Tuesday, August 5, 2008

Bookkeeping: "We're Getting Destroyed" Buys

First time I've been able to look at the market today - it is quite a sad state of affairs for us. Enough is enough - I'm going to finally apply cash to the positions that have been busting us the past 48 hours and in fact 6 weeks.

Fundamentals mean nothing. The charts have broken down across the board, including many that Monday morning we outlined as over the 20 and 50 day moving averages - the "best of the best".

Now these stocks need to be treated like financials - you buy them when they are puked up, and then you have to sell them as they approach resistance. It is sad to see stocks with the better situation treated like this but this is whole sale destruction that makes little sense EVEN IF the world goes into a recession. Trust me, US retailers, airlines, financials et al won't be thriving in a global recession either - this is just an excuse to pummel stocks. But now all the sectors are identical to me - if financials get puked up, you buy and sell at resistance, if global growth story gets puked up, you buy and sell at resistance. They are all the same stock to this market as fundamentals are for old foggies over the age of 45. This is the Nintendo generation and charts are all that matters. Every stock we own is being treated the same - beat estimates and raise guidance? Sell off by 30% within a week. Miss estimates? Sell off by 30% within a week. So what's the difference. I am suspending all fundamental talk from blog until we return to an era where it matters. All that matters is chart and sentiment. ISM shows a HUGE improvement - woo hoo , the economy is contracting less than last month - that's GREAT! Even though 97,000 other measures show the economy degrading or flat at best. But that does not matter - there are banks and retailers we need to buy as the US consumer salivates for new shoes and checking accounts as they can now afford to actually get to the mall (nevermind those credit card bills or heating bills this winter or heck that grocery bill - America is flush with cash again!)

I am making the following purchases - I'll update detail later
  1. Potash (POT)
  2. CF Industries (CF)
  3. Mosaic (MOS)
  4. A-Power Generation Systems (APWR)
  5. Foster Wheeler (FWLT) <--- earnings after the bell
  6. Jacobs Engineering (JEC)
  7. Fluor (FLR)
  8. Flowserve (FLS)
  9. Alpha Natural Resources (ANR)
  10. Massey Energy (MEE)
  11. Walter Industries (WLT)

Again these are now broken charts in most cases - some are holding at or around the 200 day moving average. If/when they bounce they'll be sold as they approach the 50 day moving average. That might be wrong or correct to do. But we have to assume after an oversold bounce they will fail as the hedge funds have abandonded them. And their buying power is all that matters in this new and improved era of markets.

Whatever the "flavor of the day" reason is irrelevent - these stocks are being puked out and they will make up any number of reasons to explain it, most of which are just paper tigers. I can at least understand the commodity stocks but to destroy the global infrastructure plays because oil drops to $120 or is dropping to $100-$110 is plain ridiculous. If we have another day like this tomorrow I'll be buying another batch of them all. Valuation did not just drop 30-40% across the board in a week or less, just supercomputers algorithims.

We're either going to enjoy a bounce soon or be down 10% for the week. I guess even when the global recession hits and these stocks earnings fall by 10-15% from current targets (oh wait, Flowserve just increased their EPS by $1.25 - doesn't fit my hedge fund computer model - does not compute Will Robinson - does not compute) -- as I was saying even as these stocks earnings fall by 10-15% from current targets some will now trade at single digit forward PE ratios for 30,40,50,60,70,80%+ growth. But nevermind that - $3.25 gas is going to bring back the US consumer, while the Chinese economy goes down into flames. We have the perfect econony - stable housing, a strong consumer, a thriving trade surplus, and consumerism - which is 70% of the economy - is booming. So better to buy American than all those silly areas with funny names. Thanks Will Robinson. Over and out.

Yours in Rambling.

Long all names mentioned in fund; long Mosaic, A-Power Generation Systems in personal account

WSJ: Don't Give up on that Fund - Not Yet

This story in today's Wall Street Journal dovetails nicely with the previous blog entry. I always say you are buying the fund manager, not the fund; the fund is simply the wrapper (although in certain fund families there is a deep research team of analysts which can help to some degree). While past performance is "no guarantee of future results", obviously it makes more sense to stick with someone who has demonstrated past success than failure.
  • In a market where the mighty have fallen, it is hard for investors to separate the strong from the meek. As a result, they are ready to bail on any mutual-fund manager whose performance has faltered. While it certainly makes sense to abandon a fund that has fallen and can't get up, it is tough to tell just how much strength and vigor an issue has while the entire market is hurting. New research shows that there is a distinct benefit to sticking with a high-performing manager through a rough patch.
  • That survey is good news for buy-and-hold investors who picked a management star and need a reason to hang around hoping for a comeback, but it doesn't make it any easier to decide whether a fund's performance problems are temporary or permanent.
  • The study, conducted by Baird Advisory Services Research, looked at more than 1,300 funds, defining "high performers" as those that topped their benchmark by one percentage point annually over the 10 years ended in 2007. About 505 funds qualified.
  • The key finding was that many of these top funds went through periods where they got killed by the market or their peer group. More than three-quarters of these high achievers had at least one three-year stretch where the fund lagged behind its benchmark by one percentage point or more. More than half of the funds experienced benchmark underperformance of three percentage points or more, and nearly one-third of them lagged behind by five percentage points or more in a three-year period.
  • Despite those bouts of underperformance, the funds were able to be superior achievers over the full 10-year window.
  • Tim Byrne, director of Baird's Private Wealth Management Research, Products and Services, said the moral of the study is that even the best money managers have periods where they don't look so good, but the longer an investor sticks with them the better the chances for success, for high performance over time.
  • "The problem is that people buy a fund after the manager has proven that they are a high performer, but they sell the first time there's a problem," Mr. Byrne said. "They wind up chasing performance -- buying high and selling low -- instead of sticking with a manager who has proven that they can deliver if you give them enough time."
  • The trick is in deciding which managers deserve a long leash. (bingo) Mr. Byrne said he looks to see if a manager has "proven that they can dig out of a hole, because you have to believe they can create return fast enough to help you catch up from any down period."

The question is - how much near term failure can one allow for? (1 year? 2 years? 3???) All interesting questions and it also highlights the difference between the hedge fund world and mutual fund world. Many managers have provided meager gains for years on end in mutual fund world and keep acquiring assets. In the hedge fund world, those who do not consistently perform are "weeded" out in relatively short order.

Speaking of fund managers milking the system for years, here is a "star" of the late 90s that I ran across in the WSJ this weekend. It's taken a full decade of literally the WORST performance for him to "leave" the portfolio management.

  • Van Wagoner Emerging Growth has consistently disappointed investors, giving it a dubious distinction as the worst-performing U.S. actively managed stock fund over the past 10 years.
  • But at least one thing is changing at the woebegone fund: Longtime manager Garrett Van Wagoner is planning to step down, even though Mr. Van Wagoner, 52 years old, controls the company that sponsors the fund, Van Wagoner Capital Management.
  • When asked about his best stock pick of the past year, he says, "I don't know if I have any best picks." (hah)
  • Specializing in the volatile world of small-growth stocks, many of them tech firms, Van Wagoner Emerging Growth has clocked an annualized 10.2% loss for the past 10 years. During that time, actively managed domestic stock funds were up an average 5.6%, according to fund tracker Morningstar Inc.
  • For 2008, the Van Wagoner fund is down 28%, about twice as bad as the broad market's fall.
  • In fact, about 95 stock funds have delivered negative annualized returns in the past 10 years. Around two-thirds are growth offerings haunted by bear-market declines earlier in the decade, such as the $4.8 billion Vanguard U.S. Growth, the biggest, down 3% over the past 10 years.
  • Mr. Van Wagoner is a vociferous fellow who started Van Wagoner Capital Management in 1995 and regularly appeared on CNBC during the technology-stock bubble. He makes himself available to investors by posting his email address on his Web site.
  • Mr. Van Wagoner has posted negative annual returns for seven of the past nine years. For the privilege, it charges investors about 5% of assets in yearly expenses, more than three times the level of the typical stock fund. Mr. Van Wagoner says fees are so high despite efforts to reduce it because it is spread among a declining asset base.
  • Mr. Van Wagoner thinks his approach of reviewing company fundamentals has gone "the way of the dinosaur." He believes the market has shifted to trading with a herd mentality that doesn't reward the small, risky technology companies he focuses on. (on this point I do have to agree - its a new era led by hedge funds who pile in and out of similar positions causing major dislocations in price, many times without regard to fundamentals - they are paid on 90 day holding periods. "Have to make the quarter" - "Have to make the quarter" - "Have to make the quarter" - it is all about quarterly fees and I think it has truly changed the market dynamic - especially in volatile times)
  • The firm's funds are down to less than $50 million in assets from $3 billion in 2000. (staggering but that is what a 300%+ year in 1999 will do for you)

Bill Miller: "Toughest Market I've Seen"

I've written about Bill Miller in the past [Apr 9: Bill Miller is #596! Ouch] not to criticize but to show just how hard it is to stay on top...

How far the mighty have fallen ... Bill Miller is a mutual fund manager who had an incredible streak of 15 years in a row of beating the S&P 500 (this ended in 2006). He took large contrarian bets in concentrated fashion so hence why I have followed him with interest. I saw an article a few months ago about how he was buying financials, homebuilders, and the like and I just felt bad. Maybe over a 4-6 year time frame, but for the short term.... not so much (although I can at least understand the homebuilders because about 2 months ago they stopped going down no matter how bad the news was - but he was buying 2 years ago, not 2 months ago).

That said, I am not posting this to criticize him; I can only hope one day to have a mutual fund (hint hint) that other people can criticize me for my strange ideas.... but it has been a mighty fall, he only beat 4 of his 600 peers this last quarter in his mutual fund category. It just shows why it is not worth it to bottom fish too early in my book; when stocks do turn up from a very beaten down sector, if you miss the first 20-30% move, no big deal - if it's truly a new bull market there should be years of gains ahead...

Just like Ken Heebner is celebrated today, so was Bill Miller about 5 years ago. How quickly things can change. I disagreed (and continue to) with his insistence on sticking with the homebuilders, financials (obviously) but I still respect anyone who chooses to play against the typical mutual fund grain of buying 100s of stocks, which effectively makes you into an index destined to perform in a mediocre fashion. Running a concentrated portfolio means you will have a much better chance of shining through... or under performing. Fortune has a blurb on Miller this week...
  • Shareholders of the battered Legg Mason Value Trust mutual fund won't find many answers in manager Bill Miller's second-quarter letter to investors.
  • In his note this week, Miller, who famously beat the S&P 500 for 15 consecutive years until stumbling in 2006, deplores market conditions that continue to punish value investors, but doesn't discuss his strategy. His $9.7 billion LMVTX (LMVTX) fund has dropped 34% since last July, while the S&P 500 fell 12%, and suffered outsized losses as financial stocks plummeted.
  • Investors have responded by pulling out $2.4 billion from the fund in the first six months of the year, according to Financial Research Corp. The impact has been felt throughout Legg Mason (LM), which announced its second straight quarterly loss last week. Miller is not only the firm's star manager, but also chairman and chief investment officer of its stock investing arm, Legg Mason Capital Management.
  • Unlike his missive after the first quarter, in which he suggested the worst was over after the collapse of Bear Stearns, he also offers no timelines. (another in the "the worst is over" camp - unlike the pundits who scream it daily on TV for months on end, those who actually manage money have to put money where their mouth is, and you can see from his fund the results - it very easy to "say" it on TV or in the print media like many love to do)
  • Instead he writes that the crisis around Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which have dropped over 65% this year, has convinced him that this market is the most difficult he's faced.
  • Still, he seems to dismiss critics who suggest that his bad bets on housing and banking stocks were foreseeable, or that he should have anticipated the commodities boom driven by growth in China and India.
  • While it's true that value investors - who look for beaten down stocks that they think the market has misjudged - have suffered this year, Miller has been hurt more than most. Large value funds have fallen an average of 16% since last July, according to Morningstar. The research firm lists LMVTX as a large blend fund, but Miller trails his peers there too: on average, those funds have dropped 11%.
  • LMVTX has been so hard hit partly because the fund is highly concentrated, with only 35 stocks at present. When bets sour, as they did with Miller's large crop of financials, including Citigroup (C, Fortune 500) (down 33% for the year), the whole portfolio reels. Two of Miller's other top ten holdings, Unitedhealth Group (UNH, Fortune 500) and Aetna have also been pummeled this year, down 51% and 29%, respectively. (healthcare - get some, it's a "safe" place to hide)
  • But there's another reason why Miller's losses have outpaced other value managers. He's never toed the traditional value line and is famous for scooping up high-multiple stocks like Ebay and Google, now two of his top 10 holdings. Both have fallen this year, with Ebay down 18% and Google off 26% (technology - get some, it's a "safe" place to hide)
I think a lot of people have very short memories - it was less than 8 years ago that we learned there truly is no "safe place to hide" in a bear market. It's just a matter of relative losses - where do you lose less. After my own scathing at the time, I remember vividly :) At least in this era those in IRAs and even regular accounts have very easy instruments to partially offset their long positions on the short side (short ETFs) so there is always some silver lining.

For those interested, the full letter is here.

Bookkeeping: Adding Back Fuel Systems Solutions (FSYS) Sold Yesterday

This is quite a sad market. Friday we sold Massey Energy (MEE) post earnings pop in the $81s saying it would probably give up all it's gains. Within 2 sessions it fell to mid $60s. Yesterday morning I sold down a position in Fuel Systems Solutions (FSYS) in the lower to mid $39s on the "Cramer followers" pop.... by the end of the day it was down in the $36 and gave back almost the entire 10% gain. This has simply been the pattern - gains are not sustained. We can't do this over and over over 55 long positions in a mutual fund environment, but we are doing it here and there selectively.

I am out of pocket most of the day today so I am simply going to place a market order to get back the Fuel Systems Solutions position I sold yesterday at whatever the opening price is today. There is a press release out saying earnings will be out this Thursday after the market close. I do expect good things, and normally do not increase positions ahead of earnings, but will do so in selected cases (i.e. we did it in Massey Energy for a quick gain). And if it pops? Well, you see what this market does to stocks that pop that are not in healthcare. You have to sell the pop knowing there is a great probability your gain will be stolen from you in short order. It is quite sad what this market has become - it's quite broken.

On a larger theme, the S&P 500 continues to break down slowly - we have the sell offs and then a rebound, selloffs and then a rebound, but its stair stepping downward. I do like some of the pricing now in fertilizer and coal and if I check in later today and see prices down in similar fashion to yesterday we'll begin adding. The fundamentals remain solid but fundamentals mean nothing as hedge funds are the marginal customer and when they want out of the sector, in their locust behavior, we will be smashed trying to stand in their way. So we'll make some buys, knowing we won't catch the bottom. Still looking for crude $110 which is a 50% retracement of the August 07 to July 08 run.

I'll edit this post with the price I end up paying for the new stock the next time I check in - we will have a greater than 3% stake post purchase.

Long Massey Energy, Fuel Systems Solutions in fund; long Fuel Systems Solutions in personal account

China Medical (CMED) - Back on Track; Valuation Should be Higher

After some perceived hiccups the last 2 quarters, which in retrospect proved to be a great buying opportunity as the market overreacted to a 90 day (quarterly) period of time, China Medical (CMED) appears to be back on track judging from yesterday's earnings. The stock has taken some lumps earlier this year, and the last time around a lower gross margin rate and higher tax rates raised some concerns. Some of those concerns seem to have been alleviated with yesterday's numbers. Even more interesting to me, is the subtle shift in revenue stream to diagnostic reagents versus medical equipment - we like to see this is any of our medical equipment stocks since "consumables" are reoccuring revenue (thinks razor blade versus razor).
  • "We are pleased with the change in the Company's major source of revenues from selling medical equipment to selling diagnostic reagents which was achieved by the strong growth of our diagnostic reagent businesses," commented Mr. Xiaodong Wu, Chairman and CEO of the Company. "More than 95% of our revenues from ECLIA and FISH operations this quarter came from sales of ECLIA and FISH reagents which generated higher gross margin and were recurring in nature. We expect our diagnostic reagent businesses to continue their growth momentum in upcoming quarters."

On to the financial data - revenue data by 3 product lines

  • The Company reported revenues of RMB226.8 million (US$33.1 million) for 1Q FY2008, representing a 49.7% increase from the corresponding period of FY2007. The Company's revenues are currently generated from three product lines, ECLIA diagnostic systems, FISH diagnostic systems and HIFU tumor therapy systems. ECLIA and FISH system sales include the sales of equipment and reagent kits.
  • ECLIA system sales for 1Q FY2008 were RMB111.7 million (US$16.3 million), representing a 41.3% increase from the corresponding period of FY2007. The strong year-over-year growth in the ECLIA system sales was primarily due to the increasing utilization of the Company's ECLIA analyzers by hospitals as well as the expanded installed base of the analyzers which resulted in increased sales of ECLIA reagents.
  • FISH system sales for 1Q FY2008 were RMB50.3 million (US$7.3 million), representing a significant increase from the corresponding period of FY2007. The strong year-over year growth in the FISH system sales especially sales of FISH reagents was primarily due to a significant increase in FISH users. The Company commenced sales of the FISH systems in June 2007 and as of June 30, 2008, over 200 large hospitals in China were using the Company's FISH reagents. (newer product line)
  • HIFU tumor therapy system sales for 1Q FY2008 were RMB64.7 million (US$9.4 million), representing an 11.6% increase from the corresponding period of FY2007. The year-over-year growth was driven primarily by increases in unit sales.

Due to this change to focus on consumables the gross margins expanded significantly

  • Gross margin increased to 69.1% for 1Q FY2008 as compared to 57.5% for the corresponding period of FY2007. The increase in gross margin was primarily due to the change in revenue mix where a higher portion of revenues was generated from recurring sales of higher margin ECLIA reagents and FISH reagents.


  • Non-GAAP income increased 61.2% to RMB110.7 million (US $16.1M)
  • Diluted Earnings per ADS increased 49.0% to RMB3.89M (US $0.57) [Haven't had time to confirm it but first glance it appears analysts @ $.43]


  • As the June quarter is the first quarter of FY2008, the Company maintains the current annual targets for FY2008. The current targeted net revenues for FY2008 range from RMB1,190 million (US$173.5 million) to RMB1,230 million (US$179.3 million). The current targeted adjusted net income excluding stock compensation expense and amortization of acquired intangible assets (non-GAAP) for FY2008 ranges from RMB585 million (US$85.3 million) to RMB605 million (US$88.2 million). The current targeted adjusted diluted earnings per share excluding stock compensation expense and amortization of acquired intangible assets (non-GAAP) for FY2008 ranges from RMB20.10 (US$2.93) to RMB20.73 (US$3.02) assuming a diluted number of ADS of about 31.5 million and excluding interest for convertible notes and amortization of convertible notes issuance cost.
Frankly this stock is dirt cheap compared to U.S. peer group - 70% gross margins, growing 50% in the US health care equipment stocks is in some cases generating forward P/E ratios of 40-70 as people "flee" to safety. Ironically, despite a huge market opportunity many Chinese stocks trade at a huge discount (this is the opposite of the situation last fall when China was the flavor of the day in US markets). At $45 China Medical (CMED) trades at a forward P/E of 15. And this folks is why the stock market can drive you batty.

After peaking in the $57 range earlier this year, the stock crumbled in early March (within days) to $36. After a brief bounce to the mid $40s it spent the next 2 months punishing shareholders, finally bottoming out near $33 around the last earnings report. Have I mentioned for the 1000th time this is not a buy and hold market? Technically, the stock is showing some nice relative strength because, after all, it's in the hottest sector of the stock market - health care. Even more impressive, it is holding up as most Chinese stocks have taken a major beating as investors move away from perceived risky assets. The stock was "rewarded" for its performance by "only" falling 4% post earnings.... which in this market is considered a victory ;)

The stock has fallen back to the 20 day moving average near $45 - if this stock was trading in a vacuum I'd be gobbling up shares hand over fist as we have a compelling story not reliant on banking or oil. However we don't exist in a vacuum and this very troubled market is stealing away capital like a thief in the night. At this point I'd like to buy the stock at either a pullback to its 50 day moving avergae (near $43) or on a newer high past its recent peak of $50 signaling institutional money is pushing in. That said, this move to consumables has really changed my perception (been following this stock for a few years) and I might begin a starter position later today simply to put a stake in the ground.

[Feb 25: China Medical - What Stock Market Correction?]

No position but will be starting one shortly

Monday, August 4, 2008

Larry Lindsey: Uninsured Depositers May be "Iceburg" for US Economy

Larry Lindsey, despite being associated with the early years of this White House, is someone I enjoy listening to, since each episode I've read or listened to his commentary it's made pragmatic sense. No wonder he left the administration in 2002 ;) In fact his Wikipedia entry makes a funny comment when you think about the way it is worded...

He left the White House in December 2002 and was replaced by Stephen Friedman after he estimated the cost of the Iraq war could reach $200 billion.

How dare he put a high number on the war! It's off balance sheet anyhow so it doesn't matter.

I digress. He has an excellent interview (again) on CNBC which agree with much of what I think. Our leadership continues to fail us.... but are we every surprised with Fannie and Freddie being 2 of the top political donors? Nah.
  • Uninsured depositors, including company payrolls, are the next "potential iceberg" for the U.S. economy, said Larry Lindsey, CEO and president of The Lindsey Group economic advisory firm. "All you need is one case where the uninusured depositors, the big deposits, don't get covered, and you have the potential that they start to run," he said

  • "To run an economy, to have a function that works, you've got to have a place where people can keep their money safely ... Unfortunately, the way the Congress has structured it now, that's not the case."

  • The futility of Congress' bailout bill for mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) which includes no reforms to put limits on the companies and prohibits risk-based pricing, also a presents problem for the economy, Lindsey said. It does nothing to protect Fannie and Freddie's securitization function, a "vital" part of the economy. It does, however, continue their role as hedge funds, a benefit only to shareholders, Lindsey said.

  • "You'll notice that since the plan passed, mortgage rates have actually risen in the country," he said. "That's because we have a less competitive market."

WSJ: After the Bubble, Ghost Towns Across America

Our continuing saga, courtesy of the Wall Street Journal
  • Dennis Pflueger and his wife won a rent-free year in a nice new house in an expensive subdivision not far from the headquarters of Wal-Mart Stores Inc. As part of the prize, they then have the option to buy the four-bedroom home for $452,000.
  • Mr. Pflueger, a telephone-cable installer who describes himself as an "old redneck," is in the middle of his free year. But the Pfluegers are a bit lonely. Just one other family lives in any of the 28 new or unfinished houses on Foxboro Court. Up the street, a sign announcing "Elegant Homes" sits on a lot choked with weeds. The block is as quiet as an old ghost town.
  • When their 12 months end, the Pfluegers will move on too -- perhaps to that trailer on their daughter's property. Mr. Pflueger recently found a job but still can't afford to buy the house. "That's way out of my league," Mr. Pflueger says.
  • Since real-estate tanked, many new planned communities across the country are half-empty, with for-sale signs outnumbering residents by a large margin.
  • Some of the projects abandoned by bankrupt developers are in places that were hotbeds of new housing construction: Southern California, Atlanta, Las Vegas, Phoenix. As of July, the percentage of vacant housing stock available for sale or rent stood at 4.8% nationally, the highest figure in at least 33 years, according to Zelman & Associates, a real-estate research firm.
  • Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon.
  • In the past year, roughly 15% to 20% of residential developers have gone out of business, suspended operations or changed their line of work, according to an estimate by the National Association of Home Builders.
  • The people who bought into these subdivisions encounter all sorts of other unexpected problems, including burglars looking to steal toilets, appliances and copper wiring. And blight.
  • Her subdivision, Woodbridge Crossing in Smyrna, 15 miles from downtown Atlanta, was supposed to consist of several hundred garden-style houses. Instead, she lives on a street where most of the roughly 30 units have never been lived in. It's the only inhabited street. Paved roads surround acres of empty lots. At night, she says, Woodbridge Crossing can feel a bit like "a cemetery." One plus: She usually has the community swimming pool to herself. (always a silver lining)
Anti-regulation folks are getting their wish - the free market will truly work in the end. But it simply did not have to be like this with some basic, common sense regulation (the evil "r" word).

On the bright side, home values fell less last month than the month before for 7 of 20 major housing markets so quite clearly (for the 48th time) the housing market is "about to turn" and "this is clearly the bottom". Eventually these squirrels will find their nut. But not until home prices are allowed by the government to fall to a natural state that is in line with median wages. [Dec 6: What Should Median Housing Prices be Today?] The same government that decided the "free market" will self regulate mortgage brokers... and self regulate investment banks... and self regulate commercial banks... and self regulate... well you get the idea. (some of this authority lies in the hands of the Federal Reserve so they are not quite so innocent either - yet now we want to give them much much more power to regulate?) It's funny how on the way up, hands "off" approach is everyone's favorite but on the way down, hands "in" approach is the "best course of action" in our newly socialistic mindset.

Never preventative; always reactive - your leadership.

Meredith Whitney Continues to be Negative on Financials (and Housing)

Meredith Whitney has created a star for herself by going against the pack (along with certain bloggers) and denouncing the "this is the kitchen sink quarter in financials" thinking that pervaded the market last summer and fall. I've remained negative along with her [Mar 26: I'm on Meredith Whitney's Side] although it is a lot easier to be negative as an analysts than a stock picker because we've had these constant oversold bounces in the group which can rip your head off if you overstay your welcome on the short side. But as I repeat constantly, each oversold bounce is still a new shorting opportunity in my book.

She is out in a few media outlets this morning - I cannot embed most video from CNBC but this is a most worthy 6 minute video from this morning in CNBC. I could not agree with her points more - even when the "recovery" happens you will have (in most cases) companies with very impaired situations. Another 8 minute video here discussing her rise to prominence - another worthy video. I urge readers to view both - it is worth your 15 minutes and it combats all the Kool Aid you hear almost daily about how everything is just fine and dandy or will be "soon". [Jul 29: The Bottom is in Financials - Version 23,472] Here are some comments via CNBC website focusing more on home prices, which of course we've been pounding the table with similar comments since last summer.
  • Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.
  • In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market. "There's one obvious area where the bad news isn't all out yet, and that's with home prices ... Home prices are going to fall much more than people expect," she said.
  • "I think it's going to be well worse than 33 percent, and here's why: If you look at the futures market, it's indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you've got to put 20 percent down, and that's a lot of money for people," she continued. "Furthermore, then you've got to find a bank to lend to you, because, Countrywide's not lending to you."
  • While a number of factors have generated the troubles for real estate, the industry is getting no help from banks, who have largely used Federal Reserve liquidity-raising efforts not to lend money but rather to bolster their damaged balance sheets.
  • Whitney said banks originated $900 billion loans last year, but just $100 billion so far in 2008.
  • "No one has capital (and) no one wants to sell when your stock's down 80 percent," she said. But more importantly, everyone's just holding on."
Whitney is also in Fortune - some excerpts
  • The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue. Whitney, who audaciously - and correctly - predicted last October that Citigroup (C, Fortune 500) would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they've reported so far.
  • The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the "incestuous" relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks' ability to recover.
  • For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe. (we discussed this often last winter)
  • With Moody's (MCO) and Standard & Poor's (MHP, Fortune 500) now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening. This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution.
  • In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate. (again it's easier to be an analyst than a stock picker because if you went negative in late 2005 you were a year and a half early and would of suffered serious losses, but let's give her kudos for being early as an analyst which is their supposed job - although many have turned into cheerleaders) :)
  • Whitney's current concern is that banks aren't slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years. (so no recovery in "6 months"? hmmph - what a downer you are Whitney - but don't worry the financials will rally strongly again sometime in the next few months on "hope" that the turnaround is not too far off)
  • Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it.
  • She also argues that banks need to "get real" about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar. (nah, it's a lot better to leak out bad news slowly, quarter after quarter while constantly reassuring investors it's the 7th to 8th inning of the credit crunch - that's how it works!)
  • Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk. (clearly! She got the first part completely correct but she has now lost her touch. Thanks for the input Kool Aid touters - let me listen to you, most of which completely missed the entire first part of the credit implosion while you were trying to sell me Citigroup at $55 or Merrill Lynch near $100)
  • Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.
  • "I do not think we are near the end of write-downs," she tells Fortune, "so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower." (Bingo, but not before ripping off the shorts ahead a few times as the government intervenes to try to prop up a "very sound" system that is in the "8th inning" of the correction)

WSJ: Time to Buy Consumer Discretionary?

The stocks in this sector (consumer discretionary - i.e. things we want but don't need) have bounced after some hectic selling a few times since last summer; just about every time the Kool Aid is swirling at its highest about the "coming rebound". The theory is these stocks will turn up for a sustained period ahead of an economic recovery - i.e. the stocks will foretell the economic rebound. I've announced each time these stocks bounce that they just make for better short positions - so far it's worked like a charm. One day it won't work but hopefully by that point one has banked enough gains over the year(s) betting against these stocks that 1 period of losses will seem like a drop in the bucket.

Ironically unlike the previous 4 corrective cycles (summer 07, November 07, January 08, March 08) there is little post correction bounce this time around - it's been segregated mostly in the financials. Perhaps because whomever bought those last 4 cycles promptly got their head handed to them for drinking red, cherry flavored liquids. I find that interesting. And telling. The Wall Street Journal asks if investors should be interested in these names...
  • Investors trying to position their portfolios for an eventual rebound in the stock market face a difficult task: The stocks that usually lead a recovery -- financials and companies that make or sell goods and services directly to consumers -- are the ones with the riskiest outlook.
  • With many investors believing that banks and brokerage firms are facing an extended period of struggles, a strategy of tilting toward beaten-down consumer-discretionary stocks may seem tempting.
  • And while it may make sense for those with a long-term horizon of a year or two to start nibbling now, they should keep the Alka-Seltzer handy; those stocks could fall further before they begin a recovery.
  • These companies deal in things that people don't necessarily need, and they often are on the pricey side: autos, entertainment and restaurants. (That is distinct from consumer staples, such as food from supermarkets, where stocks are down just 5.6%.)
  • Now, there is a debate about whether it is finally time to move back into companies focused on U.S. consumers in preparation for an economic rebound. On the one hand, most consumer stocks are down sharply in price and are cheap by many measures. Many have trailing price/earnings ratios below that of the S&P 500's 16.7. But consumers could be only in the early stages of a historic pullback in spending, which would mean that the worst news for investors still could be on the way.
  • But Robert Doll, chief investment officer for equities at money manager BlackRock Inc., is skeptical. "The further away from the U.S. consumer and those who lend to the U.S. consumer, the better," he said. (Blackrock has smart people)
  • Brian Rauscher, stock strategist at Brown Brothers Harriman, said that while the valuations on consumer stocks look compelling, there still are many months of bad news ahead. He thinks Wall Street analysts are too optimistic about third-quarter and fourth-quarter earnings. (a view I've repeated countless times for not only this sector but the entire stock market) He notes that early in the year, stock analysts started to ratchet down expectations, only to reverse direction as it became clear that the federal government's fiscal-stimulus plan would support consumer spending. That needs to be reversed as the stimulus fades, he said.
  • He expects consumer stocks to take a beating as it gets closer to the holiday season. "You're going to start hearing people say things like, 'this is the worst Christmas since Jimmy Carter was president,'" he said. (agree - except we should be full bore into the next round of stimulus plans)
  • The wild card, he said, would be a significant drop in oil prices, perhaps down to $80 a barrel. (and food inflation reversing, and home heating this winter not causing a shock, and credit conditions to improve, and home prices to stop falling, and.... well ... it's gonna be a tough Christmas) ;)

Out Fishin'


I'll be out the rest of the day for travel. As you can see the commodities are blowing up and the action is very similar to August 2007 in fact; I remember watching CF Industries (CF) dropping (then rebounding) 15% swings daily but a lot more down than up. It does feel like forced liquidations in the hedge fund world but we're just guessing.

I have a series of posts scheduled for the remainder of the day to keep you satiated but won't have an eye on the market until after close tonight. Maybe it's better that way? ;)

Somehow with 25% cash and 22% short we are down nearly 2% for the day. It's just a tough market. Even pawn shops are being sold off - sheesh.

Fuel Systems Solutions (FSYS) Garnering Attention

Looks like Fuel Systems Solutions (FSYS) is getting some attention from mainstream outlets - Friday it was presented in Investors Business Daily and lo and behold later in the day, Mr. Jim Cramer was touting it on his show. Frankly, I get much unease when Cramer highlights any stock I own, especially of the smaller cap type, because of the type of investors whom he brings (in, out, flip it, rip it, punch it, kick it, pump it, and scream Boo Yah) Most people are happy with the quick bounce his hordes bring, but myself... not so much.

In fact with the market so punishing I am going to use this morning's 9% "Cramer" spike to sell some of our position to the new fans via Cramer and we'll try to buy it back lower later. We'll sell here in the mid $39s and reduce our stake from 2.8% of portfolio to 1.9%.

Investor Business Daily: Maker of Fuel Kits Rides High on Interest in Alternative Fuels
  • In countries where it's fairly easy to fill up with natural gas or propane, many drivers now have cars that rely on parts made by Fuel Systems Solutions. The Santa Ana, Calif.-based company's products include after-market conversion kits that let conventional engines run on those alternative fuels.
  • Analysts estimate the cost of a Fuel Systems (NasdaqGM:FSYS - News) conversion kit can be recouped within six to 18 months. That's because of the lower cost of natural gas and propane compared with gasoline.
  • Incentives provided by governments looking to cut vehicle emissions also are helping to convince drivers to make the switch. For example, analysts say Australia's subsidy for a conversion kit totals about $1,920. Italy offers significant incentives as well.
  • Fuel Systems' profit in this year's first quarter blew past expectations thanks to the increased demand for its transportation unit's products. The company earned 40 cents a share on sales of $94.6 million. Analysts had expected per-share profit of 18 cents on sales of $74.8 million.
  • It wasn't just sales of conversion kits costing from $2,000 to $10,000 to drivers and mechanics that boosted results. Company officials say business from original equipment manufacturers, or OEMs, has started to provide the Italy-based unit, called BRC, with another meaningful revenue stream.
  • BRC provides alternative fuel systems and components to OEMs that the manufacturers install themselves on vehicles. Plus the division has developed what officials call a "delayed OEM model" in which it installs its conversion kits on newly built cars just before they're delivered to dealers.
  • Fuel Systems expects to more than double the delayed OEM segment's output after opening a second facility for that type of work earlier this year in Livorno, Italy. Automakers that have bought into the delayed OEM model include Hyundai, Kia and Subaru.
  • Overall, an estimated 20% of the company's revenue comes from Italy, with 37% from other European nations, 23% from North America and 17% from Asian and Pacific Rim markets. Latin America provides the remaining 3%.
  • That adoption has occurred almost entirely outside of the U.S., but that may start to change, says Robert Brown, an analyst for Craig-Hallum Capital Group. He cites factors such as high gasoline prices in the U.S. and political pressure. Another possible catalyst is a November ballot initiative in California that would create a $2.9 billion fund to provide incentives for alternative fuel vehicles.
  • But Brown acknowledges what some call the chicken and egg problem: No one in the U.S. wants to buy an alternative fuel car before there are places to fill it up. And no one wants to build a new network of filling stations before there are cars that run on that alternative fuel. Meanwhile, Italy already has an estimated 1.2 million vehicles that run on a propane-based fuel and 2,000 filling stations. Australia has an estimated 500,000 such vehicles and 3,200 stations.
  • Trends are more encouraging among trucks and other heavy-duty equipment. Ports in California, for example, are rolling out alternative fuel truck fleets.
  • Wall Street also sees risks or challenges for the company, which is expected to report second-quarter results in early August. These include competition from its main rival, Landi Renzo, a privately held Italian firm.
I'd copy the Cramer comments here, but they are almost verbatim from the IBD article out Friday morning.

[Jul 2: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Long Fuel Systems Solutions in fund and personal account

One for the Radar - Thoratec (THOR)

There were some very interesting smaller cap earnings plays last week as I reviewed some of the largest movers in that space. Don't have time to get to them all via blog, but my watch list has been growing - "unfortunately" most of them had tremendous moves up post earnings so the question one always asks in these instance "to chase or not to the chase?". Indeed, that is the question. One such name is Thoratec (THOR) which is in the newest sexy sector of the market: healthcare. Specifically, it's in one of the few subsectors in healthcare I'll dip my toes in - equipment makers. Company website here.

Brief company description
Thoratec is a world leader in therapies to address advanced stage heart failure. The company's product lines include the Thoratec® VAD and HeartMate LVAS with nearly 12,000 devices implanted in patients suffering from heart failure. Additionally, its International Technidyne Corporation (ITC) Division supplies point-of-care blood testing and skin incision products.

As you can see from the chart below, the company has made quite a (round) trip over the past year
While the chart was perking up over the past 2 weeks, you could say the same for most every healthcare company so there was no indication technically of this sort of explosion as we saw post earnings.

The company was strolling along - ho hum 10% revenue growth two quarters ago, and then 12% revenue growth last quarter... nothing to get excited about. But this quarter? Try 44% on for size. And the star of the show is Heartmate II

The HeartMate II is Thoratec's first-line intermediate-to-chronic left ventricular assist device. Designed to dramatically improve survival and quality of life, the HeartMate II was developed with the goal of providing up to 10 years of circulatory support for a broad range of advanced heart failure patients.

Let's take a closer look at the financial data
  • Thoratec Corporation (Nasdaq: THOR), a world leader in device-based mechanical circulatory support therapies to save, support and restore failing hearts, today said that revenues for the second quarter of 2008 increased 44 percent over revenues in the same period a year ago. Thoratec reported revenues of $82.6 million in the second quarter of 2008 compared with revenues of $57.3 million in the second quarter of 2007. Cardiovascular Division revenues were $57.5 million versus $34.2 million in the same period a year ago. Revenues at ITC were $25.1 million versus $23.1 million a year ago.
  • Net income on a GAAP basis in the second quarter of fiscal 2008 was $8.7 million, or $0.15 per diluted share, compared with net income on a GAAP basis of $1.3 million, or $0.02 per diluted share, in the second quarter of 2007. Non-GAAP net income, which is described later in this press release, was $12.1 million, or $0.20 per diluted share, in the second quarter of 2008, compared with non-GAAP net income of $5.3 million, or $0.09 per diluted share, in the same period a year ago.
  • "We were extremely pleased with our performance for the quarter, which was driven by a 68 percent increase in sales at our Cardiovascular Division year- over-year," said Gary F. Burbach, president and chief executive officer.
  • "The key contributor to this growth was our successful launch of the HeartMate II LVAS (Left Ventricular Assist System) for bridge-to- transplantation (BTT) following its approval by the FDA in April. Our program to bring on new centers is ahead of expectations, as we added 26 during the quarter. We have also seen increased activity at existing centers and benefited from favorable pricing for the HeartMate II. In addition, we are seeing continued strong adoption of the HeartMate II in Europe," he added.
  • GAAP gross margin for the second quarter of 2008 was 61.5 percent versus 58.8 percent a year ago. The improvement in gross margin reflects primarily the increase in average selling prices associated with U.S. commercial approval of the HeartMate II and favorable pump mix at the Cardiovascular Division combined with favorable manufacturing variances. This was offset by lower margins at ITC primarily related to geographic and product mix and competitive pricing pressure in our skin incision business.
  • Revenues are projected to be between $285 million and $295 million. GAAP gross margins are expected to be between 58% and 59%, with non-GAAP gross margins between 59% and 60%. GAAP EPS is expected to be between $0.20 and $0.26, while non-GAAP EPS is expected to be in a range of $0.47 to $0.52.

AP Report on Friday
  • Shares of heart device maker Thoratec Corp. climbed to a two-year high Friday after the company blew past earnings expectations in the second quarter, and raised its 2008 forecasts. In February, the company projected 36 to 40 cents per share, excluding one-time charges, and $255 million to $265 million in revenue. Analysts expected 38 cents per share on $265.1 million in sales.
  • Analysts had lower expectations, forecasting a profit of 9 cents per share on $64.2 million in revenue on average, according to Thomson Financial.
  • The HeartMate II is designed for patients awaiting heart transplants, and is approved only as a temporary treatment. But RBC Capital Markets analyst Ryan Bachman said the larger market for the product is in "destination therapy," or patients with end-stage heart failure who are too ill for a transplant. He said the HeartMate II could be approved as a destination treatment in mid-2010.
This is quite a widely followed stock with 9 analysts covering - and they've quickly moved consensus up from 38 cents to 46 cents (it's a non GAAP world). Even at the high end of guidance of 52 cents Thoratec, post the 22% gain Friday, has become a quite expensive stock at 44x 2008 estimates. But as we know, healthcare is the new fertilizer so there is no price too high to pay for these companies. [Jul 25: NuVasive - At What Price Growth? It Seems "Any" Price] I say that a bit tongue in cheek watching companies we own growing twice as fast as Thoratec trading at 20-35% of the valuation. :)

We'll keep a name like this on the radar - since this new device was FDA approved in April it will be interesting to see how the company does next quarter. Will revenue show similar year over year growth or could they even accelerate (or decelerate for that matter?) The chart now has a big fat "gap" just north of $19 so it might be a candidate to purchase if this "hole" gets filled.

No position

Relative Strength of Portfolio Stocks

It's been a tough road of late - what is interesting in markets such as this especially is to see which stocks are holding up on their charts - major moving averages I like to keep an eye on are 200 day, 50 day, and 20 day moving averages (I use exponential averages, many use simple averages)

A "good" chart would look like this - they are becoming rare things indeed

Another example

So I've divided our portfolio into sections - (a) the names who might have broken down during the worst of the selling but now that we've had a few weeks of "non panic selling" they've rebounded back above the 50 day moving average (b) those that are below their 50 day but still above the 200 day moving average and (c) stocks below both averages - aka broken stocks. We tend to prefer relative strength around here, but most of the stocks doing well of late are of the category (c) type.

The theory with owning a lot of the merchandise in category (a) is if these stocks can hold up in this environment than it is signaling institutional money wants to be in these names and when the tide turns into a more bullish tone these should run. I like the fundamentals in every stock we own but if stocks fall out of this category we have to begin to question what "big money" knows what we do not. Or if there is simply a change in institutional money buying habits - to sit there and try to fight their tidal wave is useless in the short or middle run. Strict "value" investors tend to end up with a lot more merchandise in the (c) category. The danger here is these are "falling knives" in most cases, people buy them - they fall - they buy more - they fall more - etc etc. Yes, eventually they will turn back up, but many times by that point you are just hoping to "break even". However, if you buy these near the very low you can do very well with this category as well. As with all things investing there is no "correct" or "incorrect" methodology - much of it depends on the type of market you are in, and which style of investing is dominating that time frame.

All names listed below are in order of weighting in the fund as of Fridays's close

(A) Holding 50 day moving average (in bold are names holding above even the 20 day moving average signifying a rare level of strength)

APWR, ANR, FSYS, CF, ENER, AMSC, CMI (20 and 50 day are nearly identical), MEE, EZPW, SOHU (20 and 50 day are nearly identical), CLF, WLT, PWRD, BLK, BIDU, ILMN

(B) Broke below 50 day moving average but still holding above 200 day moving average

EXAC, MOS, FLS, IPI (no 200 day moving average yet but slightly below 50 day), MA, POT, CSIQ, GDP, NOV, FLR, JRCC, PDE, GS, RIMM, HOGS,

(C) Broke all key support levels

FWLT, MICC, TSL (Hall of Fame member of this category), KGC, MDR, XTO, PBR, DHI, LEN, LDK, COG, MELI, YGE, ATW, GFA, CTRP, WX (Hall of Fame member), AAPL, JEC

A few notes
  1. I only did this exercise for our stocks, not the ETFs
  2. You'll note I tend to move those names in category (a) to the top of the portfolio as they should have the least headwinds - so they generally get the highest weighting. The main exception to this rule is when there is a huge "gap" in the chart (usually after a great earnings report) in which I get nervous and usually cut back exposure
  3. You'll notice almost every name in category (c) I will cut back (or get out of the stock) as it trails back upward to a resistance level - we've done this for many stocks the past 2 weeks. This means sometimes we are wrong when a stock just blasts right through resistance - no harm, no foul - we'll buy it back. This also means we NEVER catch the bottom - on purpose. We'd rather buy a stock after the trend has changed and it shows strength. Because buying on the way down leads to a lot of "catching knives" and at least in my experience - a lot of lost money. The main exception to this rule is what we did with Millicom International Cellular (MICC) this past week - when a stock looks like it has stabilized after a large fall, it is worth trying a position. XTO Energy (XTO) is another stock with a similar set up. Sometimes you will be wrong and the stock is simply "resting" before another leg downward. (another reason I don't like buying stocks in this category)
  4. Earnings can change the face of a chart in 30 seconds - hence technical analysis many times can be proven completely useless on a "large positive surprise" or "large disappointment" - you will see this play out in the solar stocks in the coming weeks. Many have terrible charts but if they have the "right" type of earnings many have potential to gain 20-30% overnight.
  5. This is my methodology - it is not right, it is not wrong - it is what it is. Nothing works 100% of the time, we are just trying to put the odds in our favor and not take excessive risk.

Sunday, August 3, 2008

Bookkeeping: Weekly Changes to Fund Positions Week 52

Week 52 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: 25.7% (vs 18.9% last week)
53 long bias: 52.8% (vs 52.0% last week)
9 short bias: 21.5% (vs 29.1% last week)

62 positions (vs 59 last week)
Additions: Exactech (EXAC), Flowserve (FLS), Million International Cellular (MICC)
Removals: N/A

Top 10 positions = 29.4% of fund (vs 38.9% last week)
33 of the 62 positions are at least 1% of the fund's overall holdings (52%)

Major changes and weekly thoughts
We continue to be positioned defensively, as the market indexes aren't showing any signs of real turnaround. This doesn't mean we have to go down, but it could just be sideways actions for a bit. As I look at the major index charts I simply see very little to get excited about and until we start to make newer highs or break through old technical resistance on the charts, the only real money to be made is quick darts in and out of positions for hours or at most days - which is not our thing. Each time we get to the point we could be having a real change in character we fail.

In bear markets the most money is made on the "turn", or when a large reversal happens - we saw that a few weeks ago in financials. The problem with this is you need to be "in" those positions within a few days of that turn to catch a good part of the move. The problem with "being in those positions" when the turn happens is you are going to lose money potentially for weeks or months on end (see the 7 weeks previous to the turn in financials) and for many the "turn" only got them back to where they were a month earlier. (i.e. they are making up unrealized losses by trying to time the "turn" too early). So it's a tricky business and not one we will be partaking in. When the "real bottom" does happen we will miss it, plain and simple - since we will be positioned for safety. When the real bottom does happen it will create a lasting rally - we'll try to catch it in inning 3 or 4. Because we'll be doubting it in inning 1 or 2. But by doubting all the bottoms until proven otherwise we'll hopefully preserve our capital to a higher degree than the "serial" bottom callers - many of which have been at it since last summer. So for now you can just call us Rising Boredom Fund until we see occasion to become more bullish. I would like to make some money on the short side in the interim but with weeks such as last week where the action was random and the indexes finished near where they began there are not real great opportunities there, since we cannot short individual names. So we're in a bit of a limbo for now.

While it's been frustrating to watch good stocks sell off during earnings, the positive thing is as stock prices fall (or even hold steady) as earnings increase, our stocks become cheaper and cheaper by the day. Which should lead to a positive outcome later in the year as value is rewarded. But later in the year could mean next week, next month or next quarter. So once again, we're in defensive mode for now although we are making some forays into the stocks with the better charts that are "holding up" all things considered. Our top 10 position weighting is lower than it would be during a more constructive phase and far fewer stocks have >1% weighting in the fund. That is by design - many stocks we like fundamentally have broken down on their charts so I'm not interested in catching them as they fall - we'll let others try that since trying to guess if "this price" is "the bottom price" has ruined many people. We'll look for either a bottoming out process (many days or indeed weeks where the stock stops falling and goes sideways) or catch the stock on the way back up, post initial rebound. This means we pay MORE for the stock, but it is SAFER to buy. This goes counterintuitive to what many who don't use technical analysis believe is the methodology to follow. But there are many ways to skin the cat and I'd rather go the conservative route even if it means leaving some gains on the table.

For the fund I was very happy with all results I saw, which entailed 25% of the portfolio (long positions) last week - even the "disappointing earnings" by Mastercard (MA). This name is quite expensive so it is understandable any threat to its growth rate would be a cause for concern. But everywhere else we saw great earnings reports without many warts at all; but the stocks did not react in kind. Yet another (to me) bearish data point for the near term. When stocks shake off bad news, that's good - when stocks shake off good news, that's not so good. It's as simple as that. I raised cash this week because even some of our short exposure conspired against us - the Ultrashort Russell 2000 (TWM) really rubbed salt in the wound because it has large exposure to smaller banks which have been rallying the past few weeks, so instead of acting as a hedge its been lagging its bigger brother which shorts against the S&P 500. This is the opposite of what had been happening in the fall of 07, winter and spring 08. So we've lowered short exposure for now but at first sign of the market breaking down again we'll move more of this cash to the short side. I've tried to redeploy into some areas that the market does not associate with commodities but the problem is if you are against the global growth story you are left with the domestic growth story - which is not a story I'm buying. So again, you are stuck in limbo.

The larger weekly changes (chronologically) to the fund below:
  1. Monday, we cut back Atwood Oceanics (ATW) sharply after it fell to the low $40s last week but then bounced back to its resistance areas on the chart - it spent the rest of the week butting its head against this resistance. When the "oil trade" comes back in favor I'd expect this to be one of the names to go first, and also we have earnings this week which could be a stimulus. Many, many, many charts look identical to this one; and frankly they are text book shorts (short at resistance with a stop loss order just above resistance in case you are wrong). Since I cannot short, I cut back the position. If we're wrong, we'll buy it back from a stronger chart position.
  2. Tuesday, I sold some Alpha Natural Resources (ANR) in the upper $90s in the post earnings spike but did add some back later in the week a few bucks higher; this name continues to be the center of potential acquisition news and with a new bidder possibly emerging instead of being "dead money" for a while, we might see news in the coming weeks. Tough one to call right now but remains fundamentally among my favorites.
  3. Solar stocks showed some signs of life Tuesday so I lightened up on our "basket". Again these stocks can make you (and have made me) look foolish in a nanosecond, jumping (or falling) 20,25,30%+ overnight. I continue to think the fundamentals are very good but the market seems to disagree with me here, so we'll wait for a more bullish set up in the charts to redeploy money. Or a traumatic selloff.
  4. I cut down what was remaining of Cummins Engine (CMI) in the post earnings afterglow when the stock reached $75. As with just about all our stocks, the market punished the stock within 24 hours and we were able to buy back Thursday in the $68s. In this market, lowering your cost basis is one of the small victories you have to shoot for, since actual appreciation is becoming rare.
  5. Wednesday, I mentioned Exactech (EXAC) as a new idea, of the healthcare variety. It was to report earnings that night so I did not want to purchase pre-earnings although this seems to be the thing many people do nowadays for fun and excitement. Myself, I like to preserve my capital and leave the excitement to Jim Cramer. Despite what I considered to be solid, on track earnings the stock was taken to the woodshed to the tune of 15% down the next morning. I initiated a position there in the $25s - the stock immediately put in a good 10%ish bounce and the only way to make money in this market is to "sell the bounce" but I did not in this case, and the stock gave back almost the entire gain. This is essentially the market we are stuck in right now. For traders only.
  6. Ctrip.com (CTRP) made a nice 9% rise Wednesday - in my "shoot now, ask questions later" I cut back this position severely in a broken chart as I have with many other names the past few weeks. The stock fell back later in the week. As with many names, I'd rather buy at a higher price when the chart is showing signs of strength. Again, until fundamentals are rewarded in this market, I'm simply going to go off charts and assume every spike is a selling opportunity of the stock is trading below key moving averages. This means I will make errors and miss some "true breakouts" - but so far it has preserved capital in many other names.
  7. Along those lines I cut natural gas name Goodrich Petroleum (GDP) in half, which had a similar chart set up as other names we cut this week and last. Pretty simple - broken chart - it bounces to resistance (or near) - I'm cutting. Rinse. Wash. Repeat.
  8. I did add some Energy Conversion Devices (ENER) this week since the non polysilicon based stocks remain the flavor of the Wall Street Day. The chart is actually showing some very nice relative strength. First Solar (FSLR) showed us a very nice earnings report but after the post earnings spike (repeat after me kids) "sold off".
  9. Flowserve (FLS) knocked my socks off with a fantastic earnings report - it spiked after earnings before it (where have I heard this before?) "sold off". I initiated a position Thursday and already added to it on the pullback. Unfortunately, as with many names, the chart could break down quickly so if we start to see that we'll have to cut back even though we just added it. I expected a little better treatment from the market for guiding up $1.25 on full year guidance.
  10. We were looking for a pullback in Mastercard (MA), and got it this week. I added a bit in the $240s and pointed to support at $225 (200 day moving average) which the stock hit Friday. I chose not to add because I could see a prolonged period of weakness in this name from this sort of chart. Just speaking for looking at a lot of charts over the years, and I could certainly be wrong. If this stock breaks below $225 in fact this would be one (believe it or not) to short. If we see that, we'll cut back exposure since this would mean the big money is leaving the name. Then we'll look to add back lower in the future.
  11. We restarted a previously held position in Millicom International Cellular (MICC), in a departure from our normal "chart" that we like to buy. This stock has broken down and potentially could be bouncing off a long held support level. We'll see - unfortunately if the market worsens I doubt the old support level will hold - everything is tenuous in this market - another very cheap stock and while it is overseas it has little to do with "commodities".
  12. We did an atypical move and added to a position going into earnings with coal name Massey Energy (MEE), going from 0.6% exposure to 2.5% with a buy in the $73s. The company reported stellar earnings, made a very large pop in stock price the next morning but by this time I had seen the pattern enough - I let go 1% of the position into this dysfunctional market @ $81s since company after company has sold off post stellar earnings. What did the stock do the rest of the day? Sell off... it ended in the low $75s and almost finished where it started. Sad. And my "quick trade" on this stock shows you just about the only way to make money in this market nowadays. I can do it here or there, but to do it across a spectrum of stocks is neither practical nor the lifestyle of a mutual fund. So instead we retrench until we can hold a stock for more than 3 days.
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

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