - Boo Yah!)



As you can see during market bottoms (January 08/March 08) it has closed north of 30, in fact in the mid 30s

Now, we are really oversold (almost 8% straight down - June 2008 - yowsers) and in most cases (ex January 2008) we'd be expecting a dead cat bounce rally soon. I believe it is possible if we do fall to 1275 here to close the day we'd get some sort of reflexive rally. Or an Invisible Hand rally. Or some combination of the two.



But this would create a technical condition called a triple bottom. (January 2008, March 2008, now) Now, just from years of experience, triple bottoms usually don't end well (unlike double bottoms which seem to create very nice rallies). In a socialized market helped by the invisible hand I don't know what would happen at a triple bottom, since we have little historical record. But in a free market, it usually ends badly.

So a theory could be, crumble to S&P 1275... followed by all the King's Horses and all the King's Men buying futures like mad to create the appearance of "real" buying which pushes the indexes up and then snares hedge fund computers into buying, which self reinforces onto itself .... creating a rally (boy I sound cynical)... which will peter out after a few days, and then we will retrace to 1275... and break it on the next attempt... causing the VIX to spike. Since breaking S&P 1275 will cause even hedge fund computers to break out in a cold sweat.

That's one theory... it's complicated, it's cynical and it's "half empty".

As an ulterior investment strategy I could offer you the "half full" theory - which is followed by the pundits on TV and sponsored by your government and Federal Reserve - and simply show you this (thanks to Bluedog for his artistry) I'll leave it up to you to decide your path ;)

Did I mention the "2nd half recovery" starts next week?

Can a Near Term Top in Oil Be Far Away?

One thing we always like to look for are something that signals at least a medium term top in a sector - i.e. when everyone has thrown in the towel and is bullish, we look for a reversal. I wrote about this in April when potash spiked to $1000 on spot market and Intrepid Potash (IPI) IPO'd - immediately (within days) the fertilizers flat lined for a good 6 weeks. [Apr 23: Potash Hits $1000 on Spot Market] Some other fun ones I highlighted in the blog with some quite good timing

Sometimes, in retrospect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from

1. The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]
2. The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]
3. The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]
4. And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]

So that is 5 for 5. This would be the greatest call of all, no? 6 for 6? Shall I say the near term top is in for oil when OPEC calls for $150-$170 crude? I'm already on record saying food will replace energy as the inflation of choice in second half.... let's see if I can extend this winning streak - we'll revisit on Labor Day.

• Crude oil prices could rise to as high as $170 per barrel in the coming months but are unlikely to hit $200 and should ease towards the end of the year, OPEC President Chakib Khelil said in an interview on Thursday.
• "I forecast prices probably between $150-170 during this summer. That will perhaps ease towards the end of the year," he told France 24 television, according to a text of the interview released by the station
• The comments came as crude prices neared $135 per barrel, after rising about 40 percent this year.
• Khelil said he doubted prices would climb as high as $200.
• "I think that the devaluation of the dollar against the euro, if everything goes as I think it will, will be of the order of perhaps 1-2 percent and this will probably generate an $8 rise in the price of oil," he said.
• The head of the Organization of the Petroleum Exporting Countries, said it had been clearly established that speculation was affecting markets. "It's not a question, but a certainty. The problem is the extent of that speculation on the market," he said, adding that the effect of the subprime crisis in the United States had affected oil markets.
  

I am so sick of hearing that last point - someone not named Mark the blogger needs to call out Uncle Ben on the floor. Since the first Fed panic in mid August 2007 (cuts) oil has been straight up. It is not coincidence - it is the flooding of the world market with US pesos. Pictures don't lie - people do.

Bookkeeping: Some Assorted Buys

Still not seeing any capitulation in the generals but we are getting some nice selloffs in just about every other piece of the market. A few medium sized buys today and why - I'll use the edit and update this one post with any other buys today instead of creating new posts...

1. Research in Motion (RIMM) in $124s - believe this should get to $120 but I had a 0.1% stake so taking it up to 0.4% (almost too small to mention this purchase) I'll add more increments around $120.
   
2. DR Horton (DHI) in $11.90s - we sold this yesterday in the $13.30s so we got a 10.5% discount in 24 hours. Simply replacing (most of) what I sold yesterday. Back to 2.1% stake.
3. Jacobs Engineering (JEC) - fallen to 200 day moving average of $83 and down from $91s last week. Back up to 1.0% of fund.

I want to add Cummins Engine (CMI) at $66 (almost there) - I'd like some more infrastructure names (Fluor? Foster Wheeler? McDermott?) if they sell off; I'd like more RIMM/Apple lower. Some alternative energy plays that simply refuse to sell off are also on the "wanted" list.

Doesn't look like the commodity plays will be selling off today so I don't see anything interesting there at this point. Not much else on my buy list today that is near targets I want to buy... DryShips (DRYS) perhaps.

Keep in mind when these dramatic selloffs reverse the action is fast and furious the other way as shorts scramble to cover but its still within a larger downtrend - so no need to try to constantly catch bottoms. But right now its a tale of 2 markets - one very narrow group of winners and a whole bunch of losers - this has been the story the entire month of June.

1 PM EDIT:

1. Mastercard (MA) - added at $270 level; up to 1.0% of fund. Gap to be filled in $240s where I really want to add...
   

1 PM EDIT: Some generals being pointed in general direction of woodshed... not biting yet.

3-3:20 PM EDIT:

1. Reversed part of today's Perfect World (PWRD) buy - as I proposed, nothing is really holding up in this sort of selling and the stock reversed itself below resistance after making a valiant effort to make a run. Will catch her the next time around.
2. Bought some Goldman Sachs (GS) in the $175s - simply believe financial sellers will be exhausted first and rotation will continue if past patterns hold out. Stock hovering right below 50 day moving average and showing great strength for a "financial". Goldman up to 2.0% stake.
   
3. Bought some Cummins Engine (CMI) in the $66s as stock fills a gap from mid June. Stock approaching 50 day moving average in $65s. We had this down to a placeholder position (0.1% of fund) so taking just a first bite at it, and pushing it up to 0.7%
   

Long all names mentioned in fund; long none in personal account

Holy Stupid Idea Batman: Wireless Internet ---> In Your Car

Yet another brilliant idea from Detroit automakers; how about designing cars people want to buy - you know, cool designs - good mileage? I know... it's a radical solution. For god sakes, I have a hard enough time avoiding all you blog readers who are talking on your cell phone - now I have to deal with you checking out Britney Spears latest exploits, or that Beatles clip on YouTube? Cripes! I know, I know - it's just for your passengers or your kids - YOU'd never stoop so low to check email while driving 75 mph on the interstate. Nah. Never.

• Have you ever thought rush hour on the 405 Freeway might be more bearable if you could check your e-mail, shop for a book on Amazon, place some bids on EBay and maybe even, if nobody is looking, download a little porn? Then perhaps you should be driving a Chrysler.
• The nation's third-largest automaker is set to announce Thursday that it's making wireless Internet an option on all its 2009 models. The mobile hotspot, called UConnect Web, would be the first such technology from any automaker.
• Struggling Chrysler is hoping that providing motorists access to the information superhighway will set it apart from competitors and help reverse a dismal year; through May, sales are down 19.3% compared with 2007, the worst drop-off in the industry.
• Perhaps not surprisingly, safety advocates were less than overwhelmed by Chrysler's innovation. "Surfing the Web is something people really don't have any business doing while they drive," said Jonathan Adkins, spokesman for the Governors Highway Safety Assn. "It's definitely a distraction."
• Chrysler says that when the car is in motion, the service is intended to be used only by passengers. The privately held company acknowledges, however, that there is no way to prevent a driver from steering with one hand and Web surfing with the other.
• "We're relying on the responsibility of the consumer to follow appropriate legislation," said Keefe Leung, Chrysler's engineer for the product. (for gosh sakes - guys shaving at 70 mph? women putting on mascara? personal responsibility?)

Short the "always on" society

Bookkeeping: Adding to Perfect World (PWRD)

Good heads up by a reader yesterday on this name in the Chinese online gaming space, Perfect World (PWRD). I see no specific news, other than a license agreement with the Philippines, but I like stocks holding up in terrible tapes. So we'll push this stock back up to a 1.1% stake. It is a very easy technical trade - if the stock holds above 50 and 200 day moving averages - we keep & add. It breaks down below, we take some small loss and cut back. (I'd use $25.50 as a pivot point to sell down) So we'll add here in the $26.60s or so and if we are wrong will ratchet the position back down. If market goes into free fall I don't see anything holding up, but will be happy to be wrong.

[May 15: New Position Started in Perfect World]

Long Perfect World in fund; no personal position

Gold. Back from the Dead?

Gold used to be the anti-inflation trade. It appears oil has taken over from gold in that regards the past 9 months or so. However, gold is still the Armageddon trade as evidenced by its strong showing during what seemed like End of Days this late winter and early spring. It is starting to perk up again.... I am tempted to buy my favorite miner on this breakout, Kinross Gold (KGC) - still debating.



[May 5: Closing Precious Metals]
[Jan 30: Starting New Position in Kinross Gold]

In terms of the market - we still need fear - but we're getting there - the move to gold is a good indication. As I stated yesterday that S&P 1300 level is our temporary bottom for now - those big round numbers always act as psychological support. If that breaks, off we go to January and March 2008 lows (1270s). As mentioned, those sucker rallies as we had yesterday afternoon are not be trusted.

As I said yesterday, the Federal Reserve basically left us to our own devices - after that initial silly euphoria wore off, we woke up today to realize all the same problems were there. I truly think with crude sinking (down $5 yesterday pre Fed) they could of drove a short term stake through the heart of some commodities with a 25 basis point raise and strong language about inflation. We got neither. The banks must be bailed out - that's all that matters it appears. Inflation can rage - since it does not show up in government reports.

No position

Emails Lost in Space

Just wanted to send a quick notice out that I have a lot of lost in space emails in my spam folder on Yahoo. I've had this account for a long time and never really check the folder because for many years the most exciting messages I received entailed potential enlargement of certain male anatomy and/or the exciting potential of acquiring prescription drugs, without prescription necessary, at incredibly low prices.

However, after getting a lot of messages such as "you didn't get my email?" I checked last night to find a bevy of readers emails stored in this backwoods portion of Yahoo's servers. So let me apologize for that, and I am going to try to get back to people in the next 48 hours. Unfortunately everything older than 30 days has been erased. So if you sent something from a while back and never heard a response - please let me know. I am hoping maybe $50M or so of pledges were lost in translation? Ok I'd settle for $5000.

Generally when a person emails me the first time I try to at least send a cursory note of acknowledgement back so again, if you sent an email older than 30 days ago and never heard back from me, please re-send as it appears your messages was indeed, Lost in Space. If it's within the past 30 days, I'll work on a response shortly. Thanks.

Earnings Tonight - Oracle (ORCL), Research in Motion (RIMM), Nike (NKE)

Today we had 4 important earnings reports, in "bell weathers" that the market does follow closely. As we stated earlier this week, it is not so much the results, but the reaction to results that matters. So far, it's not been a good reaction to results. I won't get into Oracle (ORCL) too much because it's not really a name I follow too closely but it is down 3-4% in after hours on what appears to be solid results. Remember the "tech is immune to oil" trade is what is keeping the NASDAQ (relatively speaking) outperforming everything else (NASDAQ being top heavy in technology names).

• Oracle Corp (ORCL Quote, Profile, Research, Stock Buzz), the world's third-largest software maker, reported on Wednesday that quarterly profit rose 27 percent, beating Wall Street estimates, on strong new software license revenue. The company had a profit, of 47 cents a share, excluding items, which beat the average analyst target of 44 cents.
• "Nobody expected the May quarter to come in as strong as it did," said David Garrity, director of Research at Dinosaur Research.

So good news, but the stock sinks? Don't like to see that if we are bulls. But let's compare this to say Bed Bath and Beyond (BBBY) which is a retailer who reported a shoddy year over year quarter but it beat the all important lowered expectations and that stock is rocking up 9% in after hours. This is why it is generally safer to hold stocks with no serious expectations going into earnings versus ones everyone has high hopes for, as we saw this morning in Monsanto (MON).

Off we go to one of our fund holdings, Research in Motion (RIMM) - the earnings are spectacular but not good enough for hyper expectations. We sort of like that here, selfishly, since we only have a placeholder position at 0.1% of fund - awaiting some sort of pullback. The stock is down to low $130s after hours which coincides with its 50 day moving average. Might be a spot to begin scaling in, but frankly at 33-35x forward earnings it is hard to see huge upside in either this name or Apple (AAPL) - we'd like to see more pullbacks on prices. Again, as with Monsanto (MON) when everyone expects the world from you, many times any i that is not dotted or t not crossed leads to a sell off - expectations simply get out of hand on some of these names which is why I usually always cut back ahead of any earnings. In this case "earnings were light" - as with Apple, the most likely scenario is the typical underpromise then over deliver... but when the underpromise part happens (today) people forget that in 3 months the over deliver part will come, and instead try to scrutinize every line item trying to find the "weakness"... weakness in 100% year over year growth. :) We've sold some of this off in the $100s, $120s, and $130s - but by and large the stock has been stagnant for the past 6 weeks while we chased more fruitful opportunities so that is ok. Below is the typical hand wringing.

• Research in Motion (RIMM) shares got pummeled when the company's fourth quarter earnings came out, missing earnings per share estimates by a penny, reporting 84 cents instead of the 85 cent consensus. (the horror) Revenue also came up short, at $2.24 billion against the $2.3 billion expectation.
• New subscriptions and BlackBerry units shipped were essentially in line with expectations. But the problem for this company comes from its guidance into its fiscal first quarter. The Street was looking for 90 cents on $2.439 billion. Instead, RIM expects 84 cents to 89 cents on higher than expected revenue.
• That's leading to questions as to why RIM won't be able to translate those better than expected revenues into increased profits? What new expenses are we not aware of, or that Wall Street wasn't counting on? Further, for a company so used to knocking the cover off the ball, why such a lukewarm report (in comparison to the expectations among the experts?)
• A quick call of some analysts suggest to me that some are worried that RIM's historic hyper growth might be waning, if ever so slightly. That's a problem. Another analyst wonders whether the Apple iPhone is taking a bigger toll on RIM than people had anticipated, slowing the company's growth faster than expected. In other words, are RIM's problems its own?

When you take 5 steps back and really look at the numbers and ignore the "analysts expectations" the data is astounding for a company of this size - I'd call it Googlish in fact.

• RIM said it earned $482.5 million, or 84 cents a share, in the three months ended May 31. That was up from a profit of $223.2 million, or 39 cents a share, a year earlier.
• The company said that revenue surged to $2.24 billion -- up 107 percent from a year earlier -- and that it added 2.3 million subscribers, about 100,000 more than it expected.

So the end is neigh! Well, not so much. This is no Garmin (GRMN). We'll look to buy in the coming days/weeks.

Now let's end with Nike (NKE) - see the one problem with RIMM is they are based in Canada. Therefore unlike the Nike's, or IBM's or just about any US multinational they are not benefiting from the United States of Subprime Peso (the artist formerly know as the dollar). Could of added some great juice to RIMM's quarter - instead they are stuck with the powerhouse Loonie. While CNBC clangs the pots and pans together rejoicing over the incredible growth last quarter in all these U.S. multinationals the dirty secret I revealed then, and will repeat in the near future (earnings season begins anew in a few weeks!) is if not for the dollar breaking to pieces, all these beautiful earnings would look quite pathetic for most of these companies. Let's take a quick and dirty look inside Nike - truly this one company says it all about the shift in global forces. (p.s. Nike down 6% in after hours as well - not a good day for the market darlings)

• For the fourth quarter, revenues increased 16 percent to $5.1 billion, compared to $4.4 billion for the same period last year. (sounds amazing!)
• Changes in currency exchange rates increased revenue growth by 7 percentage points for the fourth quarter. (oh, so you're telling me 44% of revenue growth is due to nothing but the U.S. peso? Not so amazing - but let's leave that fact out when we crow about the glorious growth of US multinationals)

Now let's look at it region by region, going from worst to best - it sort of sums up the global economy all in 1 company.

• Worst? United States of Subprime - no currency benefit here for Americans. During the fourth quarter, U.S. revenues increased 4 percent
• Next? Europe. Weakening but still benefit from their Euro crushing the US peso in its slimy grip. Fourth quarter revenues for the European region grew 19 percent (sounds amazing!) Changes in currency exchange rates increased revenue growth by 15 percentage points (oops! reality check, 2% growth - CNBC won't mention it though)
• Better? Latin America. Fourth quarter revenues in the Americas region increased 30 percent (sounds amazing!) Changes in currency exchange rates increased revenue growth by 11 percentage points. (ok, not so amazing but still kinda good @ 19% growth)
• Best? You guessed it - those rabid Asians who love to gobble up American goods. Yummy! Feed me. Fourth quarter revenues for the Asia Pacific region grew 39 percent (sounds amazing!) Changes in currency exchange rates increased revenue growth by 13 percentage points. (ok, still amazing but not quite so amazing - 26% growth is still solid)

Note - I actually like Nike - so I am not picking on them. But why am I wasting time spelling this out? Mostly for a reality check - lots of new readers to the blog since April's earnings season and I'm warning you ahead to ignore the hype spouting from the pundits come July - MUCH of the U.S.'s "incredible" export growth is nothing more than the currency being devalued to the basement by Uncle Ben. And this leads to problems for the future.... if dollar bulls get their wish and the dollar actually strengthens what does that lead to for corporate profits of multinationals? Not good things. So cross your fingers and pray together for a terrible dollar (which by the way means everything we import is slapped with serious inflation) But that's a problem for US consumers who actually need to buy imported things (which is almost everything nowadays in our manufacturing neutered economy) and we do not care about those peons (or we'll cut them another rebate check to keep them sated for a few more months - at least until the election; darn whiners). All we care about is corporate profits. Weaker dollar, come to papa - we need you. Corporate America needs you. CNBC needs you.

Advice to Research in Motion? Move to the United States - your 107% growth can move to 150-170% growth overnight.

Conclusion: Ignore the hype about the great multinational boom - and make sure to analyze every company and discern what profits are coming from true growth; and what are coming from nothing more than the pathetic US dollar. The ones with true growth outside the dollar are where you want to be.

Long Research in Motion in fund; no personal position

Bookkeeping: "I Spit on You American Middle Class" Trades

Basically the Federal Reserve says everything is cool, inflation will abate, economy activity continues to expand (cmon now guys - seriously) - and after this euphoria wears off in a day or two, or next week we will be back to being a hostage to oil. We are back to being a lip service machine and bailing out the banks are all that truly matters to us. I mean we kind of knew that but deep in your heart you always hold out hope they'd change their tune. Hope extinguished. See you back in 6 weeks for another round of "hope".

EDIT: Warren Buffet chimed in today to say inflation is exploding. (I cannot confirm this but I believe the official Federal Reserve/US Treasury joint response was "nah nah nah, no it's not - sticks and stones.")

• Warren Buffett says inflation in the U.S. is "exploding" and he urged the Federal Reserve not to signal in any way that controlling prices takes a back seat to encouraging economic growth.
  
• "I think inflation is really picking up... Whether it's steel or oil ... We see it everyplace. It's exploding," Buffett told Becky Quick in a live interview on CNBC's Power Lunch. (Obviously Warren has been reading the blog)
• Buffett told Becky that from a consumer's perspective, the economy's weakening is getting worse. He's been saying for several months that the U.S. is effectively in a recession. (But Warren, official government reports say everything is fine, chin up Warren)
  

(back to your regularly scheduled blog posting)

The market initially cheers because as all good crack addicts, we love when our dealer does not take away our drug (low rates). Unfortunately we have to wake up tomorrow and our buzz will have worn off and we'll go back to the same news flow we've enjoyed for many weeks now - high oil, weakening consumer, weakening job market, blah blah - but we'll have some multinationals reporting to make us forget the backdrop so we can perhaps forget the larger picture for a bit longer since Asians are buying our Air Jordans in ridiculous amounts. But today - the crack - it helps make the pain go away.

To wit, I am taking this pop to lighten up in some spots - things we've done today

Sales

1. Vale (RIO) - stock is popping up against 50 day moving average ($37), lightening to 0.8% stake. Will reverse this if it shows it can hold this and keep moving up. Don't like the action in it's peers BHP and RTP today.
   
2. Mechel (MTL) - identical theory to Vale, if it pop back up over $50 (50 day moving average) we'll get back what we just let go. Down to 1.2% stake until chart improves.
3. Intuitive Surgical (ISRG) - exactly the same reasons as above but replace 200 day moving average for 50 day moving average. Down to 0.3% of fund and making me fall asleep.
   
4. Lowered exposure to Ultrashorts Basic Materials (SMN) and Oil-Gas (DUG) - both back around 2%ish from 4%ish. (if the rotational correction continues - we'll get these back in larger form)
   

A lot of the sales above are stocks that had fallen below support, and now have bounced back to (but not through). The same playbook on all of them - if they burst through support we'll pay up a bit to get our position back.

Buys

• More DB Agriculture Double Long ETN (DAG) - back up to 2.0% of fund
  
• More iPath DJ Livestock ETN (COW) - back up to 2.6% of fund
  
• More Petrobras (PBR) as it fell to support of 50 day moving average of $65 - back up to 1.5% of fund (if this breaks through $65 we'll cut back)
• Got some Intrepid Potash (IPI) since I cut this to the bone at $60 two weeks ago after purchasing in the upper $40s. (it promptly ran to mid $70s) Now its "down" to $60 this AM, so I got some back in $62-$63s. Up to 0.8% of fund.
  
• Added some myriad and sundry Ultrashorts in smallish amounts but again, until we get through the favored sons of Nike (NKE), Research in Motion (RIMM), and Oracle (ORCL) tonight - don't want to get top heavy on that side.
  

I continue to focus on agflation as the replacement for energy inflation in the 2nd half of 08; you can see this by the purchases.

Still heavy in cash until we see some direction. S&P 1300 seems to be the new temporary bottom - and we could in theory get all the way up to S&P 1360 on an oversold bounce, and still be in our downtrend. All white noise in between. Rallies still not to be trusted. Inflation is given free reign. Unruly and lightly regulated banks must be saved. Thanks Ben.

Long all names mentioned in fund; long iPath DJ Livestock ETN in personal account

Bookkeeping: Taking some DR Horton (DHI) Off the Table

I was startled last evening to realize with my cutbacks in my normal top positions, that DR Horton (DHI) had somehow managed to become my largest long position - a homebuilder! That seemed so wrong. Yet so right when we anticipated a commodity pullback. We've had a nice run in this name the past 48 hours, and our "barbell" approach (commodities on one side, and some of the out of favor sectors in smaller amounts on the other side) is helping to stem the losses. In the past on a day like this the market would be up 1% and we'd be down 2% as our quality stocks would get trashed in a "buy the junk" type of market (also our Ultrashorts in financials, consumer related, and commercial real estate would explode in our faces). Instead we just have a minor loss which I consider a "win" based on our typical holdings. This episode happens every 6-10 weeks, and lasts from 3-10 days. It seems to be happening a lot around Federal Reserve meetings (that was the last time this "junk" trade worked its best) as we hear about how Uncle Ben is now wanting a strong dollar and is going to fight inflation. All lip service (no action), but it's enough to get traders and their computers moving wholesale from global growth stories into US based stocks that have been pummeled.

Anyhow, we are not getting destroyed today as we'd normally be experiencing (the enemy, he is adapting), since some of our "barbell" plays are actually doing quite well. DR Horton (DHI) is actually a very nice chart set up - it's raced from an upper $11s range to low to mid $13s in 2 sessions (about 12% gain), with resistance ahead in mid to upper $13s. So the forward plan is simple - if this "move to the junk" ends soon, these stocks bouncing (probably mostly short covering for now) will falter as they encounter resistance. If however, this is part of a longer term move (again they usually last 3 to 10 days) they will break through resistance. If the latter happens, we'll remount this position on a move to $14 because it will mean the potential for more upside ahead as "2nd half recovery" is enjoined ($16s in DHI for example would be very likely)! Yahoo!

But for now, we're going down to a 1.6% stake from 2.3%, and monitor the situation from there.

On the flipside of this barbell I've bought very small stakes in a few coal, nat gas, and fertilizer names - but still anticipate bigger pullbacks so holding back the gunpowder. Until the gods from Mount Olympus speak to their minions at 2:15 PM this afternoon it's really hard to press bets in any direction. Expect a lot of thrashing about, as always, by knee jerk lemmings and then we'll see if the gods blessed us or not by 3 PM. See you then and we are sitting on our 30% cash stake seeing which direction we will break to next.

Long DR Horton in fund; no personal position

Atwood Oceanics (ATW) Announces New Contract for Atwood Hunter

Atwood Oceanics (ATW) is one of my oil sea drillers - this group continues to confound me in terms of valuation - many trade at 11-15x estimates even though the growth rates are 30-35%+. Blah, they are still valued as cyclical stocks. Anyhow, unlike the godfather of the industry, Transocean (RIG), which has a bazillion (ok maybe a few less than a bazillion) rigs, Atwood only has 8 functioning rigs, and of those only 3 are of the "deeper" variety - Falcon, Hunter, and Eagle (along with 1 new deepwater scheduled for 2011). So when news comes out on any of these 3, we want to focus on it.

Last night Atwood Oceanics announced the new rates for Hunter, and coming as no surprise we are seeing huge increases over old rates. This is playing out across the industry. This announcement seems to be buffeting ATW from the selloff in anything commodity related today.

• Atwood Oceanics, Inc. (NYSE: ATW - News), announced today that the ATWOOD HUNTER has been awarded contracts by Noble Energy, Inc. (NBL) for work in the eastern Mediterranean Sea and by Kosmos Energy Ghana HC ("Kosmos") and Noble Energy for work offshore West Africa for a combined term of four years. These contracts provide for an operating dayrate of US $511,000 while working in the eastern Mediterranean Sea, approximately and approximately US $538,000 while working offshore GhanaUS $545,000 while working in other West African designated areas.
• Immediately upon the ATWOOD HUNTER completing its current work offshore Mauritania (estimated September 2008), the rig will be relocated to the eastern Mediterranean Sea (estimated to take 35 days) to perform the Noble Energy contract (estimated to take 80 to 160 days to complete) and then mobilized to West Africa (estimated to take 55 days) to commence the combined Kosmos and Noble Energy contract, with the rig being moved between Ghana and other designated areas at various intervals. The initial work in Ghana for Kosmos is estimated to take 270 days to complete. These contracts provide that Noble Energy and Kosmos will provide all tow vessels and pay a dayrate of approximately $460,000 during all mobilization periods.

Current rate for Hunter? $240,000.

Eagle is contracted out to 2011, so no good upside from that one for a long time, but Falcon comes off the lowly dayrate of $160-$200K twelve months from now. We can expect a similar increase in dayrate to Hunter, when it does come free. Again, even if oil goes back to $80-$100 there is a chronic shortage in the deep(er) sea oil rigs - if these stocks even got a multiple of 3/4 of their growth rate we'd see some serious expanded stock prices.

For Atwood Oceanics their 2008 ends in September and estimates are $6.61; a year later $10.52 - toss even a 22 multiple (well below their growth rate) and you'd have a $145 stock in September, and $231 stock a year later. But the market has stuck this name / sector with a mid teens multiples...

[May 8: Atwood Oceanics Short and Sweet Beat]
[Feb 7: Earnings Update on Our 2 Drillers: Atwood Oceanics and Diamond Offshore Drilling]
[Nov 29: Deep Sea Driller Atwood Oceanics Earnings Surge]

Long Atwood Oceanics in fund; no personal position

Bookkeeping: New Natural Gas Stake in Encore Acquisition (EAC)

In a post earlier this month I mentioned how all things being equal it might make more sense to hedge towards smaller players in both the oil/natural gas exploration and production. [Jun 18: Will Encore Acquisition be Bought Out?]

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.

Many of the (smaller) names mentioned in that post have been absolutely ripping it up the past few weeks, while their big brothers have been going upward slowly or sideways.

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.

However, I am going to focus on Encore Acquisition (EAC) because after a tremendous run earlier this year, it has been consolidating this move and more importantly it literally has signaled it is willing to put itself up for sale since the market is not valuing it correctly.

Onshore oil and natural gas exploration company Encore Acquisition Co (EAC) said on Wednesday it was exploring strategic alternatives, including a possible sale.

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.

At just under $4 Billion in market capitalization (up from $2 Billion earlier this year) it's a good size fit for many companies. And it's still cheaper than the other 3 natural gas names I own in the fund for my mini basket of natural gas stocks

• XTO Energy (XTO) forward P/E 16
• Cabot Oil & Gas (COG) forward P/E 22
• EOG Resources (EOG) forward P/E 14

Now, not all companies "should" be valued the same since some have more attractive assets than others, but at a forward P/E of 13 this remains a good "value" and has land in some of the hottest markets in the United States.

With all that said, I've been calling for a "correction" in this space so I am not starting with a huge stake. But the stock has begun to pull back (not much, about 10% from recent high) and is sitting at its 20 day moving average of $70. I'd rather buy at the 50 day moving average of $62 (or lower if possible), which we might or might not get. If money rotates out of this group, we will definitely get this price so we'll hold off on going whole hog for now. So I'm making a starter stake of 1.3% of portfolio, and look to add on larger pullbacks. Keep in mind, if we are so unfortunate to be hit with any major hurricanes this summer/early fall, natural gas would be the group that would spike the most. On the other hand, if oil and natural gas go into a swoon, so will these sort of stocks - hence I feel more secure in other sub-sectors of commodities with longer term contracts in place and not so exposed to spot pricing.

This brings my natural gas "basket" of stocks up to 4 names, and EAC is the smallest of the bunch. Hopefully someone comes knocking on their door in the next 6 months, and we'd be happy to sell out north of $100 ;)

As an aside, that rotation I've been talking about? It's officially here - commodities being smashed. "Get in my Belly"

Long Encore Acquisition in fund; no personal position

Bookkeeping: Cutting WuXi PharmaTech (WX) Sharply

WuXi PharmaTech (WX) is a Chinese medical outsource company that has caused me a lot of confusion by it's actions, but I really like its business and ability to undercut competition in pricing in the long run, so I've stuck with it. I went against my normal methodology and simply began buying this stock in small pieces as it broke all support levels on its chart the past 2 weeks, with most purchases in the $17s, but a a bit in the $16s. Yesterday the stock spiked out of the blue to the $18s where I flipped out about half the position and today I am selling the rest (except for a small holding stake of 0.1% of portfolio) in the $20.40s, for a quick 20%ish gain (the position was just over 1% entering the week). There is some very good news out today as the company has partnered with U.S. player Covance (CVD). There is no way this information was leaked yesterday was it? Nah... that never happens in the markets. ;)

While this is good news, it's good news for the long term and I don't really justifies a 20% price spike "today"... but I won't complain ;) We are still down since the original purchase in November by $2000, but faring a lot better than 48 hours ago. Considering how poorly the stock has done since it's initial IPO spike, this is not a bad loss... hopefully into 2009/2010 we can start getting some upside.

• Drug development services companies WuXi Pharmatech and Covance Inc. said Tuesday they will create a joint venture to provide preclinical development contracting in China.
• WuXi, based in China, and Princeton, N.J.-based Covance will evenly split the joint venture. Operations will be located at 323,450 square-foot-facility in Suzhou, China, expected to be completed in 2009 and designed to meet the Food and Drug Administration and worldwide regulatory standards.
• Preclinical research refers to the stage of development a drug candidate goes through before being tested on human beings. It can involve both animal and laboratory tests
• "This joint venture will create a powerful partnership between China's leading provider of discovery and development services with the world's largest public contract research organization," said Joe Herring, Covance chairman and chief executive officer.

[May 28: WuXi PharmaTech with Another Solid Quarter]
[Nov 5: Two New Foreign Positions Added Today]

Long WuXi PharmaTech in fund; no personal position

Monsanto (MON) - Good Results, Expectations Very High

Monsanto (MON) reported very good results this morning, although a bit light on the revenue line - expectations just are so high for this name and at 40x forward estimates it's a quite rich valuation. Fortunately to offset the light top line number, they raised earnings guidance for the year which is helping to support the name to a degree in pre-market. For stocks priced to perfection you need to hit on all cylinders and a perceived revenue "miss" would of dropped the stock a bit more, but the raised guidance will help offset any major long term worries.

• Monsanto reported record net sales of $3.6 billion for the third quarter of fiscal year 2008, which were 26 percent higher than sales in the same period in fiscal year 2007. Results in the quarter reflected increased revenues from the company's Roundup agricultural herbicides globally, increased soybean seed and traits revenues in the United States, increased corn seed and trait revenues in the United States, higher corn seed revenues in Europe-Africa, and higher cotton seed and trait revenue in the United States.
• Monsanto's net income for the third quarter of fiscal year 2008 was $811 million or 42 percent higher than net income in the same period last year.
  
• Earnings per share (EPS) for the third quarter of fiscal year 2008 were $1.45 both on an as-reported basis and an ongoing basis.

Outlook

• Monsanto's fourth quarter is largely influenced by its global cotton business and U.S. Roundup agricultural herbicides business. The company historically records a loss in the fourth quarter.
• Monsanto now expects that its full-year 2008 EPS will be approximately $3.63 on a reported basis and approximately $3.40 on an ongoing basis. (For a reconciliation of ongoing EPS, see page 1). Monsanto's full-year 2008 EPS guidance on a reported basis does not include an estimate for the in-process, research and development charge associated with the company's fourth quarter acquisitions.

You can see from the headlines below on earlier posts on this company they have been continuously raising guidance...

[Jun 5: Monsanto Plans to Double Grain Yields by 2030; Some Have Doubts]
[Apr 2: Monsanto Hilarious Reaction to Guidance]
[Feb 12: Monsanto Raises Guidance Yet Again]
[Jan 3: Monsanto - Very Good Earnings and Raised Guidance]
[Oct 9: Looking Ahead to Monsanto]

No position

I Have Michigan Economic Bias

For those readers who have been following the blog a while, you probably see a quite negative economic view on things. While I do think government reports systematically paint a rosy view, I do unfortunately also have local bias, Michigan bias. You cannot help but be clouded by what you see on a daily basis, month after month, for years. I assume its akin to what North Carolina went through when the textile mills left in the 80s (they've since rebounded smartly) or Pittsburgh went through when the steel mills shut down in the 70s (they've sort of muddled around in a shrunken state since). Even in Michigan, we've had tough times in the past, especially late 70s, early 80s but that was cyclical - this change is structural. Many jobs will never come back, just like they did not in NC or PA - so we've been in a slow motion train wreck for over 5 years now. The simple answer is "move" but are those equivalent jobs really available anywhere else? In an economy moving to 'service' and away from 'making things'?

Now to be fair, our leadership is just about as bad if not worse as that at the national level, so aside from the global forces hitting the state - the total inability for any real leadership is hurting. But what I openly wonder as we "streamline" production and move to a service economy (like most of the rest of you) is are we a canary in the coal mine? Or a total outlier? Probably somewhere in the middle. But when I think of a "service economy" like Las Vegas with its booming job picture - I know 80-90% of those jobs wouldn't pay 2/3rd of what a typical job being destructed here is. So is that really a great long term outlook?

Here is a story of what is happening here, and why my views are most likely very certainly clouded. I do realize 90% of the states are not even within spitting distance of such calamity. And as I type each post I do try to think of the agriculture sector, the oil sector, some parts of technology, etc - that are booming from the structural trends emerging, and how those states that focus on those areas must be living in a different world. But that still leaves about 30-35 other states somewhere in the middle. Much like Peter Schiff I simply wonder how a service economy which is 70-80% based on people within the United States trading services with each other (you do my nails, I'll do your taxes, and she'll sell you stuff at Walmart) really will do over the long run? When I see people with Master's degrees desperate for a midnight shift at a grocery store it really makes me wonder. We've seen how when we take away the major drivers of our economy the past decade (building homes, and financing all forms of credit) - how quickly the worm can turn. So we're left with a huge share of healthcare jobs and government jobs - both taxing the national budget and it's people's budgets. Those appears to be "our economic drivers". So what will this economy, outside of natural resources, dominate in - in the next 50 years? A good question.

• Michigan, once the center of America's industrial heartland, now holds a more dubious distinction: It leads the U.S. in joblessness. The state's unemployment rate hit 8.5% in May. That's up 2 percentage points from April, and compares with a figure of 5.5% for the whole U.S. in May.
• But bad as those unemployment figures look, the reality is actually worse. The official number is arrived at by surveying households and learning how many family members are unemployed but seeking work. So it does not reflect those who have given up finding a job, or those who are not yet looking but soon will be.
• Go to a job fair in Michigan and you'll find you are surrounded by people who fit all categories of joblessness, official and otherwise.
• Gregory Boyd, 50, a computer programmer and IT specialist, saw his job at Ford outsourced to India three years ago. Then, he caught a break with a job at DTE Energy, Michigan's biggest electric and gas utility. But that was eliminated last fall. He has been limping along with some freelance projects since then, but needs something permanent.
• The job picture, says DCC's Perry, is worse this time around than in 1980, the last time unemployment was so high. "Then, workers were being laid off, but these jobs are being eliminated," Perry points out. "And they are going at a much faster rate than we can replace them."
• May's numbers alone show a loss of 50,000 jobs.
• Hernandez says the job picture is as bleak as she has ever seen it. "We have had people with PhDs and engineering degrees applying for clerical jobs," she says.
  
• Senior management openings for which she would normally see just three or four qualified applicants are drawing more than 50 qualified candidates.
• One hope of Michigan officials is that they can turn the villain of expensive gas into a virtue, by creating a hub for "green technology" jobs. But those jobs are slow to develop, and could take a decade to materialize. A startup company developing new battery technology might employ a couple dozen workers, at best. Meanwhile, a shuttered auto plant can put more than 2,000 workers on the street, plus thousands more from supplier plants and local businesses that catered to workers.
• Another job fair was held recently at Ford Field, the domed stadium that is home to the Detroit Lions National Football League team. The stadium is looking for workers to cook and sell the $6 hot dogs and $10 (16-ounce) beers at Lions games this fall, as well as warehouse workers, cashiers, and vendors.... Jerry has a college degree in English, which he has not put on his resume for fear of being tagged as overqualified for a job that might pay $12 an hour. Last October, the job he had supervising a customer-service group for a local bank was eliminated. "I'd move away, but this is my home and my parents are elderly and need looking after."
• A short distance away, Reginald Johnson, 24, is neatly dressed and wearing a backpack. He is pursuing an associate's degree in electronics at nearby Wayne State Community College. Polite, articulate, and eager to work, he hopes to land a job in the stadium kitchen, cooking hot dogs and sausages, or maybe the steaks and chops served in the luxury suites. But Johnson has a problem providing more than an e-mail address on his application, and he worries it will keep him unemployed.
• "I don't have a place right now. Last night I stayed at the Greyhound bus station," he says. Though representative of the hardship found in Michigan these days, Johnson is also emblematic of the pluck and lack of resentment often found among those trying to beat the odds and find a job.
  

So a lot of my "predictions" on the consumer nationwide, that have been coming true one after the other, are not in fact any brilliant analysis by said writer. I've already seen them happening here for many years - I just predicted the rest of the nation would start seeing some of the same issues. And that's the startling thing as we see the same things leak out to many (not most) other states, despite the so called strength in the national numbers.

[August 2007 Thoughts/Roadmap] & [Reviewing August 2007's Thoughts/Roadmap]
[December 2007 Thoughts/Roadmap]

BusinessWeek: The Dirty Truth About Clean Coal

I get some email questions about "clean coal" so I just wanted to post this article in full and simply say, there is no such thing. Clean"er" coal, yes. But "clean" is simply a political term tossed around people who want to win elections and/or the industry itself trying to sell you some swampland in Florida. The plain truth is economic growth comes before environment costs in some countries and that's what matters in the coal thesis. But for those clutching to clean coal as the next solar, that's just not a reality today. It might never be. But that doesn't mean it is not a great investment [Dec 6: Coal Stocks Quietly in a Bull Market]

• Get ready for the selling of "clean coal." A $40 million industry-sponsored marketing and lobbying campaign has launched, with one national television spot featuring a farmer, a teacher, and a woman in a white lab coat declaring: "I believe"—while a voiceover describes how coal can be burned in an environmentally friendly manner.
• With coal-rich swing states such as Pennsylvania, Ohio, and West Virginia critical to the Presidential race, both Barack Obama and John McCain have endorsed the idea that coal is well on its way to becoming a benign energy source.
• The catch is that for now—and for years to come—"clean coal" will remain more a catchphrase than a reality. Despite the eagerness of the coal and power industries to sanitize their image and the desire of U.S. politicians to push a healthy-sounding alternative to expensive foreign oil and natural gas, clean coal is still a misnomer.
• Environmental legislation enacted in 1990 forced the operators of coal-fired power plants to reduce pollutants that cause acid-rain. But such plants, which provide half of U.S. electricity, are the country's biggest source of greenhouse-gas emissions linked to global warming. No coal plant can control its emissions of heat-trapping carbon dioxide. "Clean coal' is like a healthy cigarette,'" says Blan Holman, an attorney with the Southern Environmental Law Center in Charleston, S.C. "It doesn't exist."
• That fact won't mute the marketing bluster. All the talk relates to the idea of separating CO2 from the coal-burning process and burying it in liquid form so it won't contribute to climate change. "When [Obama] says clean coal,' he's talking about coming up with a system to put carbon back into the ground from whence it came," says Jason Grumet, the candidate's principal adviser on energy and the environment.
• Corporations and the federal government have tried for years to accomplish "carbon capture and sequestration." So far they haven't had much luck. The method is widely viewed as being decades away from commercial viability. Even then, the cost could be prohibitive: by a conservative estimate, several trillion dollars to switch to clean coal in the U.S. alone.
• Then there are the safety questions.
• Companies seeking to build dozens of coal-fueled power plants across the country use the term "clean coal" liberally in trying to persuade regulators and voters.
• In all, some 118 electoral votes are in play in the top 10 coal-producing states—44% of the 270 needed to win the election. (and that pretty much sums all you need to know about 'clean coal')

[Jan 14: New Coal ETF (KOL) Introduced from Van Eck Global]

Long a bunch of coal stocks, before all the cool kids were doing it

Investor Business Daily: Heating, Electricity Rates Rising as Prices for Natural Gas Surge

Keep this sort of news on your radar each time we hear about the '2nd half' or 'early 2009' recovery. The consumer is stressed from so many directions I cannot keep track. We've been on the home heating beat since LAST winter (we're early) but this is one of those lagged inflation effects that we have not even touched the tip of the iceberg yet. And frankly, when I was warning about it last winter natural gas and oil were 40-50% lower in price. Again there are some limitations on what utilities can pass on in any one year, and some of the product (coal/natural gas/home heating oil) is on longer term contract but as those contracts come off, and new ones (at market prices) are brought on, the American consumer is going to take a direct hit. People "feel" gas prices because it hits with a short lag - home heating, air conditioning and the like will be next winter and summer's direct hit. (and the winter after that) It sounds alarmist but you are going to see a lot of decisions in the bottom 1/3rd of America between food and heating the residence in the coming winters. Those Walmart retail jobs in the new era service economy just do not pay for these rates of increases.

• Consumers struggling with $4 gasoline face ballooning costs for another energy source: natural gas. Natural gas futures have vaulted 154% since its Aug. 27 low to $13.203 per million British thermal units on Monday. The run-up has outpaced the rise in crude oil, which has doubled.
• Consumers may not feel the full impact immediately, but continued high prices will push up monthly utility bills, if they haven't already done so. Americans often use natural gas for heating stove tops and water, but they see a bigger hit when they fire up gas furnaces in the cold winter months. Also, rising prices show up in electricity costs, with natural gas providing the fuel for more power plants across the country.
• "The consumer really hasn't seen the impact of higher prices," said Chris Jarvis, president of Caprock Risk Management. "There aren't that many people griping about it yet."
• Utilities have begun to pass on some of those costs to customers. But rate increases vary widely, depending on location and other factors
• As a heavily regulated industry, utilities don't pass on higher energy costs as quickly as oil companies do at the pump. They also have long-term contracts, insulating them somewhat from soaring market natural gas prices.
• Xcel Energy (NYSE:XEL - News), which serves residents of Colorado and seven other states, has raised the price of electricity for customers by 15% in the first half of 2008 in Colorado, spokesman Tom Henley says. Xcel is proposing an additional 10% hike for the third quarter. Henley says natural gas prices are a key reason. Nearly half of Xcel's power capacity comes from natural gas. The other big power source is coal, which also is soaring in price.
• As for the natural gas that customers buy directly to heat their homes or water, Xcel wants rates in July that will be 38% above the year-ago period.
• Eisenhauer notes 44% of the utility's electricity comes from natural gas-fired power plants. Utilities rely on long-term contracts and other instruments, says Owen, shielding themselves from volatile spot and futures prices.
• Consumers should hope for no big hurricanes or a sweltering summer that requires more natural-gas fired electricity, they say (let's hope hurricane season is quiet this year, it would be the 3rd year in a row of no major hits - so we are pressing our bets)
  

We outlined this story earlier this month as well, more directly to home heating oil which seems to dominate the New England utilities [Jun 1: AP Heating Oil Shock to Hit New England]. We'll revisit late next fall when we start hearing the consumer in shock and awe.

Once again, I stress how anything consumer discretionary that does not cater to the upper 2% is in for a world of hurt in the year(s) ahead. Until home prices fall enough so people only use 1/3rd of their income on a rental/mortgage payment and/or people start getting wage increases of 7-10% type to reflect true cost of life the American consumer will be stressed. It is as simple as that - or I suppose if oil, gas et al drop to 2006 levels. People in power poo poo food and energy as if they were not the 2nd and 3rd/4th biggest line items in a persons expenses... the effects (psychological and economic) are tremendous. Without wages rising much, the pie of spending must draw down from one place (sporting events, camping trips, entertainment, non essential travel, Vegas, boating, eating out at restaurants, buying that extra pair of shoes) and go into essentials. This is pooring of America 101, and why sentiment gauges continue to fall to ungodly rates (in a low inflation, low unemployment - by government standards - economy).

• Consumer confidence fell in June to its lowest in 16 years as high inflation continued to sap confidence and pushed expectations for the future to a record low, the Conference Board said on Tuesday
• its inflation expectations gauge matched the record-high 7.7 percent (strange how consumers anticipate inflation, when government reports claim it's just silly to assume there is much)
• The Conference Board said its overall monthly measure of consumers' mood declined to 50.4 this month -- the lowest since 47.3 in February 1992 -- from a revised 58.1 in May.
• The index has now dropped by more than half since last July, when it was at 111.90.
• Consumers made a grim assessment of their present situation and their future prospects. The present situation index dropped to 64.5 from a revised 74.2 in May. The expectations barometer slid to an all-time low of 41.0 from a revised 47.3 in May.

Once more, the total inability for workers to demand wage hikes aligned with the 'true' inflation rate is what sets apart this oil shock from the 70s. The Federal Reserve and corporations love it. One group is the loser from this outcome. You can guess who(m).

Near Term Fate for Commodities?

It appears today was a rotation station day - out from commodities and into housing, and some financials. Final stage of correction approaching? Dunno. Too early to tell. However, the clip above may show the near term fate of commodities? ;)

Bookkeeping: Buying some Apple (AAPL) Ahead of Research in Motion (RIMM) Earnings

Keep in mind folks, we are down about 7% straight in 3 weeks and as I outlined this weekend tomorrow is setting up for a potential positive day as a lot of "safer" blue chip type of multinationals report... along with Uncle Ben. Despite constant mismanagement and poor predictions (i.e. as the economy weakens, inflation will dissipate) people always look to authority figures in times of unrest. So Uncle Ben is the calming figure - even though he will most likely do nothing tomorrow, traders will use any sliver of data point to make a case to buy. In fact, when these 4 companies report tomorrow, you can see CNBC chiming in "what is all the fuss about, things are clearly going well" - everyone has absolute short term memory and FedEx, UPS, Dow Chemical will be forgotten in a snap.

Further on Wednesday we have a slew of earnings reports from some of the best companies out there so we could have a good psychological day. Monsanto (MON) on the agriculture side, Nike (NKE) on the global brand side, Oracle (ORCL) on the big cap tech side, and Research in Motion (RIMM) on the must have gadget side. So it is quite easy to get overly negative here, but nothing in a straight line (even if you are a full blown bear) - we should expect head fakes along the way, causing pain to whatever side of the tape you are.

Nothing straight down, or up. Unless you were in the thicket in January 2008 - when in fact it was straight down. Aside from Oracle I could see the other 3 companies really having some major positives so that could set the mood brighter tomorrow and Thursday AM. Unfortunately it's always impossible to gauge the market reaction to Uncle Ben and crew so thats an unknowable variable.

With that in mind, I've cut some short exposure into this morning's tape and also am adding some Apple (AAPL) with halo effect via good results in Research in Motion (RIMM) in mind. The stock is trading around its 50 day moving average so it's pulled back to a first support level, and it's a solid place to begin to rebuild. Much like any purchase at this point, I am going slow but for now Apple is back up to a 1.4% stake. I would still like to ultimately add Apple in larger scale in the $160s (or $150s), but $174/$175 is a decent beginning. I do still believe it will go lower however over time - this is a classic double top forming - and there is a nice gap in the chart around $156

Again I've been struggling to find new technology names that actually have secular growth over 15% annualized, so my first preference is simply to add to the few names we already have in the portfolio, but I wanted to see lower prices, so we are starting to get some of that now. When money does come out of commodities (and for all you doubters - nothing straight up - it will happen at some point) it will flow into other areas so we want exposure there too.

Once we get through these earnings reports, will revisit the mood of the market Thursday around noon. Or if good reports are met with selling that would be another strike against this market. Between now and mid day Thursday the mood will be news dependent, and how people react to said news. Volatility ahead....

Long Apple, Research in Motion in fund; no personal position

Bookkeeping: A Touch of Baidu.com (BIDU) Added Back

Until we see some panic selling, my purchases will be modest. But we will layer in as prices depress.

When last we visited Baidu.com (BIDU), it was up 36% in 5 weeks so I was selling @ $377 on May 7th [Bookkeeping: Cutting Most of 3 Positions on Huge Runs]. Usually we don't nail things that perfectly but essentially the top was in. I've been buying very small lots ($3K or so) in the $320s but here at $305 I'll make a bit larger buy, so we've retrieved our sold shares for a 19% discount in about 7 weeks. The stock is now at its 200 day moving average, a key support level. If this breaks, it could free fall, so I'd look to add shares in the $280s (April lows), and if that does not hold $220s-$240s (late winter lows). The farther it drops the larger the buys will become. For now, just increasing Baidu.com to 1.5% of portfolio.

At this point, I'd rather start buying this type of merchandise that is already on sale, rather than the commodities, most of which are nowhere near any support level. Waiting for more fear in a general sense...

Long Baidu.com in fund; no personal position

We Need Fear...

We need people in commodities to not feel bullet proof or smug in their 'safe havens'...

We need 8-12% daily down drafts in oil stocks, coal stocks, natural gas, and fertilizers. (the "generals")

We need people to throw in the towel and not to feel like they are safe in any spot.

We need people chasing small cap oil stocks like Pyramid Oil (PDO) 120% up in 5 days (up nearly 1500% in 2 months), to run for the hills and not feel like this market is so easy.



That is the last stage I've been waiting for. When there is no place to hide. Every other stage has played out to perfection. We are now in the 2nd to last stage where people are hiding out in the last group standing (commodities) and they feel as if they are on top of the world as the rest of the market crumbles around them.

The last stage is when these hopes of that set of people are erased and they begin to experience similar pullbacks as everyone else has felt. As I wrote in this week's roundup - we could be coming to this time shortly. Let's see if we get some of those moves ...

I remain patient waiting for this moment. Then we can be confidant it's time to start layering in some purchases.

Dow Chemical (DOW) Raising Prices for 2nd Time in 2 Months

Wow, this is amazing... Andrew Liveris CEO of Dow Chemical (DOW) is one of my favorite CEOs - he has blasted the entire energy policy in the United States (if you call it a policy) [May 28: Bravo Dow Chemical CEO] and just 5 weeks ago instituted a price hike of 20%. Now the company is out this morning with ANOTHER 25% price hike along with fuel surcharges. Breathtaking. On top of that they are idling production (read: laying off workers) because unlike the auto companies they don't have unionized workforces, so when they cannot sell a product for more than it costs them (i.e. make a profit), they simply shut down production. Which in theory could lead to even more inflation as supply is taken off line (and can't be good for laid off workers). Frankly it's a big mess. Dow is the type of company that has products that go into almost everything in the supply chain which is why these type of companies are important to keep a track of.

Now the good news is the government reports won't show this as inflationary so nothing to worry about. Unless you live in the real world... where inflation is a tax on all things - producers and consumers.

• Dow Chemical Co (NYSE:DOW - News), the biggest U.S. chemicals manufacturer, said on Tuesday it will boost its prices by as much as 25 percent, institute freight surcharges and cut output of some products because of soaring energy prices.
• The price hikes come after last month's across-the-board 20 percent increase by the Midland, Michigan-based company, which makes thousands of products ranging from plastic wraps to car parts and insecticides.
• "What we're doing is trying to protect our earnings," Chairman and Chief Executive Officer Andrew Liveris told broadcaster CNBC.
• Dow said it is also undertaking a series of cost reduction measures on staffing, facilities and spending at its automotive unit because of the decline in North American auto sales.
• The price increases announced on May 28 were not enough to cover the additional energy prices increases, Liveris said.
• Liveris again called for the U.S. government to overcome political squabbling and pass energy measures that will increase supplies. "We've got to get bipartisan energy policy ... this is too important a country to take aspects of energy policy off the table," he told CNBC.
• From August 1, Dow will implement a surcharge of $300 per shipment by truck and $600 per shipment by rail in North America for customers buying chemicals, hydrocarbons and plastics. Freight charges will be applied in other regions later this year.
• Dow also trimmed it production of the industrial chemical ethylene oxide by 25 percent and idled 30 percent of its North American acrylic acid output. The company will idle 50 percent of its European styrene production, and has cut European polystyrene production by 15 percent.

Cutting jobs, cutting production, raising prices - all sound like good things. All things we predicted last summer/fall as Wall Streeters screamed for joy every time Uncle Ben cut rates so their stock accounts could go up 1.2% that day on "great news from the Federal Reserve". No free lunches.

If you are new to the blog in the past month, I'd encourage you to go to this post [May 30: Weekend Homework for Readers - more Dow Chemical CEO] and spend the time listening to the CEO in his last round of interviews. There appears to be more sense in this 1 man than 98% of Washington D.C. Quite a sad situation really.

Oh yes, after the Fedex (FDX) warning last week, are we surprised UPS (UPS) is also out warning? Shouldn't be - these are only bellweathers of the US economy; the only people surprised are the "2nd half recovery" pollyanas. Inflation - it's everywhere. Except government reports in the United States.

• UPS(UPS), citing a sluggish U.S. economy and the blistering rise in fuel costs, has cut its second-quarter expectations.
• The Atlanta-based overnight package carrier said it expects to earn 83 cents to 88 cents for the quarter. It originally anticipated earnings between 97 cents and $1.04.
• Slow U.S. economic growth and skyrocketing fuel expenses have resulted in lower-than-expected domestic package volume and reduced use of premium air products, the company said. Additionally, it said "the anemic U.S. economy" is affecting international results. (wait, I thought the great international story was what was keeping the market holding up? Rut roh raggy)

UPS shares are now at a 5 year low ... right ahead of the '2nd half recovery'. Strange eh?

Let's not forget CNH Global (CNH), one of the big equipment makers (especially agriculture) - even they have to increase costs (albeit by a miserly 5%) to offset rising costs of all commodity inputs. We warned this is going to be a big issue but Wall Street is behind the curve. Now the evidence is mounting. It is amazing what you see when you ignore government reports and only listen to the companies themselves. 2 completely different worlds.

• Farm equipment maker CNH Global NV (CNH) said on Monday it was slapping a 5 percent surcharge on its tractors and combines as it joined the growing list of global companies complaining of the toll rising commodity prices are taking on their profits.
• ...the move was a "response to sharp and sustained increases in its costs for steel, energy, commodities, and transportation."

[Jun 20: Steel Nabs Another One - Lindsay Corporation]
[May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects]
[May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]

Long Liveris

Cleveland Cliffs (CLF) - A Man Among Boys

Let me be the first to say I lightened up on this stock far too early - and we never had enough exposure (at most 1.5% of the fund). We have nearly a double in this position since adding it in the hectic March sell off. What a performance; and a little known fact is they have serious metallurgical coal exposure on TOP of their iron ore exposure [Chinese Warned of Record Rise in Ore Price - 85-95%!] [Apr 7: Posco Agrees to 200% Coal Price Increase]

It is funny to read through this article because I was in this name back in the days when they bought Portman and I remember the very negative reaction by VERY SHORT SIGHTED investors - who many times much prefer companies do not spend on R&D or don't spend on smart acquisitions - since all they care about are moves to boost EPS one quarter out. But never in my imagination back then did I foresee this type of move. The move into met coal? Prescient. Personally I've been blown away that one of the mining world's "Big 3" have not taken Cleveland Cliffs (CLF) out a long time ago.

• Cleveland-Cliffs Inc. has seen its stock price rise more than 300 percent since the beginning of 2007. But that's nothing.
• If you go back to January 2001 -- the height of the steel crisis -- Cliffs' stock price has gone up some 5,000 percent, from about $2 a share to more than $100 today.
• That means a $20,000 investment then is worth $1 million now. (@&*(@!&*!)
• Global growth, especially in China, and a weak U.S. dollar have been the drivers, pushing up demand for steel made here and abroad. Cliffs mines in Michigan, Minnesota and Canada supply blast furnaces across North America with iron ore, the main ingredient in making steel, while their mines in Australia ship to China and Japan.
• Cliffs recent foray into metallurgical coal is expected to pay off in a big way, too.
• It has made all the right moves, beginning with a decision to expand its iron ore reserves in North America at a time when bankrupt steel companies were looking to unload them. Adding reserves at bargain prices proved brilliant, as Cleveland-Cliffs had more iron ore to sell once the steel industry consolidated and surged back to life.
• The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.
• Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal. Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama.
• Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process.
• Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.
• "I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.
• While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price. Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.
• Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said. (this is also why I like iron as opposed to some other commodities - along with longer term contracts)

[Mar 7: Starting 2 Mining Positions Emphasizing Iron Ore]
[Feb 22: Didn't Realize Cleveland Cliffs had Coal Exposure]

Long (not enough) Cleveland Cliffs in fund; no personal position

'Rising Tide Growth' Performance vs Peers May Update

As Rising Tide Growth approaches its 1 year anniversary I have begun to track performance versus it's peer group, the "mid cap growth" category of mutual funds.

Apr 23: 'Rising Tide Growth' v Mid Cap Growth Mutual Fund Peers
May 9: 'Rising Tide Growth' Performance vs Peers April Update

The Apr 23 post has a detailed methodology breakdown.

This is still not an apples to apples comparison until we hit the July period as that will be our first year, but as each month passes we get closer to a direct comparison. With May complete we have 10 months of direct comparison and the other 2 months we assume 0% return, to reach a 12 month return.

Our general big picture goals once live is to try to finish in the top 10% of our category most years - that would place us at the very top over 3 year, 5 year, 10 year time frames. Of course that goal won't be reached every year, but have to aim high. There are about 1870 funds in this category so any finish near the top 200 or so would place you in the top 10%.

As of May 31st, Rising Tide Growth NAV was $12.24, creating a 22.4% return (we started at NAV $10.00). As always my results are kept by third party, which I link to in the left margin of the blog.

RTG Return: +22.4%
Top 25 peer range: +20.6% (1st place) to +7.4% (25th place)
Average of all peers: -0.8%

Here are the top 25 performers in the category for May 31 2008 - after a quick break last month when we fell out of the top slot, we are back to the equivalent of being the #1 "fund" in the country for our category. Barring something ridiculous we should be able to hold in the top 10 slots (the 10th best is way down at +11.9% return), as June is going very well (versus market and peers), and we only have about 5 weeks after this one to finish out "our year".

Ultimately, the goal is to be near the top of this list in the 3 year, 5 year, and 10 year categories...

[Legal Disclaimer: Rising Tide Growth fund is a hypothetical fund and in no way, shape, or form can we guarantee similar results in a similarly structured product when launched]

This Day in Agriculture - India Falling Below Potential / Opening Conservation Lands to Farming in the US

A couple of interesting reads from the previous week - it does highlight some potential solutions to the growing food crisis i.e. If India could even become 2/3rds as productive in their agriculture sector, they could race up to join the United States and Russia/satellite states as an agriculture giant. But it is a long road ahead.

NYTimes: In Fertile India, Growth Outstrips Agriculture

• With the right technology and policies, India could help feed the world. Instead, it can barely feed itself.
• India’s supply of arable land is second only to that of the United States, its economy is one of the fastest growing in the world, and its industrial innovation is legendary. But when it comes to agriculture, its output lags far behind potential. For some staples, India must turn to already stretched international markets, exacerbating a global food crisis.
• Forty years ago, a giant development effort known as the Green Revolution drove hunger from an India synonymous with famine and want. Now, after a decade of neglect, this country is growing faster than its ability to produce more rice and wheat.
• ....while (Prime Minister) Mr. Singh worries about feeding the poor, India’s growing affluent population demands not only more food but also a greater variety.
• India’s own people are paying as well. Farmers, most subsisting on small, rain-fed plots, are disproportionately poor, and inflation has soared past 11 percent, the highest in 13 years.
• The Green Revolution introduced high-yielding varieties of rice and wheat, expanded the use of irrigation, pesticides and fertilizers, and transformed the northwestern plains into India’s breadbasket. Between 1968 and 1998, the production of cereals in India more than doubled. But since the 1980s, the government has not expanded irrigation and access to loans for farmers, or to advance agricultural research. Groundwater has been depleted at alarming rates. (the ultimate shortage)
• Family farms have shrunk in size and quantity, and a few years ago mounting debt began to drive some farmers to suicide. Now many find it more profitable to sell their land to developers of industrial buildings. (loss of arable land - this is repeating in many developing countries as "urban" takes over "rural")
• Among farmers who stay on their land, many are experimenting with growing high-value fruits and vegetables that prosperous Indians are craving, but there are few refrigerated trucks to transport their produce to modern supermarkets.
• A long and inefficient supply chain means that the average farmer receives less than a fifth of the price the consumer pays, a World Bank study found, far less than farmers in, say, Thailand or the United States.
• Here in Punjab, more than three-fourths of the districts extract more groundwater than is replenished by nature.
• Today only 40 percent of Indian farms are irrigated. “When there is no water, there is nothing,” Mr. Chawla said. (that's a problem...)
• The luckiest farmers make more money selling out to land-hungry mall developers. Gurmeet Singh Bassi, 33, blessed with a farm on the edges of a booming Punjabi city called Ludhiana, sold off most of his ancestral land. Its value had grown more than fivefold in two years.

NYTimes: U.S. May Free up More Land for Corn Crops

• Signs are growing that the government may allow farmers to plant crops on millions of acres of conservation land, while a chorus of voices is also pleading with Washington to cut requirements for ethanol production.
• In disasters, the Environmental Protection Agency can roll back requirements for ethanol production, which could free up a large amount of corn for animal feed. Mr. Grassley, a strong ethanol backer, rejected that proposition, but in recent days many industries that depend on corn have urged the government to act.
• About 34 million acres are enrolled in the government’s biggest conservation program, known as the Conservation Reserve Program. Farmers enroll their land for as long as a decade and cannot take it out without paying severe penalties.

It Really is all about China - When it Comes to Cement

Paul Kedrosky over at Infectious Greed has one of those graphs where truly the saying "a picture is a worth a thousand words" speaks volumes. It truly is amazing how China dwarfs everyone - they are doing 10x more than any peer. In fact if I eyeball it, if you add every other country in the world together as one entity; it appears China would be consuming more. As I keep repeating, this economy is like an out of control Ferrari racing on oil slick mountain roads. How to keep control of the steering while is not something I'd wish on anyone.

(click to enlarge)


One name I've followed for a long time, is Mexican cement maker Cemex (CX) which is one of the world's giants (#3 in the world). Unfortunately they are so intertwined with the US market, the stock has been a disaster for a while. I was getting excited about 6 weeks ago, as the technical condition of the chart began to improve, and it looked like a breakout was happening, but just like that, the chart snapped. However, they do not seem to have major Chinese exposure.

• Cemex, the world's number-three cement maker, cut its 2008 forecast for pre-tax earnings to $5.3 billion on Monday, battered by the weak U.S. housing market and a slowdown in key European markets
• "We continue to face a difficult economic environment in the United States with construction falling more than originally anticipated," Chief Financial Officer Rodrigo Trevino said in a statement.
• Cemex, the top building materials company in the United States, had forecast 2008 earnings before interest, tax, depreciation and amortization (EBITDA) of $5.6 billion. "We now expect EBITDA for 2008 of about $5.3 billion," Trevino added.
• For Cemex, which competes globally with Switzerland's Holcim (HOLN) and France's Lafarge (LAFP), the impact of the U.S. housing crisis comes as Cemex increased its market share through last year's $16 billion acquisition of Rinker, which had 80 percent of its operations in the United States.
• "We now expect domestic cement volume in the United States to decrease by around 12 percent, ready-mix volume to decrease by about 21 percent and aggregates volumes to decrease by around 20 percent for the full year 2008," Cemex said. (sounds like an economy ready to rebound any minute now)
• Housing slowdowns in Spain and the United Kingdom are also hurting Cemex, which has operations in more than 50 countries. (notable - as we've been saying the UK is a mini USA and both countries followed the Americans into lax mortgage standards which led to major housing bubbles - in fact many say Spain has the worst of the bunch)
• In Spain, where the economy is cooling after a decade of high growth levels, the company expects cement volumes to decrease by about 17 percent this year. "This was lower than we expected and a little worrying given that Spain is one of Cemex's top markets," said a Mexico City-based cement analyst who declined to be named.
• The UK housing market is also cooling as the economy falters, feeling the impact of the U.S. credit crunch. The average cost of a UK house has fallen by about 8 percent from a peak in August last year.
• That follows a near decade-long boom, during which the price of the average UK home more than tripled. (easy credit, easy money, lax guidelines - another wonderful US import!) Cemex said it sees British cement volumes falling about 9 percent in all of 2008.

Bottom pickers might find this chart appealing as Cemex (CX) hits March lows and near January lows... again note the false breakout just over a month ago - how vicious the market can be.

Sohu.com (SOHU) - Analysts Race to it's Defense

I was hoping for more of a sell off in Sohu.com (SOHU) after Friday's "news" that after an Olympic style bump this year in their advertising business, things would return to more normal in 2009. [Jun 20: Sohu.com Sees Ad Revenue Slowing in 2009] Notable Calls blog points out that analysts have rushed to its defense this AM, and the stock is bouncing sharply at least for now. Again, gaming not advertising has provided the spark in this name.

• Citigroup notes Friday's sell-off was sparked by a Reuters article confirming what almost everyone already knew: Sohu will face challenging YoY comps on its brand adv side due to a post-Olympics "hangover" effect. However, the firm believes online gaming will continue to power rev and earnings growth in 2009. They were modeling +18% YoY for 2009 adv revs, so the company's expectations of "+20-30% YoY" is actually stronger than their estimates. Finally, they note that online gaming is highly immune from growing inflationary pressures in China, another positive. Accordingly, the firm raises their 2009E estimate, increases tgt to $90 (from $80), and reiterates Buy rating.
• 2Q tracking ahead of plan; 3Q looks excellent - Citi believes both Adv & Gaming are having a strong quarter, and should come in above company guidance. 3Q is also set to be very strong, especially with Olympics adv, which should benefit from Sohu recently being granted the rights to show live streaming video of all events. Sohu is easily one of the, if not the, fundamentally best positioned names for at least the next 2 quarters.

• Merrill Lynch reits Buy & $95 tgt on SOHU after a massive sell-off on Friday triggered by a report by Reuters on growth of Sohu’s online ad, 40% of revenues in 1Q08, to slow down to 20-30% YoY in 09. Even given a significant US market correction on Friday, they see overreaction to the article. Firm also sees Sina as another victim.
• MLCO believes the company has been communicating the same message (slowdown in ad growth in 09) for a few months. They also believe the range is inline, if notbetter, than most analysts’ estimates. For example, they are looking at 22% growth in online ad only and Bloomberg consensus shows a 23% growth in sales (including games and wireless services).
• Firm believes the focus should be on Sohu’s potential margin expansion in 2009, despite lower topline growth. They expect Sohu to obtain a high-tech status and thus a 15% tax rate for 2009. They are also modeling material operating leverage as they expect the reduction in Olympic-related spending next year, est. to be US$15-20m, to be able to offset most of the increase in operating expenses to support organic growth. They therefore expect net margins to improve to 35% in 09.

Long Sohu.com in fund; no personal position

Agriculture Consolidation: Bunge (BG) to buy Corn Products (CPO)

These names are not really my focus in the sector, but Bunge (BG) has a fertilizer component to it, and while I don't really care too much about the acquisition I like the increased guidance. A trend I expect to see across the fertilizer space as we move ahead.

• Fertilizer producer and oilseed processor Bunge Ltd (NYSE:BG - News) said on Monday that it would buy Corn Products International Inc (NYSE:CPO - News) for $4.4 billion to gain a leading position in finished corn products such as starches and sweeteners.
• Separately, Bunge raised its 2008 earnings forecast to $9.35 to $9.65 per share from $7.10 to $7.40, not counting the effects of the acquisition, which the company expects to close in the fourth quarter.
• Analysts were expecting Bunge to earn $7.59 a share in 2008, according to Reuters Estimates.

No positions

FinancialTimes.com: Chinese Warned of Record Rise in Ore Price - 85 to 95%!

Iron Ore continues its incredible ascent... the beat goes on; one can only wonder when China (who, like the Fed is also in a box) says no mas. I thought Vale (CVRD) asking for 65% price increases were outrageous [Feb 19: CVRD (RIO) Secures 65% Increase in Iron Ore Pricing], but apparently since these 2 producers have closer locations - they are asking for higher prices (longer distances = more shipping costs to bring in RIO iron ore)

China almost has to (to some degree) continue growing or risk the social unrest of telling scads of newly formed urbanites that they need to go back to the countryside and resume their rural lifestyle. Quite possibly one of the most interesting economic experiments of all time - managing 1.3 Billion people through torrid growth.

• Rio Tinto (RTP) and BHP Billiton (NYSE:BHP) have asked their Chinese steelmaker customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia.
• Traders and industry officials said the mining companies have demanded price increases for their annual iron ore contracts in excess of the record 71.5 per cent rise of 2005 and were fighting for increases of 85-95 per cent.
• Rio and BHP have warned their Chinese clients some annual contracts will expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher.
• The bold step indicates that the heated annual price negotiations, already well beyond their traditional conclusion date, are set to move into a hostile phase.
• Analysts said most of Rio's iron ore contracts would expire on June 30. However, some BHP contracts do not expire until September, leaving the latter time to negotiate and allowing Rio to take the lead in the discussions.
• Rio and BHP are demanding a larger price increase than Brazil's Vale because their proximity to China reduces shipping costs.
• Traders said that freight costs from Australia to China collapsed last week by 37 per cent as at least one of the mining companies stopped booking some vessels for July to ship under the old contracts. That move signalled their intention to move shipments into the spot market if the negotiations failed. (this appears to be the main reason spot pricing of the Baltic Dry Index dropped so suddenly - and it appears to be relative temporary)
• Although China has record high iron ore inventories, the country depended heavily on imports, they said, and it would not be long before it had to cave in and buy into the spot market.
• Morgan Stanley said in a report the ore market was under "unprecedented" pricing developments and . . . "remains very tight and in significant deficit".

Rio Tinto (RTP) CEO on CNBC Friday saying he is bullish on China for... another 10-15 years (granted he is biased)\

In the end, those with hard assets will win. These are the "big 3" in mining.

Long Vale in fund; no personal position

June Update - Top 10 Winners & Losers

Previous editions can be found

1. May 1
2. Mar 16
3. Dec 18

Here is our every so often look at best and worst contributors to the fund; as long as the winning group in aggregate is larger than the losing group we should be in good shape.

On the winning side, essentially a long fertilizer/coal paired with short financial/commercial real estate has been our core winning play. Fertilizer really helped us last fall/winter and coal has taken the reigns this spring. Keep in mind I use a basket approach for most sectors - so in theory I could of had "1 huge winner" in each sector instead of multiple large winners as shown below. Alpha Natural Resources (ANR) has only been with us since early April, when I switched into it from Peabody Energy (BTU) and in that short time it's cracked the top 10, even though my weighting has been 3-4% of fund at most. Financials have been helping us almost every month. In the next tier of winners (slots 10-15) are non commodity names such as Illumina (ILMN) which has not been a major weighting for a long time after a huge run in 2007, and Baidu.com (BIDU) which has not been a great buy and hold stock (some traumatic sell offs), but I've traded this one very well. Of course the magnitude of dollars gained is in large part based on weighting I've put on each stock - i.e. Mosaic (MOS) has many times been a 6-8% weighting in the fund whereas Illumina or Mastercard (MA) has rarely been over 2%.

Top 10 Winners
Mosaic (MOS) +57.2K - fertilizer
Ultrashort Financial (SKF) +38.6K
CF Industries (CF) +33.3K - fertilizer
Potash (POT) +28.5K - fertilizer
Mechel (MTL) +23.9K - steel/coal/iron
Consol Energy (CNX) +21.3K - coal
Massey Energy (MEE) +10.0 - coal
Ultrashort Real Estate (SRS) +17.9K
Alpha Natural Resources (ANR) +16.1K - coal
Mastercard (MA) +11.0K - credit cards

On the losing side, most of these names have been sold off so there is no chance to "improve" on the losses. Trina Solar (TSL) hemorrhaged even more money since last we looked in early May - in fact 3 of my 10 losers are solar names. I've come to the conclusion that my style of investing does not mesh with the way these stocks trade - I like to build up positions on strength as opposed to weakness, but much like the dry bulk shippers - this is one group that is so volatile you simply must buy them when the charts look completely broken - since when they do rebound, the rebounds are swift and you do not have time to rebuild positions in a structured, incremental way. Specific to Trina Solar is a year's worth of underperformance, but that's a whole different matter. One day I hope to see some of these names switch to the other side of the ledger (big winners) instead of big losers. On the good end there is only 1 new name added to this list since last we looked (the less new additions, the better for us obviously). The only newcomer is my "insurance" policy (hedging vehicle) against my basic material (i.e. the closest thing I can have to short agriculture/chemical stocks) - Ultrashort Basic Materials (SMN). While it is a loss, it is actually doing it's "job" - as stated when I bought this position, if I am losing money on it, that means the counterweights (long positions) in the same sector must be doing well. Which they are. That said, I'd like to see this loss reduced - hopefully shortly.

Top 10 Losers
Thornburg Mortgage (TMA) -25.6K - high end mortgages
Trina Solar (TSL) -25.5K - solar
LDK Solar (LDK) -14.1K - solar
Riverbed Technology (RVBD) -11.0K - networking
MFA Mortgage Investments (MFA) -9.5K - mortgage REIT
Crocs (CROX) -9.0K - plastic shoes
NII Holdings (NIHD) -8.1K - cell phone
Ultrashort Basic Materials (SMN) -7.5K
Solarfun Power (SOLF) -6.6K - solar
Chicago Bridge & Iron (CBI) -6.1K - infrastructure

AP: Record Corn Prices Mean more Expensive Dairy, Meat

As long predicted [May 27: Update on Corn and Livestock] the chickens (couldn't resist) are coming home to roost.... as always we are early and you never know when a thesis will hit critical mass. But as I've been repeating I think "oil" will be replaced with "food" as the inflation of choice for the news channels to stress over later this year and into early 09.

I will say the action this week in iPath DJ Livestock ETN (COW) was very encouraging. [Apr 23: Initiating iPath DJ Livestock ETN (COW) - Make up your own Farm Animal Headline]

I've mentioned this name, iPath DJ Livestock ETN (COW) recently as a play on the twin tower effects of (a) governmental ineptitude (ethanol boondoggle) and (b) Fed induced grand larceny against savers and lower/middle class (inflation). While I could see grains having a short term setback if the dollar strengthens, I do believe meat inflation is going to be the next shoe to fall, as producers cut back, creating the next shortage.

The weighting is currently 60% cattle, 40% hogs. Either way, get your freezer stocked up, by Labor Day those BBQs are going to cost a pretty penny. Inflation will eventually push up the value of all finite resources... including stocks! (always a bright side)

Here comes said chickens....

• Raging Midwest floodwaters that swallowed crops and sent corn and soybean prices soaring are about to give consumers more grief at the grocery store.
• In the latest bout of food inflation, beef, pork, poultry and even eggs, cheese and milk are expected to get more expensive as livestock owners go out of business or are forced to slaughter more cattle, hogs, turkeys and chickens to cope with rocketing costs for corn-based animal feed.
• ...experts say the trickle-down effect could be more dramatic later this year, affecting everything from Thanksgiving turkeys to Christmas hams.
• ...pork supplier...high corn costs were already forcing producers in his industry to cut back on the number of animals they raise.
• "There's definitely liquidation of livestock happening," and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also the vice chairman of the American Meat Institute.
• It's a similar story for U.S. beef producers, who now spend a whopping 60-70 percent of their production costs on animal feed and are seeing that number rise daily as corn prices hover near an unprecedented $8 a bushel, up from about $4 a year ago.
• "This is not sustainable. The cattle industry is going to have to get smaller," said James Herring, president and CEO of Amarillo, Tex.-based Friona Industries, which buys 20 million bushels of corn each year to feed 550,000 cattle.
• "We're in survival mode now," said Paul Hill, chairman of West Liberty Foods, a turkey processor based in West Liberty, Iowa. He estimated U.S. turkey producers will reduce their flocks by 10 to 15 percent nationwide, a cutback that will send consumer prices dramatically higher.
• If corn were to rise to $10 a bushel, Richard Lobb, spokesman for the National Chicken Council, said recouping costs through higher retail prices may not be possible. "Can you possibly charge enough for the chicken to recoup that investment?" he said. "That's a question no one can answer yet because it's never been done."

Send your thank you notes to your local Congressman/women who votes "yes" for corn ethanol! And for the 50th time - please stock up your freezer with meats... immediately.

Long iPathDJ Livestock ETN in fund and personal account

Bookkeeping: Weekly Changes to Fund Positions Week 46

Week 46 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: 24.0% (vs 15.6% last week)
51 long bias: 54.7% (vs 58.3% last week)
9 short bias: 21.3% (vs 26.1% last week)

60 positions (vs 60 last week)
Additions: Powershares DB Agriculture Double Long ETN (DAG), Ciena (CIEN)
Removals: Powershares DB Agriculture Fund (DBA), Morgan Stanley (MS)

Top 10 positions = 28.3% of fund (vs 30.9% last week)
38 of the 60 positions are at least 1% of the fund's overall holdings (63%)

Major changes and weekly thoughts
It has been a rough few weeks for the markets - the S&P 500 is now down over 8% from its interim peak reached about a month ago, and 6% in the past three weeks. I have misspoke on some earlier entries when I wrote we have broken the March "Bear Stearns" bottom; in fact we are just at the April lows in the 1320s on the S&P. Aside from 1 day of panic selloff (Bear Stearns Monday) the market has bottomed out at mid 1270s both in January and March 2008. So if we continue downward this is the technical level everyone will be looking at. I would expect the market (if it gets there) to make a stand there as "those in the know" realize this level must be held or all the hedge fund computers and technicians will be throwing in the towel (read: selling) if this threshold is broken. That said, markets that sell off this harshly typically have some vicious bounces in the opposite direction (up) which tend to punish those who are pressing the short side, so I can assume it will be a tricky market for bears and bull alike. When we do have rallies, shorts can lose a lot of money in a very short amount of time, even if the interim trend is down.



As for this week, looking at the calender Wednesday will dominate the news as the Federal Reserve meeting takes place and everyone will be pinning their hopes for some magical elixir from our favorite sugar daddy, Uncle Ben. The Federal Reserve continues to be in a box - can't cut rates because they've already stoked structural inflation, and can't raise rates because no one has been that courageous since the Volcker era (raise rates into a slowing economy) This is a much more political "independent" body, than in days past. If I were Ben, I'd actually raise rates by 25 basis points and then at least signal to the world I had an ounce of credibility on inflation - that 25 basis points would mean nothing in the big picture but at least would be a decorative move to show inflation is now a concern. Instead, I assume we will get "strong language" in the statement. Big deal.

Further on Wednesday we have a slew of earnings reports from some of the best companies out there so we could have a good psychological day. Monsanto (MON) on the agriculture side, Nike (NKE) on the global brand side, Oracle (ORCL) on the big cap tech side, and Research in Motion (RIMM) on the must have gadget side. So it is quite easy to get overly negative here, but nothing in a straight line (even if you are a full blown bear) - we should expect head fakes along the way, causing pain to whatever side of the tape you are. I personally would like to see capitulation type (what I call "waterfall" selloffs) where almost every well know stock drops 8-12%, and the stocks that have held up the best finally are trashed. This would jack up the fear factor and from these events come at least intermediate bottoms. Most of my favorite names both in the portfolio and names on my "to do" list in terms of what I want to add to the portfolio have still stubbornly held up, so I am still awaiting price targets to add to these positions, or introduce new names to the fund. As always, we won't catch the bottom - and some of our buys (if we do indeed get some waterfall selloffs) will immediately go underwater but without a crystal ball one just must scale in, into the painful selloffs - and look 3-6 months out and realize the best names will recover. This strategy has generally served us well. Most of the fund trades of late have been with asset allocation (moving cash/short/long exposure around as the market ebbs and flows). I do expect, if we do get a more serious sell off in the week(s) ahead to have a lot more transactions into the teeth of the selling. This was a relative quiet week.

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin of the blog under archives.

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

1. Monday, we took some solar exposure off the table as both Trina Solar (TSL) and Yingli Green Energy (YGE) made what I considered to be dead cat bounces. I'd like to increase solar exposure at lower prices, and broaden out the exposure to new names - unfortunately the ones I was interested in, made some huge gains early this week so we missed them this time around. This is a volatile group and if we do get waterfall selloffs, these names can drop like a rock.
2. Similarly on Tuesday, we cut some ICICI Bank (IBN) on an identical technical bounce to the solar names, stocks below key moving averages that bounced too (and subsequently failed to move through) resistance. Right now touching anything Indian is toxic as the country grapples with inflation.
3. After mulling over the fact we called this move in corn almost perfectly but did not have a pure play available to us to take advantage of the 40%+ move, I switched our agriculture commodity exposure - not by much, we simply entered a vehicle that has 2x the movement of the old vehicle we once owned. This allows us to control the same "movement" with (in theory) half the exposure. If the greater market sells off, I'll be interested to see how these commodities react - will they move down in tune? Or move in the opposite direction. Either way I believe food is going to replace oil as the inflation of back half 2008 that is most talked about.
4. Wednesday, after a review of Morgan Stanley's (MS) results, and just how poor they were in relation to Goldman Sachs' (GS) I closed out the position and put some of that cash into Goldman Sachs. While I believe the companies hit the worst will rebound the most once the tide turns in financials and hedge funds start buying this sector (and don't forget how quickly short covering can move the worst stocks up), I am willing to give up some of that in return for the "relative" safety of the best of breed. So we are changing from a "mini basket" of 2 investment banks, to just one - the one.
5. I don't normally highlight individual Ultrashort transactions because I move the position sizes often but since this was a relatively large change in direction and counter intuitive to market strength, I mentioned the increase in both Ultrashort Basic Materials (SMN) and Ultrashort Oil & Gas (DUG). I'd rather short some individual names as hedges, but since we cannot short, we have to use this method which is a very blunt object instead of a fine instrument.
6. Friday, I began increasing my financial exposure (again counter intuitive) with one of our other long held names, asset manager Blackrock (BLK).
7. I went through a list of about 25 tech names, to pick one to add exposure to this sector as a "non commodity" idea that could be in favor as hot money might try to escape commodities sometime in the next few weeks - I went back to a beaten down former fund holding Ciena (CIEN) - mostly because unlike analysts I liked their earnings report, and the stock just reported earnings so we do not have earnings risk for another 2.5 months unlike most of its brethren. In other words, hopefully much of the carnage is already in its past... the stock did behave very well Friday but in waterfall selling nothing will be safe - its all "relative". I am not sure how long I will hold this position - for now it is more of a trade. Truth be told, I'd rather buy more of our current tech holdings, but wish for lower prices to do so.

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.

Americans Running Out of Places to Hide Debt - Now Credit Cards Go

We've been on this beat a long - since the fund was born, we've been saying this is the first consumer led recession we've had since the early 80s and many (most?) market participants who have entered post 1983 are not prepared for it. They are going by the wrong playbook - the "corporate led" recession. Remember back then (almost a year ago) we had just began our first credit dislocations, interest rates were over 5%, and everyone was telling us not to worry! After all stocks always go up over time - just be patient. How patient - is a decade enough? They lied [Mar 26: Stocks Tarnished by Lost Decade] Houses have never gone down nationwide - don't listen to the hecklers! They lied [Jan 24: They Said it Could Never Happen. Ever.] Need I go on? I won't - you get the picture.

Back to our friend the consumer... he is in big trouble. We are financially illiterate (if we were not, we would never allow our government to do the things it does - we'd be storming D.C. in outrage) On top of financially illiterate we are massively overextended.... as I wrote then, when everyone was focused on the narrow niche that was subprime loans - that's just the tip of the iceberg. The easy to see spot. We have a whole nation built on consuming. A nation whose wages have not kept up with (relatively low) inflation eras, not to mention what we've had the past half decade. So they turned to their homes - and withdrew from that ATM. Over. And over. And over. Once home prices began to fall, that spigot turned off because frankly, many in the 2005 and later era got a house for little to no down... so without home appreciation there is no "bank" to draw upon. ATM is off. But no, pundits told us - we will be fine - just a little problem this summer and we'll be fine by fall... after all the Federal Reserve (starting in mid August) is on our side. And the market took off like a scorched monkey - racing to new highs in September and October 2007. On Kool Aid dreams.

Meanwhile I was typing to a much smaller audience: this is lunacy. The consumer is going to keep looking for spigots - personal loans, home equity loans, 8 year car loans, drain 401ks, and finally credit cards. Well that happened, the great "juggling act" of 2006-2007. And the bill is now coming due - the banks are beginning to turn off this spigot as well per the NYTimes. As I've been writing this will lead to bankruptcies - just a trickle for now. But we should see the tidal wave begin in 2009. I'm early. Just be patient. You see, when you run out of places to hide your debt, and your creditors come knocking and you're out of house equity to hide, you're out of 401k to hide, you're out of car loan to hide, you're out of credit card to hide - well you're doomed. And that's for those who remain employed. Sounds unreasonable right? Just as unreasonable as "stocks always go up over extended periods of time" and "housing will never fall nationwide".

We don't talk about this one much since it's a long term issue but we have whole series of posts so we have it on paper when it does start playing out (series from Aug 07 to Jan 08 here) and from there... (note you won't find this stuff in government reports)

[Apr 8: Late Payments on Consumer Loans at 16 Year Highs]
[Apr 10: WSJ - Borrowers Keep Piling on Debt] (we never learn)
[Apr 30: MSNBC - Americans Tapping Attic for Spare Cash]
[Jun 3: WSJ - Pinched Consumers Scramble for Cash]
[Jun 3: Credit Card Usage is Surging, Risking Another Debt Crisis]

So let's overlay that last headline, with the news from this NYTimes article - people turning to cards.... while credit card companies turn off the spigot... and the conclusion from this in an economy that is 70% consumer spending? Aha - 2nd half recovery. Again we can ignore reality and listen to government reports of joy, and CNBC pundits of happiness - or go walk to a neighborhood full of people who earn the median US wage of $38K and ask them how life is going in this low inflation, low unemployment environment. Trust me, even the "well off" are turning to credit cards to pay that $75-$85 gas fill up... how's it working for those in lower income strata? Juggling... it's going to be coming to an ending within 12 months. Then comes the real pain. So about this time next year after the debt for the 'housing bailouts' are working through, the debt from the 2nd 'stimulus' check is worked through (trust me, it's coming), then should come the debt hit from the 'credit card bailouts'... and our grandchildren must be built like Atlas to try to hold up all this debt we are going to be piling on them due to our current era of lack of self control and financial education. Strong dollar anyone?

• The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.
• After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.
• Banks... are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.
• The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.
• Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.
• Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries. While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.
• Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried to buy about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she insists she had rarely missed a payment and had just made one for $1,000.
• After inadvertently hitting her credit limit a few months ago and then falling behind on a mortgage payment, Ms. Pfitzer said her limit was lowered by American Express to $900 from $2,300. (oops)
• Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.
• “In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.”
• Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action. (Credit card companies also happen to be major contributors to political campaigns - the world is their oyster)
• Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.
• Among those four lenders, that amounts to a reduction of about $15 billion in three months.
• Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter. (what? 2nd half recovery won't allow that to happen)
• Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust. (I predict higher than that)
• Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.
• Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.” (same undisciplined behavior, different vehicle)
• Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida, where home prices have declined sharply.
• “It has definitely made me spend less,” she said. But Ms. Sherman said that it had been a blow to her ego, too. “It made me feel like I wasn’t responsible,” she said.
• Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expected the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers.

Think about that last statement above, and even if its 50% correct, stare at the all and think about the implications. Overlay that with 70% of our economy is consumer spending in our "new era, service economy" and get back to CNBC with your thoughts about the impending boom/recovery/blah blah blah.

The United States of Subprime is in deep do-do. Both the government and the people - but the government can just run printing presses. The people? Not so much. Their printing press is found at the local lawyers office when they file personal bankruptcy.

And to think, we have not even started a recession....