Where is Your Gas Money Going?

We've discussed this many times in the past [Jan 21: A Tour Through the Middle East] and as I wrote in January

While we wring our collective hands about how the infrastructure companies are going to lose all their business as crude drops from $100 to $75, and projects will be cancelled due to their rich customers actually giving a rat's behind if crude is $100 or $75 let's take a look at reality. I noticed a story in the NY Times this weekend on Saudi Arabia - so I'd like to overlay that with just a snapshot of what is going on in some of the other countries in this part of the world - the Kuwaits, the Oman's, the Abu Dhabi's, the Qatar's....

... because perhaps I think most of us still are very inward looking as Americans and do not realize what is truly going on in this globe. I keep returning to the theme of this transfer of wealth - each day we become more of a debtor nation and our wealth is being transferred out. Only to return to buy our assets from beneath us (and not just banks). If not with imports (to Asia) than with the "great tax" that is petrol. A "tax" on all of us, and our country as a whole. Instead of devoting resources to stop taxing ourselves, we just give lip service or misguided pushes into corn ethanol of all things. We just don't seem too worried about it, because it's a creeping problem - it's incremental, like erosion (or inflation). I would like to highlight we are in a global economic 'competition', but there seems to be very little awareness of this from 'leadership'. Thankfully, we have some of the most financially innovative institutions to lead us through this.... errr, wait. Never mind that. But that's neither here nor there as an investor; I'll let others argue about the implications - I have my views, but I am just trying to make money off the trends. But I do have to say, it is interesting to see an over reaching national vision proposed by many of these "3rd world" countries 'leadership' - something we used to do here... but I guess you need money to do any large scale projects; along with a government that can actually pass something useful and not only in self interest.

Now as with all good booms (as we see in Asia and the Middle East) there is no clean situation - there will be intermittent booms and mini-busts, but I am speaking to the greater long term trend here. Specific to the Middle East, it appears this go around, as opposed to the 70s, the countries realize that their oil reserves are not unlimited and this time they are reinvesting the monies in ways that can leverage today's riches into future rewards. Maybe they'll succeed, maybe they won't, but they seem intent on trying.

I'd recommend clicking the link I posted to the January story and taking a view of some of the pictures as well - it really pays to educate yourself so when the talking heads talk about the end of this or that boom because the dollar rallies 2% you can feel the confidence to simply chuckle at them, instead of making the mistake of actually listening to their old world view. We are selling off America piece by piece to sustain our addiction.

• The Chrysler building, an Art Deco icon of the New York City skyline, has sold to a fund controlled by Abu Dhabi for $800m. The Abu Dhabi Investment Council, a sovereign wealth fund controlled by the oil-rich sheikdom paid $800m for the 77-story building, Bloomberg reported.
• Middle Eastern investors have spent $1.8bn this year on commercial real estate in the US, more than other international buyers

It's a free market and Americans used to buy assets in other countries just the same way, so it's coming full circle. (p.s. Japan used to do this - i.e. buy US assets - in the 80s before their country's financial system imploded - however their wealth was not based on commodities)

While inflation is a serious threat in these countries right now, I guess with a starting salary of $180K USD, they will be able to handle it a lot better than our middle class. Take a look below at where your gas money is going... people are living the high life off our lack of addressing our overuse of everything. The amount of money is staggering as I outlined in [Feb 27: $2 Trillion of Petrodollars Needs a Home this Year]

Some More Hedge Funds Biting the Dust

I've talked about this subject a few times - guys in hedge funds taking huge risks; and as long as they are successful for a few years they generate what I term generational wealth (the type of wealth that lasts for your grandkid's grandkids). Then they blow up. [Mar 28: Founder of Long Term Capital Failing Again] They say it's a once in a 500 year event; a black swan. Somehow these black swans happen every 4-6 years, where hordes of hedgies blow up because they don't manage risk - but don't worry about small details like that.

Investors get pennies on the dollar (or in this case $0). They could not even sell if they wanted to because they are "frozen" as the hedge fund manager deems must happen (see below for an example) A few years later they are given money to manage again... because they are just that smart. As if anyone who does not take crazy leveraged risks could not print money for 2-3 years. It's an amazing situation; I assume others who actually manage risk deserve a chance too... but I guess I live in a fantasy world. On to the latest story...

• Several hedge funds run by flamboyant Key Biscayne trader John Devaney that were worth more than half a billion dollars last year have been wiped out, leaving wealthy investors with nothing. Zero.
• About 150 investors -- some of them his Key Biscayne neighbors -- have lost roughly $510 million, said Devaney, chief executive officer and senior portfolio manager for United Capital Asset Management.
• ''Most of the investors were institutions. Some are friends and family who were not solicited to invest,'' Devaney said in an interview Wednesday. ``There were a few high-net-worth individuals who had losses. I was the second biggest investor in the fund.''
• The collapsed hedge funds -- Horizon Fund, Horizon ABS Fund, Horizon Fund III and Horizon ABS Master Fund -- invested in junk bonds. These high-risk debt securities have lost the vast majority of their value during the yearlong credit crunch that has sapped demand for most bonds that do not have AAA credit ratings.
• Devaney, 38, a prominent bon vivant, put his personal losses at more than $100 million. Before his funds began to sour, he owned multiple homes, yachts, a $35 million Gulfstream jet and a collection of Impressionist art.
• According to a letter Devaney sent to investors Wednesday, the ultimate blow came at the end of June when Deutsche Bank, the funds' key lender, issued a margin call -- or demand for additional collateral -- after deciding the existing securities had declined in value.
• Troubles first surfaced last July when Devaney took the extraordinary step of halting withdrawals, citing a rush to the exits by investors amid subprime mortgage woes. At that time, Devaney told investors he wanted to avoid selling off the investments at fire-sale prices in hopes they would rebound as the bond market normalized. But the bond market hasn't come back.
• At first, the hedge funds also proved highly profitable, making more than a 40 percent annual return during 2005 and 2006
• After freezing the funds last July, Devaney began selling off personal assets, including a 142-foot yacht called the Positive Carry, and the jet. He also put up for sale a 16-bedroom Aspen, Colo., vacation property and listed for sale a number of waterfront residential properties on the key.
• ''We put a lot of properties on the market -- my father-in-law's, my mother-in-law's, my sister-in-law's, my mother's,'' Devaney said. ``My home is not for sale.'' (of course not)
• ''It's very unfortunate this happened,'' he said. ``But I'm not going to stop trading bonds.''

Look for Mr. Devaney to have a new hedge fund up and running by 2011 at the latest. And no, I am not being sarcastic. That is how it works.

[Apr 8: Hedge Fund Manager - Good Work if you can Get It]

Hot Market Lures New Generation Of Brazilian Investors

Hmmm, unfortunately this reminds me of stories I read of Americans in 1999 and Chinese in 2007.

• When Paolo Portinho meets up with his musician friends for a night out in Rio de Janeiro, they jam a few tunes and knock back some beers -- but only after having a serious talk about the stock market.
• Brazilians' long-held suspicion of stock investment, born out of years of rampant inflation and economic instability, is evaporating in the face of a Sao Paulo market that has more than tripled in 4 years on the back of a booming economy.
• The number of individual investors in Brazil has risen six-fold in the past five years and more than doubled since 2006 to nearly 490,000. In 5 years, the daily amount they trade has soared to 1.8 billion reais ($1.1 billion) from 120 million reais ($73.6 million). (uh oh)
  
• At a time when many Americans and Europeans are fretting over their jobs and houses as recession looms, magazine covers here are full of pictures showing grinning investors being showered in cash from their stock market exploits. (uh oh)
  
• "I've been trading stocks since I was 18 but I never saw anything like this," said Mauricio Bastter Hissa, a 44-year-old who has written several best-selling books on investing here. (uh oh) Hissa, gave up his job as a doctor last year to meet growing demand for his workshops and investment advice on his website.
• ...home brokers are a fever among Brazilian investors." Home brokers is the Brazilian term for Internet trading sites.
• A proliferation of advertisements in newspapers and magazines offering too-good-to-be-true returns on stocks suggests some people may be vulnerable to a downturn.
• "People are not well educated," said Hissa. "Not only in stocks, but in their finances -- people spend all their money, borrow a lot of money and pay 10-20 times in (high-interest) installments." (sounds vaguely familiar to a 1st world country I know)

Let's keep an eye on these guys. People grinning under showers of dinero on magazines is never a good thing ;)

59 Stocks Returning 7% this Week

A bit of an uptick in terms of the number of names this week versus the past 2-3. I've moved the market capitalization in our "criteria" down to $1.75 Billion in this constantly shrinking market. At the pace we're going I might need to move it down to $1.25 Billion soon as company values are slashed across the board.

Criteria

1. Market capitalization $1.75B+
2. Average trading volume 100K+
3. Stock price $10+
4. Returns 7%+

Green names we own, blue names we have owned in the past or discussed in the blog. We sold Intuitive Surgical (ISRG) this week into the rally. Rohm and Haas (ROH) was a takeover bid by Dow Chemical (DOW). As we discussed in the weekly performance entry, most of our performance this week was not really from any of the hedges, but a very nice rebound in our long positions, especially of the commodity type - that can be seen below in the numerous green shaded names. 3 of our top 4 holdings are in this list, and the 4th (A-Power Generation Systems) outperformed those 3 (+29% this week after a ridiculous selloff), but is of a far smaller size than the threshold we use here. This is why I keep saying, I really don't want to sell off what we own despite the potential for further melt down because these stocks are showing great strength in a poor market, which means once the market mood even turns from "putrid" to "dour" they should really perform.

In the smaller cap names (not on the list because they are below the market cap threshold), the next best two performers after A-Power were the 2 pawn shop/cash advance firms we highlighted this week. I almost pulled the trigger on a 3rd pawn shop operator, First Cash Financial Services (FCFS) as a "catch up" play to the two that guided up this week, but of course it ran up nearly 8% Friday - so obviously I am not the only one noticing this trend. Unfortunately my staff of 1 (and 10 hamsters) did not do the homework in time to catch that lift.

From the non holdings Schering Plough (SGP) is catching my eye - it seems everyone is screaming about it is time to buy healthcare as we enter (enter?) a recession, and this was a former holding for us that did not work at the time. But it seems to have picked up some steam here of late. Qualcomm (QCOM) continues showing the type of strength we normally associate with the Apples (AAPL) of the world - the chart is really firming up with higher lows each of the past 5 sessions - will have to think seriously about this name since we like to this type of action in a shoddy market. Flowserve (FLS) is one of the few ways to play "water" and is a de facto infrastructure play as well - one of the few "industrials" I really like along with our holding Cummins Engine (CMI).

Some of the names in this week's top perfromer list that we discussed -

1. Continental Resources (CLR) [Jul 10: Bakken Shale Making More North Dakotans Rich - Continental Resources +20%]
   
2. Cleveland Cliffs (CLF) [Jul 9: Cleveland Cliffs Up 15% on Guidance and Starting a Dividend]
   
3. Sunpower (SPWR) [Jul 10: Well It's a Start - Sunpower to Build 2 US Solar Plants]
   
4. Embraer (ERJ) [Jul 8: Has Embraer Hit Bottom?]
   
5. Sociedad Quimica Y Minera de Chile (SQM) [Jul 11: Let's Talk About Sociedad Quimica Y Minera de Chile]
6. Comstock Resources (CRK) [Jul 9: Haynesville Natural Gas Plays Refuse to Sell Off]
   

Symbol	Company Name	% Price Change 1 Week
ROH	Rohm and Haas Co	65.8
APPX	APP Pharmaceuticals Ord Shs	34.5
HPC	Hercules Inc	29.6
CLR	Continental Resources Ord Shs	20.4
FITB	Fifth Third Banc Ord Shs	18.2
CLF	Cleveland Cliffs Ord Shs	16.9
FLS	Flowserve Corp	15.4
ANR	Alpha Natural Resources Inc	12.7
FFIV	F5 Networks Inc	12.3
GOLD	Randgold Resources ADR	12.1
CENX	Century Aluminum Co	11.8
SPWR	SunPower Corp	11.7
CF	CF Industries Holdings Inc	11.7
BCE	BCE INC	11.7
HUN	Huntsman Ord Shs	10.9
ERJ	Embraer-Empresa Brasileira de Aeronautica	10.9
WAB	Wabtec Corp	10.7
YHOO	Yahoo! Inc	10.4
MEE	Massey Energy Co	10.1
GDI	Gardner Denver Inc	10.0
FSLR	First Solar Inc	10.0
DSX	Diana Shipping Inc	9.9
EDU	New Oriental Education & Technology Group	9.8
QLGC	QLogic Corp	9.7
TX	Ternium SA	9.7
SFD	Smithfield Foods Inc	9.4
MASI	Masimo Corp	9.2
URS	URS Corp	9.2
BLUD	Immucor Inc	9.1
MYGN	Myriad Genetics Inc	9.1
ABX	BARRICK GOLD CORPORATION	9.1
LFC	China Life Insurance ADR	9.1
YGE	Yingli Green Energy Holding Co Ltd	9.0
YZC	Yanzhou Coal Mining ADR	9.0
SQM	Sociedad Quimica y Minera de Chile ADR	8.8
BAK	Braskem ADR	8.7
BTM	Brasil Telecom ADR	8.7
BWP	Boardwalk Pipeline Partners LP	8.6
FLO	Flowers Foods Inc	8.5
CRK	Comstock Resources Inc	8.5
OMI	Owens & Minor Ord Shs	8.4
GNK	Genco Shipping & Trading Ltd	8.4
ACH	Aluminum Corporation of China ADR	8.2
PKX	Posco Depository Receipt	8.1
LDK	LDK Solar Co Ltd	8.0
PCX	Patriot Coal Corp	7.9
CAG	ConAgra Foods Inc	7.9
ISRG	Intuitive Surgical Inc	7.9
BUD	Anheuser-Busch Companies Inc	7.8
PMTC	Parametric Technology Corp	7.6
SGP	Schering-Plough Ord Shs	7.5
LEAP	Leap Wireless Ord Shs	7.4
RAI	Reynolds American Inc	7.4
MMC	Marsh & McLennan Companies Inc	7.3
QCOM	Qualcomm Inc	7.3
SRCL	Stericycle Inc	7.2
HCBK	Hudson City Bancorp Inc	7.2
MOS	Mosaic Co	7.2
ITC	ITC Holdings Corp	7.1

Bookkeeping: 'Rising Tide' Performance Week 49

Week 49 performance of the mutual fund

Comments: Whew. Exhausting. The six week battle with our friend to the right continues. He has been a beast. Wait, he *is* a beast. Well, you know what I mean. Isn't July prime hibernation season? (note to self: no.) Wasn't it just May when we were making a 2 month run off of March lows and sipping our Kool Aid and talking about how the worst was behind us and here comes the 2nd half recovery? Ok "we" were not talking about it, but "they" were. How quickly that worm has turned. Whodda thunk a week ago we'd be talking about bailouts of the two GSEs; did I mention that worm moves fast? In the end the Federal Reserve is going to be the most powerful force in the universe controlling all the strings - they were changing their entire playbook this March, were up on the Hill this week petitioning Congress for even more powers (even as they looked the other other way and missed this entire mess, and in fact many would argue created much of it), and now are potentially making new historic outreach of powers as of late today. I am almost to the point of believing some of these wacky websites out there that preach of the new world order and how it's all moving to one government. Gosh.

But I digress! This was the week of the reversal. Reversals everywhere. Huge moves down midday Monday, but a hopeful big reversal to end the day. Open Tuesday straight down, then a huge run up to close the day? Was *that* finally the reversal we were all hoping for? Uhh, no. Huge drop Wedneday. Thursday offered a little peace, and then a big swoon Friday - followed by an intraday reversal up on more dollars being dropped from the sky by the Helicopter in Chief, and then that was (almost) all erased within an hour. Cripes! And that was just the indexes, let's not even talk about the individual stocks. One of the most topsy turvy weeks I can recall - where nothing lasted for more than a few hours, and 180 degree turns were everywhere. A market in complete confusion at this historic (yet again) point... perhaps the turn from denial of what has happened to the US financial system to stages of acceptance is afoot. I don't know - it just makes one sea sick. If it's going to be like this for the next 30 years, I demand a pay raise. Keep in mind the Bear Stearns bottom was really engineering on a late Sunday night (I remember because I was hitting refresh every 30 seconds on CBSMarketwatch website) when the Federal Reserve did their "magic" (with JPM) - so be on the alert for some sort of "situation" happening this weekend... or we could be right back here getting slapped around Monday AM. Speculation of said magic might now put some sort of floor under the market. We'll see.

For the fund, we did some more buying this week and finally have (mostly) the portfolio I really like. While cognizant of further meltdown, I simply do not want to trade out of the names we own since I believe they will be the big winners of the next leg up (which I hope comes before 2013) The only names I don't like fundamentally (the small part of our barbell strategy), I am hoping will have some serious dead cat bounces (soon) since they've been down for 6 weeks straight. We've deployed all our free cash, and now we either have long or short (via ETF) positions. So to buy new things we'll need to lighten up on the short ETF exposure which I'm not ready to do at this point, aware of how that hurt us in January 2008. (even though that correction was shorter in duration, but similar in degree, than this one) This is as far as we've been allocated to the long side since the dark days of March. Which means I better turn into a pundit and start talking up this economy! Maybe I can get a guest spot on Kudlow since I'll follow the company line - Goldilocks economy baby. ;) (for a few weeks anyhow)

At this time I thought I'd share a quick look at the last 6 weeks, and how Rising Tide Growth has been doing versus the markets as a whole - I used the Russell 1000 as the measuring index since it most closely tracks to our median market capitalization. (The Dow - i.e. the safe big cap stocks - has actually been quite a bit worse over the past 6 weeks). I do want to stress "relative" stability during downtimes is a goal even if it potentially hurts short (or longer) term results. There is something to be said for having an army of investors who don't wake up each week to seeing their fund down 2-3% week after week. On that count, I am very pleased with how we've handled this correction - last week was simply unavoidable since, even with the large reductions in our commodity exposure, 15-25% down weeks in many of our names led to an underperformance versus the indexes (which we almost completely made up this week). The other 5 weeks have been solid considering the carnage surrounding us. In the month and a half correction we have endured RTG has lost 4.7% (most all in week 5) and the Russell 1000 lost 12.2%. Week by Week is seen below (week 1 on far left, week 6 on far right) I won't pop any champagne corks until we actually make a bottom because each ensuing week could provide a sharp slap to the face.


Specific to this week the S&P 500 fell 1.9%, while the Russell 1000 dropped 1.7%. Rising Tide Growth made a nice comeback from last week, gaining 1.3%. So back to our old ways of having both positive absolute and relative (to indexes) performance. We were not overly hedged this week to the short side, and in fact doing some buying on dips, so most of the gains seemed to occur as our commodity names came back to help late in the week after their complete debasement last week. 3 more weeks until our year 1 closes.

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. I'll have an update on pledge totals next week.

Price of Rising Tide Growth: $11.663
Lifetime Performance to date (vs Aug 3, 2007): +16.63%

Comparable S&P 500: 1239.5 (-15.40%)
Comparable Russell 1000: 679.3 (-14.68%)

Fund return vs S&P 500: +32.0%
Fund return vs Russell 1000: +31.3%

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 May 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

More Historic Actions (Potentially) by the Fed

Yawn. This is getting so old. Any problem in America.... Print more money, and hand out corporate welfare. Did anyone not see this coming? Oh well, the market reversed temporarily on the joyous sounds of helicopters in the distance. I haven't brought out this picture in months - I've missed it. I continue to laugh in the face of "strong dollar" proponents. Everything we do is a destruction of those current greenbacks in your pocket.

• Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, said a source familiar with a conversation between Bernanke and Freddie Mac chief Richard Syron.
• Bernanke and Syron spoke by phone Thursday afternoon and in that call the central bank chief said he intended the discount window to be open to the two companies, said a source familiarwith the phone conversation.
• The Fed declined comment on whether its discount window might be opened to GSEs. Freddie Mac spokesman Douglas Duvall declined to comment when asked about the phone call.

While not "confirmed", historic bubbles of epic proportions, continue to require historic changes by the powers that be. Oh I miss the days of "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," (April 20, 2007) and "housing is only 4.5% of GDP - not to worry" (summer 2007) And we trust "these people" to navigate us through the troubled waters... (deep chuckle)

It is sort of fun to watch them scramble - finally reaping what they (and predecessors) created. I wonder what Easy Uncle Al ---> is thinking as he watches the empire of easy credit he built crumble around him. Kick the can - recessions won't be allowed to happen - kick the can - recessions don't happen on my watch - kick the can. My guess? "Got out just in time". The can is hitting the fan.

Let's Talk about Sociedad Quimica Y Minera de Chile (SQM)

I've followed Sociedad Quimica Y Minera de Chile (SQM) for a few months now with 1 eye; it shows up in our weekly top performers list constantly. This is a volatile "fertilizer" stock (not a pure play however), but the most expensive in my universe so I have not held it, but would be happy to do so at these levels as it's lost 1/3rd of its value in oh, 3 weeks. Since I already own 4 fertilizer I don't see a need to add this, but I do want to highlight the name, and point out both its kicker as a lithium supplier (think future batteries in all these next generation electric cars we've been pointing to in 2010+) @ 15% of sales, and that it is currently sitting at its 50 day moving average. If things really work out in the automotive side, the lithium business should end up actually being the crown jewel here in the long run.

The company also has an iodine business, and since I won't pretend to be an expert in iodine this is a positive per Motley Fool because...

SQM also boasts the largest iodine production capacity in the world. Iodine is used in medical applications, LCD displays, etc

Potash (POT) is also part owner and best of all (ahem) Jim Cramer loves it. ;) So stick with Cramer, and stick with Sociedad Quimica Y Minera de Chile!! (sorry, couldn't resist) Since he mentioned it at $47 it ran to $60 in 3 sessions on the backs of his lemmings. So now you can get it at pre-Cramer prices. Which is why I mention it at $41.50. ;)

Long Potash in fund; no personal position

Bookkeeping: Adding to Perfect World (PWRD)

This market is so strange. A slow motion train wreck that will never reach a crescendo. Half our positions are actually up, but the half that are down are taking a beating in the back alley. I'd actually prefer the market to simply give up in the last hour as people leave to go to the Hamptons. Death by a thousand cuts is just not working for me.

Anyhow, I am loving the action of Perfect World (PWRD) so adding another layer on top of what we have. We added a bit Tuesday as well. The last 4 days it has been holding up like a champ and we love this sort of technical strength - you'd think they own a pawn shop in the US or something. It remains dirt cheap at 17x forward earnings for double that amount of growth. This is a chart begging to break out, if the market would stay flat for 3-4 days. It is back up to 1.6% of portfolio and I'd add more but cash is down to vapors.

We are now down to 0% cash. We either have Ultrashorts or long positions. I don't want to liquidate the remaining Ultrashorts (despite seeing a ton of names I want to add to) until/if/when we have that last traumatic selling event OR the market turns on a dime. I'd have to see S&P 1275+ to be convinced. In either scenario (pukey type selloff or reversal past 1275)--> I am going to actually turn the key and become for a short time at least a 100% long mutual fund - and see how the other half live (ok it's not actually half, it's how the other 99.9% live). With my luck, the moment I did that, the next day we'd have a Black Swan Event and have a repeat of Black Monday, 1987.

I want to add one of these darn pawn shops but they refuse to fall down. Very strange action considering how strong the government reports show the economy is ;) So either their charts are lying to me, or the government reports are. Hmmm.... ?

[May 15: New Position Started in Perfect World]

Long Perfect World in fund and personal account

Bookkeeping: Adding back some Baidu.com (BIDU) and Apple (AAPL)

I have to say I am mighty impressed by Apple (AAPL) and Baidu.com (BIDU). I cut these names Monday [Cutting the Strongest Tech] anticipating a tech stock breakdown. Many tech stocks have broken down - but these two have been really holding up. I don't want to really be "out" of them; I was just hoping for a pocket of serious weakness to add at far lower prices - that has not happened. So I am going to reverse part of my sales here and get some back - I still think there is more upside in other beaten down names but you have to respect such strength in a shoddy market. I had cut these to the bone (0.1% of portfolio)

Baidu.com (BIDU) I am adding back at $310s (sold earlier this week in mid $320s) - this is just below the 200 day moving average - back to 0.7% stake (chart below does not show the 200 day in the correct place)

Apple (AAPL) I am adding back in the $173s (sold earlier this week in mid $170s) - back to 0.5% stake

I could simply be impatient, but it's been 6 weeks waiting for a real sell off in these names ;) Maybe if S&P 1225 breaks and we get to 1200 or 1170s which is next support someone will actually sell these names in quantity so I can scoop them up at prices I prefer.

In case you've been living under a rock or in the Halls of Congress and are oblivious to the real world, Apple launched it's new iPhone today - usually there is a sell the news reaction but this stock in unbreakable right now. Pooring Americans will give up their Apple gadgets only from their cold steely hands it appears. I'll add more if there is true waterfall type of selling that destroys every name but thus far these two have held up.

With growth so precious (and becoming more so by the day) the stocks that have it might be getting even better multiples in the quarters ahead.

Long both in fund; no personal position

S&P 1225 Finally Reached

Well, the PPT could only hold it off for so long, S&P 1225 is now on the scene. So we now are back to summer 2006 lows.

Frankly I don't really want to sell any merchandise - we can see whenever the market even stays stable for 3 hours these stocks are running - we were up nearly 1.5% this AM as the market was down 1%. So selling now is simply guessing when the market will turn and I have no idea. I continue to believe we need to have 1 gut wrenching fall from here (maybe by 4 Pm today) and then open down on Monday and maybe we finally have that elusive bottom. Almost every day the Invisible Hand keeps buying those darn pre market futures and we can never get one of those whoosh down mornings where you wake up, and want to hide under the bed. Maybe Monday they will allow us to pull off the bandaid quickly instead of slowly.

Love the stocks; hate the market - not gonna sell the merchandise everyone else wants in their portfolio.

EDIT: From +1.5% to -1.0% in a manner of 90 minutes :) Fun. If only our stocks traded in a vacuum.

Import Prices Now Breach 20% Year over Year

Well once we get through the latest financial crisis (remember when they told us it was the kitchen sink quarter last fall?) - we can begin to focus on the disaster that is the economy, errr.... I mean, we can focus on the "slightly slow growth" economy with benign inflation that has not become anchored in the citizanery psyche.

Unlike the talking heads, I do not focus on the highly manipulated CPI or PPI - if you've been around a while you know why. I love to use the import report which came out today [Jun 12: Import Prices Continue to Breach New Records] - and boy is this one a doozy. Click on that link in the previous sentence for some background.

We've been tracking this report since the blog began, since frankly we import most of our goods into America - so by tracking those prices we can see what inflation "really is". Now keep in mind, crude oil is part of the figure but let's look at the trend we have been tracking

November 07, the year over year import price increase was 11.4% [Dec 12: Real Inflation Showing in Reports not Called PPI/CPI]
January 08, the year over year import price increase was 13.7% [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis]
March 08, the year over year import price increase was 15% [Apr 11: GE Warning and Import Prices Show us Real Inflation]
April 08, the year over year import price increase was 15.4% [May 13: Import Prices Continue to be a Disaster]
May 08, the year over year import price increase was 17.8% [Jun 12: Import Prices Continue to Breach New Records]

Drumroll - June 2008 -----> 20.5%!

Boo Yah! But no inflation in America. Only the rest of the globe... or so we are told insistently each month.

• Prices of goods imported into the U.S. rose more than forecast in June as record energy costs and a decline in the dollar made purchases of foreign products more expensive.
• The 2.6 percent increase in the import price index last month matched the gain in May, the Labor Department said today in Washington. The index jumped 20.5 percent from a year ago, the biggest year-over-year increase on record. Prices excluding petroleum rose 0.9 percent last month.
• Food prices rose 1.9 percent in June and were up 15.8 percent from a year earlier, the biggest year-over-year jump since this measure began in 1977.
• The year-over-year increase for June in the main index was the biggest since it was first published in 1982
• Prices for imported industrial supplies and materials increased 5.8% last month, and were up 50.1% year over year.
• Excluding all fuels, import expenses rose 6.6 percent in June versus a year earlier. (whew! thank god no one uses fuel! So the "non fuel, non food" only went up 6.6% - that works wonders when workers wages are going up by half as much!)

On to the other key measure we love to track, and we were very early on - the change from China as a deflationary pressure to an inflationary pressure ; if you are interested in this developing situation I have a history of stories on the subject here. Very few are talking about this in the mainstream - we used to see price decreases from China, now just the opposite.

• Prices of goods from China were up 0.6 percent, those from Latin America rose 2.9 percent and imports from the European Union cost 0.6 percent more in June. (this ties last month's record)
• Prices for goods from China rose to a 4.8% annual gain.(this is a new record)
  

Folks, we are way overdue for a rally - we needed an "event" - and this "foregone conclusion" of the nationalization of our mortgage market strikes a chord as a potentially good one for this cycle. (quite interesting to see no real panic today - so apparently it's all priced in by now??) Nothing straight down. Or up. But please don't forget the reality of what is happening in the "real economy" as the market slithers upward (one of these days) and you are assured everything will be ok "by the 1st half of 2009" (told to you by the same people who said in 2007 there were no major issues, and then when issues starting spreading told you everything will be fine by first half 2008, and then second half 2008, and so on and so forth) Their Kool Aid is dangerous. Inflation is becoming a disaster, and our Federal Reserve (non political of course) sits on its hands to bail out banks with low rates, continuing to throw middle class and lower class to the wolves; in sharp contrast to the other major "1st world" countries across the globe. Enjoy.

Or I could just be pulling a fast one on you and as Phil Gramm says, people such as I are the root cause of a nation of whiners. I assume he relies on government reports. Lies. Lies. And more Damn Lies.

Freddie (FRE), Fannie (FNM) Crushed in Premarket

I believe in the era of lightning speed global transfer of capital, along with huge pools of capital (hedge funds) owning the vast majority of daily trading volume, along with the loss of the "up tick" rule (meaning you have to wait for the stock to trade up to layer on more short positions) - things are moving far faster than ever imagined. I can imagine a scenario, much like a wounded zebra in Africa, the scent of blood attracts the pack of lions (take the top 5-10 hedge funds) working in concert... err independently... to pummel these stocks into the ether. Financials are all about "confidence" since they are leveraged to the hilt - for every trillion these companies "guarantee" they have a few billion to cover the actual loans. That is essentially our entire financial system of the past 30 years. Once you lose confidence - you are done - as Bear Stearns (BSC) found out; and Lehman might be finding out soon - EVEN with the Federal Reserve literally being an open spigot for the investment banks, post Bear Stearns collapse. Interesting times indeed.

We spoke yesterday of Whose Bottom Will this Be? Quite potentially all 3 candidates we discussed might be blown out together.

• Shares of Freddie Mac dropped 35 percent and shares of Fannie Mae tumbled 27 percent in premarket trading Friday as Wall Street continued to worry about the health of the mortgage companies and the potential for a government takeover.
• "We should not be in a position that only two government-sponsored lenders are willing to make mortgage loans and, without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.
• There does not appear to be a change in fundamentals at either company, he said, just a change in sentiment.
• "In an instance where equity capital is not raised and investors see a meaningful change in debt spreads, it is clear to us that government action would be undertaken to ensure that the institutions would not fail," Parmentier said in a note to clients.
• So far this year, shares of Freddie are down 77 percent, and shares of Fannie are down 67 percent.

The NyTimes has a front page article on the same topics we discussed yesterday. Basically things become self fulfilling prophecies nowadays - and in lighting quick fashion as capital has no boundaries and it is concentrated in fewer and fewer hands, that dictate our fates.

• The word began spreading across Wall Street trading desks on Monday morning: Fannie Mae and Freddie Mac, the giant companies at the heart of the nation’s housing market, might be in trouble.
• The tumult, which continued on Thursday, started with a cautionary analyst’s report, one that might have caused few ripples in normal times. But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington.
• Fannie Mae and Freddie Mac are so big — they own or guarantee roughly half of the nation’s $12 trillion mortgage market — that the thought that they might falter once seemed unimaginable. But now a trickle of worries about the companies, which has been slowly building for years, has suddenly become a torrent.
• And investors around the world own $5.2 trillion of the debt securities backed by the companies.
• “There is a real panic about these companies on Wall Street right now, and sometimes a blaze like that grows almost without reason,” said Tom Lawler, an economist who worked at Fannie Mae for over two decades before leaving in 2006 to become a consultant. “There wasn’t really any new news to set off this crisis. The stocks just started falling, and didn’t stop.”

I still have never seen a reason the uptick rule was eliminated a few years back - never an explanation. Maybe the hedge funds have more lobbying power than I assume. Oh well. CNBC is already spinning this as a good thing because the US government can make money on this mortgage business. :) Being completely broke, they need any revenue stream they can get.

On the "plus side" this will be the cataclysmic event that can create a bottom; then we can rebound - until we get to the Merrill Lynch (MER) / Washington Mutual (WM) bottom next quarter ;)

Please note - charts below do not include this morning's carnage

Gaming Stocks Absolutely Destroyed Yesterday

Did I mention avoid anything to do with the U.S. consumer? Yesterday...

1. Wynn Resorts (WYNN) down 10%
2. Las Vegas Sands (LVS) down 11%
3. (grand prize to) MGM Mirage (MGM) down 21%

Story to follow (we've been on this since last summer)... but thankfully Steve Wynn decided to destroy the greedy shorts in afterhours with a $500M buyback, taking shares up 15% in after hours and pushing the other 2 names up in sympathy.

• Casino operator Wynn Resorts Ltd (WYNN) said on Thursday it would increase its share buyback program by $500 million, and its stock jumped nearly 15 percent in extended trade.
• In a statement, Wynn said the new buyback program would come on top of a previously announced $1.2 billion repurchase plan.
• Separately, Wynn said second-quarter operating income for its Las Vegas casino, on a GAAP basis, would be between $18 million and $22 million. That is down from $63.4 million in the same period last year.
• Wynn's Las Vegas casino has drawn fewer consumers to the resort as current U.S. economic woes such as the declining home market and higher gas prices have forced Americans to cut discretionary expenses.

As they say, in bear markets - its very hard for either bulls or bears to make money. The bears were sitting back, drinking their honey, and bloated with gains, when Mr. Wynn laid down the hammer. This is another one of my favorite "managers"; it is too bad his industry is in a death spiral in the United States of Subprime. Look how smart he is, announcing a huge drop in profits ($18 - $22M vs $64M the year before) but still trouncing the bears with the buyback news. That's the type of management you want to have on your side.

But let's look at the bigger macro picture - a theme we've discussed many times here. (We're early) And it's getting worse by the month. Thankfully we are not in a 'technical recession' or anything.

• Casino stocks were battered again Thursday, with shares of the big players scraping to multiyear lows on the back of news of a precipitous drop in Nevada's gambling revenue.
• Statewide, gambling revenue in May slumped 15%, with a roughly similar pace of decline in table games and slot machines alike. Things were even worse on the Las Vegas Strip, where total gambling revenue fell 16.4% -- the largest decline yet in 2008, and one that is at an increasing rate as quarter-to-date revenues for the Strip are off 9%.
• "The decline in Strip revenues is worse than the period immediately following Sept. 11, 2001 and except for January 2002 is the worst monthly performance in more than 10 years," analyst Robin Farley of UBS wrote in a research report. "The weakness in gaming revenues was not confined exclusively to the Strip as the Las Vegas locals market declined 19.5% in May, bringing year to date revenues down 8.7%
• By way of contrast, last fall MGM shares cracked $100 at one point; Sands was nearly $150; Wynn traded above $176 (some of the best shorts outside of financials - unfortunately for me there is no Ultrashort Casino ETF)
• He sees no immediate end in sight either: "We are recommending that investors avoid the Las Vegas-centric stocks as it appears that market is performing worse than some of the regional ones. People are just staying closer to home."
• "Despite efforts to disguise discounting on the high end, many of Las Vegas' luxury resorts are slashing rates" as well as offering additional lures including meal credits, free play and even airfare and gasoline rebates.

But hey, as with all things in America now - thank god for China (Macau)

• (for Wynn) In Macau, however, operating income is expected to be in the range of $100 million to $106 million, compared with $53.2 million in the year-ago period, the company said.

But that's not enough reason to buy these names. Now, they will bounce, and when the market runs - they will rally. And they'll be an excellent short (again) as there won't be a 2nd half 2008 recovery. Nor a 1st half 2009 recovery.

No position but would of been short if I could (but covered earlier than this for fear of dead cat bounces)

Mastercard (MA) to Join S&P 500, and S&P 100

Go team go.

• Standard & Poor's said Thursday that credit card company Mastercard Inc. will replace insurer ACE Ltd. in the S&P 500 index on July 17. S&P said ACE is changing its place of incorporation to Switzerland, rendering it ineligible for inclusion in S&P indexes.
• Mastercard will also replace General Motors Corp. in the S&P 100. GM will continue to be a member of the S&P 500, the index said. (sort of pathetic GM is no longer in the S&P 100 but remains a Dow 30 component)

Long Mastercard in fund; no personal position

Marriott (MAR) Earnings - Strong Overseas; Weak US - No Rebound Until 2009

We like to follow companies that we have no inkling to invest in, simply to get a gauge on the reality of the economic plight (as opposed to relying on government reports). One such group are the hotels and Marriott (MAR) is a big name in the group. Last time around [Apr 17: Let's Review Some Earnings, and Add some Truth to "Earnings Labeling"] we found out

Once again great GLOBAL growth, helped by WEAK DOLLAR and putrid US growth. Notice a pattern? Again, pray the US dollar craters so that these companies continue to show great earnings (but the consumers of America will continue to pay higher prices through dollar destruction).

So here's my comment - I don't know the mix of sales between US rooms and non US rooms, but if I knew that we could do the math easily. If the rest of the world generated 18.5% growth, and your overall growth was only 6.5%, how bad was the US? Obviously to weigh down that 18.5% growth to such a large degree it had to be poor, but we don't know how poor without the actual sales mix. Summary: US stinks but hey Marriot is "cautiously optimistic".

Well the Kool Aid has worn off and "cautiously optimistic" has turned to "umm, not so much". Yet another company succumbs to the fairy tale of the "2nd half recovery" - the stock dropped 7% as unicorns, mermaids, and Hank Paulson were told "No Vacancy for You". Time to bang the drumbeat of the new and improved "1st half 2009" recovery. Now we have to ask what *if* the U.S. brand of malaise spreads worldwide under a cloud of inflationary demand destruction. Then where will these companies who have no strength domestically be getting growth from? Let's hope it does not get too severe overseas although parts of Europe are already sinking, and parts of Asia are suffering mightily from double digit inflation. Keep in mind Marriot is not exactly the Holiday Inn - they reflect what should be a more "sheltered" consumer from the storms hitting the lower and middle class.

• Marriott International Inc (MAR), the world No. 3 hotel operator, reported lower quarterly profit on Thursday and expects weak economic growth and soft U.S. lodging demand to persist into next year.
• Net income declined to $157 million, or 42 cents per share, in the second quarter ended on June 13, from $207 million, or 51 cents per share, a year earlier.
• "While our hotels outside the United States continue to benefit from solid global demand, business conditions have deteriorated in the United States," Chief Executive J.W. Marriott said in a statement. "While there is much uncertainty," Marriott said, "we expect weak economic growth and soft U.S. lodging demand to persist into 2009."
• A major concern for the hotel sector is its reliance on the U.S. airlines, which are cutting routes and fighting for their survival amid unprecedented fuel prices. Oil prices have roughly doubled in the past year.
• Marriott also cut its earnings outlook for 2008 to between $1.77 and $1.88 per share. Analysts expect $1.93 per share. (again, a big thesis for us is the ridiculous 2nd half 2008 analyst estimates for "growth" across the stock market - as these numbers fall, stocks will become much more expensive if stock prices hold steady)
  
• Revenue per available room, an industry benchmark known as revpar, grew 5.6 percent globally on strength in markets like the Middle East and Southeast Asia. But in North America, Marriott's largest market, revpar rose just 1.4 percent in the second quarter.
• As a result, Marriott's domestic hotels have implemented "contingency plans" according to Arne Sorenson, the company's chief financial officer. Those include modifying restaurant menus, hiring freezes and mandatory vacations for workers, and looking non-room sales, such as banquets.

Listen to the companies; ignore the government reports.

Foreclosure Activity Map

I've basically stopped commenting on these foreclosure statistics and sales statistics in housing because all this "trying to find a glimmer of hope" in line item 23.1-b is just so silly, not to mention way too early. But Barry Ritholtz over @ The Big Picture has some nice eye candy for us, and as they say a picture is worth a thousand words. In case you were wondering, foreclosures are up 53% year over year (yawn)

[click to enlarge]

This is nice because it shows us the intensity / location of the foreclosures in an easy to identify format

Some quick comments

• Look at that US wind corridor from TX to North Dakota - almost foreclosure free except for areas around big cities. Go rural America. (also benefitting from the fact they did not have huge spikes up in values in the 2002-2006 time frame)
• All the usual suspects make their appearance - the 6 Horsemen (CA, NV, AZ, FL, MI, OH) - note the latter two are starting to "lighten" to a softer shade of pink now since we've been suffering through this for far longer than the rest of the country.
• Northern VA has super high cost of housing, and the results to match

Surprises?

• northern CO? I assume that is Denver or north of it?
• Tennessee looks to be in quite bad shape - just as bad as Ohio. I wonder why that is - it spans the entire state.
• Northern GA is in bad shape and North Carolina was supposed to be the epitome of stability but seems to be having a lot of issues
• The northeast corridor between New Jersey and New Hampshire is in pretty tough shape but the cost of living is so intense there, and some serious high taxes - so perhaps not quite the surprise.
• Indiana worse than I thought, Pennsylvania better than I thought

Please note some states have now put in laws to slow down the foreclosure process so that obviously would retard the natural progression and improve their current statistics

• While foreclosures continue to rise nationwide, efforts in some states to give borrowers more time before losing their homes appear to be working. In Maryland, where a new law has increased the time to finalize a foreclosure to 150 days from just 15, foreclosure filings dropped almost 18% from last year's levels. In Massachusetts, which last year passed a similar law, filings dropped almost 3%.

So all in all, this is all new inventory that will come onto the market, and cause a "spike in sales" (the seals will clap and cheer and tell us about the housing rebound) We on the other hand, in between dismissive chuckles, will check back in 2010-2011 for the true bottom. If oil goes to $200+ and sticks, see you in 2013.

Bakken Shale Making More North Dakotans Rich - Continental Resources (CLR) +20%

Note to self - step up marketing in North Dakota for the newly rich land owners who happen to be sitting on some great motherloads of dead dinosaurs.

We got another runner here in Continental Resources (CLR); looks like a big hit in Bakken Shale - more on the oil side than natural gas.

• Oil and gas producer Continental Resources Inc. on Thursday said a test of its second well in a promising area of North Dakota resulted in encouraging results.
• Continental said initial results of the Mathistad 1-35H well, drilled into Bakken shale of McKenzie County, on July 4 flowed at an average rate of 1,095 barrels of crude oil equivalent per day.
• On May 20, the company's first well in the formation flowed at an average initial rate of 693 barrels of crude oil equivalent per day.
• In April, the U.S. Geological Survey estimated that technically recoverable crude oil in the North Dakota and Montana Bakken shale area at 3 billion to 4.3 billion barrels of undiscovered crude oil.

For all you ever wanted to know about Bakken (it looks like CLR owns the most land there) click here.

And those 4 Haynesville natural gas plays we mentioned yesterday that refused to fall even below the 20 day moving average? Most are flying to the tune of +9-12% today. ah! So much for the pullback. Charts don't like - people do. ;)

Wait, CBSMarketwatch told me 48 hours ago that the commodity run was over (again). Hmmmm.

No position

Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot

This is the second name this week to breakout off of higher guidance; earlier in the week we saw Cash America (CSH) [Jul 7: Missed Opportunity in Cash America] The past 2 days we have an incredible technical breakout (on the chart) of EZCORP (EZPW) on increased guidance. This is despite closing 11 stores in Florida. It looks like a trend, long awaited, has now arrived. 56% year over year growth certainly fits into my wheelhouse.

• EZCORP, Inc. (Nasdaq: EZPW - News) announced today that it expects earnings for the quarter ended June 30, 2008 to be approximately $0.25 per share, $0.04 per share better than its previously provided guidance of $0.21 and 56% greater than the $0.16 per share earned for the June 2007 quarter.
• For the fourth quarter and fiscal year ending September 30, 2008, EZCORP is raising earnings per share guidance to approximately $0.35 and $1.19.
• Commenting on these expected results, President and Chief Executive Officer, Joe Rotunda, stated, "In our June quarter, we realized stronger than expected sales gross profit in our U.S. EZPAWN operation and lower than expected levels of signature loan bad debt in our EZMONEY operation. While our pawn and signature loan portfolios grew during the quarter, their rate of growth was less than we typically see during this period -- leaving our loan balances at a lower than anticipated level going into our September quarter. All of these factors were influenced to some degree by the economic stimulus checks received by our customers during May and June."

Time to take a second scrub of the entire group - again, other names include First Cash Financial Services (FCFS), Dollar Financial (DLLR), and Advance America (AEA).

The AP has a news story on this development as well... (always a bull market somewhere) Since I believe this is the early part of a much longer developing trend we need to look at these just as closely as we'd investigate Walmart (WMT) or Big Lots (BIG) - all playing off the same Pooring of America trend. Once the rebate checks run out, these guys should really see business take it to yet another level. Once again we are faced with the dilemna of do we buy the breakout or hope for the pullback that may never come. I waited on a host of natural gas plays to fall back yesterday and they are each up 5-9% today. Bah.

• Cash-strapped consumers desperate for deals are increasingly turning to pawn shops and payday lenders instead of the local mall and neighborhood bank. With credit drying up and gas and food prices rising, most retailers are seeing sales decline as shoppers cut back on discretionary spending. But for pawn shops, which offer used goods at low prices and allow consumers to sell their possessions for cash, consumers' pain has translated into big revenue and profit gains.
• Texas-based pawn shop operators Ezcorp Inc. and Cash America International Inc. both boosted their profit outlooks for the upcoming quarter this week. The companies also offer "payday loans," or short-term, high-interest cash advances to consumers on their paychecks. As more people struggle to cover the rising cost of gasoline and groceries, they are turning to payday lenders to help them bridge the days between paychecks.
• Cash America said it was helped by more merchandise sales, strong revenue from its online cash advance service and better-than-expected revenue in its pawn lending business. Pawn shops offer loans in exchange for goods that can then be sold if the customer doesn't redeem them.
• High gold prices may also be spurring shoppers to pawn their jewelry for extra cash, she said. At $927.30 on the NY Mercantile Wednesday, prices are down somewhat from their record-high of $1,000 in March, but still up sharply from last year's $650 an ounce.
• Roth's Elizabeth Pierce said even if the economy strengthens, pawn shops may continue to be popular. With more shoppers venturing into pawn shops, she said, consumers are seeing that the stores aren't necessarily the dodgy domains of the desperate that many perceived them to be. "If you need to replace something and you're looking for the cheapest alternative, you might be willing to put aside some of those preconceived notions about those businesses," she said. "It might raise awareness.

The human being in me really hates reading these tales, but the cold hearted capitalist says "opportunity". I'm just pretending its another Walmart outlet...

No positions (yet)

Whose Bottom will this Be? Lehamn Brothers (LEH) or Fannie (FNM)/Freddie (FRE)

This is a long post, but it is important to read - so you can tell your neighbors what is happening to the United States of Subprime, and why we are going to be potentially footing the bill in the biggest bailout ever. And how a lax system full of "anti regulation" and cronyism, along with "heads we win/tails we still win" executive compensation has created a disaster.

In January 2008 we had the SocGen bottom (rogue trader doing crazy trades bringing down world markets 5% in 1 day)

In March 2008 we had the Bear Stearns bottom

I had postulated that this time around it might be the Lehman Brothers (LEH) bottom - but Fannie Mae (FNM) and Freddie Mac (FRE) are making a horse race out of it. Who will get bailed out first? Or whose bankruptcy (in the case of Lehman, the other two simply are too big to fail) will mark the bottom? Do we need an "event" to make this bottom?

Frankly if not for the historic changes the Federal Reserve has done (creating massive moral hazard) - [Mar 22: A Historic 9 Days for the Federal Reserve] I believe March 2008 would of marked a major change in our financial markets history with a slew of banking failures - Lehman and Merrill looked like they were heading the same way as Bear. Only historic changes of the rules by our powers that be and the new implicit backing stopped that. In March, we literally changed the rules of free markets in America - and become essentially a socialized market (ironically as we move to socialism, the Chinese move towards capitalism). But it is only corporate socialism in Cramerica - for you peons out there, you are on your own. Safety nets are only for major political contributors.

Now, I believe "they" *want* someone to fail to prove that this is still a (ahem) "free market". It's all about appearances now - we can't have our creditors (the whole world essentially) believe we will just print money to bail out everyone. But it cannot be Fannie or Freddie since that would literally plunge the country into depression - the housing market would literally freeze - as we've outlined on these virtual pages - as the credit system has frozen for mortgages, these 2 quasi government agencies have been doing upward of 70-80% of all mortgages for portions of 2008. Without them - there is no US mortgage market.

But let's take a look at the latest candidates.... first Lehman Brothers (LEH)

• Lehman Brothers Holdings Inc. shares plunged as much as 19 percent Thursday morning as continued credit fears shook Wall Street, and government officials again reiterated that no bank is too big to fail.
• Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson both testified before the House Financial Services Committee that the government's overhaul of regulators will help increase oversight. However, they both said that doesn't mean financial institutions are too big to fail.
• Lehman Brothers, the nation's fourth-largest investment bank, is seen by many analysts to be the weakest of Wall Street's biggest firms. Concerns emerged about Lehman's liquidity and leverage last month after the investment bank reported an unexpected $3 billion loss for the second quarter.

As happened with Bear Stearns, the rumors are now flying fast and furious - it must be good to be a powerful hedge fund shorting these names - you just have to get the media's ear, float rumors that companies have stopped doing business with the bank, and you cause a loss of confidence, and a literal "run on the bank". And you become a very rich firm overnight and your clients laud you for your brilliance - while you just helped kill a firm and unemploy hordes of people. Ah, unregulated (hello SEC) markets. Again no one has investigated who was buying all those massive puts a few days before Bear went down - I wonder why. (Goldman? Nah) I'm sure it was just "good timing".

• As rumors swirl of hedge funds ceasing to do business with Lehman Brothers, one major trading partner of the embattled Wall Street investment house, SAC Capital said it "is continuing to do business as usual with Lehman."
• SAC Capital spokesman Jonathan Gasthalter said rumors that SAC, a giant hedge fund with more than $16 billion under management, had stopped taking so-called counterparty risk, where it would no longer lend money Lehman - effectively pulling its credit lines - are "absolutely false."
• Separately, Pimco, the world's largest bond fund, also said it continues to tade with Lehman. Pimco's comments also came in response to rumors that the bond fund was scaling back its business with Lehman.

On to the twin towers of equity destruction - Fannie and Freddie. I can't take credit for this since the guys at Minyanville.com had this thesis before me - but essentially your grandchildren will be paying for the nationalization of these 2 entities. Nationalization is a fancy word for bailout. I've written a lot about this subject in the blog, but not much lately since we have other crisis to deal with on a weekly basis. Our government's solution to the housing problem has been to loosen regulation, allow more risky loans to be taken on by these 2 institutions, and create more lax standards for these two so they can "support" a housing market that needs to crack - creating more and more risk to them (and therefore all of us). As always, SHORT SIGHTED - but what else is new with this bunch. I was typing that for these "solutions" proposed in the late winter and early spring to work, housing needs to turn on a dime and better recover by early 2009 at the latest. Or else these "bright ideas" are doomed, and going to create a new tax expenditure for all of us taxpayers. Well, it looks like it might be coming sooner than I thought (I was tossing around failures of the Big 2 to commence in mid 2009 to late 2009 as the housing market continued to implode)

The stocks have been in free fall for days, and now even William Poole (ex Fed head) is saying out loud what many know, but don't want to say. Technically these are both insolvent.

• Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, tumbled to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government bailout.
• Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac's decline creates ``challenges'' for the company's plan to raise $5.5 billion.
• Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.
• ``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.
• The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding.
• Senator John McCain, the presumptive Republican presidential nominee, said the federal government can't allow them to fail.
• ``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

The Wall Street Journal chimed in this morning (obviously leaked by those in power) to assure us we have nothing to worry about because the government has it covered.

• The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter, as the stock prices of both companies continue to fall sharply
• The talks have become more serious recently given the financial woes of the shareholder-owned, government-chartered companies, whose stability is vital to the functioning of the nation's housing market, these people say.
• The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily. (from whom?)
• The shares of the two companies have plummeted for several reasons. Investors are worried they will suffer bigger losses as housing prices continue to fall and mortgage defaults rise. Stock-market investors are also worried they will need to raise significant amounts of capital to cover those losses. For stock investors, that means the value of their ownership stakes in the company will be cut.
• The current credit crisis has prompted some unprecedented thinking from national policy makers about how to maintain the integrity of the financial system.
• Any move to prop up the mortgage giants would likely set off a political firestorm. The two companies have long been a target for some Republicans who contend that Fannie and Freddie have profited from an implicit backing they receive from the government.

It's a long story - you can click the link to follow the rest. This is not surprising to long time readers of the blog... here are some warnings

1. [Nov 20: Freddie and Fannie Trading Like Chinese Small Caps]
   
2. [Feb 27: OFHEO Increases Allowance for Fannie Mae] Instead of limiting risk, to "save" the mortgage market the regulators told these companies they will allow them to take even more risky loans
   
3. [Mar 10: Barron's Cover Story - is Fannie Mae the Next Government Bailout?] Even Barron's saw the writing on the wall - politicians of course, could not
   
4. [Mar 19: Fannie, Freddie Layered with MORE Risk] We bemoaned the "solutions" the politicians were coming up with for the housing problem - all of which added even more systematic risks on the back of these 2 institutions
   
5. [Apr 15: Could the US Lose It's Triple A Rating] We discussed the United States of Subprime losing its Triple A rating if it had to bail out these 2 institutions - think our dollar is a joke now? Just wait.
   
6. [May 7: Some Things I'm Reading] 2 articles from Wall Street Journal and NY Times warning about this

I thought I'd be writing this piece 1 year from now; not today. In my February entry (above) I wrote

And on a serious note, Fannie is only surviving due to the government's implicit backstopping (it won't fail) and you - the tax payer have a good chance of bailing out this company if things continue down this path for another 18 months. Also, remember Congress' bright idea to stuff this institution with even bigger loans since those markets are frozen, and what do you do when the market is frozen? The government rides to the rescue.

So this is where we are now. If I can figure this stuff out sitting on a computer and reading/researching how can all these intellects in Washington miss the whole boat. In fact they've exaggerated the problems by heaping more systematic risk on an already broken business model. Because they want to get re-elected, and as long as they could kick the can through another election season - then this is the way of D.C.

So if/when it happens the politicians will once again drag executives up to the Hill to grill, when instead they should be looking in the mirror. Our regulators were asleep at the wheel. Our Federal Reserve was asleep at the wheel (or better yet CELEBRATED because housing prices can go up 20% a year in our new paradigm). Our executives in banks not only were asleep at the wheel, they became ultra rich, even those that were "fired". And they have been getting bailed out with interest rates slashed solely to save their bacon, but causing massive inflation problems for the proletariat. Heads they win, tails they win. For you? Heads you lose, tails you lose. Cramerica - for the corporation, by the corporation. It might not happen this week or this month or this quarter. But housing will continue to degrade. And this problem might get put to the back of the shelves for a few months - but it will re-emerge later. Get your wallets ready for the biggest bailout imagined. And please send your grandchildren the I.O.U.

Always a Silver Lining - We no Longer Own FCStone Group (FCSX)

As bad as things are, we could always have it worse. For example, FCStone Group (FCSX) could be our largest holding; or a top 10 holding; or any sort of holding! It's a derivative of the commodity boom. Would seem like a safe bet. Not so much - down 45% this morning off of earnings. Did I mention every day during earnings season is like running through a mine field?

• Commodity risk management firm FCStone Group Inc (FCSX) reported third-quarter profit below analysts' view, hurt by bad debt write-off and decline in value of derivative instruments.
• Net income for the quarter ended May 31 fell to $8.0 million, or 28 cents a share, from $8.1 million, or 29 cents a share last year. Excluding items, net income was 42 cents a share.
• Analysts expected the company to earn 47 cents a share, according to Reuters Estimates.
• Revenue, net of cost of commodities sold, rose 29 percent to $83.4 million, while analysts were expecting $82.55 million.

We owned this name briefly, took a $1600 loss after that hellacious March selloff where ANYTHING remotely "financial" (and this is very remotely financial) took a slashing to the throat - but said we are taking our ball home @ $33.65. We were early - the stock eventually rallied to the low $40s. Today, the stock is now in the $16s. Better to be early, than never. Revenue is up 30%, they are making money (not as much as analysts had wished for but still very profitable) and you still get destroyed to the tune of 45% loss. The market is simply sinister right now. There are going to be some major oversold rallies at some point - for those who actually have capital remaining. Much like Croc (CROX) there must be some price that some of this merchandise is a good value, but I thought that with Crocs in the mid teens, and it's down 50% from that level. It's very easy to lose your shirt out here in this type of market (or your holey shoes)

Again, I realize retail traders absolutely love to "bet" before earnings - but I don't understand the mentality. The idea of the stock market is to put the odds in your favor, not take a 50/50 chance.

No positions - thank god

Bookkeeping: Closing Intuitive Surgical (ISRG)

Intuitive Surgical (ISRG) is sort of in no man's land right now. It is below all key moving averages, but not too far away... and it has not really "broken down" - it's sort of in the middle of both scenarios. Neither strong not super weak. At this valuation, and technical level I don't have any major conviction in adding to it so I am going to close the position to raise a bit of cash - it is only a 0.3% stake so it did not raise too much for us.

We started this position in mid April, after it sold off from the mid $300s on disappointing guidance but it has done nothing since - losing a cool $3300 for the fund. It has simply drifted sideways or downward. The valuation is still rich and even with this pullback this is the type of valuation that requires the company to hit on all cylinders and even one wrong phrase in a conference call or earnings report sends the lemmings in a tizzy. While I like the diversification it gives us in terms of sectors - it is not performing at this time and just eating up space and money. I'd be more interested on either a pullback to 2008 lows in the $230 area or on a breakout over $285. Unfortunately it is now receiving the dreaded "death cross" where the 50 day moving average crosses below the 200 day moving average - we never like that. (the chart below does not show it accurately) But all it takes with a stock like this is a "happy" earnings report and technical analysis will mean nothing (i.e. the stock could skyrocket). Not worth the chance with the chart breaking down like this. With the stock up a bit from recent lows of $250, we're selling it in the mid $260s.

Analysts were out defending Intuitive Surgical (ISRG) recently but it has done nothing even with that support. (granted the market is killing everything)

• Shares of robotic surgery systems maker Intuitive Surgical Inc. rose more than 1 percent Monday, as a ThinkPanmure analyst said market fears about hospitals' access to credit to buy equipment have been overblown.
• Sunnyvale, Calif.-based Intuitive Surgical makes da Vinci systems which allow surgeons to perform highly intricate procedures through small ports or incisions, using robot technology. This makes the surgery less invasive for patients, who experience less pain and quicker recovery.
• Analyst Stephan Ogilvie upgraded shares of Intuitive Surgical to "Buy," and backed his $360 price target, saying a recent sell-off has created a buying opportunity for investors at historically cheap levels.
• Over the last 12 months the stock has almost doubled, but since mid-April shares have lost about a quarter of their value due to a disappointing 2008 outlook.
• He also said that checks with a number of third-party hospital finance specialists lead him to believe there hasn't been a slowdown in access to credit to buy hospital equipment, despite weak financial markets. And although General Electric Co.'s earnings miss last quarter on disappointing health care capital equipment sales generated concern about such hospital investments, Ogilvie doesn't think GE's story was a market-wide phenomenon.
• In a note to clients, Ogilvie said his channel checks show lenders are requiring additional assets to secure loans, and hiking rates for hospitals with mediocre credit, but "that has not slowed purchasing in general.
• He also said hospitals are rushing to take advantage of the March 2008 economic stimulus package, in which Congress doubled hospitals' potential deduction for equipment expenses to $250,000 through the end of the year.

No position

Well It's a Start - Sunpower (SPWR) to Build 2 US Solar Plants

These plants are not so big, but it's a start. America has finally hit the stage Germany and Japan were a decade ago. Congrats.

Reactive. Not proactive.

• SunPower Corp. said Thursday that Florida Power & Light Co. hired it to build two solar power generating plants, one of which is expected to be the largest in the U.S.
• SunPower will design and build a 25-megawatt plant in DeSoto County, Fla., to be completed next year, and a 10-megawatt plant at the Kennedy Space Center, to be completed in 2010. FPL will own, operate and maintain the two plants, both of which require state regulatory approval.
• The company said the "largest operating solar photovoltaic power plant in North America is currently the 14-megawatt installation located at Nellis Air Force Base in Nev., also built by SunPower."
• A one-megawatt plant running continuously at full capacity can power 778 households each year, according to the U.S. Department of Energy.

So 35 MW combined = about 28,000 homes or a very small town in Florida. Better than nothing I suppose.

No position

Another Retailer (Canary in Coal Mine) Down - Steve & Barry's

A few months ago we discussed the beginning bankruptcies - the first major retailer, Linen 'n Things, bit the bullet back then. [Apr 11: This Day in Bankruptcies - Another Airline and Our First Major Retailer] Now we have news of another major retailer, this one a major mall tenant - Steve & Barry's. This store has actually always amazed me - you walk in there and you can get a jacket for $9. I had no idea how they did it, but whatever they did, it was not working out. Sort of ironic since it was the type of store you would think would be thriving in the 'Pooring of America' scenario.

• Fast-growing retailer Steve & Barry's LLC is expected to file for Chapter 11 bankruptcy protection as early as Wednesday, say people familiar with the matter, a collapse that stands to hurt everyone from Sarah Jessica Parker to the nation's struggling mall owners.
• The Port Washington, N.Y., company hasn't been able to raise rescue financing in recent weeks, and is considering a plan that would sell off all of its assets. It also has been in last-minute discussions with Sears Holdings Corp., about a bailout or partial sale, say people familiar with the matter.
• A filing would be painful to mall owners across the country, who ponied up hundreds of millions of dollars to attract Steve and Barry's into huge, empty spaces, often as large as 100,000 square feet. Many, and potentially all of those 275 stores could close, say people familiar with the matter. As of January, the company had between 16,000 and 17,000 employees; most of those jobs will be eliminated, people familiar with the matter say. Some vendors have already stopped shipping to the company in anticipation of a filing.
• With fashionable clothes priced below $10, Steve & Barry's deep-discount model was built to thrive in a difficult economic environment. (that's the scary thing)
• But a souring economy has made this a brutal period for retailers, who are pinched by slackening consumer spending and higher transportation costs. For Steve & Barry's, which ran its operations on the thinnest of margins, these factors made it all the more difficult to survive. (but energy inflation does not matter - if you strip out energy and food, everything is dandy - so please keep those interest rates low)
  
• People close to the company's finances say most of the retailer's earnings came in the form of one-time so-called tenant improvement payments from landlords of $2 million to $7 million per store.

Look for many more retailers to come in the next 1-6 quarters. Once more, I stress, the consumer discretionary area will be (and is) the next (current) financials. If you are not catering to the very low end (where the middle class are fleeing too) or the very very upper end (in which case you feel no pain from silly things like $4 gas) - you are in trouble - as the American middle class is gutted by inflation and inability to get wage gains that reflect "true" inflation. It will take time to play out since (a) we stole money from our grandchildren so Americans can 'spend, spend, spend' (rebate checks) and (b) people are borrowing against credit cards to stay afloat. That ends eventually as the limits are reached and/or the credit card payments overwhelm the budget. Then the personal bankruptcies begin in large numbers - that's going to be a 2009/2010 issue. But it's setting up for a great post-cleansing 2011.

This is the spiral we've been talking about for a long time - the exact opposite of the "credit expansion, spend over your heads, charge it on my house ATM" service economy the US has morphed into the past 10-15 years. Each service job relies on other service jobs - once the first jobs begin to be wiped out - all the the jobs that rely on those people to spend on services, begin to erode. It's a chain reaction. Many service industry jobs will be lost - we overbuilt our stores because people were spending over their heads. Right Starbucks? [Jul 2: Starbucks Tells Walmart - "Here you Take Them!"] 12K Starbucks workers. 16-17K jobs here from Steve & Barry's. 75-125K Wall Street Jobs (just getting started). Auto workers here. Carpenters there. Airline workers to the right. Mortgage brokers to the left. 10-15K there. 3K here. 8K there. Eventually it adds up even if the government tell us a ton of jobs in "new businesses that are too young to show up in statistics" are popping up by the day. What a farce. You will see strip malls in many of the hardest hit states empty out (you would not believe what some parts of metro Detroit area - solid middle class neighborhoods - now look like in terms of strip malls - 5 out of 7 storefronts empty here, 4 out of 6 empty there - over and over and over. You drive around wondering who will be "missing" since the last time you drove past that spot). I've written throughout last summer and last fall that many of those small, one off (non chain), restaurants will simply disappear (killed by rising food costs on one side and killed by retrenching customers on the other side). Same for small service stores - the small businesses that make up 80% of American jobs - florists, dog groomers, nail technicians; all the non essentials. Where there were 3, there will be 1 left.

Unfortunately this is simply a very sad cleansing from a perfect storm of issues - I won't repeat them because we have talked about them ad nauseum since last summer. They are simply now coming home to roost all at once. Technically we might not even hit a "government measured" recession because their numbers are a complete fantasy - but read behind the scenes and when multiple sectors of our economy are in depression - autos, airlines, housing, finance, and retail.... you tell me how in an economy which is 70% based on spending we cannot even get -0.1% GDP (whereas Canada has gone negative? Please). The government statistics are now beyond folly. (why is consumer confidence at 28 year lows if the aggregate numbers show such strength we hear from our friends in D.C. with their gold plated benefits and six figure salaries - living in a parallel universe). Years upon years of trickle "down" economics are showing to be nothing more than trickle "on" economics - you know when the greatest proportion of GDP ever goes to corporate profits and the least percentage ever to employee wages = something eventually breaks. And "it" (employees) are now breaking - slowly but surely. Maybe the market is signaling they are seeing this, and why we are getting this relentless flood of selling.

Oh look there, another 2,500 jobs lost at Northwest Airlines; but that's ok - because it's an old school industry and we don't need those type of jobs. Send these folks over to Walmart along with the Starbucks folks, the auto workers, the hotel workers, the Las Vegas folks, the Steve & Barry workers... man we're going to have a Walmart every 50 feet at this pace to keep up with all these new workers that need a home. Walmart, federal government, and healthcare - the "growth" areas of the economy ex farmers and wildcatters. How about a national inititiative to at least put the construction guys back to work rebuilding our crumbling infrastructure with the NEXT stimulus? Nope that would make too much sense - let's just do more borrowing from China to hand to people to spend on luxuries such as ... food. And gas. The booming 2nd half 2008 recovery we were promised for the past 6-9 months has commenced. Aren't we all enjoying this?

Unfortunately the great cleansing has to happen. Housing prices need to fall to a level people only spend 30-35% of their salary on a roof over their head. [What Should Median Housing Prices be Today?] So they can pay for all the other things in life. Many of which increasing at 10-20% rates. The income pie for most is growing at best 3%ish. For many, as they lose jobs at higher pay, and take newer jobs at lower pay (when desperate you will take any pay)- their income pie is shrinking. That leaves even less money for "discretionary spending". So unfortunately the inflation is things we don't directly control (but need) could lead to the Fed's greatest worry - deflation. Deflation is what gets rich people worried - after all for that small sliver of society assets, not income, is what matter most. When assets deflate - then they will feel like many in the middle of America are now feeling. Poorer.... and feeling "trickled on".

[Stuff I've Been Negative on Since Last Fall]
[Do the Bottom 80% of Americans Stand a Chance]

Shaw Group (SGR) - Solid not Spectacular

Shaw Group (SGR) is a former fund holding we closed out a few months ago (quite poor timing on that one) [May 13: Closing Shaw Group] - not my favorite nor least favorite global infrastructure stock. The main kicker with Shaw is it's an ancillary play on the potential nuclear buildout coming to the world/US. Not a ton of year over year growth but it's been favored of late by the market (previous to this selloff in the group) due to the nuclear angle I believe.

Backlog is continuing to show impressive growth. Most of their work is in the US (negative) but it's with the unlimited pockets of the federal government (positive) as opposed to local governments. (a few quarters ago about 85% of their business was in the U.S.) They also have a lot of typical energy projects which we do like. Here are some highlights from it's earnings report last night.

• The Shaw Group Inc. (NYSE: SGR - News) today reported net income for the three months ended May 31, 2008, of $53.9 million, or $0.64 per diluted share, compared with $54.1 million, or $0.66 per diluted share in the third quarter of 2007. The reported results for the third quarter of 2008 include a net loss of $4.8 million, or $0.06 per diluted share, related to the Westinghouse segment. Excluding the Westinghouse segment, net income was a record $58.7 million, or $0.70 per diluted share.
• Revenues for the third quarter fiscal 2008 grew 14 percent to a quarterly record of $1.8 billion, compared to $1.6 billion in the corresponding 2007 period.
• Shaw’s backlog of unfilled orders at May 31, 2008, rose to a company record of $16.4 billion, up $3.1 billion or 23 percent from a year ago, and up 15 percent from the second quarter of 2008. The record backlog excludes the majority of the work expected to be performed under the EPC contracts signed during the quarter with Southern Company and SCANA, and the letter of intent signed with Progress Energy, for a total of six new Westinghouse AP1000^TM nuclear reactors, as Shaw continues to operate under limited notices to proceed for these projects. Approximately $6.5 billion, or 40 percent, of the current backlog is expected to be converted to revenues during the next 12 months.
• “The record new awards in the quarter and our record backlog are indicative of Shaw’s position in its core markets today. Notably, the E&I segment added more than $2.7 billion in new awards during the quarter, and has nearly doubled its backlog to $5.2 billion. The increase in E&I’s backlog was driven by the $2 billion contract modification for the Department of Energy’s MOX project in South Carolina and the $700 million Army Corps of Engineer’s Inner Harbor Navigation Canal Hurricane Protection Project in New Orleans. Looking ahead, we expect Shaw’s strategic position in the growing nuclear power market combined with our strong position in our traditional markets to drive revenue and earnings growth into fiscal 2009 and beyond,” continued Mr. Bernhard.
• Shaw continues to expect earnings per diluted share, excluding Westinghouse, to approximate $2.30 for the fiscal year 2008.

[Apr 9: Shaw Group Misses Its Numbers]

No position

Just Vicious Out There

The "Guy Bottom" might not be there after all - just a poor market where no rallies hold. I have no analysis for you other than this is vicious action. The bear snickers at us! This has to be the 3rd or 4th failed "reversal" in the past few weeks. The total inability to follow through for more than a few hours stinks. This is feeling more like 2001-2002 by the day.

I thought I could put the buckets away for a day or two - apparently not. Where are those darn unicorns, butterflies, and mermaids? The 2nd half recovery was supposed to begin a week and a half ago! :)

Well we were actually up 3% around noon for the day. Unfortunately rallies don't last more than 4 hours around here anymore. *Poof* goes the nice day. Might get those natural gas target prices after all.

I won't sell my Mosaic. I won't sell my Mosaic. I won't sell my Mosiac (need to practice ahead of time)

Hide the children.

Alcoa (AA) - the Expectations Game

Alcoa (AA) earnings are the traditional kick off of every quarterly earnings season. I don't really follow this name much simply because, while it's a basic material, aluminum is not exactly my favorite. But I'd like to show readers the reality behind the numbers, while the seals on CNBC were clapping and hooting and hollering about the "beat". I'd also like to show you a trend you will be seeing this earnings season, and the ones coming - higher input costs. And squeezed profit margins - we've been warning about this "era" coming since last summer. It's now here.

First to the "great news" - Alcoa "beat" estimates - 66 cents versus 65 cents. So the seals cheer "better than expected". It's a joke. 90 days ago Alcoa was expected to do 77 cents, 60 days ago that was lowered to 75 cents, 30 days ago it was lowered to 73 cents, and JUST A WEEK AGO it was 68 cents. So they would of missed ALL these estimates. Only in the past few days (by miracle - not) the analysts were "guided" to push their numbers to 65 cents, and TA DA - we can have the seals crying with joy over the "better than expected" number. YEE HAW Cowboy.

Other reality checks?

• Soaring energy costs and inflation in raw materials have eaten away at Alcoa's profits in recent quarters. "The energy situation along with the inflationary pressures on many materials has increased the cost of aluminum refining and aluminum smelting by 20 to 35 percent between 2005 and 2007, and we would expect a similar rate increase this year," Chief Executive Klaus Kleinfeld said on a conference call.
• Alcoa Inc.'s second-quarter earnings fell nearly 24 percent - Net earnings were $546 million, or 66 cents per share, compared with $715 million, or 81 cents per share, in the same quarter last year, the company said.

So cost inflation is eating away their profit margin - and their profits are falling by a quarter year over year. A picture of health! Better than expected!

I cannot stress how you, as an investor, must read past the headlines. I do realize (and it drives me crazy) that a lot of people only read the headline and like lemmings a horde of buying orders comes in as long as Reuters says "beat expectations" - that's the "game" - and we are the guilty party as investors for creating this - it's all about "beating the numbers" - nothing long term matters. Everyone sits on their online brokerage account waiting for that press release at 4:10 PM, with the "analysts estimates" memorized, the "whisper number" memorized, and ready to hit buy within 9 milliseconds of the headline crossing the wire if the "number is beat". Or vice versa if not. Or loading up ahead of earnings and pulling down the arm of the machine - Joker... Joker... Joker (those who do not watch 1970s game shows have no idea what that reference means). And hope it spins jackpot for us! The adrenaline rush - yeah! That's not gambling is it? hah.

So companies have to play along - CEOs pull out all the stops to make sure they don't disappoint on a 90 day rolling basis (90 days means nothing other than on Wall Street - it is a very short amount of time to judge a business). They have stock options to worry about after all - so they press the envelope to make sure the numbers are made one way or the other. (see it's all ingrained in the entire system). Stocks move many times up 20% or down 20% simply on that "magic headline". It is a sad state but that's what "earnings season" has become. And this is why (for newer readers) you will see me cut back on almost every position going into its earnings - it's a gamble. And it's not even a gamble that makes sense - companies skyrocket on nothing more than currency gains or "1x adjustments" that mean nothing to their long term business, while other companies get smashed for "spending on Research & Development" (how DARE they think long term if it costs them to not beat the numbers by the 'appropriate' amount this quarter) or "guiding for 68% growth when expectations were for 72%". And just like that, a real fundamental story can implode in your face to the tune of 25-30% in after hours, for no good reason. Not worth the risk.

So the headline we all wake up to today is Alcoa is a beast, and its shares were up 5% early today- they beat their number; Fast Money traders rejoice. The reality is, this is a company that is not doing well - in my eyes. Expect a lot more charades like this, in this - and every earnings season. The only positive is sometimes you can pick up good companies the market has smashed in the mouth because the "headline" was not what the lemmings were hoping for. But that's a hollow victory when every day in earnings seasion is a literal mine you could be stepping on if the "headline" is not what the lemmings want.

Short lemmings

Haynesville Natural Gas Plays Refuse to Sell off - Goodrich Petroleum (GDP), Petrohawk Energy (HK), GMX Resources (GMXR), Comstock Resources (CRK)

We've discussed recently the hot new place for natural gas is the potentially enormous Haynesville Shale [Jul 2: Petrohawk Energy and Chesapeake Energy Flying on Haynesville Shale News] (EDIT: Let me add 2 additional names) I've been hoping one of the 4 names closely associated with this space, either Petrohawk Energy (HK), Goodrich Petroleum (GDP), GMX Resources (GMXR), and Comstock Resources (CRK) would sell down to their 50 day moving average now that natural gas has finally been hit. But no mas as the charts below show.

Things are going so well, that Goodrich actually placed a 3M share offering at $64 today and the stock is trading above it. That's a sign of serious strength - this is about a 10% dilution.

• Goodrich Petroleum Corp. late Tuesday priced its public offering of three million shares at $64 each, a slight discount to the stock's last closing price of $64.96.
• Net proceeds, estimated at $183.9 million, will be used to pay off Goodrich's outstanding balance on its senior revolving credit facility. The funds also will be used for general corporate purposes, including capital expenditures and expansion of its activities in the Haynesville Shale.
• Goodrich currently has about 33.4 million shares outstanding.

As an aside one of the big players in the field, Chesapeake Energy (CHK) announced a quite large 25M offering last night (the stock is trading off 4% today) but based on previous history - these are the type of breaks in the stock price you do want to buy. [Meet Mr. Gas] CHK is finally back down to it's 50 day moving average.

• Natural gas company Chesapeake Energy Corp (CHK) said on Tuesday it plans to sell 25 million shares of its common stock in a public offering, with proceeds going to temporarily pay down debt.
• Chesapeake also said it also expects to tap the revolving bank credit facility again to fund its plans to expand drilling and leasehold acquisition in areas including the Haynesville Shale in northern Louisiana.
• In March, Chesapeake said Haynesville might hold as much as 20 trillion cubic feet equivalent of potential natural gas reserves.

I am now sitting here wondering do I bite the bullet and jump in one of these 4 holding their 20 day moving average at these prices (i.e. they won't go lower?) Or could take the easy way out and buy the giant, CHK. Still thinking this one through, but prefer one of the 4 smaller "pure plays" in this group - the smaller the better for buyout potential. With the market still looking mighty pathetic perhaps we get another chance at lower prices. HK @ $35, GDP @ $55, CRK @ $65 or GMXR below $60 would be a nice addition to our natural gas basket. Might be asking too much, right Gordon G?

No positions, but stalking eagerly

Mercadolibre (MELI) up 15% on Termination of CEO Stock Sale

What a day - rarely do you get four 15%+ movers. Mercadolibre (MELI) which has been hit with the ugly stick (I've stuck with it), is rallying from a very oversold level on news the CEO won't be selling a 1.8 million load of stock. Analysts are happy. Myself, I am sort of getting tired of this stock since either they are doing a proposed share dilution and that kills the stock or their management gets greedy (like all good public companies) and showers the public with shares so they can buy their 18th house.... err, I mean fund a good college education for their children. We've taken a bath here (actually a bath in every room in one of MELI's CEO's mansions) but it still is a very uniquely positioned company. I wish management would play along - unfortunately there is no peer we can switch to with a more shareholder friendly management. If these people would be a little less greedy "today", we could all win "in the long run". At this point I'll just be looking to lighten the position as it heads (hopefully) back to upper $30s. This is a potential crown jewel being mishandled. I was hoping Ebay (EBAY) would of bought it by now and taken me out in the $70s.

I will say it is nice to see analysts defend a stock after a 50% haircut, unlike a certain mismanaged solar company that falls in half and analysts stand to the side laughing. Goldman is even so kind to downgrade it after a 50% drop! Thanks! I won't name it, but it rhymes with Leena Troller. Not that I'm bitter. As you can see people, management is a big issue with publicly traded companies. Those with the best ones get valuations that are in excess of their peers.

• MercadoLibre (MELI) shares are on the mend today after CEO Marco Gaperin disclosed in an 8-K filing with the SEC late yesterday that he has terminated a stock selling plan under rule 10b5-1 which had been installed on May 20. Under the plan, Gaperin was to sell up to 1,768,794 of his MELI shares.
• Stifel Nicolaus analyst Scott Devitt notes that since he had filed the plan, MELI’s share price has been cut in half, from $54 to $27. He contends the sell-off is overdone, and that the termination of the CEO’s stock selling plan could provide a catalyst for the stock. He notes that Galperin has owned a position in the stock since it was founded in 1999; he owns a 12% stake worth $197 million as of yesterday’s close.
• Imran Khan, an analyst with J.P. Morgan, asserted this morning that the recent sell-off “has created a buying opportunity” in MELI shares. He says Q2 numbers should be strong; he expects revenue of $32.3 million and EPS of 8 cents. Khan says checks find 20% sequential listings growth.
• Tim Boyd, an analyst with American Technology Research, likewise contends the selling in MELI has gotten out of hand. “I don’t think the stock is down for any reason other than it’s a high-multiple growth stock with no real catalyst between now and the Q2 report and investor psychology is horrible,” Boyd wrote to Tech Trader Daily in response to a query on the recent slide in the stock. “I have very high conviction in a strong Q2 report and [management’s] body language has been unequivocally positive over the last two months. It’s a scary stock right now, but a must-own down here. I think earnings gets us back above $40 easily. News of CEO canceling his 10b5-1 plan (which I have never seen before) triggers short squeeze today.”

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

Long Mercadolibre in fund; no personal position

Bookkeeping: Closing Arch Coal (ACI)

We're starting to get portfolio bloat with 60 long positions so I'm cutting the coal basket by 1 name - and Arch Coal (ACI) will be the one to go. I like *every* name in this space, but for now those who are identified more strongly with metallurgical coal are getting the attention, rightly so. The top 3 exporters of American metallurgical coal are Alpha Natural Resources (ANR), Massey Energy (MEE), and ironically Cleveland Cliffs (CLF). These are up 8%, 7%, and 20%ish respectively today. Arch is up 2% :) (no, that is not the reason I am selling)

Thermal coal is seeing all the same dynamics as metallurgical coal in terms of "direction" but simply not quite as sharp of a magnitude, and Arch is more of a thermal coal producer. Since I've added 2 new coal names of late to the portfolio - Walter Industries (WLT) and James River Coal (JRCC) we're still keeping a nice allocation to this sector. I've added a bit to all 4 of the remaining names to compensate for the loss of ACI.

Arch Coal (ACI) has been very good to us with a $8,200 gain since the original purchase back in mid February. We are selling our 1.2% stake right at $65. Again, this is not in any way a negative commentary on Arch Coal as I believe it will be much higher in the quarters to come, since it has a lot of unhedged production in 2009 - for all I know it could be the best performer in the sector in the coming 12 months. Simply some streamlining of the portfolio.

As an aside, this market still looks pukey. Absolutely no follow up to what should of been yet another nice reversal yesterday. What sold off yesterday is blessed today and vice versa. Bah - this market is only good for daytraders.

Long all names mentioned except Arch Coal in fund; long Alpha Natural Resources, Massey Energy, Cleveland Cliffs in personal account

Bookkeeping: Reversing the Fertilizer Sales

Long time readers will know this is about the 678,211,121st (give or take) time I've cut back the fertilizer names as they break support at the 50 day moving average, only to reverse on me within days. [Jul 7: Cutting Some Fertilizer Exposure] I even wrote in that entry

Historically you want to buy them when they touch the 50 day moving average since they bounce, but with the market acting so poorly we could get some washout action.

So ONCE AGAIN - I am repeating the same pattern, and with egg on face buying back what I sold - luckily I sold right near support so we are paying almost the same price to get the position back. It would of been nice to of bought on yesterday mornings dip but I was greedy and wanting even lower prices. (washout conditions) "Greed, for lack of a better word, is good" - but not in this case.

I'm actually even adding more than I sold off, because this *is* my favorite theme and when we're getting news like this from Potash (POT) you just feel dumb for ever selling these names - the best secular bull market there is.

• PotashCorp issued a new domestic potash price list July 8, 2008. Prices for all potash products and grades shipped into the US market are increased by $250 per short ton of product, effective September 1 through November 30, 2008.

Yes the market can dump. Yes we can lose money temporarily on these purchases. But these continued price increases simply mean more and more and more earning beats. And more raised guidance. This combination is in such short supply in the market right now.

So from here on, I will simply be buying on dips and not selling unless we see a big move. I've had Mosaic (MOS) as a 6-7% stake in the past and if we do get dips I'll simply push it to that level again and take some pain in the near term. There *will be* another monster run in this sector sometime in the 2nd half of 2008 and I want to have my bells on when it happens. Damn the short term performance metrics.

Increased stake in...
Mosaic (MOS) to 3.5% of fund
Potash (POT) to 3.0% of fund
CF Industries (CF) to 2.2% of fund

Note to self - every time Mosaic breaks the 50 day moving average you BUY not SELL.

Long all names mentioned in fund; long Mosaic in personal account

A-Power Energy Generation (APWR) Up 15% on Announcement of Completion of Largest Wind Turbine Plant in China

Ok we're having a good day... another of our names is flying - that's 3 of them @ 15%+. Again this is not NEW news to blog readers and this stock was beaten to a pulp in this panic - I actually added a touch first thing this morning to take A-Power Energy Generation (APWR) to a 3.1% stake. This is a good company WITHOUT the wind business, but with the birth of this new line, it's going to be a lot more than good in my opinion. [Jun 27: New Position in A-Power Energy Generation Systems to Create Alternative Energy Mini Basket]

• A-Power Energy Generation Systems, Ltd. (NASDAQ:APWR - News) ("A-Power"), announced today that it has completed the construction of the first phase of its wind turbine production facility in Shenyang, China. The first phase is a 310,000 square foot production facility with an annual capacity to produce 300 2.5MW wind turbines and 420 750kW wind turbines.
  
• “We are excited to announce the on-time completion of the first phase of our wind turbine production facility which we believe is the largest wind turbine production facility in China. This marks a significant event for A-Power as we anticipate that the wind business will quickly become a significant contributor to our revenue and earnings. We are presently in the process of finalizing agreements with component suppliers in both China and Europe. Once this is completed and exact delivery dates are established, we expect to turn our previously announced LOIs for the 2.5MW units into contracts and obtain additional orders for both our 2.5MW and 750kW wind turbines.
• "Based on ongoing discussions with potential customers, we expect that orders will quickly exceed the capacity of our new facility. As a result, we have already laid the foundation for phase 2 of our wind turbine production facility, which, when completed, will increase A-Power’s wind turbine production capacity by another 30%. It is estimated that construction on phase 2 will commence in Q4 2009 and will be completed in about 4 months at a cost of approximately US$10 million. After phase 2 is completed, A-Power will have the capacity to produce 400 2.5MW wind turbines and 550 750kW wind turbines each year.
• "Production of our wind turbines is expected to begin later this quarter and we expect it will become a significant revenue contributor beginning in 2009.”

Long APWR in fund and personal account

Fuel Systems Solutions (FSYS) Up 15% on Upgrade

I don't have details so if anyone has access to this I'd be interested in reading the reasoning/research - since it's a small cap company there is very little coverage. I'd like to take credit for it with my article on Pickens yesterday but apparently it's an upgrade from firm Broadpoint Capital.

• Broadpoint Capital upgrades Fuel Systems Solutions (Nasdaq: FSYS) from Neutral to Buy with a $36 price target.

I truly believe we have the correct stocks - we just have such an awful market, they are not able to show their colors. It's a shame the rest of the economy is in such shambles.

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

Long Fuel Systems Solutions in fund and personal account

Cleveland Cliffs (CLF) Up 15% on Guidance and Starting a Dividend

I actually expect dividend payment to become part of the rule for other commodity makers, especially the fertilizers as they turn into cash flow machines. Cleveland Cliffs (CLF) trading up 15% this AM on this line item along with raised 2008 guidance and preliminary 2009. Boo and Yah. Unfortunately some sucker sold a partial position at $99, citing market conditions earlier this week. (hand in the air) None of the 2008 guidance is "news" to blog readers but I guess it was "news" to the market. If only the market could stay upright for more than 3 hours at a time. Blah.

• As a result of the recently announced iron ore settlements between major Asia-Pacific iron ore producers and consumers, as well as the rising price of hot band steel, Cleveland-Cliffs Inc (NYSE: CLF - News) today updated its 2008 iron ore revenue and cost-per-ton guidance. In addition, the Company provided commentary on expected pricing for its North American Iron Ore segment for 2009.

ASIA 2008

• With the recent iron ore pricing settlements in Australia of an 80% increase for fines and a 97% increase for lump, Cliffs said its Asia-Pacific Iron Ore segment is expected to achieve average revenue per tonne of approximately $102 in 2008 based on its anticipated product mix. This is an 87% increase from the previous year, and up from previous guidance of $89 per tonne.
• Cliffs expects costs per tonne in Asia-Pacific Iron Ore of approximately $55. The increase from the Company’s previous expectation of $53 per tonne is primarily the result of higher expected royalty payments related to higher than expected year-over-year price increases, along with increased energy costs. ($2 is not bad considering the huge increases in input prices for many companies)

NORTH AMERICA 2008

• In estimating Cliffs’ revenue-per-ton guidance in its North American Iron Ore segment, the Company updated its steel pricing assumptions, which is one of many adjustment factors used to determine prices in its North American Iron Ore supply agreements.
• Cliffs said it now expects an approximate 34% increase in adjustment factors related to steel pricing, using an annual average hot band steel price of $750 per ton at certain customer’s steelmaking facilities. This is an increase from the Company’s previous assumptions of 25% and $700 per ton, respectively.
• This new expectation, combined with the other factors used in determining pricing for its North American Iron Ore supply agreements, results in estimated revenue per ton of $85 for 2008, compared with previous guidance of $81 per ton. The Company said each $10 change from $750 per ton in the average hot rolled steel price at certain steelmaking facilities will result in a change in average realization of $0.24 per ton.
• Cliffs expects 2008 North American Iron Ore costs per ton to increase approximately 16% compared with 2007 to approximately $56 per ton. The increase from the Company’s previous expectation of $53 per ton is primarily the result of rising energy costs and higher than previously projected royalty payments. (again we are going to see a lot of this across earnings reports in the coming quarters - inflation is a tax on all things producers and consumers - the only companies we want to hang out in are those who can raise prices at a faster rate than their costs are going up)

NORTH AMERICA 2009

• In addition to providing an update to its 2008 outlook, Cliffs provided commentary on its 2009 pricing expectations for its North American Iron Ore segment, which sells virtually all of its production under long-term supply agreements. Cliffs indicated that, assuming no change in World Pellet Prices in 2009 and no changes in producer price indices or steel pricing (all adjustment factors that determine its pricing in North American Iron Ore), average realized 2009 price per ton would be approximately $107. This 26% increase compared with the expected 2008 average price realization is based on contractual base-price adjustments, lag-year adjustments and price caps contained in the Company’s current supply agreements.

DIVIDEND

• Mining company Cleveland-Cliffs Inc. said Tuesday that its board declared a quarterly cash dividend of 8.75 cents.

Note to self. Keep remembering that not only is Cleveland Cliffs a man among boys, but also a takeover candidate. [Jun 24: Cleveland Cliffs - A Man Among Boys]

Long Cleveland Cliffs in fund and personal account

Sell Coal Stocks! The Dollar is Up 0.000002%!

Danger Will Robinson! Sell coal stocks - CNBC says the run is over! CBSMarketwatch opines after a 2 day correction "Have Commodities Peaked?". 2 days - that's massive - the end of days are upon us. Crude might "fall" to $115 and the malls will be teaming with over eager consumers basking in $3.50 gasoline. As goes crude, so goes coal - I mean it's the same color! Bernanke will be attacking inflation with the use of 3 and 4 syllable words (not raising rates but using even STRONGER language) as the 1 and 2 syllable words were not effective at "breaking the back" of inflation so far this summer. Get out! Hurry!

Bloomberg July 8 - China Shuts More Coal Power Plants; Warns on Shortage

• China, the world's second-biggest energy consumer, shut 2.5 percent of its coal-fired power plants, prompting local governments to limit electricity consumption and issue warnings on possible blackouts. Insufficient coal supplies forced the closure of 58 power- generating units in central and northern China as of July 6, or 14,020 megawatts of capacity, data from the State Grid Corp. of China showed yesterday.
• Coal inventories at State Grid, the country's biggest power distributor, were enough for about 11 days of consumption as of July 6, compared with 12 days in April and 15 days in March.
• ``The power problem is beginning to look deep-seated and structural and unlikely to be resolved rapidly,'' said John Kemp, a London-based analyst with Sempra Metals Ltd. (Yes John, welcome to the reality of a World of Shortages)
• The latest power-plant closures come even as the government last month imposed ``caps'' on thermal-coal prices through the end of the year to control raw-material costs and ensure electricity production. ``Coal suppliers may sell the fuel to consumers willing to buy at much higher prices."
• Aggravating the shortfall, China has been shutting thousands of small and unsafe mines in Shanxi and other areas. China generates almost 80 percent of its power from coal, with the northern province its biggest producing region.
• The central province of Henan restricted electricity use in eight cities as power plants shut because of fuel shortages, Xinhua News Agency reported on June 27. Henan will face a power deficit when consumption peaks in summer, it said.
• State Grid Corp., which buys electricity from 541 coal- fired power plants and distributes it to more than 1 billion people across the country, said yesterday the coal stockpiles of 64 power plants have fallen below the ``caution line.'' That means that the inventories of those generators can't meet more than three days of consumption
• Overseas suppliers may be unwilling to sell the fuel to China because of the government caps on domestic prices announced on June 19, Fang said on July 1. That would aggravate the country's coal shortages. (hmm, here is a solution - pay up)
• Global coal prices will ``move modestly higher over the next six to 12 months,'' Daniel Brebner, UBS AG's executive director of commodity research in London, spoke in a phone interview on July 3. ``You have infrastructure issues building in both the U.S. and Russia, and a potential power crisis in China over the summer.'' (so the US is just like any old BRIC developing country eh?)

Russia you say?

• Russia's hydro power levels have fallen to the lowest for 16 years and coal-fired plants are struggling to take up the slack because a rail wagon shortage is making it hard supply enough fuel, Russian coal exporters said on Monday.
• "The acute water shortages are in the European part of Russia, the stations on the Volga river, and these account for about one-third of our electricity production," Yushin told Reuters. (water - the ultimate shortage)
• On top of that, there are around 20,000 rail wagons in Russia but 30,000 are probably needed, with old old wagons falling apart three times as fast as they can be replaced.
• "The Chinese don't have wagons to spare for export. They have their own huge need to meet," a Russian coal mining source said.
• Not only large-scale coal-fired plants but also smaller communal combined coal-fired heat and power plants serving several apartment blocks could run out of fuel in the winter due to transportation problems. "The coal plants usually buy their fuel for the winter now, in the summer, and build stocks. At this rate, if nothing changes, we think there could be four power stations shut down during the winter in the west of Russia, at Murmansk, St Petersburg, and elsewhere," an exporter said.
• The government is likely to displace some coal exports from the rail network in order to prioritise the movement of domestic coal, the exporters said. (ok so you're saying that Russia will keep coal in house instead of exporting to China - got it - let me go sell my coal stocks) "The producers all have large stocks of coal in Kemerovo and elsewhere at the mines but they can't move it because there are so few wagons," another major exporter said.
• Even without a hydropower shortage Russian coal exports were projected to fall by at least 10-12 million tonnes in 2008 from around 85 million tonnes total thermal and coking coal last year, exporters said. (that sounds like a problem, but coal stocks are down and CNBC says the run in commodities is over - sniffle - I better sell)
  

Desperation anyone?

• More U.S. coal is moving to Asia, including the first Utah coal and the first whole cargo of Powder River Basin coal through Westshore Terminals at Vancouver, Canada, market sources said Monday. Utah coal has never before moved through Westshore, the largest dry bulk terminal on North America's West Coast, and Powder River Basin has shipped there only as part of a blend, said Denis Horgan, terminal general manager.
• "It's because there's such a shortage in the world market now," said John Hanou, vice president of Hill & Associates, a coal consultancy. "It tells you how desperate people are." "We're seeing inventories around the world depleted," he said. (but... but... the dollar is rallying here and all commodities must be sold - the hedge fund playbook says so)
• A person familiar with the PRB market said the coal is going to South Korea to replace Indonesian power-plant-grade coal, which is comparable to PRB. "Never, ever, has Utah coal gone through here before," said Horgan. "The rail rate is prohibitive, and it can only happen in a high-price scenario." The Utah mine is more than 1,600 miles from Vancouver, making the haul one of the longest ever done for export coal in the United States, Hanou said.

Well all we need to do is get some more mines up and running, and take care of this shortage lickety split! Err... umm....

• The cost and lead time involved in acquiring new equipment are among the impediments to raising coal production in the United States, a coal company executive said on Friday.
• The cost of both machines and supplies has risen sharply, and manufacturers need lead times of as much as 36 months to deliver equipment, said Paul Vining, CEO of Magnum Coal.
• For example, the cost of roof bolts, the long rods driven into mine ceilings to secure tunnels, has risen 60 to 80 percent in three years due to higher steel prices, Vining said. (No inflation here Ben - I mean I don't eat roof bolts so it's not food, and I don't light my house with roof bolts so it's not energy - but don't you worry, it's not part of the core rate so it doesn't exist - let's keep those rates super low!)
• As for lead time, it takes 18 to 24 months to get a new mining machine and up to 36 months to get a big coal-hauling truck. Even tunnel tram cars take 15 months, he said.
• The equipment and supply issues come atop tighter government safety and environmental regulation, a shortage of qualified labor and declining reserves, Vining said. (but other than that, there should be a booming supply of coal any week now)
• He said productivity in the key Central Appalachian area -- the amount of coal produced per worker -- is down 15 percent in the past three years due to the various challenges.

For your own safety - please ignore CNBC. And if your timeline is any longer than 4 weeks, get some coal. Again. [May 1: Walter Industries - the Most Amazing Company] I wrote then

So as you see the "strong dollar" is not going to do diddly unless it appreciates by say 750-900% by next year at this time... at which point I'd still be a bull on coal. As long as those Chinese want steel at any price, we are happy campers. I am trying to hand you a gift here, so that you make enough money so that EVERY reader can invest in my mutual fund when we launch in 2009 (right?) - remember, coal is going to be next year's fertilizer... with CNBC anchors aghast at coal and wondering "where did this all come action come from, I thought the bubble ended last year with that stupid potash!". I'm telling you now, a year ahead of time. I'm using Alpha Natural Resources (ANR) and Massey Energy (MEE) more specific for the metallurgical coal but any coal name has some exposure. [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In]

I'm reiterating the table pounding. Whatever the stocks do in the next 2-6 weeks. Same for "this year's" fertilizer - namely, fertilizer. ;) Ignore the punditry that streams out every 10-12 weeks about the end of an era.

Note to newer readers - I post a variation of this same entry 3 months and will probably continue to do so for, oh another decade. [A Long Term View on Commodities]

Long a bunch of coal and fertilizer; short CNBC pundits

Fluor (FLR) v Perini (PCR) - a Rising Tide does not Lift all Boats

Fluor (FLR) and Perini (PCR) are in the same sector - infrastructure. That's about all they have in common. I have owned both at one time or the other, but clearly owning Perini (PCR) was a mistake. My thesis with infrastucture is to focus on the customer base - oil rich Arabs, trade rich Chinese, and essentially bankrupt (federal) US government with unending pocketbook (read: your taxes) who runs deficits to their hearts content. That was my error with Perini - unfortunately their customer base is heavily focused on non federal government Americans (although they are trying to change that) i.e. local governments, US customers who need credit lines - casinos for example [Jan 17: Perini Shows Collateral Damage of Tightening Credit + Slowing Economy]

Construction company Perini Corp (PCR) said Deutsche Bank on Wednesday delivered a notice of loan default to the developer of the Cosmopolitan Resort and Casino project under construction in Las Vegas, Nevada.

Now compare this to the type of projects Fluor is working on - wind energy [May 16: Fluor as a Play on Wind? $1.8 Billion says Yes], solar energy (huge contract with LDK Solar), business with Kuwait, business with the US Department of Energy [Jan 11: Infrastructure Companies Cleaning Up on Contracts] The chart below shows the 1 year relative performance and you can see, based on customer bases alone, the massive difference. The call in this group for long time blog readers has always been - focus on their customer base.

(click to enlarge)
Now with that said, my one concern in this sector is the increasing cost of steel might curtail "some" projects, even for cash flush foreign customers, but all things relative - we still want to focus on those with customers not having to deal with US credit markets, or local governments which actually have to balance a budget unlike our "bottomless pit of spending" federal government. And once again, this shows - even if you get the trend right, picking the right boat to ride the wave is still very important. We closed the last of our Perini last November near $56 (for a smallish loss) as the stock was acting technically weak (breaking support); 8 months later it's a $25 stock.

Long Fluor, LDK Solar in fund; no personal positions

Readers Homework - Do Your Pickens

T Boone is everywhere today [May 20: Oil to $150 by End of Year] - CNBC, Good Morning America, USA Today - and since our leadership is ignoring the problem.... err solving the problem by suing OPEC and proposing gas tax holidays - he has launched his own website "The Pickens Plan" and a publicly tirade, err campaign. Thankfully he is incredibly rich so he can afford to do this and get the facts out in front of the people. Middle class people in this country with ideas need to either band together in huge groups to aggregate their money, or be left out in the cold. So we need to get the message out to people, because only when they pressure their representatives to a huge degree, does it appear the politicians will bow to the people over the lobbyists. (what a country) As I wrote in May, there is great irony that an oil man is leading the national vision for a move away from oil (of course he has his hands in water, natural gas, and wind so he will profit from the eventual moves but that is just being smart)

When a flipping OILMAN is leading your green movement, you know you have problems of economic incentives and vision by government.

I "got's" me some Pickens videos all over the place and at the bottom is the USA Today story which you can read as well. There are more videos on the CNBC site but I can only embed these on the website. Pop Quiz Friday - do your homework.

• Get ready, America, T. Boone Pickens is coming to your living room. The legendary Texas oilman, corporate raider, shareholder-rights crusader, philanthropist and deep-pocketed moneyman for conservative politicians and causes, wants to drive the USA's political and economic agenda.
• "We're paying $700 billion a year for foreign oil. It's breaking us as a nation, and I want to elevate that question to the presidential debate, to make it the No. 1 issue of the campaign this year," Pickens says.
• Today, Pickens will take the wraps off what he's calling the Pickens Plan for cutting the USA's demand for foreign oil by more than a third in less than a decade. To promote it, he is bankrolling what his aides say will be the biggest public policy ad campaign ever "Neither presidential candidate is talking about solving the oil problem. So we're going to make 'em talk about it," Pickens says.
• Were it a country all by itself, Nolan County, Texas, would rank sixth on the list of wind-energy-producing nations, says Wortham. Year-round wind conditions, the terrain, low land prices and a small population make it an ideal location for wind farms. It already produces more wind-generated electricity in a year than all of California
• Add those operating further west, the Permian Basin region around Midland and Odessa, and the entire area has more than 3,000 turbines operating, producing about 6,000 megawatts of electricity — about equal to the power produced by two to three nuclear power plants. New turbine towers are going up at a rate of three to four a day in the Sweetwater area, Wortham says. "It depends on the (Texas) Public Utility Commission, but the number could be 20,000 ultimately," Wortham says.
• Getting lots more electricity with wind is only half of the Pickens Plan. Increasing wind-power production by itself won't reduce U.S. dependence on foreign oil because most of that oil is consumed as gasoline.
• The key, Pickens says, is that wind energy can be used as a substitute for natural gas now burned to generate electricity. That, in turn, will make far more natural gas available for use as a transportation fuel. Pickens' plan is to produce enough wind power within 10 years to divert 20% of the natural gas now used to fuel power plants for use in cars and trucks.
• Powering vehicles with compressed or liquefied natural gas, CNG or LNG, has been Pickens' pet project since the late 1980s.Yet the concept has been very slow to catch on.
• Distribution is a major problem. CNG drivers can, like Pickens, install inexpensive equipment to fill up at their homes. But with fewer than 800 natural gas filling stations around the USA, drivers can't count on being able to fill up wherever they go. So, for the most part, CNG, or LNG, has remained limited to fleet operators, such as local bus companies or big-city police departments.
• Pickens aims to shout down the skeptics by taking his case to the people via his TV ad campaign. If the nation is to break its addiction to foreign oil, a network of CNG stations could be built along interstates and in major cities for a relatively small investment, he says. Some gasoline retailers have told him they would add CNG pumps to their stations once they're certain there'll be enough vehicles capable of running on natural gas to justify costs.
• Washington, Pickens adds, can encourage the move to natural-gas-powered vehicles by providing modest economic incentives for fuel retailers to invest in CNG pumps at their stations, for automakers to build CNG-powered cars and for individuals to convert their existing vehicles to CNG use. (Australia does this, would the U.S. ever be so progressive and forward looking?) And it should continue to provide tax incentives for another 10 years to encourage wind energy's rapid development as part of an overall plan to wean the nation from foreign oil, he says.
  
• "Try everything. Do everything. Nuclear. Biomass. Coal. Solar. You name it. I support them all," he says. "But there's only one energy source that can dramatically reduce the amount of oil we have to import each year, and that's (natural) gas."
• Critics could easily accuse Pickens of advocating a major new public policy initiative that will line his own pockets. He is, after all, a big player in both the wind power and natural gas businesses. Pickens says that while his hedge fund will earn money for its investors, earning more money personally is meaningless: "I'm 80 years old and have $4 billion. I don't need any more money."
• Washington's role, Pope said, should be in setting the goal and clearing roadblocks such as the patchwork of state, regional and federal regulations that block the creation of a true national grid that can shift electricity from anywhere in the country to anywhere that it's needed. (Fat chance!! I mean, "go team"!)

So in my World of Shortages scenarios these are the type of things we need. They are must haves and technological shifts that WILL happen as economic pressures mount. The question is, will we approach these sort of things in REACTIONARY mode (as we do everything else) during CRISIS, or will we ever be proactive on anything in this country? I really don't know but my hopes are not high based on precedent. If nothing else and it did not save us ONE DIME - it would be better to spend the money "in house" (we are the Saudia Arabia of coal, and close to it in natural gas) then sending it to governments who frankly do not like us (I'm not talking about you Canada!)

Anyhow, for those interested Pickens has a company he backs for natural gas for fleets - Clean Energy Fuels (CLNE) - [not profitable] which has not taken off yet since coming IPO. Myself, I've chosen to go the route with Fuel Systems Solutions (FSYS) [very profitable] which makes those conversion kits that many other countries are subsidizing so their population can move from petrol to nat gas. [Jul 2: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Again this is an issue that should span political lines - Dems can make it a green issue, Reps can make it a national security issue. Too bad lobbyists are more powerful than the people. Whatever. When oil is $200+ in 2010 (going to $115 first) we can start "working on the solutions in bipartisan fashion" I suppose.

Long Fuel Systems Solutions in fund and personal account

Bookkeeping: Worst of Breed Rally

I have to tell you it is almost uncanny how every recent correction has played out almost identical. We've been talking about this for the past month - first goes the weak sisters of retail, financials, and homebuilders (the "early cycle recovery" stocks), then come the non early cycle but non commodity (tech is a great example), and everyone runs into commodities as a "safe haven" while the rest of the market crumbles. At which point, the bears come to the safe havens and maul the last group hiding. (that stage has happened over the past week)

Then we move to the next stage where the hedge funds, flush with the governments 'easy print' cash need to find someplace to run up, so they go back to the early cycle names (along with short covering). Aside from yesterday which appears to be a situation that was specific to Fannie Mae and Freddie Mac, we seem to have been entering that phase the past week - these sectors, if not rallying, stopped going down. Only homebuilders were lagging. And most joined the party today.

The only thing missing this time around has been that truly "watershed" selloff where all parties are indited. Maybe it happens, or maybe the 6 weeks straight of selling was the watershed, just in a rotational pattern. I don't know. But in weeks like this (where as I wrote the indexes would hold up, or even rise) and our global growth portfolio would get smashed, while our Ultrashorts in Retail, Commercial Real Estate, and Finance would blow up in our face (at the tail end of the corrective process) we'd have performance like this -- index +1%, Rising Tide Growth -6%. And I'd kick the proverbial dog. To allay this to some degree, I've tried to add a small barbell approach (owning some "junk" sectors) while as discussed and you can see in our holdings, completely slashed short exposure to the bad sectors in the past week. In fact, we've gone so far as to go long the Financials (for a trade). Well we're still getting our head handed to us, but it's not quite as bad as the previous iterations. I am simply amazed that the pattern is playing out so identical - usually on Wall Street, once a pattern is detected it's exploited and becomes useless very quickly. You can see today the short covering in the Crocs (CROX), in the Under Armour (UA) etc - all the most beaten down merchandise flying. This makes for trecherous shorting since it is very difficult to short what has been working for weeks on end, and even the index shorts are working against you.

With that said, I want to see the S&P over 1275 to feel more frisky (1270 seems to be the new resistance) BUT I am going to add some long exposure in areas that usually hover closer to the bottom of the portfolio - i.e. non commodity type of stuff

First, we're adding to homebuilder DR Horton (DHI) position - while Lennar (LEN) was up 11% today, DHI has been up around 4%ish. So simply as a 'catch up' buy.

The next 2 buys are simply Chinese names that have shown some great relative strength of late - WuXi PharmaTech (WX) and Perfect World (PWRD). The former is a "healthcare" stock which the Street has been running to (along with tech) of late, although it's treated as a "Chinese" stock instead of a healthcare, and the former we've simply been waiting for it to break its head over resistance. These latter two I've had as 0.1-0.3%ish type of exposure so I'm simply making them into 0.8% type of holdings each.


If "the pattern" continues - commodity stocks will act listless for a week or two, everyone will call the death of commodities - all the hot money chasers will get bored since "these stocks suck - they don't go up 8% everyday" - and in about 10-15 days they'll take off. Again, it cannot be that easy, but I am just outlining how it has worked in the past. So I'm buying merchandise that is not in that wheel house. With the market holding in here well to close the day, I am sure the Invisible Hand will work its magic in premarket tomorrow and get us north of S&P 1275 ;) We'll see tomorrow at 9:29 AM.

Long all names mentioned except Crocs, Under Armour in fund; long DR Horton in personal account

Gaps Being Filled - Another Positive. Mastercard (MA) and Fluor (FLR)

A lot of earnings gaps are being filled... gaps are a controversional subject in the technical trader world (of which I am loosely associated, although I am more of a fundamentalist) - BUT we have to respect charts and frankly the world looks a lot scarier without them because all you see are stocks in free fall. I went many years without using charts when I first started and looking back now, I don't know how I did it - it seems completely foreign not to look at them at this point. The controversy of gaps comes with the question - do all gaps get filled? No, not all gaps get filled, but a good many do. Let me show you two stocks I have sold off at higher levels patiently waiting for their gaps to fill - both just filled them in the past 24 hours.

Fluor (FLR) @ mid $160s - FILLED!

Mastercard (MA) @ low $240s - FILLED!

Now that is a positive step. However that does not mean this is "the bottom". Certainly I could see the way things are going Fluor fall to it's 200 day moving average of mid $150s and Mastercard down to just under $220. Or maybe they stop here and reverse - but at least with technical charts you have some sort of roadmap. And I cannot stress that once again, this is simply not a buy and hold market. Even the best stocks eventually are being taken to the woodshed, and I'm not talking the cursory 5-10% correction that happens in long winded bull market movements. Mastercard, probably one of the safest fundamental stories in my universe, just dropped 25% in a matter of a few weeks. These are serious corrections that erase all your unrealized gains - in just a few sessions. No matter where you are hiding. Hence I'd rather pay taxes (our last sale in MA was in early May right near $300) and lock in gains along the way instead of giving up all our gains and saying "hey no taxes if you buy this fund!" If we are in a bull market, we ride the trend and make less transactions. This is not a bull market (in case you did not get the news alert)

Again, the one gap I am keeping my eye on is this one below - it would make me much more bullish if this one filled as it would signal complete "throwing in the towel"; but with the "tech is a safe haven" thesis maybe it won't. Or maybe an earnings disappointment will be needed to do the trick. Or maybe it will "never" fill (I doubt it)

NOT SO FILLED!

[May 16: Fluor as a Wind Play? $1.8 Billion Says Yes]
[Apr 29: Mastercard Continues to Impress]

Long Fluor, Mastercard in fund; no personal position

Still No Panic

We are doing all the things necessary to form a bottom - the natural gas stocks are finally being hit, fertilizer is now joining coal in the outhouse, and we are getting some minor rotation into financials. All things we've been looking for to form a bottom.

On the negative side - this move into technology as 'safe haven' is, aside from idiotic, stalling the process - now people are using Apple (AAPL) and Google (GOOG) as safe havens. We need to eliminate all safe havens. And then it will be safe(r) to swim. The VIX is still in the mid 20s unfortunately - I'd like to see it cross 30. (What's the VIX you ask - read here)

This has to be one of the more orderly carnages I've ever seen. We're taking a lot of boffo hits in the portfolio in individual names, but I remain on the sideline with new buy orders despite some salivating prices since I want to have cash at the ready when (if) a real panic emerges. I still don't see that panic. Maybe there will be no "panic moment"... but I am hoping for some between now and Friday when I think General Electric (GE) [just a hunch] will provide a soothing moment to the market. We have a slew of multinationals who report in the first two weeks of earnings season and many will be able to put up good numbers on the destruction of the US peso alone. So that should create a counter trend rally *IF* we could get some sort of washout. We should of opened down heavy this AM but I believe the Invisible Hand was in there doing their tricks of buying futures in premarket... if they'd just let us wash out it would be less frustrating. Pulling off this band aid every day is getting old.

I am interested in getting some of these countertrend plays like Big Lots (BIG), Embraer (ERJ), or Cash America (CSH) <--- by the way putting in another strong performance today. I like the beaten down merchanside here over the stuff that still should be taking a beating. Like "safe tech". I do own Ciena (CIEN) but it's a "beaten to hell" tech.

We'll see how the market handles S&P 1225. If no hold there, then maybe the panic will begin. Every move up without crossing over S&P 1275 is just fools gold for now...

Remember, we predicted this sort of action in our weekly summary... the indexes look benign but damage underneath is extreme. This has been the pattern near the tail end of other corrections. And it makes it nearly impossible to outperform the indexes on weeks like this (S&P is down less than 10 points for the week as I write this, whereas many individual names are losing 7-10% a day)

If past is prologue we might have one of these transition weeks where the markets do falter (some) but not as bad as previous weeks - however the strongest groups of the past (global growth) take much more serious damage.

Long Apple, Ciena in fund; long Ciena in personal account

Has Embraer (ERJ) Hit Bottom?

Our blogger friend Blue Dog now refuses to travel with the rest of us peons - its private jet or nothing for guys like him. We should all be so lucky. But he got me thinking about the one Brazilian stock that has been in freefall - Embraer (ERJ). This is actually one of the older Brazilian stocks out there - it was trading publicly before Brazil was the place all the cool kids hung out. They make (mostly) commercial and executive jets - if they ONLY did executive jets I'd actually be all about the stock as the top 1% in the world are doing just fine thank you. [Some Parts of the Economy are Booming - Like Yacht Building]

Now with oil in the $140s, all things aircraft have been in free fall, but if you believe (like I do) this is a parabolic move in crude that is due for a correction (in a much longer path upward) you might be interested in such a stock. Especially off of this morning's good news. Backlog is still at record levels despite all the crazy pricing in oil, but I am not sure how "firm" the backlog remains if oil rises to say $200 (which I doubt at this stage of the game). After all Boeing (BA) has a record backlog as well and it's stock is in a similar death spiral.

• Embraer delivered 52 aircraft during the second quarter of 2008 (2Q08), closing out the semester with record of 97 jets delivered. This result is a 59% increase over the 61 airplanes delivered during the first semester of 2007.
  
• The Company's firm order backlog for the Commercial Aviation, Executive Aviation, and Defense and Government segments also ended the quarter at the highest level in its history, totaling US$ 20.7 billion.
• During 2Q08, Embraer delivered 43 jets to the Airline Market and nine jets to the Executive Aviation segment. With 97 jets delivered during the first semester, Embraer reaffirms its estimate of delivering 195 to 200 jets in 2008, tending toward the higher figure, as well as 10 to 15 Phenom 100 jets.
• During the second quarter of 2008, Embraer signed contracts for the sale of seven EMBRAER 170 jets to the ETA Star Group, from Dubai and for five EMBRAER 175 jets to TRIP Linhas Aereas, which is one more Brazilian airline that will fly Embraer jets. In the Defense and Government area, the Company signed a contract with the Brazilian government for the sale of two EMBRAER 190 jets configured for transporting government officials. Furthermore, Executive AirShare, of Kansas City, Mo., increased its order for Phenom 300 jets to four firm orders and four options.
• The Phenom executive jets continued to show positive sales results, with the number of firm order contracts approaching 800 aircraft.

Below is a 3 year chart - now I am not normally a bottom picker but this stock is so far below any resistance area it has me thinking of adding it, if nothing more, as a trade and a hedge against lower oil.

ERJ now trades at 10x forward earnings for 2008 for solid 20-25% growth. Again, I am all about investing in anything catering to the ultra rich in the new Gilded Age (people like Blue Dog) - they could care less about gas $4 or gas $10 for that matter. This is why I wish they only did executive jets.

• Brazilian jet maker Embraer's executive jet business will increase as a percentage of revenues from 15 percent to 25 percent by 2010, a top executive said Friday.
• Embraer currently offers the Legacy 600 executive aircraft, which seats up to 13 people, and will start deliveries of two versions of the smaller capacity Phenom jets later this year. By 2013, Embraer will offer another three models: the Lineage 1000, Legacy 450 and Legacy 500, he said.
• At the same time, he said sales at the commercial jet division will increase.
• Colin Steven, vice president for marketing and sales, said airport congestion, delays and additional security checks linked to the terrorist threat are drawing business class customers to the executive jet market. (bingo)
• In the 10 years until 2017, Embraer estimates the global executive jet market to be worth $201 billion. Embraer currently has 15 percent of the market
• Revenue last year at the world's fourth-largest commercial aircraft jumped to 9.98 billion reals ($5.92 billion), compared with 8.27 billion reals ($4.9 billion) in 2006.

As an aside, another Brazilian stock I used to own/trade before it was fashionable to be in Brazil was airline GOL (GOL) - now that folks is a frightful chart and I'd rather own the manufacturer over the airline business.

No position (yet) but leaning strongly

Transocean (RIG) a Piece of Green in a Sea of Red

I was wondering why Transocean (RIG) was bucking the trend today in the oil services and sticking in the green - looks like they just announced a 5 year, $1.19 Billion contract for their rig Pathfinder. If you divide that into days, it looks like a day rate of $650K+ which is about as high as I've seen. Continue to love this space and wonder why the valuations are not higher.

• Transocean Inc. (NYSE:RIG - News) today announced that its deepwater drillship Deepwater Pathfinder, a single-activity rig capable of drilling in water depths up to 10,000 feet, has been awarded a five-year contract by a subsidiary of Eni for drilling operations primarily in the U.S. Gulf of Mexico. The contract is scheduled to commence in March 2010 following completion of the rig's existing contract commitments.
• Estimated contract revenues that could be generated over the five-year contract period are approximately $1.19 billion. Estimated contract revenues represent the maximum amount of revenues that may be earned in the contract period, excluding revenues for cost escalations.
• The Deepwater Pathfinder drillship, which entered service in 1998, is one of 39 High-Specification Floaters in the Transocean fleet, 18 of which are Ultra-Deepwater Floaters capable of drilling in water depths of 7,500 feet or greater.

Pathfinder's previous dayrate was $395K. We outlined this same path of price escalation in Atwood Oceanics (ATW) a few weeks ago. Once the hedge funds are done running away from the commodity sector, these stocks will shoot up again...

Long Atwood Oceanics in fund; no personal position

VMWare (VMW) Shows Us Yet Again that "Technology" is "Safe"

Just like Nvidia (NVDA) last week [Nvidia - Ouch], VMWare (VMW) shows us yet again that the current Wall Street thesis that you can hide in technology because it is safe is yet another brilliant strategy. Down a quarter of it's value this AM on a warning. I know, I know - it's all due to Microsoft (MSFT)... just like Nvidia was all due to ATI. If you take away those outliers technology is safe overall since there is no exposure to oil - yep, that's the ticket, right Nokia (NOK)? (down 37% YTD) Somehow consumers and producers cutting back in everything = won't hurt technology. Nope. Sounds like a lot of good horse sense from this set of eyes.

• Shares of VMware Inc. plunged 26 percent in Tuesday morning trading, after the virtual software maker warned its fiscal 2008 revenue would fall short of prior estimates, and said it replaced President and Chief Executive Diane Greene with former Microsoft executive Paul Maritz, effective immediately.
• The company said fiscal 2008 revenue will fall "modestly" below prior guidance for 50 percent growth year-over year. In fiscal 2007, VMware reported sales of $1.33 billion.
• On average, analysts surveyed by Thomson Financial expect total revenue of $2 billion for the full year.

Not long this safe stock in a very safe sector totally oblivious to the economic cycle

Bookkeeping: Blah

All of yesterday's trades did not "take" it appears on Marketocracy.com. I was having trouble logging in all morning, and then when I did log in and place trades that just stood in open orders all day. They "executed" post close at 0 shares for $0. Hence nothing went through unfortunately.

EDIT 9:40: I repeated all of yesterday's trades except for selling James River Coal (JRCC) since the entire gain disappeared. So "stuck" in that full position. Paid up (a lot more) for Ultrashort Oil-Gas (DUG) from where I was buying yesterday. Lost a lot of gains in Canadian Solar (CSIQ) and Cleveland Cliffs (CLF), lost some money from where I tried to sell in the fertilizers yesterday as they are weak this AM. Overall position = disgust.

An Upcoming Wind IPO: Noble Environmental Power (NEPI)

Just wanted to put this name, Noble Environmental Power (NEPI) on readers radar if they are so inclined to invest in the wind farm sector. The problem with many of the "wind plays" available in the US are they either are part of much larger companies (nor pure play) or smallish and unprofitable. NEPI takes it 1 step further and has not even made 1 dollar of revenue in 2007 ;) But that won't stop the hype machine from taking over and who knows - Noble Environmental Power might join Broadwind Energy (BWEN) as a Cramer "House of Pleasure" pick! After all, one must look forward not backward! And one day they will have revenue! :) Gosh this reminds of me 1999 when stocks were going public based on numbers of eyeballs they would attract to their website.

• Now, Noble Environmental Power, a fast-growing wind-power company based in Essex, CT, has filed for an initial public offering worth up to $375 million.
• According to its filing with the SEC, Noble Power is “focused on developing, financing, constructing, owning and operating windparks in attractive energy markets in the United States.” The company’s plan is to sell energy and energy-capacity generated by its wind parks. Its first three parks have been up and running in New York since March, and the firm hopes to quadruple its total power capacity by the end of 2009, with more parks under construction in New York and Texas. By 2012, it may expand to Maine, New Hampshire, Vermont, and other states.
• To date, the company has not yet generated significant revenue—it reported $72 million in net losses as of the end of 2007. It is also dependent on state policies and regulations that support wind parks—not always the easiest projects to push through
• The principal shareholder is JPMorgan.

None the less, some information for you to peruse

Noble Environmental Power's SEC Filing - a must read for any new IPO

NEPI's website

GE Energy sold 333 Wind Turbines to Noble Environmental late last year

• The contract valued at approximately $650 million will add nearly 500 megawatts of wind power capacity to the renewable energy supply of the US. Noble Environmental Power will use the turbines for new and expansion projects in New York and Texas.
• The turbines ordered will be GE’s popular 1.5 megawatt model. More than 6,500 are installed or committed for projects worldwide.
• The wind turbines in this latest agreement will be shipped during 2009, with most of the projects expected to enter commercial operation by the end of that year.

Some Evening Reading

Some interesting articles for those so inclined, that I came across over the previous week - some are relatively lengthy in duration. I highlighted some quick points in each. With the tremendous day to day (and INTRAday) movements in the markets we've been focusing more on stocks/sectors rather than the underlying economic stories of late, but we'll try to keep posting some pertinent entries of that type somewhere in the hectic mix of stock news.

1) The New York Times has a very lengthy oil story entitled 'American Energy Policy, Asleep at the Spigot' I've written many times that we are a reactionary society, not proactive - unfortunately this leaves us at the mercy of crisis after crisis ("fire fighting"); and of course fixing the window pane after it's broken is always much more expensive than protecting it in the first place. Much of the story details the back story of what was going on in Washington D.C. (i.e. inaction) during the past 20 years.

• Even (Chevron CEO) Mr. O’Reilly says that he still can’t get his head around current oil prices, which closed above $145 a barrel on Thursday, a record. “We can see how you can get to $100,” he says. “At $140, I just don’t know how to explain it. We’re surprised.”
• For the rest of the country, the feeling is more like shock. As gasoline prices climb beyond $4 a gallon, Americans are rethinking what they drive and how and where they live. Entire industries are reeling — airlines and automakers most prominent among them — and gas prices have emerged as an important issue in the presidential campaign.
• Outside the thriving oil patch, it makes for a bleak economic picture. But it didn’t have to be this way. Over the last 25 years, opportunities to head off the current crisis were ignored, missed or deliberately blocked, according to analysts, politicians and veterans of the oil and automobile industries. What’s more, for all the surprise at just how high oil prices have climbed, and fears for the future, this is one crisis we were warned about. Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.

2) BusinessWeek has yet another housing crisis cover story - if you've been reading the blog for a few months this is all old news, but it is always interesting to see the "come to Jesus" moments by analysts and pundits in these types of stories, after months/quarters/years of denial. Generally we like to see cover stories on economic subjects since by the time something hits critical mass it's priced in. However, BusinessWeek ran a similar cover in January 2008 and that did not exactly mark the bottom in housing. We'd rather see it in Time Magazine or something of that sort and frankly the mess is so huge this time it might take about 10 magazine covers.

• The housing crisis is entering a new and frightening stage. The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself. When home values fall low enough, hard-pressed homeowners become less able or less willing to keep paying their mortgages. That forces lenders to repossess homes and then dump them back on the market at fire-sale prices, which depresses prices further and leads to even more foreclosures.
• Efforts by the private sector and government to stop the slide before it gets out of control haven't done the job. Poorly designed mortgage securities rife with conflicts of interest, as well as legal disputes over priority between creditors, are forcing many homes into foreclosure needlessly, accelerating the market decline.
• "The depth of pain is not being registered in D.C.,"

3) BusinessWeek with another story on Wind - The Power, the Promise, the Business

• Ferrell is one of the fathers of Kansas wind farming. He ran through three different developers before getting the operation going on his land. There was stiff opposition to wind farming in the Flint Hills from preservationists concerned about marring the landscape and from politicians tied to the coal industry, but, finally, Ferrell had his way.
• Some call the vast American prairie the Saudi Arabia of wind, capable of producing enough electricity to meet the entire country's needs—assuming there's the will to harness it.
• In the U.S., more than 25,000 turbines produce 17 gigawatts of electricity-generating capacity, enough to power 4.5 million homes. Total capacity rose 45% last year and is forecast to nearly triple by 2012. Right now, only 1% of the country's electricity comes from wind, but government and industry leaders want to see that share hit 20% by 2030, both to boost the supply of carbon-free energy and to create green-collar jobs. (why we need to wait 22 years is beyond me)
• Such a transformation won't come easily. While much of America's wind energy is in the Midwest, demand for electricity is on the coasts. And the electrical grid, designed decades ago, can't move large quantities of electricity thousands of miles. There's plenty of wind off the coasts, but it's both expensive to harness and controversial; not-in-my-backyard sentiment has slowed some of the most high-profile projects. (oh that's why)

4) BusinessWeek tells us India's economy is hitting a wall. And I've got the Indian bank stocks to prove it. Thankfully we had some excellent returns from this country in the fall and early winter but it's been a "house of pain" since. But it does show you how quickly things can change, both reality and "assumptions".

• Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing.
• In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment in India's stock market is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months,"
• Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries. (sound familiar? one must really wonder if governments worldwide were reduced by 90% in size and stature how much more efficient markets would be - their self serving and short sighted decision making are the handicap for many a country)
• A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth.

5) Another long predicted event - the center of all things American consumerism, Las Vegas, is down and out per The Independent. Think of Vegas as one big Whole Food Markets organic milk, roasting in the back of a Hummer. All good in 2005/2006. Not so good without the house ATM as a crutch for Americans to use as piggy bank. And the higher the price of things we must have (non discretionary) go, the lower the price of things discretionary must go. Because as "good news" (as touted by everyone but actual workers) - the current US worker will not be getting the "wage inflation" of his brother from the 70s. So as the pie stays flat or slowly growing, something needs to give. Everything discretionary. [Stuff I've Been Negative on Since Last Fall] It's a slow process that is working itself up the food chain of the American income strata...

• Because America's most outrageous city is facing a growing multitude of problems, and they all boil down to a single, unavoidable point: right now, far too little happens in Vegas, because not enough people are actually staying there.
• The onset of global slowdown, high petrol prices, and a nation-wide housing slump is spelling disaster for a town that owes every aspect of its wealth ... to its ability to inspire free-spending hedonism.
• With Americans cutting back on luxuries, and the price of transport rocketing, the so-called "Vegas vacation" is facing the axe. This week, as the nation celebrated Independence Day, major hotels were taking stock of a fall in all-important room occupancy rates from their usually impressive 95 per cent levels to nearer 80 per cent.
• More worryingly, new figures showed gambling revenue has also dropped – a further 3 per cent this month – starting a price war between worried firms anxious to lure punters back. Hotel rooms, which last year averaged $130 each, now go for less than $100 (£50).
• Las Vegas Sands, which controls the Venetian and Palazzo resorts on the famous neon-lit Strip that runs through a "miracle mile," has dropped below $50 a share, a third of its value last September. MGM is at $28, from over $100 a year ago. Wynn resorts, owned by the ebullient billionaire Steve Wynn – a Texan version of Donald Trump – neared $70, from almost $180 last year.
• Local bankruptcies have quadrupled. The property market, which rode the wave of a boom for most of the past decade is now below its peak by anything from a quarter to a third (depending on whose figures you believe), while Nevada now boasts, if that is the right word, the nation's highest foreclosure rate.

Missed Opportunity in Cash America (CSH)

I've been secretly studying the pay day lenders and wondering why in my "Pooring of America" scenario the charts were not better. Cash America (CSH) is one of the handful of names in this space and today we have the type of news I've been waiting for. And just like that the chart "improved". Similar peers include Advance America (AEA) and Dollar Financial (DLLR). I've been eyeing adding one of these to the portfolio - but a recent ruling by Ohio capping rates at 28% created some unknoweable risk (other states could follow suit?). More and more of the American economic strata will, unfortunately, be turning to these types of outfits which are bordering on outrageous with their fee structure. Ummm... there is always a bull market somewhere.

• Pawnshop operator and cash advance provider Cash America International Inc. boosted its second-quarter guidance Monday, as economic woes and turmoil in the lending industry sent more consumers to its pawn shops.
• The news sent Cash America shares up $4.37, or 14 percent, to $36.47 in afternoon trading, after peaking at $36.90 earlier in the day. Over the past 52 weeks, the company's shares have traded between $26.17 and $48.86.
• Cash America said it now expects to post a second-quarter profit of 62 cents to 64 cents per share, up from previous guidance of 51 cents to 54 cents per share.
• Cash America said its pawn lending business benefited from higher-than-expected revenue from pawn loans and higher gross profit dollars on the sale of merchandise.
• In addition, the company said its online cash advance product offering posted strong revenue growth and lower-than-expected loan losses. (online payday loans? Now that's scary - you don't even need to show up anymore even though there are 100s of these places now sprouting up)
• Cash America also said Monday that it has not yet closed any of its locations in Ohio as a result of a new state law there that caps payday loan interest at 28 percent. The company said in May that the change in state law could force it to close up to 139 of its Ohio locations. (for those unfamiliar with this type of business - many times the interest rates run in the 100s of % - I've seen up to 500%)
• Payday loans are short-term, unsecured loans offered to cash-strapped consumers that typically mature in two weeks or on the borrower's next payday. The loans are often priced at a fixed-dollar fee, but the underlying annual interest rate is usually near 400 percent or more. (I cannot stress again, the typical blog reader does not realize what a good sized portion of our populace has been doing the past decade to get by, and now it will start going upstream to higher and higher income strata - these companies also cater big time to the very underpaid military; many times these shops are sitting right outside a military base)

But nevermind this type of evidence - the government reports say everything is fine and the economy shows little signs of stress. And inflation in food/oil while a bit worrisome doesn't really matter in the big picture. And once again the good news is unlike the 70s, workers cannot demand higher wages... "great!"

[Jun 22: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Apr 30: MSNBC - Americans Tapping Attic for Spare Cash]

Bookkeeping: Cutting Back the Strongest Tech

I continue to be taken aback by the "tech is a safe haven" thinking, and in fact am going to take advantage of it - while I love the strength I continue to raise cash and am taking a deep cut into what remains in both Apple (AAPL) and Baidu.com (BIDU). Former in mid $170s, latter in mid $320s. I am holding Research in Motion (RIMM) simply because I was adding around these levels and it has taken some pain of late.

I think by process of elimination the technology sector is being favored so I am not actively pursuing Ultrashort Technology (REW) right now. Nothing else could explain the "strength". The earlier rotations (out of commodities) during previous corrections led people into housing, retail, and financials. It "appears" it is dawning on the masses that there will be no "2nd half recovery" and hence it is stupid to buy stocks that have no real hope of recovery anytime soon. Unfortunately we were counting on that "rotation" and built up some stakes in those sectors - but after being burned 4x the market finally seems to have wisened up on the 5th iteration. So what sector that leave if you flee commodities? You guessed it - technology. So it is a bit of a conundrum - do you stay in those names because they ARE holding up or when you look for names to cull do you cut the strength? I've decided to cull the strength.

I still see a massive gap in the Google (GOOG) chart and as Google goes, so goes tech - so I am using it as a proxy - all these names tried to break out this morning but have fallen back (yet still in the green) Aside from nat gas/oil names I'd like to see this group punished before calling any bottom. Unfortunately to fill the gap in the chart (for non technical types a gap is simply when a stock opens at a higher price than it closed the night before) - Google needs to drop down to $460 (current $540). Seems impossible huh? Well we've seen a lot of impossible things happen in the past 12 months.

If I'm wrong I can always reverse this but I am actually cutting a lot of the names holding up "relatively well" instead of the beaten down positions. Again, at this point, I don't agree with the thesis that technology is safe simply because it does not have exposure to oil, but this appears to be a working thesis of the hedge fund computers so I can understand it from the point of "where else will one put their money if they flee commodities/global growth and no longer want to keep trying - and losing- in homebuilders, retailers, and financials". If the market correction does end with a waterfall type selloff, prices in technology will also be materially lower. I think such a selloff would create better values elsewhere if indeed they refuse to sell off technology.

Long Apple, Baidu.com, Research in Motion in fund; no personal positions

Bookkeeping: Cutting some Fertilizer Exposure

Cutting 3 of the 4 fertilizer names here as they potentially break down. Historically you want to buy them when they touch the 50 day moving average since they bounce, but with the market acting so poorly we could get some washout action. Mosaic (MOS) for example *STILL* has a gap in its chart around $110 that I've been eyeing for an entire quarter. (currently just under $130) Just from history when there is real panic these names drop 10-15% in 1 day. See August 07, see January 08, see March 08. I'd like to buy these portions back in a panic sell.

Cutting about 15-20%ish position in Potash (POT), CF Industries (CF), and Mosaic (MOS)

I was unable to log in this morning but that spike, once clear it was unable to breach S&P 1275 (old support, now resistance), would of been great to fade with some index shorts and Ultrashort Oil - Gas (DUG). Even though I did not get the prices I wanted this AM, I added them here in the last 30 minutes.

The best thing for this market would be to see the type of selling we saw in coal last Wednesday in all the natural gas and oil names. They still have not seen any major pain. The last foxhole to smoke out. The action in financials is simply troubling - Fannie Mae (FNM) is a disaster.

The last times the market bottomed the fund was down 7-8%ish intraday (and yes I was feeling sick at those moments) before recovering/reversing by the end of the day. So I'm "all in" for now on the long side and won't be purchasing long positions until we get a similar moment. The bounces over the past 6 weeks have been so pathetic it is embarrassing for the bulls. S&P 1260 is now clearly broken and as we said, S&P 1225 is the next stop (current 1240s) If that breaks S&P 1170s is in the cards. I'll be an active buyer at 1170 if and when....

Long all names mentioned in fund; long Mosaic, Ultrashort Oil-Gas in personal account

Bookkeeping: A Few Bounces that I'm Selling Into

We have some very nice quick bounces in some purchases we made late last week so I'm raising some cash into a few

1. Energy Conversion Devices (ENER) bounced from $59s to $69s - I'm have a devil of a time logging into Marketocracy.com this morning so I cut some in the $67s
2. James River Coal (JRCC) which was more of a trading position from $40 to $48, I cut some in $46s (unable to log in when I wanted to)
3. Cleveland Cliffs (CLF) from $92 to $100, I cut some in the $99s
4. Canadian Solar (CSIQ) from $30 to $36 (some contract announcements this morning) and now it approaches what was formerly support at $36 as resistance. I could not log on when I wanted to so sold some just below $35.

These are "quick trades" but I'm taking them where available and trying to raise cash. The market still looks unhealthy at this point.

General thoughts today - this bounce is tepid and disappointing. S&P 1275 has now turned from support to resistance. The financials have turned over again - disappointing. Finally the natural gas and oil stocks are withering as we had predicted would be the last to fall so our Ultrashort is working there.

Long all names in fund; long none in personal account

Bookkeeping: Cutting iPath DJ Livestock ETN (COW) to Raise Cash

Cash is quite low so I was looking through the portfolio for candidates to either sell out of or cut back... I chose iPath DJ Livestock ETN (COW) simply due to the fact I think it is more of a late 2008 or early 2009 story and have a flattish return at this point. If we do get a "last leg / swoon" down I want to have cash on hand to buy other ideas. My thesis on COW is not changing - but after a slew of purchasing last week I am poking around for some places to raise cash. This is one.

I sold 400 of 500 shares in the $43s.

Long iPath DJ Livestock ETN in fund; no personal position

Is the Buck Finally Stopping for Steel?

While steel has had an amazing run, my thesis is at some point prices reach a level customers balk. But that's been the thesis in crude oil too - and so far the voracious appetite by certain countries has offset the demand destruction in others. However, we have been warning of the first signs of demand falling [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects]

At some price point it no longer makes sense to build things, even for China (although they are forced to, to swallow up the masses of populace moving from the countryside to the cities). I have to say I've been amazed that the steel companies can continue to pass along all costs to their end customers but at some point this stops. The point seems to be closing in.

In the past week we are seeing increasing signs of stress - ArcelorMittal (MT) Says Half of Customers Rejected $250 Surcharge

• ArcelorMittal, the world's largest steelmaker, said about half its U.S. customers refused to pay a $250-a-ton surcharge that was added in May to make up for soaring raw-material costs.
• ArcelorMittal will seek higher prices from those that rejected the surcharge on fixed-price contract shipments in the next round of annual discussions, Lou Schorsch, head of the company's flat-rolled business in the Americas, said today in an interview in Chicago.
• ``With about half the customers we've had some good dialogue and good resolution where we've made some adjustments,'' said Schorsch, who is responsible for about $21 billion of the steelmaker's business in the Americas. ``The other half have said, `We can't afford to eat it.'''
• The company is trying to take advantage of soaring global demand to pass on higher costs for iron ore, the main ingredient in steel, and the energy to produce and ship the metal. U.S. steel prices rose to a record $1,052 a ton in June, 82 percent higher than a year ago, Purchasing Magazine said yesterday.
• ArcelorMittal in April agreed to pay Brazil's Cia. Vale do Rio Doce, the world's largest iron-ore exporter, 87 percent more for the ingredient as rising demand from China pushed up prices. ArcelorMittal also may pay Cleveland-Cliffs Inc., North America's largest iron-ore producer, about 60 percent more this year. Costs for coke, scrap, energy and transportation also are rising.
• Some steel mills may pressure reluctant customers to accept surcharges by threatening to reduce the amount of metal they will sell, Aldo Mazzaferro, an analyst at Goldman, Sachs & Co. in New York, said in a May 12 note to investors. Contracts usually specify the price for the steel rather than volume to be sold, he said.

And just today in the Wall Street Journal

• Some automakers are refusing to pay surcharges on steel contracts they agreed to, the Wall Street Journal reported, citing Aditya Mittal, chief financial officer of ArcelorMittal.
• Some of these automakers have threatened to challenge the surcharges in court, the Journal said, citing people familiar with the matter. The newspaper didn't identify any companies refusing to pay.
• The resistance is one of the first strong signals to steelmakers that their hardest-hit customers have reached a tipping point and may not be able to withstand higher prices.

So we finally begin to reach the very interesting point of many cross currents. Is the demand in China so great for (insert any commodity here) that if European or US customers say no, then (insert commodity) producers can just take their product elsewhere and get ridiculous rates (and folks a 1 year increase of 82% in steel or 105% in crude oil *is* ridiculous - demand is not growing at that rate). Or will the curtain begin to fall and will producers of said commodities begin to be unable to pass along costs? I don't have the answers - some of these moves upward in price have gone far above my near term estimates - while I am a long term World of Shortages guy, demand is not increasing at triple digits year over year. But prices are for certain things. So the path ahead will be very interesting.

Now unlike Ken Heebner of CGM Funds I've taken a completely different tact in approaching the steel boom - I've placed our investments into the inputs - iron ore and metallurgical coal - while his money (since last quarter) is concentrated in the actual steel makers. From my end, if the steel makers finally reach a ceiling in price, their margins will get squeezed (and in theory their stocks should suffer, not their suppliers). Also much of the supplier product pricing is longer term in nature (1 year contracts) versus a much more fluid situation at the steel maker level. But one could make multiple arguements - (1) eventually the same pressure would travel downstream to their suppliers - i.e. steel maker says to iron ore producer we cannot charge our customer any more so we cannot pay a new higher price for iron ore.... causing prices to stagnate or fall for suppliers (very plausible) or (2) even if the suppliers can maintain high prices the stock market won't care and "throw the baby out with the bathwater" and punish the entire supply chain (also very plausible). I don't know how it will work out, but I've tried to think 3-4 steps ahead and try to position us for what I see as this eventuality. And hopefully the market does not devolve into situation 2. Frankly nothing can go straight up in price without causing cut backs. Cities and states simply cannot do projects at costs ABC, auto makers cannot build product at profit at costs ABC, refrigerator makers cannot make profit at costs ABC, etc. So the buck will stop - at what price we don't know. And how the individual components of the supply chain will be affected we also don't know.

With that said I do believe there is still quite a bit of upside surprise in 2009 and 2010 earnings in many of the suppliers to the steel industry even at current prices (i.e. if prices did not go one iota higher), and for U.S. Steelmakers they have the advantage of the ever limp US Peso so their pricing on the world market, will at least be "relatively" cheap (i.e. producers in stronger currency markets will see their demand falter first). But this speaks to the timing of investments - even the best thesis are going to have their ups and downs and speed bumps. The world does need steel to build it's infrastructure. But at what cost? Only federal governments can truly afford to build project after project at losses. Once again - many moving parts and we'll need to monitor it over the coming quarters and years.

I repeat it every week - inflation is a tax on all things, producers and consumers. If consumers cannot accept price increases - that means producers margins will buckle. While Wall Street tends to sneer at Main Street as inconsequential - corporate profits are the lifeblood of stock valuations. So if/when producers profit margins buckle that has a real impact on stock valuations. It's all connected in the end.

Long Cleveland Cliffs, Vale in fund; long Cleveland Cliffs in personal account

Note we use CVRD for the label for Vale since this is what it used to be known as.

Bookkeeping: Weekly Changes to Fund Positions Week 48

Week 48 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: 3.2% (vs 20.2% last week)
60 long bias: 86.5% (vs 64.6% last week)
9 short bias: 10.3% (vs 15.2% last week)

69 positions (vs 62 last week)
Additions: Ultra Financial (UYG), Canadian Solar (CSIQ), Walter Industries (WLT), LDK Solar (LDK), Fuel Systems Solutions (FSYS), Energy Conversion Devices (ENER), James River Coal (JRCC)
Removals: N/A

Top 10 positions = 28.2% of fund (vs 23.7% last week)
48 of the 69 positions are at least 1% of the fund's overall holdings (70%)

Major changes and weekly thoughts
Another tough week in the markets - we won't rehash the news stories because anyone reading the blog for more than a few weeks has seen it all predicted here. As we were warning throughout that "it can't get worse than this" and "the recovery begins 2nd half of 2008" rally of April/May, I had repeatedly typed it had all the scents of that September/October 2007 rally of the same ilk - except the buzzwords then were "The Federal Reserve will fix this - don't fight the Fed" (they fixed it all right), and "the kitchen sink quarter in financials is in". Remember, the pundits were not even acknowledging the chance of a recession at that point - that didn't happen in most major brokerage houses until December 2007. Humans are if nothing else, very repetitive animals and we saw the same hopeful behavior, and same results. In fact we have now seen 5 such "corrections" since last summer, all coming off the tail end of a "ever hopeful" period of the "worst is behind us". The only difficulty as an investor is knowing when the Kool Aid stops flowing... we were typing in September/October the market was missing the story and this rally was ridiculous just as we were typing in April/May the market was missing the story and this rally was ridiculous. But to sit on the sidelines chiding the market for rallying 10%+ for no good reason, means leaving a lot of money on the table. So as always we try to act as the adult in the corner, chiding the kids while they bathe in Kool Aid but trying to stay involved so we get the upside, but make sure we keep a level head and realize the party will end badly. And so it has. Again.

As I always like to say, it only matters when it matters. Frankly the economic news is very unchanged from what it was for much of the winter and spring - the only difference is the acknowledgement of the circumstances. Some months the deteriorating situation is acknowledged (and the market falls); some months it is not (the market rallies). Unfortunately for the buy and hold crowd, I have to say I believe this is going to be the pattern for quite a long while. I think housing will deteriorate quicker than most people assume (i.e. prices falling) and most of the current "activity" in the hardest hit markets are foreclosure sales - not true buyers/selling meeting. Once the sellers who still believe they will get 2006 prices face up to reality (much like stock market participants) I believe housing prices will have their swoon and it will be relatively sharp. And from there we can have the makings of a bottom - my hunch is late 2009 into early 2010. But everything in this market is levered to the beast that was the housing bubble so until we get stabilization in housing prices I have a hard time seeing a new bull market emerge. Now on top of that we have Federal Reserve stoked (not created, but stoked) commodity inflation which is a wildcard - the higher prices go, the longer our recovery. But I do look forward to the day we have a very boring blog where all I type all day are "everything is going well, malls booming, auto sales booming, housing flying off the shelf". It will be a lot less work on my end - unfortunately, I don't see that day happening for quite a few years. Uncle Alan Greenspan's bubbles have created inflated assets worldwide and we now are seeing the other side of that. Once the deflation is over, we can go about our normal business.

Despite taking some hits this week, I've been much happier with the fund performance on this go around (correction) than in previous episodes. Throughout June our global growth type of long positions continued to perform although we began liquidating them into the strength (too early in many cases) anticipating a week like this. We stood aside throughout the month with high cash and short exposure, ignoring the pundits call for the repeated "the bottom is in" and "it's time to get into this market full of great value". Our buying has been sparse throughout June, as we were waiting for merchandise we were focused on to finally become discounted. This past week was the first week we really saw that begin to happen. So following our strategy we began layering into favorite names, recognizing we have no idea what or where the bottom is, but when we see stocks we like faltering 20-30% in a week's time, we want to begin increasing exposure. Is this the bottom? I *still* don't think so, but that is a gut call and the market is famous for making people look foolish. If past is prologue we might have one of these transition weeks where the markets do falter (some) but not as bad as previous weeks - however the strongest groups of the past (global growth) take much more serious damage. So I'm looking to see a market that once again looks better on the surface but with potential for some individual damage of much higher degree - there have literally been weeks during previous corrections where the indexes were up, but the fund was down 4-5% as specific sub sectors of global growth were hammered as people ran to "early cycle" recovery stories in financials, retail, and homebuilders. To whit, I've cut back our short exposure to those sectors since when "this type" of week happened in the past, not only were some of our long positions losing 10-15% (sometimes in 1 day) but our Ultrashorts in Financials, Real Estate et al were hammering us to the tune of 6-10% losses. Again, there is no guarantee this is how it plays out but in each of the previous 4 rolling corrections we had a period like this so it would not surprise me to see this action soon. I've tried to position us better than in the past if this indeed is how it plays out. Again, one advantage of investing in a fund like this is, sometimes I will be correct - sometimes I will be wrong - but instead of staring at a NAV and not knowing the thinking behind the drops or increases, you'll at least be in on the thought process (even if you disagree with it).

I thought this week, I'd take the time to do something I use to do more often, but since it is a time heavy exercise with the data tools I have in Marketocracy.com (i.e. I need to do this all by hand) - and that is to break out the portfolio by sector. This is a good time to do it because (a) I want to explain why the # of portfolio holdings are increasing and (b) it shows a little of the strategy as we enter what I believe might be the tail end of this leg down in the market. What I have below is all our holdings by sector - the number next to each sector title are the # of stocks we own in this sector, and the percentage is what % of the portfolio that sector is as a weighting in the fund.


First, I've tried to keep the number of holdings generally in the 50-55 range (on the long side) but we are currently up to 60. Why? I am using a basket approach in every sector - and have increased this especially in the solar field (where we've been burned by focused holdings in 1-2 names) and our new "non solar alternative energy" sector which we've made a 3 stock mini basket. The way I view it is fertilizer, while being 4 stocks, is 1 position. Coal, while being 5 stocks, is 1 position. Natural gas, while being 4 stocks, is 1 position. US housing, while being 2 stocks, is 1 position. Why? These all tend to trade in tandem (directionally) although the degree of gains individually does differ. But which will be the "favorite" of the market - is anyone's guess. So while we have 60 names on paper, we have far fewer "positions" from a practical point of view. Please note - this basket approach doesn't apply to say technology or even financials where a Goldman Sachs (GS) is a very different company from Mastercard (MA). But contrast that to say natural gas where there are upwards of 40+ public companies - I have my thoughts on which are my favorites but the market may go in a completely different direction so I'll place out multiple fishing lines and hope the market chooses one (or multiple) of our holdings as the "Golden Child" of the next move up.

Second, what is the current strategy? This pie chart looked very different a week ago. Entering the week we had cut back our commodity exposure (global growth if you will) - coal was much lower, fertilizer was somewhat lower, natural gas has been cut back, and oil services has been cut back. Financials exposure was lower as I just bought Ultra Financial (UYG) this week. Solar exposure was far lower exposure - but these stocks have been decimated the past few weeks, so I finally created a sizeable position after some of these names have lost 40-50% of their value from recent highs. The "non solar alternative energy" was a target list of 3 names - 2 of which I was waiting for sizeable pullbacks - which we finally got over the past week and a half (I did not want to chase these names like most people do and then see them reverse 20-35% on me, which happened to a lot of people). So this position barely even existed 2 weeks ago in the portfolio but now is up to 6.5%. Etc. Etc. So with the sizeable pullback in coal (this week) I did begin to make a serious exposure there - is this the bottom in these names? Doubtful... we'll add more if they fall more. Same for fertilizer. You can see I still don't have much exposure to oil & natural gas - while everyone throws "commodities" in 1 bucket, I am discerning. Natural gas has held up the best, so I think it still remains most at risk for a reversal - I am willing (and wanting) to add exposure here but I want to see some pullbacks like we saw in coal this week. Will I get it? Maybe - maybe not. If not, we'll apply the money elsewhere. Same for oil services. The metals have been trashed and we began increasing exposure to Cleveland Cliffs (CLF) for example but I'd still be wishing for more of a pullback in some of these names to increase exposure.

So this is a general "roadmap" of what we are doing - we began to increase exposure in names that have been hit the hardest but still holding out for worsening action in groups that have not. Meanwhile we're "rotating" to the absolutely trashed groups in the meantime, trying to catch a 2-3 week wave of "oversold" bounce in those groups. Which we'll sell - and then eventually short against (retail, financial, homebuilder). Could we have what I term a "waterfall" selloff and each and every group demolished next week(s)? Definitely - but hard to model a long mutual fund in that regard. We have followed our gameplan to the maximum, and still hold 3%ish cash and 10%ish short exposure - even after a bevy of buying this past week. Again we've held out all of June in 20%ish cash and 20-25% short exposure waiting for the final shoes to begin dropping. To start rolling that last part of the cash/short exposure over to the long side we are going to be needing to see 8-12% type of drops in individual names. And if that happens, we're going to be like 99% of other mutual funds (for once) and be quite near 100% long. While I think this market has a long period of sideways to down (with large "oversold" rallies contained within it) nothing goes straight down (or up) - although it has been straight down for 5 weeks. Timing is paramount in such an environment.

As for the week ahead, believe it or not we have earnings season kick off with the traditional first big name - Alcoa (AA) on Thursday. As if we did not have enough to deal with ;) Only a few interesting names on the docket from my end with global infrastructure name (and former holding) Shaw Group (SGR) out Wednesday but we do have General Electric (GE) out Friday. After the disaster they sprung on us last earnings period [Apr 11: GE Warnings and Import Prices Show us Real Inflation] , the contrarion in me says after such destruction in the market, and such a bad mood - simply an "in line" number from them will brighten the mood of the market and we'll go back to "it's not as bad as we though, we can come out of our fox holes" type of thinking. Unless crude oil is $155+ by that point. ;)

After a lull for most of June, it was a very hectic (short) week for us - the larger changes (chronologically) to the fund below:

1. Monday, most transactions were of the ETF variety...
2. Tuesday was an incredibly tricky day, as the market opened down - threatening to break support - than rallied hard - then broke down again - once more threatening support and looking as if it was going to roll over - before a rally towards the end of the day saved the markets. Early Tuesday I continued what we've been doing for weeks - cutting into the "generals" (the leaders) in fertilizer, coal, oil services, and natural gas. By the end of the day that looked like a foolish move since we had such a promising reversal but by the next day it looked smart as coal fell off the cliff and other leadership sectors were also blown apart.
3. We cut Apple (AAPL) as it headed towards the 50 day moving average (from below) - the chart actually held up quite well all week and we'd be willing to buy back on a push above the 50 day ($173s) as this would signify great strength in a perilous market.
   
4. We began a new "trading" position in Ultra Financial (UYG) which is the inverse of the tool we've been using since last August - Ultrashort Financial (SKF). This ETF is down 35% in the past 30 days, so hopefully we are catching it within the last 5%ish of it's fall and can get some nice hedge from it on a "rotation" into these names (however short term). The hope is to hold this for a few weeks to 6 weeks and derive a nice gain when the inevitable "oversold" bounce happens in the sector. Then we'll switch back to SKF - the carnage in financials I'm afraid is going to be with us for a long time.
5. I've changed tactics on solar - since my individual selections have been not what the market likes I've decided to adopt a more basket type approach that we utilize in other sectors, and used the recent selloff in the sector to really add across this group. We started off with a new position in Canadian Solar (CSIQ) - the thesis here was the stock had held up the best, and was holding its 50 day moving average unlike all other peers - and was down 30% in just 2 weeks. Well that theory lasted all of a few hours as the stock was pummeled for another 15%ish loss within 48 hours. We added a bit more later in the week (Wednesday/Thursday). This is one group I am abandoning my typical strategy of buying on strength or on breakouts because simply put the moves are so quick, and so strong by the time you are buying on strength the move is sometimes 1/2 over. So we are just going to systematically buy as they fall, knowing that momentum will return at some point to solar. This happens over and over and over in the 2 years I've been investing in this sector - frankly it is a bit bemusing to watch crude oil $145, coal at records, natural gas flying and solar stocks (which should benefit from this troika of events) demolished to the tune of 40-50% across most of the stocks. But no one said logic had any place in the market.
   
6. Wednesday the coal carnage began with many names down 17-20% in 1 session alone. This was long overdue as the charts had turned parabolic. We began a new stake in an old favorite that we never pulled the trigger on, Walter Industries (WLT) - much like solar I have some favorites in this sector - but unlike solar the market has agreed with me on whom the favorites are, but I am willing to take a broader basket approach in this group too.
7. We restarted an old position in LDK Solar (LDK) - just another name to the solar "basket" - we had last sold this name around $36 only to watch the stock run to mid $40s. But now we are able to rebuy near $32. If you haven't gotten the picture yet - solar is a very difficult sector to "buy and hold" - the inherent volatility of this group is among the highest I've ever seen. I added more to a current position in Yingli Green Energy (YGE) as well.
8. We began our 3rd name in the "non solar alternative energy" space with Fuel Systems Solutions (FSYS) in the $32s, with a target of adding more on next support at $28. We got that $28 level within 24 hours - this is such a "generous" market, eh? While we overpaid in the short run with the initial purchase - we did not chase it up in the mid $30s and into near $40 range, so we did not suffer (most) of the quick reversal many did in this name (Louis Navellier by the way recommended it recently in the upper $30s - his subscribers must be happy) Again, I wish I had bought in the low to mid $20s when I first identified it but I wanted to do more research before I pulled the trigger and the stock simply was a moon shot straight up with no pullback. So now we get the pullback and we have to stick with the conviction despite the stock price acting haywire and take advantage of the opportunity. Certainly it could go lower in the near term for all we know.
9. We added to some Goldman Sachs (GS) - the financials, all things considered, held up well this week. Only when the market truly looked like it was about to fall off the cliff (which was multiple times) did they weaken....
10. We had cut back our position in Cleveland Cliffs (CLF) to almost nil far too early and left a lot on the table - as the stock fell from $120 early this week to mid $90s we upped our stake materially to 1.7% - we added a bit more Thursday on the morning drop (not substantial) - a move to the $80s or $70s would have our tongues wagging and we'd love to make this a top 3-5 type of position in the fund at those prices. I remain amazed this company has not been bought out.
    
11. Thursday, to finish off our solar basket we had waited very patiently for Energy Conversion Devices (ENER) which we felt was overpriced and without sense in the mid $80s to fall to a meaningful support level - we achieved that with a move to $59 (50 day moving average) in the morning and struck. Does that mean it was the bottom and it cannot go lower? Certainly not, but we got a 30% discount from prices just seen in the recent past.
12. We bought in the abyss Thursday morning - spreading purchases across a lot of the generals we had just sold off Tuesday for much higher prices, along with some other names we had been waiting for "sale prices" on.
    
13. To finish off our coal exposure we began a trading position in James River Coal (JRCC) near its 50 day moving average in the low $40s - a move to the mid $30s or so would have us adding.

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.