Tuesday, August 19, 2008

Coming Soon: A Post-American World

I was watching the CBS Early Show Sunday when one of our favorites, Fareed Zakaria, popped across the screen - hence I was forced to pay attention. I cannot bring the video over and in fact I don't see any video on the CBS website but I'll bring over some of the text. We highlighted Zakaria back in May [May 4: Weekend Reading] and if you are into the "big picture" there is a video and a series of links on his book - basically it argues not so much on the demise of America as much as the "rise of the rest". While, in current trajectory and with total lack of leadership and urgency I am a lot more worried about America than he is, I can see an ultimate end game where the rise of the rest actually helps buoy America instead of the vice versa condition we've had for the past 50+ years.

When we worry about the U.S. it's not so much the "End of Days" scenario but simply a parallel to Roman Empire, or British Empire - they are still around; but the prominence and wide swath of power/control diminished. I envision the same here - and no it won't happen in 1 year, or 2 years but it's BEEN happening slowly but surely - I call it erosion. Bluedog's blog reports we have troops in 147 countries and 10 territories. Why? There were not even that many countries in the Olympics. We're doing this with what money? The US spends more on military then the next 45 countries combined. Etc. Staggering stuff that we never "hear" about. But "someone(s)" are making a ton of money off this.

Just from my readings and TV viewings I simply see a complete lack of belief that not only is any erosion happening but even that it COULD happen to the "greatest nation on Earth". Luckily the people inside said nation have a lot of positives to offer, but at this point it is almost like we have to fight government and in fact a lot of big business and their interests to get in the right direction. National vision or leadership is kaput. These systematic bubbles that are "redistributing income" are wiping out normal average people via purported "100 year events" now on a 7-8 year cycle are just 1 example of many. In the end it's just a great transfer of wealth and moving the country more similar to a 3rd world country where wealth is increasingly congregated in fewer and fewer hands; that used to be ok when a rising tide lifted all boats but the past decade (and it has nothing to do with any 1 political party) has sharply reversed that trend. And I don't see it changing with any scenarios I can build out for the next 5-15 years. Not with our entitlement costs skyrocketing and great swathes of people in their 40s, 50s now buried under multiple bubbles - aka wealth destruction - during their prime earning years. As for the country as a whole, as Buffet says - we are like a big farming land owner - who needs to sell off X amount of acres every year to help us pay for the rest. But one day we run out of land.
  • Consider the Olympic Games a giant exclamation point … a fanfare announcing a message from the Chinese. They're putting the world on notice, that they are players playing to win, and not just Olympic gold. They want you to know that China is a power to be reckoned with, and proud of it, that it's bearing down on the United States … fast.
  • "The implications are that China will be the commercial leader of the world," Albert Keidel, an expert on China's economy, told Teichner. "It will also deserve and demand leadership in global institutions." Keidel is the author of a startling new study for the Carnegie Endowment for International Peace, "China's Economic Rise: Fact And Fiction."
  • "We can model the economy and show that by 2035, it (China) will be as big, if not bigger than the United States' economy will be at that time, and by the middle of the century it will be twice the size of the U.S. economy at that time," Keidel said. "That's staggering," Teichner said. "That's conservative," Keidel said.
  • So where will that leave the United States? Are we slipping? Are we reaching some inevitable tipping point that will change the world as we know it? Is the golden age of America coming to an end?
  • Fareed Zakaria, editor of Newsweek International, said, "What's happening right now is, the world is moving beyond America. The future is, in many ways, being shaped in distant places by foreign people."
  • "That's a big shift from a world in which America was at the center economically, financially, culturally, militarily, politically, to a world in which there are more centers and many forces, from India to China to Brazil to South Africa that have to be taken into account," Zakaria said.
  • "This is not happening because America is failing or declining," Zakaria said. "It's happening because the rest are rising, and it's happening because the natives have gotten good at capitalism."
  • Alan Wolff, an international trade lawyer and former U.S. trade negotiator who specializes in china, said we're not used to foreign competition. Coming out of World War II, we had a lot of breathing space; the rest of the world's economies were devastated, "but they're catching up," Wolff said.
  • "Worldwide, 179 countries are growing faster than we are. As our manufacturing jobs have moved offshore, the United States has counted on innovation to keep its edge, but how much longer will that be possible?"
  • Take the iPhone. The idea, the genius, was American. But the phones themselves are made in China, where the government is determined that the next generation of geniuses will be Chinese.
  • "Actually, that's a stated national policy," Wolff said. "They have a medium- and long-term science and technology policy, 2006-2020, and in that policy one of the statements, one of the parts is to establish global brands, with indigenous technology, with Chinese technology behind those brands."
  • Michael Jemal is president and CEO of Haier America, told Teicher that innovation and having its own patents is the "life blood" for Haier. "Haier applies for two patents every single day, every day of the year. In fact, it's more than that." Never heard of Haier America? Just wait. Right now, Chinese-owned Haier is trying to buy GE's appliance division When it entered the U.S. market nine years ago, the company sold three products. Now it sells 3,000. You name it, Haier makes it, everything from little dorm refrigerators to air conditioners, washing machines to flat screen TVs.
  • "Haier is the number one brand in China," Jemal said. "In asia, we're in the top ten. The objective here in the U.S. is also to build a market share, to be in the top three in the U.S."
  • The 600-plus foreign companies operating in South Carolina account for 1 out of 5 manufacturing jobs. They employ nearly two hundred thousand workers.
  • Wolff said the president and Congress must face the new reality of global competition. "We need to change our tax policies, change our immigration policy. We made the U.S. a magnet, an attractive place for the best and the brightest in the world, and we frustrate that by saying, 'You get a Ph.D. here and that doesn't matter. Right now, we're throwing you out.' That's very self-destructive behavior."
  • "We save too little, we consume too much, we borrow too much from the rest of the world, we use energy in a profligate and wasteful fashion," said Zakaria. He says the U.S. must change its ways, and soon, if we want to hang on to the wealth and influence we have.
  • "I think that our window for policy change is very short," he said. "I think if we don't, in the next few years, four, five years, make the necessary adjustments, what you'll see is something that looks a little like the trajectory of the British empire in the 20th century. It's not that Britain collapsed, it's that it just slowly faded away in significance, in power and wealth."
  • But Zakaria worries that one day historians will write about how the United States globalized the world, but forgot to globalize itself.
These "big picture" themes are a lot of what shape my long term investing themes - granted none of it matters in this current era, but one day it will matter again. And if China has "slow growth" (of 7%) next year or coal stocks are garbage because crude oil is down 20%, the US centric investor can do what he does. But we live in what I believe to be an inward looking society that really is missing a lot of what is going on in the world. So we'll continue to report on it, because not only are "they" not going away, but "they" are growing in strength and independence as time goes on... why we are busy fighting over national gas tax holidays. "They" are very hungry - sort of like the Greatest Generation here in the U.S. While many of "us" work very hard to keep up (with the Joneses), at the national level and in aggregate I believe we've grown complacent. There really is a global competition going on and we don't seem to realize that. When I think that is too harsh an indictment I just review these sort of items - [Feb 23: Two Million Minutes - a Global Examination] which follows the High School life (and preparation for the global world) of students in America vs India vs China. It is eye opening and worrying. I guess we'll find out how it all turns out by 2050 ;)

Bookkeeping: Cutting Mastercard (MA) as it hits 20 Day Moving Average

Well we caught another HUGE run, this time with Mastercard (MA) - made well over $6 on this one from front to finish. (being facetious) At this rate we might beat a 6 month CD. I was hoping Mastercard could break out past the 20 day moving average (mid $240s) and make an attempt to the 50 day ($260s and falling), but hope is for those guys who use fundamentals. Usually we wait for a stock to attempt to hit the 50 day moving average before watching for a rejection but I'm not even going to wait that long and assume the "move" is over as it's getting batted back even at the 20 day. Could be wrong. Could be right. But cash we will go into... selling this down from 2.5% of portfolio to 0.5%. I keep finding very few opportunities to make money on the long side - thankfully Fuel Systems Solutions (FSYS) never lets up.

I have a pretty big buy list right now but in this market, the best way to make anymore than 1.5% on a position (ex airlines of course) if to wait for the hammering and just guess where the catching knife falls and then hope you are close. The odds are poor with that methodology, because being a few days early means you can be down 15%+, but true sustained breakouts are rare at this time. For example - remember that nice post earnings breakout of Ctrip.com (CTRP) - almost gone.

Remember that nice post earnings breakout of Intuitive Surgical (ISRG) - almost gone.

Etc. Countless charts like these. No one is "investing"; everyone is "trading". Yes a few names are actually sustaining breakouts but guessing in advance which few will do that, versus the 90%+ that are giving back all their gains within a few weeks is best left to Nostradamus. Why is FSYS sustaining its run? I have no idea - the chart (at the time) looked no different than ISRG or CTRP. Just random action - 1 out of 20 stocks will be allowed to sustain a big move; the other 19 you have to sell when you get the pop. Because the market will take all your gains away if you don't. So we'll obey until odds turn more into our favor.

Long all named mentioned in fund except Intuitive Surgical; long Fuel Systems Solutions in personal account

Time for Commodities?

I wrote both last Friday in our performance update

Ironically in this "buy the carnage" environment, I'm going out on a limb and saying we should be due for an oversold bounce in commodities soon. After the prescient call in oil in late June made us 6 for 6 on major turning points (not that it helped us escape the carnage) [Jun 26: Can a Near Term Top in Oil be Far Away?] I'm going with the group think that $110 or at worst $100 should provide an intermediate floor in oil. And with that the panic will subside (for a while at least) in all commodities.

Other reasons? First,
only 1 person emailed me today to ask if I was buying fertilizer. So most people have given up :) always a good (anecdotal sign). Second, we are starting to see the complete opposite of what we saw 2 months ago - (then) commodity price going up but stocks not following (oil/natural gas) (today) commodity price going down but stocks not being decimated. And the coal prices and fertilizer prices simply are not going down; so unlike natural gas down 40%, and oil down 20% - these have been the babies out with bathwater. But fundamentals don't matter - only quant hedge funds programmed trading. But that will end at some point and the hordes will scurry back. At least for a trade so they can goose their quarter. Now with that said, the charts are gosh awful in some... err many.... err most cases, so we'll see how sustained the rally is. Last point? Valuation. Mosaic (MOS) now trades at just over 6x May 2009 earnings. But they say in commodity land, sell when valuations are cheap and buy when they're expensive, so one could explain that away too. Maybe when Mosaic starts trading at 2x May 2010 earnings we can sell even more - because it will be even cheaper ;) But we do see some charts that appear to be bottoming - could it be Mosiac (MOS) made the 2nd part of a double bottom today? Too soon to tell.

And Sunday night in our weekly summary

I also have lack of conviction in any 1 sector so we're spreading our stakes over many sectors. That said, we've had a 2 month dismantling of the commodity sector and since they are no different then banks, retailers or homebuilders at this point; those groups had significant rebounds during the past year even when their fundamentals were deteriorating - so even if one believes the fundamentals are deteriorating at some point the market punishes the "crowded" trade - which at this point is sell off commodities. Maybe it won't be this week but my hunch is we are near to a bounce in the group. The question is how long will it last - but with broken charts everywhere we'll be selling into any bounce and if we are "wrong" and this is just step 1 of a much larger move up, we'll buy back positions as they show strength.

.... that in this market where you buy the beaten down and sell the strength, this 2 month hammering in commodities looked to be showing signs last week of relenting, and I felt a bounce could be in the offing. So far this week that been a good call as we are seeing some good action. But the open question is sustainability. Do you sell the bounce or buy the bounce? I don't know. My initial plan is to sell the bounce and if things continue upward to rebuy - since these moves can have some legs once HAL 9000 decides he loves commodities again. But do we expect a fundamentally driven move upward over a sustained period? Not anymore. Not in this market. Every stock, regardless of sector is the "same" - buy when oversold, sell into overbought - no moves last for more than 2 months.

I am using 2 charts as my proxies - in my 2 favorite commodity groups - Mosaic (MOS) in fertilizer and Walter Industries (WLT) in coal. Both are neither the worst or best chart in their group, and both have broken down below their 50 day moving average but then began to trade sideways. Now both are making runs at their 50 day moving average from below, and I'd like to see both close ABOVE and then make a confirmation day (a following day with a higher close/high) and then we can get sort of happy about this sector. But I would not expect any 3 month rallies.

Further if the market begins to break down action (not saying it will) will these stocks move in inverse relationship? Or will we finally reach that point where everything is sold at once instead of a sector by sector woodshedding action. All open questions - but those are my thoughts going forward. But once again, we seem to be in a place where the hardest hit gets the rotational money - the name of the stocks/sector mean little in this era - they are all the same to computers. These are not a fundamental investor's thoughts; these are a trader's thoughts. Because long term investors who use fundamentals as a basis for buying are being bludgeoned in this era.

So I'll be interested to see if we have the complete opposite trade - consumer discretionary/financial = bad, commodity = good. You know, caveman trading logic: "This stock good.. grunt. Beaten down. grunt. Me like. Me Buy. grunt. Retailer is last week trade. grunt. I sell. Technology? Not in caveman days."

Look for Jim Cramer to come on TV if this move lasts for a few more days saying "I want you in commodities - the move downward was overdone" ;) I'm still doubting the move will be sustained but I am sort of hoping for it to see if this prediction will come true.

Long Walter Industries, Mosaic in fund; long Mosaic in personal account

Bookkeeping: Cutting Back Buckle (BKE) Ahead of Earnings

I don't have quite the same conviction with retailer Buckle (BKE) as I have with some of these other names I've held through earnings, so with the company reporting Thursday and the stock now testing its 50 day moving average I am following the game plan and cutting back. Perhaps more ominous "might" be the formation of a series of lower highs over the past month - we don't like that. I've cut this back in the $48.40s from a 1.4% stake to a 0.4% stake, pending more information Thursday.

While I hate the consumer trade, there are basically 3 "youth oriented" clothing stores hitting their same store sales during the past year - Buckle, Aeropostale (ARO), and Urban Outfitters (URBN). The former 2 report Thursday and it was a toss up deciding which one of those 2 to buy so I get some 'consumer exposure' (one of the only things working in the market the past 2 months)

So we'll see how the results are Thursday - both companies have been reporting 20% same store sales figures, but it simply makes little sense to risk much capital ahead of earnings when even great reports (in the wrong) sector are punished. Is retail the wrong sector? I don't know. That changes by the day in this new era of market. Last week it was the right sector. By Thursday it could be the most hated sector. It depends on what site of the motherboard the hedge fund computers wake up on I suppose.

We'll assess these 2 names again Thursday and either continue on with Buckle or maybe make a switch. One of my 3000 strong analysts (readers) reported to me via email that the Houston store (Buckle) was nearly empty when he visited, which seems to be in direct contrast to their same store sales so we'll see in 48 hours. ;) Until then and without the ability to short some of these consumer discretionary names breaking down, I'm playing this market like a 89 year old granny: conservative.

Now... where are my teeth?

Long Buckle in fund; no personal position

Bookkeeping: Cutting Back Cummins Engine (CMI) on Technical Breach

Cummins Engine (CMI) is breaking down below the 50 day moving average so we're cutting back from a 2.0% stake to 0.3%. The stock price is low $66.20s. We're just sticking to this same game plan and cutting stocks HARD the day they breach support, even if it means we are going to sell some stocks unfairly and/or they reverse and bounce on us. Much like selling off fertilizer or coal stocks when their fundamentals are only improving this sort of trade makes zero sense to me from a company business standpoint. But until fundamentals are again respected in US stock markets, we'll stick to charts. We usually take a very incremental approach, building positions slowly or exiting slowly but not in this market.

Cummins is now trading at forward PE of 13 for 20% type of growth, and wonderful exposure to overseas markets - where they have been many years before the competition. But those are fundamentals and it's beyond the point. I see so many "cheap" stocks beaten senseless while people run into money losing operations such as airlines - it's gone from bemusing to a bit of a joke. But it is what it is, and I don't fight armies of quant hedge fund computers. (we tried for a few months; it does not work)

Shoot first, ask questions later continues. We'll preserve capital for the day sense returns.

[Jul 30: Cummins Engine Continues to Quietly Execute]
[Apr 30: Cummins Engine Excellent Report on Strong International Sales]
[Apr 18: Restarting Cummins Engine as the Rest of the World Moves on Without USA]
[Sep 23: Stock to Watch: Cummings Hitting on all Cylinders]

Long Cummins Engine in fund; personal position

Bookkeeping: New Position in iShares Short Treasury Bond (SHV)

Long time readers will know I've been holding cash in a 10-25% range for pretty much the entire life of the fund. In Marketocracy.com I don't get this cash swept into a money market and hence for nearly 13 months have been earning 0% on this money. I was talking to an investing friend yesterday and bemoaning this fact, and he mentioned some ETFs which are as close to a money market as you can get - i.e. i want stability of principal and try to get a few percent points of return.

His suggestion was iShares 1-3 Year Treasury Bond (SHY) which looks, from volume, to be a very popular instrument. Average duration is 1.74 years and a 30 day yield around 2.5%.

I am going even more conservative than that since I effectively want as close to a money market as possible and am using iShares Short Treasury (SHV) which is less popular (by volume) but has average duration of 0.34 years and a 30 day yield around 1.8%.

So not much of a difference in yield and 1/4th of a year is as close as you are going to get to "cash" I suppose. And 1.8% yield is better than 0% I've been getting. The main problem is commission costs - as I liquidate this to buy other positions I'll incur commissions each time I trade "out" of a piece of SHV, but as long as it is not often enough to eat the 1.8% yield away I suppose I'll still come out ahead.

So while I'll create this as a separate position it is effectively "cash" in terms of replacing a money market account that I'd normally have in a brokerage. I only wish I had done this over a year ago since it would of helped goose returns a bit. In this environment even 1% helps.

Since I don't want to incur commissions each time I leave "cash", I'll actually keep a bucket of cash to the side and then put 75-80% of my free cash into this instrument so we create some interest on the money. For example, we currently have about $200K in cash, so I put $160K into the ETF. This way if I decide to buy something for $40K or less, I won't be paying the commission to "sell" the ETF.

Obviously I won't have to deal with that in a normal brokerage where free cash is swept into a money market.

Long iShares Short Treasury Bond in fund; no personal position

3 Casino Stocks - I Guess Gas Went up 2 Cents the Past Few Days?

Gas is down 40 cents, the US consumer is back! Pile in! Pile in!

Not so much.... as I keep saying each time these consumer discretionary stocks [Stuff I've Been Negative on Since Last Fall] jump on Kool Aid recovery talk - they just create yet another opportunity to short - the danger is timing. 3 casino stocks rolling right back over. Again we cannot short individual stocks in the current situation but this is simply the easiest way to make money the past year - let the "junk" to their oversold rallies and then get short. We're losing a lot of return by not being able to do this.

I don't see gas prices jumping up the past few sessions, so I wonder why this is when the theory was how great everything would be as gas prices fell? Ah yes - reality. Just 8 days ago these stocks were ramping up 12-14% [Aug 11: The "Turn" Appears to be Here]

Some amazing action out of the retailers - see Coach (COH) - and which we considered last week continues to fly. Lots of tried and true shorts over the past year such as Polo Ralph Lauren (RL)Harley Davidson (HOG) are simply unstoppable right now as oil heading to $24 brings the US economy back ;) I'd be unsurprised to see restaurants also fly. Once again, this is simply the opposite trade of everything that has worked the past year to short - casinos should also ramp. It is quite a simplistic thinking but it is what it is - look at up 10%, Wynn Resorts (WYNN) MGM Mirage (MGM) up 14%. It is truly amazing how the entire world has changed by a 40 cent drop in gasoline prices - headed to 65 cents.

A month earlier? [Jul 11: 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%
Have I mentioned this is not a buy and hold market. Nothing but traders moving stocks up and down to create some return for their funds. This is all the market has become. Did anything change fundamentally from 3 months ago? 2 months ago? 1 month ago? I know - I know - gasoline is down 40 cents so everything is fine in the United States of Subprime! But it didn't pop back up today - did everything revert away from "fine" the past 3 trading sessions? I only type this so for all of you who sit there and wonder "why is my stock doing this or that" and try to attach logic or fundamental reasons to it - to urge you to stop doing that. Save yourself the grief. Your stocks are in the hands of others and it's like balls of yarns for big cats - very big cats - with a lot of money and leverage. Fundamentals are not changing - just shorting, short covering, naked shorting, leveraged long positions, etc etc etc.

Fundamentals? So old school. Check back in about 6-8 weeks when these stocks go back on another 40% run upward. And then fall back down in 11-13 weeks. Rinse. Wash. Repeat. Since this is the only way to make money anymore and buying companies on their actual business is useless, I expect myself to be the proud owner of one of these gaming stocks in a few weeks so that I too, can yell about the upcoming economic recovery (even though the moves have nothing to do with fundamentals) and cheer these on as their fundamentals degrade. MGM is so bad you cannot even see the 200 day moving average on the chart anymore.

No positions but yearning to be long a casino stock in about 3 weeks - or maybe an airline or automaker

Best Stock on the Planet: UAL (UAUA) [United Airlines]

Every morning I see this stock up in premarket - its a wonder. Prospects are incredible going forward. They are projected to go from a $10 loss this year to a hopeful $5 loss next year. This will take their PE ratio from infinity to... infinity. But that's ok - the quant hedge fund computers love this stock. Best chart on the planet; talk about the "anti-oil" stock.

ReneSola (SOL) - The Sun Shines On

Quite a staggering good result from ReneSola (SOL) this morning; the stock has had a huge run since we began adding a week ago so some pullback might happen but it won't be for fundamental reasons. The revenue growth they had sequentially (quarter over quarter) is more than most companies do year over year - 40%! Research and Development spending jumped $3M from the previous quarter - that was much higher than I expected; if it had held steady from last quarter their net income would of went up from $23.3M to $26.3M and their EPS would of came out even more impressive. The only issue I have with SOL is their high share count for such a young company which makes it hard to grow earnings PER share - but the operating metrics are improving across the board and the year over year growth is off the charts. They "only" lost $800K in currency so unlike other companies in this space it was not a huge effect (especially spread over so many shares) - which was one reason we sought this name out for this quarter.

Despite tremendous growth in the near term it's all about "beating the numbers" game - analysts were in at $0.32 EPS and $141M in revenue. The company blasted those figures.

Note - they have an accounting treatment which I am not going to get into but it's spelled out in the earnings report. I'm just using the first set of numbers they reported.
  • Net revenues for the second quarter of 2008 were US$173.0 million, an increase of 40.7% sequentially and 289.0% year-over-year. The increase in second quarter revenues was primarily attributable to an increase in output from the expanded production capacity and increasing wafer ASPs.
  • Gross profit for the second quarter of 2008 was US$42.8 million, a 57.1% increase sequentially and 330.0% year-over-year. The gross margin for the second quarter 2008 was 24.7% compared to 22.1% in the first quarter of 2008. (that is a huge difference in just 1 quarter - 2.6%) The increase in gross margin was primarily attributable to a further reduction in the silicon consumption rate to 6.24 grams per watt from 6.30 grams per watt in the first quarter of 2008, the continuing reduction in non-raw material related production costs, and increases in wafer ASPs due to a high demand for our wafer products.
  • Operating profit for the second quarter of 2008 was US$34.5 million, an increase of 48.9% sequentially and 328.4% year-over-year. The operating margin was 20.0% in the second quarter compared to 18.9% in the first quarter of 2008. (we love seeing those percentages increase, even with a huge increase in R&D spendings) The increase in operating expenses was primarily attributable to a substantial increase in R&D expenditure relating to our investment in developing alternative silicon feedstock materials.
  • Net profit during the second quarter of 2008 increased 31.9% sequentially and 294.6% year-over-year to US$23.3 million. (EPS diluted came in at $0.38)
Polysilicon Project Update
  • On May 14, 2008 ReneSola announced that it had increased the planned annual polysilicon manufacturing capacity to 3,000 tonnes at the wholly-owned facility in Meishan, Sichuan Province, China. Construction of this facility is on track, with completion expected in early 2009. The facility is expected to be operational in the first half of 2009.
Feedstock Procurement (big issue in solar world)
  • As a part of ReneSola's diverse feedstock procurement strategy, the Company recently signed a number of polysilicon procurement contracts with international and domestic suppliers with terms ranging from one to five years. With two long term polysilicon procurement contracts signed in 2007, a total of 2,500 tonnes of polysilicon will be delivered during 2008 and 2009, with the majority to be delivered in 2009.
Production Capacity
  • As a part of ReneSola's ingot manufacturing capacity expansion to 645 MW by the end of 2008, the construction of a facility to house 160 MW of multicrystalline furnaces is now complete and ready for delivery of the furnaces which will occur during the third and fourth quarters of 2008.
  • Construction has begun on a new multicrystalline wafer facility that will hold an additional 355 MW of multicrystalline furnaces as a part of ReneSola's 2009 wafer manufacturing capacity expansion plan. The facility is expected to be complete in January 2009. The furnaces are contracted to be delivered in batches, and the last shipment is expected to be delivered in early third quarter of 2009.
Third Quarter, 2008 and 2009 Outlook
  • Production output in the third quarter of 2008 is expected to be in the range of 90 MW to 95 MW, compared to 82.5 MW in the second quarter of 2008 and 36.0 MW in the third quarter of 2007. Gross margin for the second half of 2008 is expected to remain stable at the level under the Equity Accounting Method for the Company's investment in the Joint Venture.

  • Based on strengthened wafer ASPs and increased production output we are once again increasing our annual production output and revenue estimates for 2008 and expect output to be in the range of 340 MW to 350 MW from the previously guided 330 MW to 340 MW, and expect estimated annual net revenues to be in the range of US$640 million to US$670 million from the previously guided US$570 million to US$590 million. (that's a substantial jump from their side - analysts are in $612M)

  • We maintain our wafer production capacity target to be 1 GW by the end of 2009 and our 2009 annual production output is expected to be in the range of 650 MW to 750 MW, including output from tolling arrangements in the range of 100 MW to 150 MW.

So at this point the $1.29 2008 analyst estimate is obviously in jeapordy - they've now done $0.28 and $0.38 = $0.66 in the first half of the year. If they had zero growth from here and just replicated this quarter's performance that's another 76 cents. Due to an increase in share count from dilution which I believe on first glance is not showing on this earnings report I don't have an exact model on where they should be going for the year - also the question of R&D spending is an open one - does it continue at this new higher rate or does it fall back to a more normalized level - or somewhere in between. But it seems in a very back of envelope way that with the new guidance, $1.45-$1.50 seems likely for the year. Growth rates of 200%+ cannot continue but even if ReneSola "slows down" to 75% growth rates in the coming 2 years, perhaps they can get a better forward PE ratio than the current 12.

But that's just me, and fundamentals don't matter to this market.

Favoritism by investors seems to switch from company to company each quarter - and unfortunately they do all tend to trade in one band - despite the individual pros and cons - but for this current round it seems the 2 Chinese wafer makers have the best combination of momentum, lack of headwinds, and investor sentiment. Not to mention, despite huge runs in th past week, they still are dirt cheap - trading below Home Depot (HD) valuations.

[Aug 12: Some Adjustments to Solar Patch & New Position in ReneSola (SOL)]

Long ReneSola in fund and personal account

NYT: Export Boom Helps Farms, but not American Factories

Ah, the weak dollar has led to the great American manufacturing export economy - well not so much
  • Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal. (let's cheer that US Multinationals have not found a way to outsource these products - at least we have something left that others in the world want to buy)
  • This helps explain why manufacturing jobs are continuing to disappear by the tens of thousands and factories are closing even during a miniboom in exports. While the surge in commodities is a welcome relief, it is an unreliable prop for an industrial power.
  • “The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly,” said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute. His point was that while Boeing’s aircraft or Caterpillar’s tractors are distinctive and sought after, corn grown in Iowa is virtually interchangeable with corn grown in Argentina or any other bread-basket country. “Over a long period,” Mr. Bivens said, “commodities contribute right around zero to export growth.” (easy now, let us have some bright spots in the morbid economy)
  • An analysis of trade data by the federal Bureau of Economic Analysis illustrates just how lopsided the gains have been between manufactured goods and unprocessed commodities. All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported.
  • Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent.
  • But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. (oh really... imagine that) Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.
  • We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas,” said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. “But on the margin, we will shift a little bit of manufacturing back to the United States.” That has happened recently, in response mainly to soaring transportation costs and the weaker dollar.
  • Many American manufacturers argue that as factories spread across the globe, exporting is no longer an effective means of competing against sophisticated and ever more numerous local manufacturers. In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.
  • Currency fluctuations rarely alter these long-term commitments, and profits stay abroad. “Most of the money we make overseas, we keep there,” Mr. Pistell said, “and then plow it back into growing the business overseas.”
Conclusion: We continue to move to a flatter world - as consumption flattens in the US but grows overseas more production will follow (i.e. jobs). We are told the weak dollar is a great boom for the U.S. manufacturing base. The numbers tell a starkly different story, as we've pulverized the manufacturing base so there are not many even left to take advantage of this shift. But it is good for U.S. commodities - the multinationals have yet to figure out how to move coal mines or Iowa farmland to distant countries to take advantage of cheap labor. So we at least have that going for us as we continue to move to the 95.2% service economy.

Monday, August 18, 2008

Reader Investment Pledges mid August Update

Time for our monthly update on pledges. Another very good month where readers committed $654K towards our goal; again well ahead of my "projections" for $200-$225K a month. Especially solid in lieu of the fund hitting a slump the past 8 weeks, and a dismal market overall the past year. Total dollars committed is now $3.96 million. As mentioned in the past, my goal was to get to $7M in assets by the end of the first year of actual existence (preferably sooner so I don't have to lose money) and hopefully launch with $4M at least; so assuming all 200 or so investors are still onboard (which is not my assumption) we are now at that level. We've also gotten some good publicity from the Barron's article, and some smaller media requests so things are progressing very well for what I think will be a unique product.

If you are interested in investing/pledging as always send me an email (link on the website, upper right margin) or attach a comment to this post or one of the previous monthly updates. The original post on the purpose of the blog can be found here [Jan 7: Readers 'Pledges' Towards Mutual Fund Launch] Any time day or night, you can see how I am doing by verified independent 3rd party metric here: 'Rising Tide Growth' performance

Frequently Asked Questions can be found here.

With the pledges coming in well ahead of plan, we can now give a more firm update on launch date - at this time we are now shooting for "around" New Year's day - SEC approvals will determine the actual date. I know many people pledged (some a long time ago) without a firm date in mind and simply said "let me know when you are ready to go" with a very open ended commitment, so hopefully that gives you a better idea. We'll be working on the prospectus and N1-A (massive paperwork) with lawyers in the coming 3-4 weeks and then have everything off to the SEC by some point in September. From there you simply wait for comments/requests from SEC and eventually get your approval, generally 90-115 days from sending in the paperwork. What we'll do is have our new website up and have applications and prospectuses up by pdf file as soon as possible when the time comes, and be "open" at concurrent time frame of approval. And then it's for real.

A few more updates on the actual website - there is an open question of what exactly I can or can not do. The SEC has very strict regulations and you do not want to run afoul or essentially the fines levied would put one out of business. So as stated in the past, I plan to be as transparent as possible while staying within the rules. From feedback from countless readers that is a huge selling point for people and one of the main reasons for interest - we generally attract a hands on (not passive) investing group and instead of flying blind they like to know what is going on with their money. So it's a lot of extra work on this end to convey the thought processes, but it will differentiate us from the pack. And hopefully over the long run, performance will be the other differentiator. With that said, and this is subject to approvals as lawyers are still working through it, but our general plan now is a weekly update of all holdings posted after the close Friday of each week. The #1 rule in this sort of venture is no forward looking statements. Period. Hence some things I do today i.e. "I'd like to buy if/when it hits $XX" won't be allowed. Everything has to be historical. The #2 rule is I can't talk about a position until holdings have been updated. So if I make a transaction, it will be reported after the fact and after the week is over so I don't make a mistake in communication that puts me out of business. Meaning, trades won't be posted "within a day" like they are now, but more like our end of week summary where I review the top transactions of the week, ONCE the holdings are updated. So those are the 2 main differences I see from the current format, but it's still developing... even with those caveats I cannot imagine anyone else having a more transparent platform. As for economic commentary, mocking misleading government reports, pointing you to interesting stories from other blogs - all that will stay in real time. So hopefully that gives you a better idea of what the vision is for the future. The more detail the lawyers give - I'll pass along as we move forward.

Blog readership continues to grow but the market (and most likely the performance chasing nature of investors) has slowed us down recently - now we're averaging about 3200-3400 visits a weekday, and email readership consistent in the mid 600s range from last month. Obviously I sound a lot smarter when I'm beating the indexes by 20%+ than when I'm lagging so that is to be expected. But just like Ken Heebner or T Boone Pickens didn't suddenly turn stupid, I believe my brain is still intact - it's just a quite different market than any of us have seen. So adjustments are critical until we return to normal, whatever the new normal might be. There might be entire quarters I lag the market, or heck a year or two but hopefully the long term metrics are top notch and our first year, relative to the market was still excellent even if we hit a major slump at the end. ['Rising Tide' Performance Year 1] The market will return to quasi normal at some point in the future - we just picked a very interesting time to start up; it's certainly been an epic test to actually make a profit in this time frame. And frankly when I have bad spells, you will see why - as opposed to just watching a NAV fall on a daily basis without any idea what is going on behind the scenes. With that said I believe my thesis (plural?) have been on and economic calls made last year better than 99% of "famous" pundits paraded on TV on a daily basis [Jul 14: Reviewing December 2007's Roadmap & Views] but the market has eventually punished all sectors, and all stocks at one point or another - so making money on a consistent basis, even with the correct economic views has been a tough slog. But at least we've been in the positive column, unlike most peers.

I'm updating things on a state by state basis each month, as I outlined in [Investment Pledges by State] As we wrote, to make it cost effective to register in any state we need about $40-$45K coming in from that state. The good news is if you are not in a registered state, once the amount is breached, its a matter of 24 hours, and a fund can be open for business in any state. So if someone shows up in 6 months from a state that is not registered, they can be added almost instantly. I don't have the state by state data with me when I type this post so I'll update it at a later date - below is last month's "standings" if you will. I know a few of the 8 states that were "close" now are moved up to the top group but I don't recall which off the top of my head.

We now have 15 states (up from 12 last month) where the threshold is met and we'll be registered if we started today: WA, CA, MI, AR, NJ, TX, GA, IL, NY, MA, OH, FL, VA, NV, and AZ

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

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

1 state TBD: SC

In addition to investors from Canada, Costa Rica, Germany, New Zealand, Singapore, and Uruguay we've now added Slovenia.

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

As always, thanks for the trust in investing.

January 7, 2008
= $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008 (click here for full post): $1.2M raised
May 15, 2008 (click here for full post): $1.6M raised
June 17, 2008 (click here for full post): $2.5M raised
mid July, 2008 (click here for full post): $3.3M raised
mid August, 2008 $3.9M raised

(there is a big gap here I cannot seem to erase - so scroll down for the list - sorry for the formatting)

Amount Who Where
$75,000 Self MI
$2,500 Michael D Oceanside, CA
$7,500 Oth Parts Unknown
$10,000 Dean D San Jose, CA
$2,500 Oza P MA
$20,000 Oren L Chicago
$10,000 Rob T NYC
$5,000 Ryan Seattle, WA
$7,500 Ted Sunnyvale, CA
$2,500 Brian P Cerritos, CA
$50,000 David B Middlesex, NJ
$50,000 Ian M San Antonio, TX
$40,000 "LiquidWindows" Deep in heart of TX
$5,000 Jonson LA, CA
$5,000 Jimidean Birmingham, AL
$5,000 Brooks R Baton Rouge, LA
$50,000 Zlatanscores New Jersey
$3,000 Ben S Portland, OR
$20,000 Sheng S Omaha, NE
$10,000 msuberri NJ
$5,000 David W Houston, TX
$10,000 Ryan T NJ
$3,000 NandaK Nashua, NH
$50,000 WaltF Louisberg, KS
$2,500 Joe Scranton, PA (email)
$2,500 Todd Nashville, TN (email)
$250,000 David R South Carolina (email)
$100,000 A.F. Los Altos, CA (email)
$50,000 Satya Temple City, CA (email)
$15,000 Bobby L San Jose, CA
$200,000 Ganesh S Bellevue, WA
$2,500 Michael A Charleston, SC (email)
$2,500 TJP Sterling, IL (email)
$75,000 Bob B VanBuren, AR (email)
$10,000 Pat L Tuscon, AZ (email)
$37,500 Art H Auburn, CA (email)
$5,000 Dan D Augusta, GA (email)
$5,000 Jeffrey H Greensboro, NC (email)
$37,500 Tom L San Fran, CA (email)
$10,000 Wesley W San Jose, CA (email)
$25,000 Tom S (daKat) Minneapolis, MN
$5,000 Dan W Mentor, OH (email)
$10,000 Jim G Marana, AZ (email)
$5,000 Andrey G Baltimore, MD
$20,000 Doug M San Fran, CA (email)
$75,000 "Skooker" moving (email)
$3,750 Brian C Milwaukee, WI (email)
$2,500 Jason F Big Apple, NY
$3,000 Chung W San Jose, CA (email)
$3,000 Mac Bellevue, WA
$10,000 BMW Bay Area, CA (email)
$10,000 "steelelana" NY
$10,000 "Jpassana" TX
$5,000 Brian J Racine, WI (email)
$5,000 Ceferino J Parts Unknown (email)
$10,000 Link M Knoxville, TN
$5,000 Pankaj Forest Park, OH
$20,000 Alex A Big Apple, NY
$100,000 D.K. Los Altos Hills, CA (email)
$20,000 Roger B Arlington TX
$20,000 Rohit S Chicago, IL
$5,000 Praveen K Atchison, KS
$25,000 Robert D Niantic, CT (email - IRA)
$100,000 Scott R Longbranch, WA (email)
$20,000 Roy S Knoxville, TN (email)
$50,000 Douglas D Atlanta, GA (email)
$20,000 Mahender B Crofton, MD (email)
$15,000 Joon K NYC (email)
$15,000 Linda A Houston, TX (email)
$5,000 Bob M Atlanta, GA
$3,000 Kiran A Atlanta, GA (email)
$5,000 Alven LA, CA (email)
$75,000 Vijay K New Jersey (email)
$3,000 Tyler CA (email)
$20,000 Jeff M Cedar Rapids, IA (email)
$50,000 Will W CA (email)
$10,000 Burt B Venica, CA (email)
$4,000 Kathy A Deland, FL (email)
$10,000 Nate W Novi, MI
$5,000 Tom R Canada (email)
$20,000 Anurag V Germany (email)
$200,000 S.D. Costa Rica (email)
$5,000 Behrouz F Ottawa, Canada (email)
$20,000 Hong H Hamilton, Canada
$15,000 Jeff F Calgary, Canada (email)
$2,500 Hamish E Queenstown, New Zealand
$25,000 George L North Carolina (email)
$4,500 Satyakee S Houston, TX
$2,500 "j/marketfolly" TX (email)
$30,000 Rich P Concord, CA (email)
$50,000 Rich T S. Yarmouth, MA (email)
$5,000 Xiang X Salem, MA
$25,000 Shane V Houston, TX
$100,000 Dave K Downey, CA (email)
$10,000 Bill H Boston, MA (email)
$20,000 Kurt C LA, CA (email)
$20,000 Charles L San Mateo, CA (email)
$5,000 Troyhouse Chicago, IL
$10,000 Darin P Corvallis, OR
$10,000 Adam M Columbus, OH (email)
$15,000 Justin K Columbus, OH
$5,000 Adam S CA (email)
$5,000 Mike M Atlanta, GA
$25,000 Darius K (Asterix) VA
$20,000 Arun Sunnyvale, CA
$20,000 Tao Z New York, NY
$48,000 Ghassan G CA (email)
$25,000 Greg B CA (email)
$100,000 Frank G NJ (email)
$5,000 Bill G PA (email)
$5,000 Jayson E WI (email)
$20,000 V.K. Amber, PA (email)
$3,000 Steven H CA (email)
$10,000 Mark M PA
$6,000 Gavin W Canada (email)
$20,000 Alan N Scottsdale, AZ (email)
$30,000 Bruce C Lake Stevens, WA (email)
$2,500 Junyuan Singapore (email)
$10,000 Trieu Texas
$30,000 Nestor T Uruguay (email)
$20,000 Dave B Palo Alto (email)
$10,000 Adrian B Canada (email)
$3,750 Rajesh S Florida (email)
$2,500 Shelley G LA, CA (email)
$2,500 Sachin S Chicago, IL (email)
$3,000 Bob H FL (email)
$15,000 Stanley T Canada (email)
$10,000 Ron S Florida (email)
$3,000 Scott H Westlake, OH (email)
$10,000 Bruce L Kentucky (email)
$15,000 BD San Diego, CA
$10,000 Zhong L McLean, VA (email)
$100,000 Andrew H Reno, NV (email)
$40,000 Glenn E Tampa, FL (email)
$5,000 Dennis B Chicago, IL (email)
$10,000 Patrick G Buffalo, NY (email)
$5,000 Peter M Hubbardston, MA
$10,000 Karen K VA (email)
$5,000 Jake M Madison, WI
$5,000 Martin T New York (email)
$5,000 Bob B Merrimack, NH (email)
$10,000 Matthew L South Carolina (email)
$10,000 Ed S Arizona (email)
$60,000 Jason N NY, NY (email)
$25,000 Richard D Fairfield, CT
$2,500 Wei Z Fairfax, VA (email)
$25,000 KB Texas
$5,000 Carter W Seattle, WA
$4,000 YJ Brentwood, CA
$5,000 Bill H Boston, MA (email)
$20,000 Tomaz K Slovenia
$25,000 CS Texas
$10,000 Olivier Florida (email)
$100,000 Jake L NJ (email)
$2,000 Marshall St Charles, MO (email)
$5,000 Greg R Florida (email)
$10,000 Rohit CA
$2,500 Bruce W Nortborough, MA
$10,000 Robert V Doylestown, PA (email)
$25,000 Eugene/Wei L NY (email)
$2,500 Gary F Chicago, IL (email)
$6,000 Gramlich W Laguna Beach, CA (email)
$25,000 Ron W Carlsbad, CA (email)
$2,500 James S San Fran, CA (email)
$50,000 Armour B Phoenix, AZ (email)
$2,500 Mike H Bothell, WA
$25,000 Dave C Clearwater, FL (email)
$12,500 Song H Singapore (email)
$10,000 Jatinder M Elkins Park, PA (email)
$10,000 Victor C Melbourne, FL (email)
$20,000 Jerry H CA (email)
$20,000 Andy S Mt Dora, FL (email)
$2,500 Dale Z New Jersey (email)
$20,000 Ralph B Bay City, MI (email)
$10,000 Kirk T Fort Worth, TX (email)
$2,500 John C Philadelphia, PA
$7,000 Lisa Leesburg, VA (email)
$2,500 B M Charlotte, NC (email)
$10,000 Jim F New York (email)
$10,000 Ben Indiana (email)
$2,500 Albert W New Jersey (email)
$5,000 Steven M West Virginia (email)
$10,000 Robert T Houston, TX (email)

$3,958,500 Total

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