Government Ban on Naked Short Selling in 19 Financials Created the Greatest Short Squeeze of All Time

Remember this list of 35 stocks (mostly financial) that as of Thursday morning had returned (at least) 35% in 1 week? [Jul 24: 35 Stocks Financial Sector Mutual Funds are Mocking Us With] Some bursting nearly 100% upwards? Some with market caps $30B, $50B, $70B, even $100B? Our financial system trading as if they are penny stocks? Well it was the greatest short squeeze we're ever going to see... the numbers in this Reuters story border on the absurd

• Short positions have dropped further in shares of the 19 financial firms targeted by U.S. regulators' emergency short-selling rule this week, a market data company said on Friday. S3 said it compared short sale data from July 14, prior to the U.S. Securities and Exchange Commission emergency rule, to the close of trade on Thursday.
• Short sales, or bets a stock will fall, are now down 98 percent in shares of mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE) and have fallen 85 percent for all 19 financial companies, S3 Matching Technologies said, citing data from its clients.
• S3's clients are primarily individual investors. Data on short sales by hedge funds, which have been active in this type of trading, is closely guarded by the firms.
• The rule is designed to prevent illegal "naked" short selling, which occurs when an investor sells a stock that they have not yet been borrowed. "You used to be all closed out before you had to show where the shares are. Now they have to show that they have the shares up front before you can even place the order," Standerfer said.

• While the SEC said last week that its rule was not intended to stop legitimate short selling, which can prevent stocks from becoming overvalued, S3's data showed that its clients are dramatically changing their strategies.

• "Retail traders were shorting Fannie and Freddie a lot and now it has become virtually impossible as there are no shares available to borrow against the shorts," Standerfer said. "Retail brokers are very concerned about complying with the SEC rule. As an intraday retail trader you used to be able to short during the day and cover near the end of the day with abandonment."

My take from the article is the retail investor is not so "dumb" after all, and knows the games the foxes play. Knowing the restriction on illegal naked short selling will drive these stocks up, they got out of the way quickly even with their legal short selling. And so you have the short squeeze of a lifetime. Or perhaps we can use the pundits' explanation instead: "better than expected earnings" (ahem)

I haven't spent much time on this subject since words escape me on how dirty it really all is, but again I want to emphasize we are just tiny mice running in between the legs of huge elephants. On short selling, especially of the naked kind, I could write a 10,000 word essay but I'll spare you. Shorting is good, legal, fine, and needed. Naked shorting is not. In summary we have now protected those who have been profiting from this game for years on end (the investment banks especially) because the gun was finally turned towards them. Instead of defenseless small caps. That's the short hand version, but for those who want the dirty details I encourage you to head over to Mish's blog and start at this post for the info CNBC will conveniently forget to mention while they clap like seals for the upteempth time as the "financials clearly have bottomed".

Open questions

1. Why is this rule only being enforced now? (we know that answer)
2. Why only for these 19 "holy" companies and not the entire market? (ah that would take away profit opportunities from these banks and their customers aka hedge funds so we can't have that)
3. What does it say that after the huge short squeeze up, many of these financials, especially of the government sponsored equity sort, began another leg down? (we know that answer)

Again, free markets?? Pfllpt....

So as all the King's Horses and all the King's Men once again reassure us the financial system is sound, sturdy, and quite frankly a wonderful place to be, 2 more banks went "away" in the still of the night and will re-emerge Monday with the word "Federal" at the front of their name. These are just babies compared to IndyMac. I assume this is now going to happen every other Friday? That appears to be the pattern - quiet knock on the doors late Friday, re-emerge Monday clean and sober. So let's count on Washington Mutual (WM) two Fridays from now or perhaps 4. Oh wait, maybe another shotgun marriage aka Countrywide (CFC) and Bank of America (BAC) will be arranged by the powers that be.... err, I mean perhaps the free markets will rule and another bank will scoop up WM. ;)

And as opposed to all the King's Horses and Men, it appears one of the best financial focused fund managers is not drinking the Kool Aid, per the Wall Street Journal. I'm not either.

• David Ellison, one of the most respected financial-stock managers in the mutual-fund industry, has had it. While he is pleased with the run-up in financials in recent days, he still sees signs of Armageddon in the sector.

• He recently pumped up the cash level in his two funds to as much as half his assets. His FBR Large Cap Financial fund stood at 50% cash at the end of June, up from 2% at the start of 2007, and his FBR Small Cap Financial is at 38% from 0%, according to Morningstar Inc. "I don't want to lose any more money," said Mr. Ellison, an intense fellow who speaks about the stocks with barely concealed anger.

• Having so much cash is a boldly bearish and unusual move. Investors pay money managers to pick stocks, and portfolios often limit cash to less than 5%. The cash levels are by far the biggest Mr. Ellison has ever had. His usual objective is to invest at least 80% in firms such as commercial banks, savings and loans, brokerages, insurers and real-estate companies.

• What also is unusual about Mr. Ellison is that he is one sector fund manager willing to be down on his own sector. Since these managers are locked into their sectors, be they tech, energy or banks, they are always optimistic. When times are good, sector managers say even better times are ahead. When times are bad, they say it is a great time to buy as the market overpenalizes the gems they can spot. (and this folks is why the "financial asset management system is broken. And yet another reason to not be locked into 1 sector)

• Mr. Ellison, 50 years old, has earned the right to be listened to. Ranked one of the highest in its field by fund tracker Morningstar, the $123 million FBR Small Cap Financial has returned 6.7% annually over the past 10 years, 3.8 percentage points better than the Standard & Poor's 500-stock index's total return and five points better than the finance sector.

• Spend an hour with him nowadays, and one will come away convinced the financial-service industry's glass isn't just half empty -- it is being shattered. He can cite dozens of facts about record foreclosures, nonperforming assets, uninsured liabilities and loan losses (I assume he has been reading the blog of late? Or maybe Peter Schiff's) (grin)

• The timing of a sector turnaround is impossible to predict, said Mr. Ellison. His downbeat themes: No one has any idea how much worse things will get amid poisonous debt lurking inside financial outfits, and this is just the beginning of a complete regulatory overhaul needed to eventually fix the problems.

• He likes that Wachovia Corp. has cut its dividend, but thinks too many financial executives remain in denial. (Bingo - as we enter the 5th "kitchen sink quarter" and we remain in the "8th inning of this dislocation". This has been the never ending 8th inning) Perhaps one of the worst offenses: the dearth of share repurchases by managers who "are so positive they have all this capital. Their words are saying one thing, but their actions are saying it isn't true." (so true. where is all the insider buying at these BARGAIN prices? laughable)

I continue to say this is nowhere near close to being over and aside from these occassional huge spikes (government aided or not) off of oversold conditions you need to try to avoid, the other 90% of the time these remain, by and large, excellent shorts. And will remain so. Much like Japan in the 90s, these institutions (financials) and their government handlers are leaking out bad news piece by piece (for well over a year now), instead of admitting to the mistakes and magnitude up front - or in some cases not even having a handle on the magnitude. (which in many cases is impossible until all these homes go into default one by one across America) I don't know which scenario is more frightening or dismaying - ignorance or denial? I just know we will have a lot more knocks on the bank door on a Friday night "Hi, we're from the government and we're here to help you."

Long Ultrashort Financial in fund and personal account

'Rising Tide Growth' Performance vs Peers June Update

Aside from measuring Rising Tide Growth versus market indexes, the past few months we have begun new measures to track performance versus it's peer group, the "mid cap growth" category of mutual funds.

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

Note: For newer readers, the Apr 23 post has a detailed methodology breakdown, and is worth the quick read.

This is still not an apples to apples comparison until we hit the July period as that will be the completion of our first year, but as each month passes we get closer to a direct comparison. With June complete we have 11 months of direct comparison and the other 1 month we assume 0% return, to reach a 12 month return (ending June 30, 2008).

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

I figured June would be an excellent month because we did great versus the indexes, which had a horrible month at -8.6% on the S&P 500 for example. We lost 1.1%. Knowing 99% of our peers do not hedge with short exposure I figured we'd expand our lead as May's #1 fund in the category which we did. July, of course, is going to be awful and push us back to the pack but I still hold out hopes to finish as #1 :) And a top 10 finish (out of 1860 funds) seems assured. Always good to keep things in perspective even though I love to have winning periods every month - it's just not realistic.

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As of June 30, Rising Tide Growth NAV was $12.11, creating a 21.1% return (we started at NAV $10.00). As always my results are kept by third party, which I link to in the left margin of the blog.

RTG Return: +21.1% (19.4% after fees)
Top 25 peer range (1 year as of June): +16.4% (1st place) to +3.0% (25th place)
Average of all peers: -6.6%

Here are the top 25 performers in the category for June 30, 2008.

So let's put things into perspective. Our annual expense ratio will be 1.75% so +21.1% turns into +19.35%. So we'd be the best fund in America in our category by 3%. We'd be beating the 25th best fund in our category by 16%+. We'd be beating the average of our peer group by nearly 28%.

As I scroll through all the non sector funds - we are ahead of every small cap fund in America (growth, value or blend) - by a wide margin. We are ahead of every mid cap fund in America (growth, value or blend) - value and blend has no close competition. Only in the large cap arena are a few funds ahead of us - a few Janus funds, 1 Fidelity fund, and Quaker Strategic Growth.... and of course Mr Ken Heebner. :) So all in all we'd be top 10 in all the non sector mutual funds out there of any size through June. We'll check back in 4 weeks to see how far we fall back in July but I believe I'd be winning Rookie of the Year if we were up and running. ;) If you can survive this market, you can survive anything...

Obviously our long term goals are to be near the top of this list in the 3 year, 5 year, and 10 year categories...

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

The Dominant Animal

We don't know where commodity stocks will go in the next day, next week, next month, next quarter, or in fact next year. That's up to the hedge funds and their super computers. We're just gnats riding on their behinds. But I do believe the trend is up in the long run - very up. For long time readers we've discussed the 'World of Shortages' theory in everything from dirt to water. [Mar 22: The Long Term in Commodities] I'm a Malthusian at heart it appears. [Mar 24: New Limits to Growth Revive Malthusian Fears]

Demographics are destiny [Jun 20: World Population to Hit 7 Billion by 2012] I do believe there will be technological innovation in the "very long run" which will help stave off a lot of worst case scenarios but getting from here to there will cause some major dislocations. Very major. Remember it is all about time frames. Once we get through this global slowdown.... errr, global hiccup.... errr, slowdown in Western countries only while the East hums along... err, slowdown in the UK, Spain, and USA only while rest of the world hums along.... err, slowdown in Spain and the UK only as US GDP *never* goes negative - we'll come into a new era of growth. That will drive demand for commodities hard and soft. The longer the major consumers (ummm... hello mirror) of said commodities drag their feet and kick the can, the more the disclocations will cause pain to many. Including those in the mirror.

I thought those interested would enjoy this article about views from Paul Ehrlich who apparently wrote quite an eye opening book in the 60s, and is now following up with a new book. As we like to say in the business "he was early" ;) Whatever your view on the "environment" there are economic opportunities to be had by being ahead of the crowd (of hedge funds).

• In 1968, Stanford University biologist Paul Ehrlich published The Population Bomb, a synthesis of scientific research and personal observations that offered a disturbing account of a world with too many people and too little food. The book was a national bestseller.
  
• Now 40 years later, Ehrlich, still at Stanford, and his wife, Anne, have come out with a new book, The Dominant Animal, in which they seek to explain how man's rapid rise to dominance has spawned a series of interlinked woes: soaring energy demand, agriculture crises, and, above all, environmental degradation.
• No longer, the Ehrlichs argue, can these issues be viewed as independent of one another, nor will a single response suffice as a remedy. U.S. News recently spoke with Paul Ehrlich. Excerpts:

Energy, food, and environment problems seem increasingly entangled. We can't talk about one without talking about the others. Where do we start?
We've got to dramatically revise the way people think about the world—and about our cultures. You can get all the way through Stanford University and still think your food comes from supermarkets. For example, people don't understand the involvement of the transport system in agriculture, or the oil connection. Obviously, there are huge problems with what's happening to people who live on two bucks a day and can't afford food, but agriculture is also our single most important activity and generates our biggest environmental threats. We can't go back to hunting and gathering. We've got to tackle the population issue, so ever more mouths don't need to be fed. There is also a consumption problem. I just spent four weeks in Africa, and there and all over the world people want to eat the way we do, which of course means more beef and pork and much more production to feed animals.

The so-called new consumers in Asia have been cited as a big factor in the fuel and food crises today. Who are they?
People who have a little more money and education have, in China and India particularly, developed very rapidly the same consumptive attitudes as the average American and European. That's not necessarily bad: Who can deny them wanting the stuff we have when we haven't shown the slightest interest in reducing our own impact on the environment? In 1972, I cowrote an op-ed called "What if all the Chinese had wheels?" At that time, there were 500 million Chinese, and it looked like one day they might want cars. Now, we have 1.3 billion Chinese, and we know damn well they want cars; they're buying them and manufacturing them.

Some estimates show the world population growing to about 9 billion people by 2050. Can the planet sustain that? (my note - actually 2042)
Probably not without disaster. If humanity put the effort in, we could end up with fewer people then. We have already seen a trend toward smaller families and actual shrinkage of population in Europe. It's not written that everybody has to have huge families. But in Africa, where the people are poor and have four, five, six kids, it will be tough. Even the optimistic scenario of population falling to 7.5 billion in 2100 takes us through roughly a doubling of energy use, and energy use is the best single measure we have of damage we do to our life-support systems. We don't have a clue if we can hold society together through that.

What if these predictions are off—and population growth continues?
Population growth will end sooner or later. The big question is: Will it end by a huge die-off, or will it end because low birth rates spread in Europe, Japan, and a few other places to the rest of the world? The actual limits depend on consumption patterns and technologies available and how environmentally benign they are, and what kind of lifestyle people want to live. We can't all go back to being subsistence farmers. We must make decisions about technologies and lifestyle. If you're rich, you can by a Van Gogh or you can buy a private jet. Obviously, one of those consumption decisions has a very different impact on the environment than the other.

But how do you control consumption?
There are no consumption condoms. This problem is enormously complex. What I am convinced of is that it is human behavior we have to change. The discussion of key issues is limited to a tiny portion of a population. We need to set up a system to keep these issues on the front burner...They are all long-term issues. The politicians, of course, have very little interest in them because solutions don't give votes for the next election.

You say that our energy supply is adequate. So what's the problem?
We're not running out of fossil fuels—we're running out of environment. We could go a long time if we could just burn up fossil fuels and dump the carbon dioxide in the atmosphere. We'd be in good shape at least for long enough to carefully consider our future. But when you see what's happening with the climate, you realize we can't do that. One of my colleagues went to Norway recently. She said it was horrendous to see global warming actually in action. Almost all the lakes they used to ice skate across in summer are gone. Everything is just melted. We don't have the time to continue what we're doing now and hope to change later.

The same holds for the food supply?
Unless we are extremely lucky, climate change will continuously alter the distribution of precipitation all over the planet. It's not that we're just going to deal the cards once and some farms are going to be better off and others worse off. Changes in water management will be required over centuries, for instance, switching from rain-fed to irrigation and maybe back. It's going to be extraordinarily expensive and disruptive, especially when we have a problem of how to feed ever more people.

Crude oil is at record prices. What's the first immediate step on energy?
You really need an overall energy policy. We have been reducing our energy research and development budget, not increasing it. The quickest energy solution is efficiency. Next is to stop population growth. If we'd stopped U.S. population growth in 1945 at half today's size, guess how much less fuel we would need to buy from the Middle East. Energy policy is a vast area we are not putting the right kind of thought into. The whole launch into biofuels was done without any ecological analysis of what the actual climate gains and losses would be or what the environmental impact would be.

Can biofuels even be part of a real solution?
It's not necessarily an insane idea. What was insane was not to very carefully look at it and get some more lead time. There may be some place in a sensible world for use of biofuels. It's not crystal clear. You hear, well, we'll just do X and Y in wasteland. I work in a laboratory in a beautiful mountain valley in Colorado. All the land is classified as wasteland and could be used for biofuel production, which would just be destroying beauty and biodiversity. It's important to understand that when biodiversity is gone, we're gone, too.

Brazil has a thriving biofuels industry based on converting sugar cane to fuel.
They are also cutting down big chunks of the Amazon. We don't know how much of the Amazon you can cut down before the whole thing goes, and what the effect on global climate will be. Besides the loss of biodiversity, the resulting climate change could basically destroy us, and we're probably not going to know in the near future until we've run the experiment and find out.

Recently there's been chatter about revisiting nuclear power.
Nuclear power, whether you are in favor of it or against it, is not a silver bullet. It is another very complex issue. There may be a place in our energy mix for nuclear power. But it's not going to solve this complex of problems.

What else might be in that mix?
We could easily increase efficiency on energy use in buildings and transportation. Let's build only coal-fired power plants that can sequester carbon dioxide, or shift away from coal to natural gas and then various solar technologies. There are lots of things we can do; no single one of them is going to solve the problem. You need action at the local level, at the state level, and the federal level, and the international level. (my note - hence we are doomed)

At the federal level, there is gridlock. How can we speed up progress?
Elect smart, informed people. (my note - did I mention doomed?) I get the impression that Congress thinks if it promotes wind power, in two years we could be getting 75 percent of our energy from wind. Actually, we'd be lucky to be getting 10 percent in 30 years. There is a huge time delay in deploying new energy technologies. The only way to speed that up is basically to go to a WWII-type commitment. The Manhattan Project took three or four years, but we put gigantic amounts of effort into it. We need a Manhattan Project on energy and the environment, but we don't yet even know what direction to go.

The presidential campaign, so far, hasn't offered much guidance.<
Essentially none of this is in the campaign. Sure, there are occasional statements on candidates' websites about climate. But what my colleagues and I are dealing with all the time and are scared witless about are not presidential campaign issues. It's sort of a wonderland. Whatever you think about gay rights and what starlet isn't wearing her panties today, those are not critical issues for most of our society.

The international community is starting work on replacing the Kyoto Protocol, which was intended to decrease greenhouse gas emissions. The U.S. never ratified it, and other countries haven't upheld their pledges. Is there any reason to be optimistic this time?
If there is going to be any real success in the international talks, it is going to have to come from the world's publics speaking up. It is beginning to dawn on them that there could be huge problems in the future. In California, we've had a record dry spring. When I was in Australia two years ago, there was no agriculture in New South Wales. I saw huge road trains full of sheep going to the abattoirs to be slaughtered because they didn't have anything left to graze on. There were no crops growing. Climate change is a symptom of a systemic failure to understand that humanity is wrecking its environment.

Bookkeeping: 'Rising Tide' Performance Week 51

Week 51 performance of the mutual fund

Comments: Whew, we are closing out our first year in traumatic fashion. All things considering (5 corrections in 12 months, or is the start of the 6th? or just a continuation of the 5th?) we had been tracking to an excellent year but have given back nearly 5% of gains in the past 2 weeks, and the entire month of July has been the complete opposite of June when we avoided the market meltdown. I'm still reeling from last week when we correctly positioned for an oversold bounce with 90% long exposure AND our #1 position at the time had a takeover bid but we lost 2%. Talk about owning the wrong stocks. It's just been one of those... months. The rubber band that is "reversion to the mean" is definitely attempting to snap us back. This week continued the woodshed action, notwithstanding a day of respite Friday. It's still a good year but memory is freshest from more recent experiences and we cannot seem to escape this particular woodshed.

Frankly we are at a cross roads. Good results in the "global growth" space are not being rewarded because oil = potash = coal = iron = corn = coffee = natural gas = wheat. It's all the same. Apparently the global slowdown means nothing will be consumed any more. I don't mind being wrong and getting blown up by companies reporting bad earnings (ok I do mind but that has not been the case) - but right now you cannot win for losing. Some of the best earnings production I've seen in a decade is being systematically sneered at. So we're stuck. As I wrote earlier today [NuVasive - At What Price Growth? It Seems "Any" Price]

I really believe the dirty secret in this market is something I complain about weekly in the technology sector. There is very little serious growth (i.e. >25%) in the >$1 Billion market cap arena outside of commodities - we have a few pockets here or there, but most of those names are trading at stratospheric levels and/or reside in China or solar, where they get a P/E ratio of 8. And once you go below that size of company the risk increases substantially (smaller companies have potential for huge reward but many stumbling blocks along the way).

So on one hand it makes it easy on growth investors to target stocks in this era because the choices are so few. But with so many "growth" investors piled into these names, the valuations make one dizzy. It will work, until it stops working. And then you get Chipotle'd. Or worse - Crox'd!

So are choices are limited - (a) buy these worst of breed airlines, retailers, autos, financials, restaurants, home builders at the exact right moment and hope we nail it so we can ride the +40-50% in 5 sessions and then sit on the sidelines for the 8-10 weeks after that move. OR (b) pay 70-80x FORWARD earnings for the few companies with serious growth in non commodities [Jul 23: Healthcare Companies that Start with the Letter 'I' Outperform]. OR (c) buy the "safety" sectors that are immune from oil that the hedge funds ran to when abandoning global growth - oops, that [Jul 17: The Google Gap] did not work out so well [Jul 18: Did I Mention Healthcare is Safe? Gilead Sciences Down 9% on Earnings] for them either. OR (d) buy these ridiculous "global growth" companies that fit my "growth at a reasonable price" wheelhouse that trade at 10-15x forward earnings for 50-80-100%+ growth. Oh wait, those are the stocks down 30-45% in the past 2 weeks because crude could (gasp! cringe!) fall to $100. So that's not an option at this moment either.

I've been revamping and redoubling the hunt for names that the hedge funds are not piled into (going into smaller and smaller market caps in my search), so when the rats all jump ship we are not capsized - we've bought a few but the choices are limited if you want any sort of true secular growth and profitability in 1 company. In the larger and mid cap areas, few companies outside commodities without valuations in the 70-100x forward level, are not beset with troubling charts - look at Mastercard (MA) - look at Apple (AAPL) - these are not charts you want to show to a young child. They look to be breaking down.

So as they say, when in doubt, sit it out. As you can see from my posts, I have been using this respite (all 1 day of it) to build up cash, and sell off exposure to anything a hedge fund computer wants to destroy on the next leg down. The few areas I do want to be in, are not being rewarded for fundamentals. So that leaves us nothing but technicals, and their charts have bad set ups now that the hot money has gone to chase lovely Citigroup (C). We are in quicksand right now and frankly it's beginning to feel a lot like 2001-2002 in terms of the market. Speaking of - the bulls cannot even put together a proper rally even with levels of governmental socialism Putin would be proud of throughout 2008. You know things are pathetic when even an attempt to retrace to the 50 day moving average is a pipe dream, and the spindly 20 day moving average can beat you back. Either we are carving out one of the saddest bottoms I've ever seen or a lot of bulls are going to be trapped shortly. Again.

For the fund, we began making some more systematic changes late in the week after the stocks we owned in the global growth area failed to rally off either the Peabody Energy (BTU) or Potash (POT) earnings report. I don't consider Friday's action to be any sort of real reaction - just the type of oversold bounce after a hellish selloff that we've been seeing in (gulp) "early cycle" stocks the past year. Precursor? Further, I polled the readership and 84% of blog readers want to buy the commodity dip (no surprise since I would like to do it to) but the contrarian in me was alarmed it was still that high of a percentage. *grin* Since nothing on the fundamental side is working, that leaves us for now with these darn charts. And I have countless charts, in both the portfolio and watch lists, which look just like this

Regardless of name of the company or the sector, I generally employ a similar strategy on any chart that has this set up. If I've been "stuck" in the stock (holding it while it breaks support) and it bounces to resistance (former support) I am going to cut back exposure. I did a lot of that Friday. Then one of 2 things happens - it pulls back and I'll be "correct". Or it will push through and I'll be "incorrect". If it's the latter, and we see the beginning of a new move up (that is sustained longer than a few days that is) we should have many percentage points of gains ahead, so missing the first 3,4,5% should not be a huge burden. If it is *the* move (i.e. breakout) and not just a head fake. If it's the former, then we protected our hides to some degree. Seeing we have so many stocks in this position I spent the latter part of the week employing defensive measures and tossing in stock into the bear's mouth and raising cash. If we have to reverse that Monday or in 3 days, in 3 weeks or 3 months I am fine. For now - playing defense. Simple as that. I'll give up some upside for that "insurance". In fact another two of our fertilizer companies report Monday, so we'll have a test very quickly to see if gains can actually be held or if this is just another trap.

Both the S&P 500 and Russell 1000 only lost 0.2% this week (which considering the past 2 months is akin to a 3% gain in the old days). That makes it 7 out of 8 weeks of downside for the general markets. Rising Tide Growth, continued a very poor July with a 2.7% loss. Capital destruction has been hot and heavy this month; 1 more week to finish out the year. We're still far ahead of our goal to beat the indexes by 15% each year - it just has not been back weighted, that's for sure.

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

Price of Rising Tide Growth: $11.111
Lifetime Performance to date (vs Aug 3, 2007): +11.11%

Comparable S&P 500: 1257.8 (-14.16%)
Comparable Russell 1000: 688.5 (-13.52%)

Fund return vs S&P 500: +25.3%
Fund return vs Russell 1000: +24.6%

Last week's results here.

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

WSJ: States Slammed by Tax Shortfalls

As we've been predicting for a long while.... I wrote in [Apr 25: Shoes Beginning to Fall in the States],

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury.

I wrote in [Dec 16: California in a State of Emergency - Coming to a Theater Near You]

Here it begins folks.... as I stated in this week's piece [The Web of Credit Snares Another: Cleveland] One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.

I don't know when (or hey, even if) the equity markets will finally come to the realization of the scope of the coming damage, as the bond markets obviously have. But this is only 1 of many shoes. Again, do you expect home values to go up in 2008? How will California's 2009 budget look? In just over a month the projected shortfall in CA has risen from $10 billion to $14 billion. Give it another 12 months... as many people sitting on overinflated 'assets' are finally going to sell at 20-30% lower prices. Remember, new homes are being sold off at 40% off levels seen in 2006 as home builders desperate to get rid of inventory price at fair value....

Why do you care if you don't live in California? Well it will be hitting a lot of other states for one, and secondly eventually the "real economy" affects the market ... eventually... no matter how persistent the 'invisible hand' is in seeing that this not happen. I will repeat, by the time these political candidates get to their primaries the economy is going to be the 1st, 2nd, and 3rd issue. We're just getting started here.

Fiscal Emergency for California

So here we are - the new fiscal year begins in July 2008 and CNBC's long touted 2nd half 2008 recovery is upon us! Oops. Not so much. As tax revenue from both the home "fake boom" and consumer spending "fake boom" dwindle, state and local budgets are now becoming an issue. And we have not even faced the real "unemployment" depths that will be hitting within the next 12-18 months. Much like subprime was the leading edge of the mortgage crisis, I believe school budgets especially will be the canary in the coal mine and where the first stresses will become "major stories". Budget year summer 08 to summer 09 will be bad. Budget year summer 09 to summer 10 is going to make this year look like a picnic. Cover story of the Wall Street Journal earlier this week - States Slammed by Tax Shortfalls I'll call this the "Michigan-anding" of America. Everything in this article sounds so familiar...

Remember, unlike our friends in D.C. our local governments cannot just call up the local Helicopter (Ben) and ask for a money drop. Save for a rainy day during good times?! Never! That's Un-American!

From here...simple decisions need to be made ---> (a) cut services, jobs, benefits and/or (b) increase taxes. [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%]

• The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year. -- identified Wednesday in a survey by the National Conference of State Legislatures --That gap is more than triple the size of the previous year's. (wait til next year)
  
• It is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010.
• Sales-tax collections, for example, have been hurt by the housing slump and high gasoline prices, which are prompting cutbacks in consumer spending. Personal income-tax collections have been hit by rising unemployment, while corporate income-tax collections have been eroded by falling profits.
• Unlike the federal government, most states are required to balance their budgets. (hah)
• Most have so far resisted tax increases, instead opting for raising prices on things like tolls and college tuition, and cutting back on services like education and health care.
  
• Some chose one-time measures such as tapping rainy-day funds that were built up in flusher times. That could lead to future cutbacks if the economy doesn't bounce back in coming months. (in that case count on future cutbacks)
• The spreading economic weakness also is affecting localities, which are being ravaged by falling property-tax collections and a decline in state aid.
• Several state-university systems are being forced to raise tuition and tighten their belts.
• Regents at the University of California and California State University system have raised undergraduate fees 7.4% and 10% annually, respectively, to cope with rising enrollment and other costs. Virginia Tech is raising its tuition for in-state undergraduates by nearly 11% (this won't be found in your friendly CPI figure - move along, benign inflation in America - substitution effect will be in full force - everyone in America will be going to community college or better yet skipping college all together so we can keep the core CPI low)
• States are also reducing their payrolls and programs. Vermont is cutting about 400 jobs through attrition, while Tennessee is using buyouts and possibly layoffs to eliminate about 3,000 government jobs.
• Social services have been hit hard. Ten states have made targeted cuts in Medicaid, while three have cut contributions to the Temporary Assistance for Needy Families program. (that's ok, we have banks to bail out - don't worry about those people)
  
• The housing slump, now well into its second year, is the primary culprit. The decline in home sales has cut into real-estate transfer taxes. Construction spending and employment have declined. Fewer home sales have resulted in lower sales of home furnishings and washing machines, eating into sales taxes. (I was told not to worry 18 months ago - after all housing is only 4.5% of GDP... hmm, darn CNBC)
• Of course, for many states, today's budget woes stem at least partly from expanding their services during the good times and not planning enough for the inevitable downturn. Meantime, states are dealing with shortfalls of many kinds. According to the report by the association of state legislatures, 22 states are reporting sales taxes that are below forecast. Seventeen states had a shortfall in corporate income tax, 11 states were behind on personal-income taxes, and 11 were also behind on miscellaneous taxes such as insurance-premium taxes. (gosh and that is during "an economy that has hit a few minor roadblocks but is structrually sound" - just imagine if there was a recession)
• At the same time, costs are rising. Over the past several years, many states have taken over more of their K-12 education funding from local governments, while many others have expanded Medicaid.
• In Illinois, Gov. Rod Blagojevich unilaterally cut $1.4 billion from the $59 billion budget the legislature sent him in May. The state says it expects to save an additional $500 million through belt-tightening at state agencies. The governor's changes include heavy cuts in spending for education and health care. (aka non essentials)The state plans about $600 million in health-care cuts, including making hospitals and nursing homes wait longer for Medicaid reimbursements.
• Health services, among states' fastest growing costs, are being cut across the country. Ohio is closing two mental-health facilities as state agencies look to shed $733 million. The state is also cutting a program that provides free nicotine patches to smokers. Virginia's funding for hospitals and nursing homes to care for the poor and elderly was reduced by $76 million over the next two fiscal years, according to an analysis by the Commonwealth Institute for Fiscal Analysis in Richmond, Va. Maine is cutting money for foster care, mental-health services and "flexible funding," which social workers can spend on specific needs for clients.

2008 2nd half recovery? Full steam ahead.

[Jul 14: Reviewing December 2007's Roadmap and Views]
[Jun 19: Tent Cities Sprout Up Across Southern California]
[May 7: Vallejo California Votes for Bankruptcy]

Russian Stock Market Plunging

Looks like that Mechel (MTL) "tiff" along with a few other things are causing some major selloffs in Russia. So let me get this right; when a government gets all socialistic .... the stock market reacts poorly. Hmm... that would explain a lot of things over the past year.

Before I post the story I just wanted to post this one sentence I read last evening that sent chills through me, sitting thousands of miles away. I was going to title this post "Phrases you never want Putin to say about you"

Such as...
(CEO) Zyuzin, who was invited to attend the meeting, ``has suddenly fallen ill,'' Putin said. He urged Zyuzin to get well soon, ``otherwise, we'll need to send him a doctor and clean up all these problems.''

Ok maybe I am reading too much into that but have I mentioned we live in interesting times?

• Investors piled out of Russian stocks Friday after the abrupt departure from the country of a foreign oil boss and the prime minister's unexpected severe criticism of a large steel firm.
• MICEX, the exchange where the bulk of trading in Russian stocks takes place, plunged 5.5 percent by the close of markets, while the RTS Index lost 5.6 percent to sink to its lowest point since March.
• After Prime Minister Vladimir Putin's scathing attack on Mechel late Thursday, heavy trading in New York sent the steel and coal maker's stock down nearly 40 percent, wiping more than $5 billion off its value -- though shares rose around 20 percent in early trading in New York on Friday.
• Earlier Thursday Robert Dudley, CEO of the embattled Anglo-Russian oil producer TNK-BP, left the country three days before his visa was due to expire. Russia has not renewed the visa on the grounds that he allegedly does not have a valid work contract. Dudley, who said in a statement his departure follows a sustained assault on the company in the past several months, vowed to run the company from abroad.
• The developments rattled investors, leading to a heavy sell-off in Russian equity, which is dominated by oil stocks.
• "Sentiment is moving against Russia," said James Fenkner, managing partner at Red Star Asset Management in Moscow. "If oil has any kind of bounce, the market will look kindly on Russia. If oil (prices) begin to slip, there will be a great unwind."
• Observers say soaring oil prices have largely masked the political tensions bubbling beneath the surface, and investors are tensely watching how the corporate conflict plays out at TNK-BP, widely seen as a test case for foreign investment under new President Dmitry Medvedev.
• While the TNK-BP dispute has spooked investors, observers were skeptical that the onslaught on Mechel heralded a politically motivated attack of the type that brought Yukos oil company to its knees and caused lasting harm to Russia's investment image.
• "I think the probability of this becoming a Yukos-style asset grab is relatively small," said Red Star's Fenkner. "But if it's an asset distribution, then all bets are off."
• In a research note, Chris Weafer, chief strategist at UralSib, said, "The last train carrying the optimists out of Russian equities has just left the station. Let's hope it's just for a vacation rather than emigration."

Well we've lost the I and C of BRIC, and now it appears we are losing the R. Everyone to Brazil!

Oops, wait crude might be heading to $100 so Brazil's stock market should sell off somewhere in the 80-99.9% range due to that. Hedge funds say so. Got it.

We've lost 'em all folks. I knew this was a ploy to get the US stock market up one way or the other. (eliminate all other choices one by one)

I need to fix my hedge fund thesis to this: crude oil = potash = iron ore = Russia = coal = wheat = Brazil = nickel = corn = coffee = natural gas. It's all one trade! It's all good! Or all bad! Ah, who knew these guys were paid the huge bucks for 2nd grade logic.

Bookkeeping: Cutting Massey Energy (MEE)

See Cleveland Cliffs note. Identical Thoughts. On the plus side it did fill the gap from late May ;)

Down to 1.4% stake with sale in $67.50s

EDIT 12:30 PM - sold another batch as it hits 50 day moving average. Sold in $71s - down to a pithy stake of 0.6%. (seems so wrong to sell off your favorite names, but so right to the hedge fund computers). Lightened up on some James River Coal (JRCC) as well under $38 as it is up 13%.

Long both names in fund; long neither in personal account

Bookkeeping: Reducing Cleveland Cliffs (CLF) to "Holding" Stake

Selling all Cleveland Cliffs (CLF) except 10 shares near $98. Waiting for clarification from chart - a technical move here.

Resistance at $100 (50 day moving average) and $105 (recent highs). I'm more constructive north of $105. 3 successive lower highs. Not good. Until then I continue to build up my crumbs...

As an aside, adding more short exposure all over the place...

Long Cleveland Cliffs in fund; no personal position

Bookkeeping: Closing EOG Resources (EOG) and Encore Aquisition (EAC)

Here is the open question - much like banks, these "commodity stocks" will bounce. What do you do on that bounce?

Will they mark a new leg up or just a quick reversal that hot money will sell into? I am (for now) betting on the latter. And if I am wrong, then one can always pay up (buy higher), giving up some gains along the way.... as a real trend will last for a long while.

I heard a striking fact this morning - the last time XTO Energy (XTO) traded at these levels crude was in the $70s and natural gas was in the $6s. The former is now in the $120s and the latter in the $9s. But the stock price is the same. So... either the hot money has been "delevered" as we spoke about yesterday, and needs to sell at any price and this is the buy of the century... or the stock prices are signaling further moves down in the commodities. I don't have a clue. It really doesn't matter why - it just matters that the stocks are being trashed. I have no problem cutting back, watching for technical action to give a more clear signal and then making decisions later when the path is more clear ....even if I give up gains along the way.

Now, unlike the hedgies, I actually discern among the commodities - for example fertilizer I am a lot more bullish on then potentially crude which I believe has been run up by speculation and I was calling toppy a month back. [Jun 26: Can a Top in Oil Be Far Away?] But unfortunately there is no discerning among hot money so when hot money sells, it all breaks down. And the charts for many things in this space are breaking, regardless of fundamentals. Great earnings are being ignored. Etc. So it's prudent to build cash, take some shelter and re-assess when things become more clear. Right now the movement of "hot money" is forcing my hand... again, we are just gnats on their behind.

One candidate to cull is EOG Resources (EOG), one of our natural gas stocks - it has broken below its 200 day moving average and is now bouncing back up to right below. Again, this could be "the bottom", I don't know nor do I really care. If it is the bottom, then this will just be leg 1 of a new recovery bounce and there will be plenty of money to be made - even if you buy higher. For now I want to reduce risk and with "only" a $1000 loss here will take more of our crumbs off the table and re-assess. Fundamentals mean zilch right now so even though this is one of those names with fantastic fundamentals, it means nothing at this point.

I'm selling EOG in the $105s; this was a 1.1% position. Right now everything in this space is just a technical trade - so I'm treating them as such.

Another is Encore Acquisition (EAC) which we are going to take a $2000 loss here selling in the $60.80s. It has broken its 50 day moving average and its 200 day moving average is far below. This was a 1.2% stake.

I have no problem buying both these back at higher prices when/if this group falls back into favor. For now I need to protect capital and not worry about appreciation as much. Hence these moves; these are relatively minor losses in the big picture although we lost some unrealized gains along the way as well.

Long XTO Energy in fund; no personal position

More Drama at the Cleveland Cliffs (CLF) Corral

What an interesting saga - more details are emerging this morning per the Wall Street Journal on what exactly Harbinger Capital is thinking and why they are opposing the merger between Alpha Natural Resources (ANR) and Cleveland Cliffs (CLF) [Jul 17: High Drama at the Cleveland Cliffs Corral]

• Cleveland-Cliffs Inc. forgot to get just one thing before unveiling its $10 billion deal for Alpha Natural Resources Inc. -- Phil Falcone's permission. As a result, the Cleveland iron-ore producer may have inadvertently put itself into play.
• Within two days of the deal's July 16 announcement, Harbinger Capital, Mr. Falcone's hedge fund and Cleveland-Cliffs' largest shareholder, said it opposed the move, leaving the transaction in doubt. With a 16% stake in Cliffs, Mr. Falcone effectively has enough power to block any transaction.
• Behind the scenes, the Harbinger chief has begun pushing for Cleveland-Cliffs to take advantage of the global steel boom and put itself up for sale. Mr. Falcone reckons Cleveland-Cliffs could fetch as much as $130 a share, or about $14 billion, according to a person close to Harbinger. Harbinger hired Moelis & Co., a mergers-and-acquisitions boutique, as its adviser.
• Cleveland-Cliffs could be an attractive target for a number of steelmakers, analysts say. Russia's OAO Severstal, which has been expanding in the U.S., is seen by some in the industry as the most likely suitor, provided it could raise enough cash for a deal.
• Luxembourg-based ArcelorMittal, the world's largest steelmaker by revenue, also has been mentioned, though some analysts say Arcelor's long-term supply guarantees from Cleveland-Cliffs make a purchase unnecessary. Domestic steelmakers, including Nucor Corp. and U.S. Steel Corp., also would have the financial resources to pursue the company.
• But any takeover offer could run into resistance from another key camp—Cleveland-Cliffs management. "We believe our growth strategy exceeds any value we would get for the shareholders," Cleveland-Cliffs Chief Executive Joseph A. Carrabba said in an interview Thursday. He declined to comment on whether the company had already been approached.
• Without Harbinger's support there won't be a deal with Alpha, either. In order to win approval under Ohio law, Cleveland-Cliffs would need two-thirds of the shareholder vote. Though a victory might be mathematically possible without Harbinger's support, it is unlikely.
• Mr. Falcone has a different take on the markets, says a person familiar with his views. He believes commodity prices are nearing their peak, and that this is the best time for Cleveland-Cliffs to fetch a premium valuation. He would prefer that Cleveland-Cliffs focus on cutting costs instead of integrating a big company.
• Cleveland-Cliffs informed Harbinger of a deal the night before the announcement, according to people in both camps. Mr. Carrabba said Cleveland-Cliffs had been sharing its views of consolidation in the mining sector with shareholders, including Harbinger, for the past two years. Harbinger increased its stake over that same period.
• "Most folks would have taken that as an endorsement of our strategy," Mr. Carrabba said.
• The hedge fund sees the Alpha deal as an attempt by Cleveland-Cliffs to put itself out of reach of potential acquirers.

Takeaways:

1. Fascinating!
2. In almost every blog entry re: Cleveland Cliffs I mentioned I saw it as a future buyout candidate for a steel firm; apparently Harbinger Capital had the same thought process but a lot more money to do something about it.
3. When this deal came through I was not surprised that Alpha was a target, but WHOM was doing the acquisition was a shock - it lent to the belief that Cleveland Cliffs wants to be an independent player as opposed to a company being acquired.
4. I still thought the combined duo could be acquired but due to the size it would limit the number of companies who could swallow a combined entity
5. Hedge funds, unlike me, don't have time to wait so they don't want a long drawn out process of these 2 companies combining, and then wait for another bid for the new company - they want their quick gains and then out. They get paid on the quarter. Nothing else matters aside for the current 90 day period.
   
6. The power of hedge funds in this market grows by the second, minute, hour, and day.
7. The fact that hedge funds have the power to overrule a management who wants to go in a different direction is a growing trend
   
8. We've reduced our exposure to both names due to the "commodities stink because hedge funds say so" trade, along with the uncertainty and overhang - but both names remain among our favorites.
9. Both names have fallen below their 50 day moving average within the past 2 sessions
   
10. Interesting to see the take by Harbinger that this is the "top" in commodities. While I could see that for a 12-18 month period, I obviously disagree over a 5-10 year time frame. But again, hedge funds care about 1 quarter out as that is what they are paid on, not 5-10 years.
11. Did I mention fascinating?

Long both names in fund; long Alpha Natural Resources in personal account

Diamond Offshore Drilling (DO) - Excellent, but Maybe Some Other Time

We are getting a larger and larger basket of names with excellent earnings that no one cares about. Diamond Offshore Drilling (DO) is another deep sea driller and once more, at crude $80, $100, $120, $140 there will be a strong demand for rigs, especially of the deeper sea variety (see Mark shout in wind here) Not that it matters nowadays (you'll start hearing that in increasing amount it appears) but...

• Diamond Offshore Drilling Inc (DO), a drilling contractor, reported a better-than-expected 65 percent increase in second-quarter profit on Thursday as tight supply and high demand lifted rates for its rigs.
• But shares of the company fell more than 1 percent, following the decline of other energy stocks. Energy shares were hit after a report showed a build in natural gas stocks and worry about a global recession.
• "Diamond's results were very good, yet the market is ignoring them," Mark Urness, oilfield services analyst with Calyon Securities, said. "The market is ignoring fundamentals and is being driven by fear."
• Profit rose to $416.3 million, or $2.99 per share, from $251.9 million, or $1.81 per share, a year earlier. Wall Street analysts had expected, on average, a profit of $2.77 per share, according to Reuters Estimates.
• Revenue jumped 47 percent to $954.4 million.
• Diamond and other drillers have seen dayrates soar as high energy prices prompt demand for offshore rigs from exploration and production companies. Dayrates have topped $500,000 for rigs used to drill in deeper waters.
• The Houston company which has a fleet of 46 rigs, also set a special cash dividend of $1.25 per share, a figure that might have disappointed some investors who were hoping for an increase, analysts said.
• In the quarter, the company said the average rate for its floating rigs used to drill in deeper waters was $385,000 per day, up 26 percent from a year earlier.
• Diamond also said it had signed letters of intent for four of its rigs at rates of $520,0000 to $540,000 per day, which analysts said were rates that are in line or exceeded expectations.

Yawn. Revenue up nearly 50%. Earnings over 60%. Contracts signed for 6 year range at >$500K dayrates. Wake me up when something exciting happens; my friend, the supercomputer at our hedge fund, says it broke the 200 day moving average so it's a sell sell sell. Yawn. Fundamentals. Booooooriiiiing. That's so 1990s.

And the beat goes on - we'll continue to post the information that no one cares about at this moment in time :) We don't own this name anymore in the fund, but own peers.

No position

NuVasiva (NUVA) - At what Price Growth? It Seems "Any" Price

I am reviewing an old watch list with a handful of "medical device" names I followed around the time I found Intuitive Surgical (ISRG) back in the middle part of the decade. NuVasive (NUVA) was a name that had one big pop at the time, and then traded sideways for a long time (between $15 - low $20s) for a long time. So I stopped following the name. Well it appears the past few years to have broken that range. This is yet another name where valuation makes little sense to me but this market is so starved of non commodity "growth", that market players appear willing to pay any price. The stock popped last night after a steller earnings report but profitability is just now beginning. Even if next year (2009) estimates are surpassed and the company earns something in the low .50s, it is already trading at more than 100x forward earnings. Gross margins of 80%+ are simply mouth watering however....

• Medical device maker NuVasive Inc (NUVA) posted a second-quarter profit, helped by strong revenue growth, and raised its 2008 outlook, sending its shares up 10 percent.
• Net loss for the quarter was $495,000, or 1 cent per share, compared with a net loss of $3.4 million, or 10 cents per share, a year earlier. Excluding stock-based compensation and amortization of intangible assets, the company earned 14 cents a share.
  
• Revenue rose 61 percent to $57.4 million.
• Analysts were expecting a loss of 5 cents a share, before special items but including stock-based compensation expenses, on revenue of $51.7 million, according to Reuters Estimates.
• For 2008, NuVasive said it expects to earn 5 cents to 7 cents a share, excluding one-time charges, up from its prior view of break-even to 3 cents a share.
• Revenue for the year is expected in the range of $238 million to $240 million, up from a previous forecast of $210 million to $214 million.

Full report here.

NuVasive is a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. The Company's product portfolio is focused on applications in the over $4.2 billion U.S. spine fusion market. The Company's current principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS®, as well as a growing offering of cervical and motion preservation products.

I really believe the dirty secret in this market is something I complain about weekly in the technology sector. There is very little serious growth (i.e. >25%) in the >$1 Billion market cap arena outside of commodities - we have a few pockets here or there, but most of those names are trading at stratospheric levels and/or reside in China or solar, where they get a P/E ratio of 8. And once you go below that size of company the risk increases substantially (smaller companies have potential for huge reward but many stumbling blocks along the way).

So on one hand it makes it easy on growth investors to target stocks in this era because the choices are so few. But with so many "growth" investors piled into these names, the valuations make one dizzy. It will work, until it stops working. And then you get Chipotle'd. Or worse - Crox'd!

No position

Chipotle Mexican Grill (CMG) - the Bear Gets Them All Eventually

I've been negative on restaurant stocks since the beginning of the blog for reasons that are very apparent now but not back then in the "economy is fine, and inflation is a ridiculous concept" era. [Sept 19 - Tough Times Ahead for Restaurants?]

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

One name I highlighted was Chipotle Mexcian Grill (CMG)

add to the fact its now trading at nearly 60x 2007 earnings and its hard for me to get excited at these valuations, but for the next 5 years it's one to watch.

Then in its own entry later [Oct 30 - Chipotle Mexican Grill (CMG) - The One Impervious Restaurant Stock]

Chipotle is apparently the teflon stock in the sector, with a super (considering the headwinds) report. That said, at >60x 2007 estimates it's priced as a teflon stock. And they didn't say much about the cost of inputs like cheese, but they are the growth stage of expansion where apparently they can laugh mockingly at the increases.

Just too pricey for me especially in this economy and the economy over the next 18-24 months. Hopefully analysts will question on the conference call just how much the rising food inputs are costing them, and if they are passing it along to the consumer and in what degree. And if their forecast for future food prices are part of the reason they are guiding so low in 2008. Or just a slowing economy... as people make McDonald's their sit down 'restaurant' of choice as we all get slowly poorer with our more useless pesos, err dollars.

Unfortunately there is no Ultrashort Restaurant ETF or I'd be be a happy camper. I made a lot of good calls in consumer discretionary in the late summer/early fall 2007 but with the ability to short individual names they are just calls, and not helping our performance. Even the bullet proof stocks like this one are getting their woodshed moments - the stock is down 17% today off of earnings, and now over 50% from last summer's peak. Much like Whole Foods Market (WFMI) - when a "best of breed" stock trades at multiples nowhere near any of its peers - it's usually a good candidate for the hit list. This is actually a best of breed company with a very good management, but it does not live in a vacuum. Most of the "junk" rallying of late, outside financials, are the stocks that have an association with the US consumer and have been beaten with an ugly stick repeatedly since last summer despite the pundits assurance the economy is fine. It is not fine. It will continue to be not fine. Especially with mortgage rates now heading to near 7% - everything is based off housing in our service based, credit laden economy. As I wrote earlier today, these lists of stocks rallying the most the past week and a half are going to be great shorts. Again. [Stuff I've Been Negative on Since Last Fall]

• Chipotle Mexican Grill Inc (CMG) on Wednesday said new restaurants fueled a nearly 23 percent gain in quarterly profit, but the result missed Wall Street targets.
• The Mexican-themed, fast-food chain known for serving naturally raised meat said second-quarter net income rose to $24.5 million, or 74 cents per share, from $20.0 million, or 60 cents per share, a year earlier. Analysts, on average, had been looking for earnings of 75 cents per share, according to Reuters Estimates. (1 cent miss = 17% drop in price = brutal)
• Revenue grew to $340.8 million from $274.3 million, but missed analysts' consensus estimate of $343.9 million. (4 million revenue miss = 17% drop in price = did I mention brutal?)
• Chipotle attributed the sales increase to the addition of 49 new restaurants and a 7.1 percent increase in comparable restaurant sales in the second quarter, when customer visits also increased.
• Restaurant level operating margins slipped to 22.4 percent from 23.2 percent the year earlier, primarily due to an increase in food costs and higher advertising costs. Those higher costs were partially offset by menu price increases and lower promotion costs.
• The company repeated its outlook for long-term earnings per share growth of 25 percent, reiterated its 2008 forecast for comparable-store sales increases in the mid-single digit range and said it still plans to add 130 to 140 new restaurants this year.

Even at $70, this still trades at over 25x forward earnings. It is too bad it is not tied to the Brazilian or Russian consumer instead of United States of Subprime consumer. There is a nice base built in upper $50s to mid $60s from spring 2007 - perhaps a good buy there. One of the few nice houses in a very blighted neighborhood.

In this market environment where the market is trending down it would be a lot easier to drive performance with the ability to short individual names. A few darts thrown in the general direction of a few Vegas casinos, restaurants, retailers, boat, auto, RV, hotel - would of really helped us this past year. Ultrashort ETFs are better than nothing - but very blunt instruments with imperfect precision.

No position

Bookkeeping: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP

I am looking for names hedge funds don't own much of :) So their actions won't ruin our portfolio, errr.. won't ruin our portfolio FURTHER. I think the pawn shops/cash advance areas, aside from being counter cyclical, will fit that bill. Main risks here are legislative, or the economy returns to boom time. Meaning the only risk is legislative ;) We've discussed these names of late - and both that I am targeting report today. Cash America (CSH) this AM, and EZCORP (EZPW) after the close.

I should of bought these when we first identified the trend but frankly this is one sector of the market in 10+ years of equity trading I've never looked that close at, so I had to do more research. These appear to the best of breed. Both are selling off today after big runs, and while I wish to grab either at the 20 day moving average - EZPW @ $16 or CHS @ $39, I'm going to start today. Forward P/Es at current price are 14.5 and 13.4 for the latter, with higher growth rate for former. With valuations so close to each other I'd always rather buy the faster grower. I also like the heavier emphasis on pawn shops over cash advance (the latter having the legislative risk)


Starting a minor stake in EZCorp (EZPW) - just 500 shares to begin in the $17.40s. Hope to add at $16 (20 day moving average), or even better $14.50 (50 day). This gives us a 0.8% starter stake. I'll add on strength (reversal from today's action) or a pullback. Sort of in no man's land now so hence why the small stake. Folks, I double checked the SEC filings and I see no risk statement that has anything to do with production of potash, iron ore, coal, crude oil, natural gas, nickel, wheat, or any sundry commodity. So I hope the hedge funds will leave us in peace on this one.

No surprise on the Cash America earnings since they preannounced... but

• Cash America International Inc. said Thursday its second-quarter profit jumped 52 percent to top Wall Street expectations, as the pawnshop operator benefited from increased pawn loans and merchandise sales. (no recession here folks, move along)
• For the three months ended June 30, the company reported net income of $20.1 million, or 67 cents per share, up from $13.2 million, or 43 cents per share, in the year-ago period. Analysts polled by Thomson Financial, on average, expected earnings of 61 cents per share on sales of $238.7 million.
• Results also beat Cash America's guidance of 62 cents to 64 cents per share, which the company raised from a prior estimate of 51 cents to 54 cents per share earlier this month. (oh the old underpromise overdeliver... I always love a management who knows how to play the Street)
• Revenue increased 16 percent to $248 million from $213.9 million in the second quarter of last year.
• Revenue from pawn loans increased 17 percent, while sales of merchandise rose 26 percent.
  
• Cash advance fees increased by to $92.8 million from $86.9 million. The company reported a 24 percent increase in cash advance fees from its online channel, which helped offset a slight decline in fees at its stores.
• "Higher loan demand continued our trend of increased revenue from pawn loans and we experienced better-than-expected retail sales activity during the quarter, partially aided by the tax stimulus payments received by many of our customers," said President and Chief Executive Daniel R. Feehan in a statement. (well I'm glad my tax dollars are hard at work)

Full Year Guidance now Raised

• Pawnshop operator and cash advance provider Cash America International Inc. on Thursday raised its full-year earnings guidance based on strong results for the first half of the year and expectations for continued demand for its loan products. (hmm everyone told me 2-3-4-5 months ago we'd be in the throes of the "2nd half recovery" by now)
  
• The company now expects a profit of between $3 and $3.20 per share, up from a prior estimate of $2.85 to $3 per share. Analysts polled by Thomson Financial, on average, forecast earnings of $3.08 per share. Cash America earned $2.48 per share in fiscal 2007.
• The planned closings in Ohio are a result of a new state law there that caps payday loan interest at 28 percent, a level that prevents the company from offering the cash advance product profitably.
• The company also said it expects third-quarter earnings per share of between 62 cents and 66 cents. Analysts expect earnings of 64 cents per share. (I bet this gets raised later in the quarter as the economy "recovers")

But if I believe the pundits once gas goes to $3.00 this whole issue is revolved, the economy booms, homes fly off the proverbial shelf and we coronate Ben Bernanke as our new ruler. Right? Right!

Investor Business Daily chimed in yesterday as they caught the trend - focus on EZCorp (always good to wait for the lemmings who jump in on an IBD mention to jump back out)

• It doesn't get much better than this for pawnshop operator EZCorp. Tight credit and record food and gas prices have made it tough for a lot of consumers to make ends meet. Many are turning to outfits like EZCorp (NasdaqGS:EZPW - News) to help ease the burden.
• EZCorp helps strapped consumers with no cash resources or access to credit in a couple of ways. Its 294 pawnshops in the U.S. and 30 in Mexico lend cash in exchange for personal possessions put up for collateral. Its average U.S. pawn loan is $80 to $100.
• For the growing number of consumers who have tightened their belts, these locales also sell used, forfeited goods at low prices.
• EZCorp also offers workers short-term advances on their next paychecks, or payday loans, at over 500 locales. The average payday loan is for $445 on a term of 20 days.
• For 11 straight quarters earnings have soared by at least 21% and sales by at least 14%.
• "The pawn business is thriving in this environment," analyst Elizabeth Pierce of Roth Capital Partners said. "The credit market is tight, and people are looking for alternative ways to raise cash. One channel is a pawnshop."
• EZCorp also is seeing merchandise sales rise as consumers look for cheaper alternatives to replace electronic items and other goods.
• EZCorp's bright forecast comes in the wake of strong second-quarter results. Earnings rose 30% from the prior year to 30 cents a share. Sales jumped 27% to $113.6 million.
• The pawn business is the big driver. Last year, 73% of revenue came from the U.S. pawn business, Pierce says.
• EZCorp has 294 U.S. pawnshops operating under the EZPawn name and its 30 stores in Mexico go by Mexico Empeno Facil. It runs 461 EZMoney payday loan sites. It also offers payday loans in 71 EZPawn stores.
  
• It operates in 12 states. But over half of its pawnshops and payday loan sites are in the Lone Star state.
• EZCorp is gaining muscle in the pawnshop business through acquisitions. Most recently, in June, EZCorp agreed to acquire Value Financial Services for $110 million. Value runs 65 pawnshops, 58 of which are in Florida, four in Tennessee and three in Georgia.
• Once the deal closes, which is expected to occur this month, EZCorp will become Florida's largest pawnshop operator. "Florida is a great state for the pawn business," Pierce said.
• The state has a big population of service-sector employees, she says. Many are hourly workers, who are often more inclined to use pawnshops. (hey, our whole economy is moving that direction aka service sector baby - might be the birth of a 50 year bull run)
• EZCorp expects the buy to be accretive to 2009 earnings by 12 cents to 14 cents a share. "It's very accretive," said analyst Dennis Telzrow of Stephens Inc., which seeks an investment banking relationship with EZCorp. "It gives them the ability to grow that business and enter some other markets, maybe in some adjacent states."
• In another buy, last June, EZCorp paid $23.2 million for 15 pawnshops and one payday loan store from Jumping Jack Cash, a rival in Colorado.
• Separately, last October it acquired 20 Mexico pawnshops from MMFS International, a subsidiary of Mister Money Holdings. The deal, valued at $15.3 million, gave EZCorp the infrastructure to expand in Mexico, the company says.
• Separately, in June, EZCorp said it would halt operations in its 11 payday loan stores in Florida. The decision came after the Florida Office of Financial Regulation filed an administrative action against EZCorp. The office alleged that the business model used in its Florida stores violated the state usury law. Rather than continue to battle with the regulatory authorities, EZCorp opted to close the stores, says Telzrow.
• "I think 20% to 25% earnings per share growth is sustainable for the next three to five years," said Telzrow.

Just have to love that trend in annual revenue, and EPS below - slow and steady staircase up.


[Jul 10: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]
[Jul 7: Missed Opportunity in Cash America]

Long EZCORP in fund; no personal position (could change in next 24 hours)

Bookkeeping: Closing Vale (RIO)

Love Vale (RIO).

Love to stay in business more.

Perhaps this is capitulation on my part.

I still like the name here at a potential double bottom with March 2008 lows in the $28 range, and in fact doubled the stake last week on this thesis but that was before the next leg down of the commodity sell off. I can only assume Vale has some crude oil stake, right? Because iron ore = corn = coal = crude oil = nickel = all the same. Since we can exit this position "flattish" ( no major gains, no major losses) I'll take this 1.3% stake and move it to cash as well. Building up my pile of crumbs. Until there is any meaningful sign of support in this group, it is just tossing good money after bad. Some other names have crumbled so bad for no real reason that it would be dumb to lock in these losses, but this one we are not in that situation so it's a good candidate to liquidate. No change to long term thesis, we've held this name since March 07 2008.

I've written in one of my comments today that this reminds me of August 2007 which differed from the other selloffs in that we were getting random herky jerky dislocation type sales... which "felt" liked forced liquidations by hedge funds. I believe a similar thing is happening now. These stocks are now being punched in the gut even when crude oil is flat on the day. I think a lot of overlevered hedge funds were caught with their pants down on the "short financial trade" and now they need to puke up merchandise at any price to raise funds. I could be wrong, but the price action is not lying. It is chopping people's hand and feet off left and right - fundamentals mean nothing and/or we are now pricing in a worldwide Great Depression if the stocks are signaling the future. I simply think it's the hedge funds liquidating but again - who knows.

I'd rather miss the first 10-15% of a true recovery than give all the year's gains back. So I'm liquidating "here" or "there". Vale is "here".

[Apr 25: Excellent Piece on Vale (RIO) in WSJ Today]
[Mar 26: CVRD Pulls Out of Xstrata Deal]
[Feb 19: CVRD (RIO) Secures 65% Increase in Iron Ore Pricing]

Mortgage Rates Heading Near 7% -> Housing Rebound Imminent

I know that headline sounds like a joke, but this is what the pundits want you to believe. The banks are ok because housing is going to be fine, just let the government interfere a bit more and they can fix that problem as well. With their normal efficiency. Sorry - not going to happen - we have a long way to go, median prices need to fall a long way [Dec 6: What Should Median Home Prices be Today?] Remember the truth -> any "pickup in sales" you see in the hardest hit states are dominated by foreclosures - which are pricing way below the "market". Only when sellers come to grips that they won't be getting their dream prices, and find willing buyers in scale will there be "market clearing" prices and non foreclosure homes be trading in large volumes (note if you live in natural resource states which never had huge run ups in values like Texas or Wyoming this conversation mostly does not apply to you) ;)

And, the higher mortgage rates go - the more expensive it gets (i.e. you can afford less home). So prices must fall even further as the monthly mortgage payment covers less principal and less interest. We've been spoiled by historically low rates in the "Easy Al (Greenspan) era" - even at 7% rates would be quite low by historical nature. But we've been addicted to the 5% (6% in the 'worst of times') era.

But please, go buy bank stocks because the housing market is shaping up for a rebound - it's imminent in fact (6 months out - or are the guys who told us Spring 2008 now pushing for Spring 2009? I don't know - eventually if they keep guessing they are going to "nail" the call)

• Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market. Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.
• The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates.
  
• The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.
• Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly.
• But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets.
• “When we get to rate levels like this, the market just shuts down,” Mr. Barnes said. (in the early to mid 80s these levels would of seemed like an absolute gift, but we've been conditioned on Uncle Alan Greenspan monopoly money so it seems like purgatory to pay high 6%! The horror!) While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. (and bingo was his name-o)
• Inflation, which tends to send bond prices down and bond rates up, is another concern (this was my first concern as outlined in [Jun 12: Higher Inflation Expectations? Higher Mortgage Rates Coming] but hey let's throw in the nationalization of Fannie and Freddie on top of it)

I don't write about this subject that much anymore because the "recovery" is so far off it is just wasting time and space to go into it each week. Just remember, incomes need to fall into some relation with home prices. The era of buying $350K homes on $45K salary is over. [Apr 26: Bankrate.com - Average Joe Still Can't Afford a Home] If you are a newer reader - stare at the chart in this entry I wrote in April, about how out of whack home prices have gotten in relation to the previous 100 years. Reversion to the mean - it's cool.

This whole epedemic is courtesy of your "no regulation needed, consumers don't need protections and will figure it out, securitization is a cool thing" era. So as prices come back in line, by (market) force, which the government cannot socialize as it is trying to do with everything else - all these underlying assets these banks (the current golden children of the stock market) hold will continue to blow up. And this is why this is "not" the bottom. Nor will it be next kitchen sink quarter. Nor the one after that. Nor the one after that. Or the one after that. (short of national moratoriums on foreclosures - folks don't count it out - it's not a free market anymore) They are all oversold rallies to be sold/shorted. And if interest rates peak over 7% and/or go to 8%? Well then I am being an optimist and keep layering on kitchen sink quarters for another 4-6 quarters past end of 2009. Our banking system will be much smaller by the time we get "there". (translation IndyMac is just the start - it's been 'forgotten' quickly by the Kool Aid drinkers)

[Jul 10: Foreclosure Activity Map]

Bookkeeping: Cutting Back Gafisa (GFA) Sharply

I am continuing to raise cash in this brutal market.

Gafisa (GFA) is another favorite but it's chart is setting up a nice situation to take profits and buy back later on strength. It is trading in the mid $33s. You can see resistance all over the place in the mid $30s. So I'll be happy to pay "up" (pay a higher price) once Gafisa clears those resistance levels (traders above the moving average) - from where I am selling today that is less than 5% higher. That is a small price to pay right now - if the stock pulls back to upper $20s we could also buy back there. But right now we are in no man's land and with the stock jumping 20% from last week's low point I am going to scurry off like a rat with my crumb.

I am reducing Gafisa from a 1.8% stake to a 0.1% ("holding stake") with sales in the mid $33s.

There are some serious bargains being created now, but until the market turns rational I'll be piling up cash and hoping we don't fall under $10.00 NAV, where we started. Cripes. Even pawn shops are selling off and I don't believe they have any crude oil exposure? Gosh, even the wonderful banks are down - what has this world come to when banks aka the new bull market - sell off.

Mechel (MTL) Down 20% on Putin's Comments

We sold out of Mechel (MTL) completely yesterday in the $37.50s despite loving the theme/story. [Closing Mechel]

It just hit $28s - as I wrote; the Russian government appeared to be a game changer which is a shame. Today some comments out by Putin.

• New York-listed shares in Russian steel maker and coal miner Mechel (MTL.N: Quote, Profile, Research, Stock Buzz) fell over 20 percent on Thursday after Prime Minister Vladimir Putin criticised its pricing policies.
• Putin, addressing a meeting of Russian steel makers, accused Mechel of selling raw materials in the domestic market at double the price of its exports.
• "I'm asking the federal anti-monopoly service to pay special attention to this problem," Putin said.
• "And maybe even the investigative committee of Prosecutor Generals Office"
• "This (Mechel) was a benchmark stock for the sector, but now people are remembering what happens here when you come into conflict with the government," said Pavel Koryshev, trader at East Kommerts investment group in Moscow.
• Traders were quick to draw comparisons with Putin's once sharp criticism of oil firm YUKOS, which was bankrupt under a huge back tax bill. (and I believe their CEO is still in jail)
• "People are getting out of Russia. Putin had some very angry comments directed straight at the company and it is quite rare for Putin to specifically single out one company," he said.

It might be a great buy here in the upper $20s. But frankly I cannot quantify the risk anymore- I don't know about you, but I don't want to be subject to the 'special attention' of Putin. For someone with a 5 year horizon these are probably some incredible prices. But as I wrote yesterday I have no idea what the next few weeks or months will bring. The conservative stance I take every day coming "into work" managing the fund, did work out in this case.

I'll repeat this for newer readers - when you begin in the markets you wake up every morning asking "How can I make the most money today?" The longer you stick around the more you wake up every morning ask "How can I avoid losing the most money today?" Those who continue to only ask the former question, will be eliminated from the markets (their capital will be destroyed) in due time. Just my belief... and it does not mean we won't lose money along the way either. But without capital you have nothing.

Frankly this move yesterday in MTL was just good timing - we could of been destroyed just as easily if this comment came out 24 hours earlier. *wave rabbit's foot*

No position

Kinross Gold (KGC) Buys Aurelian Resources

For gosh sakes - I just want a darn hedge (gold) and I had to buy the one company that decides it's going on an acquisition spree! It might be a fine deal in the long run but I bought this as a hedge (I know, I know buy Gold ETF next time) Down 5% this AM - I was wondering why this was the only gold stock in my watch list down this morning. When it rains it pours. Bah.

• Kinross Gold Corp. said Thursday it will acquire Canada-based Aurelian Resources Inc. for more than $1 billion in a move designed to boost its mining reserves.
• Toronto-based Kinross will pay 0.317 Kinross shares, plus 0.1429 of a warrant, for each Aurelian share. The warrant will have an exercise price of $32 per Kinross share, and will expire within five years.
• The deal -- worth about Canadian $1.2 billion (U.S. $1.18 billion) -- gives Kinross control over Aurelian's gold, silver and base metals reserves in Ecuador's Cordillera del Condor region.
• Kinross expects to issue about 47 million shares, or about 8 percent of its outstanding common shares, as part of the buyout. (wonderful)
  

Long Kinross Gold in fund; no personal position

Bookkeeping: Cutting Baidu.com (BIDU) on Gap Up

After so much hemorrhaging the past week and a half I am going to take profits when offered and with Baidu.com (BIDU) up nearly 17% I am going to cut most of the position and wait for a pullback. If no pullback, that is fine - I am harvesting cash as I wait out this worst of breed rally. If you haven't noticed this is not a buy and hold market... that said, stocks that have gapped up like this have a tendency to run, but in terms of portfolio management and desire to raise cash until I can figure out this "new paradigm" of selling stocks that beat earnings and buying stocks that miss, I am culling winners. Any market led by junk is not a market I trust.

Selling in the $337s and bringing Baidu.com down from 0.7% stake to 0.1% stake. If we are fortunate to get that gap filled around $300, which is 11% down from here, we'll get this stake back.

[Baidu.com, Amazon.com - Party Like It's 1999?]

Long Baidu.com in fund; no personal position

Potash (POT) - The Beat Goes On

Nothing surprising in this morning's earnings report - and frankly it does "not matter" right now because as we all know, potash = oil. At least in hedge fund's eyes. The analysts finally seem to be somewhat catching up to the earnings potential, they only missed by 30 cents this time around after being wrong by a few miles for quarters on end [Oct 23: Analysts Still Doubting the Fertilizer Stocks]. As with last quarter, I urge anyone considering this sector to read the Potash (POT) earnings report because it is almost like an industry analysis each quarter. I won't copy the whole thing but have a few key points below. 220% year over year earnings growth and an astounding 62% sequential growth rate. With its relatively fixed cost model, gross margin (dollars) in the 1st half of 2008 have already surpassed all of 2007. And Mr. Doyle is defending the stock (like he needs to) with share purchases. In the long run, after the growth rates slow down in these stocks they will be cash flow machines spitting off oodles of dividends. I need to reinforce 2 things - #1 despite the name, Potash has its hands in all 3 nutrients and #2 despite the fuss in the media or hedge funds, this company is sold out of all production and basically on "allocation" which means it is parceling out product because demand is higher than supply. Last, notice the input costs and keep in mind who has the most vertical integration in the industry versus who does not.

But again, until hedge funds make oil their plaything I guess none of it matters. We'll continue to stick in sectors that have the best fundamentals and await the return of the hundreds of billions of dollars after it is done milking the bank trade.

• Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported record second-quarter earnings of $2.82 per share(1) ($905.1 million), a 220 percent increase over the $0.88 per share ($285.7 million) earned in last year's second quarter.
• This represents the highest quarterly earnings in company history - 62 percent above the record $1.74 per share ($566.0 million) set in first-quarter 2008 - and reflects rising global fertilizer demand and the impact of significantly higher prices for potash, nitrogen and phosphate products.
• First-half gross margin reached $2.3 billion, compared to $871.1 million in the first six months of 2007, and has already exceeded the record full-year total of $1.9 billion set last year.
• Cash flow from operating activities prior to working capital changes(2) reached $1.1 billion for the quarter and $1.7 billion for the first six months of 2008, compared to $473.7 million for the second quarter of 2007 and $756.7 million for the first half of that year.
• This strong performance was enhanced by our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile, Israel Chemical Ltd. (ICL) in Israel and Sinofert Holdings Limited (Sinofert) in China, which added $94.0 million to our before-tax earnings in the quarter.

Discussion of various nutrients

• The resulting tight fertilizer supply/demand fundamentals impacted all three nutrients in the quarter, and were clearly evident in higher product prices. First, in potash, inventories were reduced to historically low levels around the world. For example, reported North American producer inventories were 41 percent below the previous five-year average at the end of June, an extremely low level given upcoming summer maintenance shutdowns. Global demand remains unsatisfied, even without considering the protracted contract settlements that left China approximately 3 million tonnes short of previously expected 2008 potash requirements.
• Global nitrogen and phosphate supply was impacted in the second quarter by China, the world's largest urea exporter and second-largest phosphate exporter in 2007. China introduced a 35 percent tax on phosphate and nitrogen exports during the first quarter to protect its domestic supply, and then raised it to 135 percent effective from April 20 to September 30, 2008. Phosphate supply tightened further in May when a severe earthquake struck Sichuan Province, which produces 11 percent of China's phosphate rock and a significant amount of related downstream fertilizer, feed and industrial products.
• In nitrogen, while higher global costs for oil and natural gas supported higher product prices and generally restricted product movement to regions relatively close to the source of production, the Chinese export tax immediately and significantly drove world urea prices higher.

Input cost data

• Phosphate producers without an integrated supply of phosphate rock continued to be affected by rising costs for key inputs. The price of rock from Morocco rose to $350-$400 per tonne, compared to $190 in the first quarter of 2008 and $56 in last year's second quarter.
• Delivered sulfur prices rose to $800 per tonne or higher in China and India, while US molten sulfur prices increased $200 per long ton from the first quarter of 2008.

Share buyback

• As previously disclosed in January 2008, the Board of Directors authorized a share repurchase program that allows PotashCorp to buy back up to 15.8 million shares over the course of one year. Prevailing stock market conditions in the second quarter provided an opportunity to accelerate the buyback. We purchased 7.5 million shares for cancellation in the second quarter, in addition to the 3.4 million shares repurchased in the first quarter. By the end of the second quarter, we had purchased approximately 10.9 million shares under the repurchase program at a cost of approximately $2 billion.

Guidance Raised

• PotashCorp is raising full-year net income guidance from $9.50-$10.50 per share to $12.00-$13.00 per share. We expect third-quarter net income to be in the range of $3.25-$3.75 per share. (vs analysts $3.27 Q3 and $11.67 for full year)

This is only about 20% of the data available in the earnings report - worth a full read.

Once again, can't do much about the stock price performance; I am old fashioned and assume buying the best stocks eventually lead to profits but in this market I am considered an old fogie advancing such concepts. I continue to believe earnings potential has been underestimated by the market as I've been saying for the past year. Another raised guidance shows analysts and the market are still behind the ball. These growth rates cannot continue forever, but again - in the long run these will shift to slower growing but massively profitable cash flow machines.

But for now the stocks are not in favor.

Long Potash in fund; no personal position

35 Stocks Financial Sector Mutual Funds are Mocking Us With

I usually post a "best of" list each week in terms of best returns. I thought it would be instructive to show the top 35 stocks (over $2 billion market cap) of the past week. The numbers are staggering... not just in the % return but I am including the market capitalization in the far left column. For those who are newer to the market, market capitalization is simply the # of shares X the stock price and it signifies "size". The scale below is billions so 13.2 = 13.2 Billion. When you cross reference the percentage moves against the market caps you can see you many "billions" have been created on paper in the last 5-6 days. Again, we've seen this action before, and you just have to shake your head when stodgy financials trade like small cap Chinese stocks or dot coms from the late 90s, falling 60%... popping 50%. $100 Billion market cap companies at that. Obviously it represents a very stable economy as financials are our "backbone"... or is it rear end?

Again, for now these are the "Golden Children" but I contend the list of this and last week's winners will in fact be the "Best of (Shorts)" list in about 3-4 weeks. They have been throughout the fall winter and spring. No reason to change now. Unless you believe the economy is recovering by New Year's.

p.s. someone remind me to buy Northwest Airlines the next time crude is $150. Thanks.

Mkt Cap	Symbol	Company Name	% Price
13.1	FNM	Fannie Mae Ord Shs	89.7
35.9	WB	Wachovia Corp Ord Shs	84.9
6.3	FRE	Freddie Mac Ord Shs	84.4
144.1	BAC	Bank of America Ord Shs	74.7
2.2	NWA	Northwest Airlines Corp	68.5
7.9	RF	Regions Financial Corp	65.7
14.0	LEH	Lehman Brothers Holdings	52.8
2.6	FDRY	Foundry Networks Inc	50.4
100.8	WFC	Wells Fargo & Co	48.4
4.7	CMA	Comerica Inc	48.1
17.4	LVS	Las Vegas Sands Corp	47.6
14.0	STI	SunTrust Banks Ord Shs	47.0
3.0	ZION	Zions Bancorp Ord Shs	46.8
3.3	JEF	Jefferies Group Inc	45.8
8.1	GM	GM Ord Shs	45.5
15.6	BBT	BB&T Corp	43.9
113.8	C	Citigroup Ord Shs	43.5
5.8	KEY	Keycorp Ord Shs	43.3
8.6	FITB	Fifth Third Banc Ord Shs	43.2
24.3	PNC	PNC Finl Service Ord Shs	40.7
7.0	BRL	Barr Pharmaceuticals Inc	40.7
7.0	UB	UnionBanCal Corp	39.3
18.9	IBN	ICICI Bank	38.8
33.7	MER	Merrill Lynch Ord Shs	38.4
3.2	PHM	Pulte Homes Ord Shs	36.6
70.1	AIG	Amer International Group Ord Shs	36.3
2.5	VLY	Valley National Bancorp	36.2
26.0	BLK	Blackrock Inc	34.6
2.2	AF	Astoria Finance Ord Shs	34.4
52.9	USB	US Bancorp Ord Shs	33.8
5.7	RCL	Royal Caribbean Cruises Ltd	33.2
2.4	CYN	City National Corp	32.9
3.3	SNV	Synovus Financial Corp	32.0
4.0	MI	Marshal & Ilsley Ord Shs	31.8
140.0	JPM	JP Morgan Chase Ord Shs	31.7

Baidu.com (BIDU), Amazon.com (AMZN) - Party Like its 1999?

Mmmm... two "dot coms" doing well in 1 evening, I just had a flashback to another century. I just have to ignore the valuations in both (another flashback to the late 90s) as they keep on producing.

Baidu.com (BIDU) first since we own it (we cut back going into earnings) - this name trades at a multiple of... err.. nevermind that.

• Baidu.com Inc (BIDU), China's top search engine, said on Wednesday its quarterly profit rose 87 percent and forecast another surge in revenue, boosted by Internet traffic growth ahead from the Beijing Olympics.
• Beijing-based Baidu posted a second-quarter profit of 265 million yuan ($38.6 million) for the three months ended June 30, compared with 141.9 million yuan a year earlier. The result beat the average expectation for net profit of $35.5 million, according to eight analysts polled by Reuters Estimates.
• Revenue doubled to 802.6 million yuan ($117 million) in the quarter, compared with 401.3 million yuan a year earlier.
• The company forecast revenue in the current quarter in a range between $905 million yuan ($132 million) and $935 million yuan ($136 million), representing a rise of between 82 percent to 88 percent from a year earlier. Analysts, on average, are forecasting third-quarter revenue of $135.76 million, according to Reuters.
• Baidu dominated China's Web search market in the second quarter, with market share of nearly 63 percent, according to data firm iResearch. Google Inc (GOOG) had 26 percent and Yahoo China was third with nearly 8 percent of the 1.3 billion yuan ($190.6 million) market, it said.

Amazon.com (AMZN) also looks somewhat impressive; at least the market is happy as expectations seem to have been lowered. I guess the thesis of the pooring consumer sitting at home trying to save money by not driving to stores works for them - shows you their superiority to say an Ebay (EBAY). Valuation is still a worry here, but no gap filling will be going on here anytime soon it appears.

• Amazon.com Inc's (AMZN) quarterly net income doubled from a year ago and beat Wall Street targets, though much of the gain was related to the sale of European DVD rental assets, confusing some investors. The after-hours share weakness may have been a reaction to a $53 million non-cash gain from selling the European DVD rental assets, said analyst Dan Geiman at McAdams Wright Ragen.
• "You back out that one-time item and it was pretty much an in-line quarter," Geiman said.
• Amazon posted second-quarter net profit of $158 million, or 37 cents per share, compared with $78 million, or 19 cents per share, a year earlier. Revenue in the quarter, which is seasonally the slowest, rose to $4.06 billion.
• Seattle-based Amazon, which has been lowering prices on many goods to spur purchases during the U.S. economic downturn, reported a rise in operating profit margin to 5.3 percent of total sales from 4.0 percent a year ago.
• North America segment sales, representing the company's U.S. and Canadian sites, were up 35% from a year ago to $2.17 billion. International sales, representing the company's U.K., German, Japanese, French and Chinese sites, were up 47% to $1.89 billion. Excluding the impact of foreign-exchange rates, international sales grew 34%. (Any company still growing US centric sales at pace with foreign sales - you have to tip your hat at least a little)
• "Given the state of the economy, this is a very impressive performance," said Sanford Bernstein analyst Jeff Lindsay. "But it is not quite as impressive as the initial figures might look."
• "The big issue for us is the margin guidance is really, really bad," said Tim Boyd of American Technology Research, who has a sell rating on the stock. "Basically we're back to the old Amazon. Anyone can grow their top line if they ignore margins." (boo yah - but you know investors in this day and age - they never get past the headline "beat" or "miss")

Both these stocks are too rich for me, but the former has far fewer headwinds so I'll justify it in the portfolio, although much like Apple (AAPL) I have a hard time building it into a major position simply due to valuation, and what I'd consider a cap on upside because of how expensive they are at current levels. Even with fantastic growth rates. But still worthy of holding in each case.

Granted neither is as good as Washington Mutual or Fannie Mae, but what do I know.

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

Poll of the Month - What Will You do on the Next Commodities Bounce?

New Poll up on the website - email subscription readers please join in and respond...

There will come another time when commodities will act like a strong sector again, like say (ahem) financials... how will you respond?

Q: One day, Commodities will Reverse and Bounce - What Will You Do? (3-6 month time frame)

A #1: I'm a buyer into the bounce - the reversal will signal a bottom; what a steal to buy at these prices

A #2: I'm a seller of that bounce, the story is over - it was fun while it lasted

Peabody Energy (BTU) Stellar Results - Who Cares

First, wow what a day. I feel like I suddenly own a fleet of financials for the past year. Very strange past 2 months - in June while the market was demolished we held up fine, and now the exact opposite is happening in July. I guess reversion to the mean still holds. I am checking the results over at CGM Focus (CGMFX) every day to see how Ken Heebner is handling this and he was down 5% yesterday alone and over 9% the past week; 14% for the month. This is the "risk" part of risk/reward of running concentrated portfolios. We're outperforming those results the past month, but that is not much consolation as we watch the past year's gains boil away. I'll have to double check our holdings for subprime exposure tonight (no wait, that would be a "good thing" to have the past few weeks) - in the meantime we are back to over $200K in cash as I check for missing limbs. Some of these "global growth" stocks are now priced below levels they traded when crude was below $100. Nuts. The group that really gets me are the infrastructure stocks - why they are being decimated along with everything else is really a mystery. Again it's all just "one big trade" it appears.

A couple of things before we get to the results of Peabody - (a) commodities are out of favor since the price of oil is all that matters... oil goes down = the commodity trade is broken, and sell them all and (b) I don't own coal for 2008 earnings so if they hit, or miss an earnings number it is irrelevant (to me).

Peabody "only" beat analysts expectation by 32 cents... and they are down 5%+ for the day as I write this. I'd chuckle, but since our gains are evaporating so fast it is hard to do so. But this is showing us that caution is in store and even great results right now, don't matter. One day they will matter again, but this is not that period. With fertilizer reporting tomorrow, if we do not get good "reactions" to what will be stellar results it's really going to be a downer - I cut a bit of that sector back today just for pain threshold reasons. Also I can see the bears pointing to "input costs" rising (which has been an issue the past year, and will be an ongoing issue from here to infinity) - i.e. natural gas for one... even though natural gas has fallen off the face of Earth in the past 3 weeks (and hence should no longer be an issue, eh?). But logic has no place to call home right now. Buy homebuilders...

With that said, on to Peabody Energy's (BTU) results. (which again, don't matter right now since the market is too busy buying banks which just announced $4 billion of losses because for the upteemth time since last summer, "that" was the "kitchen sink quarter") I know, I know the market is a forward looking indicator and it's "signaling" the imminent recovery in 6 months - the same one it signaled in September/October 2007 (at all time highs) and in April/May 2008. Those 2 "signals" didn't work out too well. I'm sure this will be the real one. Ahem.

• Coal miner Peabody Energy Corp. said Wednesday its second-quarter profit more than doubled, beating Wall Street's expectations as the miner benefited from higher shipments, soaring global prices and tighter coal supplies worldwide.
• The St. Louis-based company, one of the world's biggest coal producers, reported net income of $233.4 million, or 86 cents per share, compared with $107.7 million, or 40 cents per share, in the April-through-June period a year ago.
• Analysts polled by Thomson Financial expected, on average, earnings per share of 54 cents and revenue of $1.5 billion.
• Revenue rose 43 percent to $1.53 billion from $1.07 billion in last year's second quarter.
• Peabody, whose coal fuels roughly one-tenth of all U.S. electricity generation and more than 2 percent of worldwide electricity, tweaked the lower end of its full-year earnings guidance, saying it expects income from continuing operations between $2.50 and $3 per share. The company said in April it expected per-share profits of $2.20 to $3 for 2008.
• "We believe that the strength in the global coal markets is very long-term in nature, and we expect this will result in very attractive coal prices for many years," Richard Navarre, Peabody's president and chief commercial officer, told analysts. (granted he is biased)
• Such bullishness was rooted in Peabody's belief that global demand for coal used in making steel and generating electricity will continue to outpace supply, while inventories in key countries -- chiefly China -- remain critically low. Coal, the company said, is expected to outrun all other energy forms over the next two decades.
• Peabody said worldwide steel demand has grown at a 6 percent yearly clip, stoking the need for greater amounts of the kind of coal used in metal-making. New electrical generation requiring coal to produce the steam that drives turbines is being developed in scores of nations around the world, the company said.
• All told, Peabody's top executive told analysts Wednesday, "major coal exporters are straining to keep up against this sustained demand growth."
• "All aspects of the coal chain are under pressure, and more nations than ever are seeing the valuable resource that their coal represents," said Gregory Boyce, Peabody's chairman and chief executive. "We believe global supply and demand is even tighter than many think," given stockpile shortfalls in China, India, Indonesia and South Africa.
• The company, which Boyce said generates more than half of its earnings from outside the U.S. compared to just 1 percent five years ago, sold 59.8 million tons of coal during the quarter, compared with 57 million tons during the same period last year.
• Peabody said Monday it has completed a $50 million expansion of an Australian mining complex that exports coal to Asia. The New South Wales operation's expansion included development of a mine expected to produce more than 2.5 million tons per year. The complex's primary mine produced more than 4 million tons last year.
• Australia produces 60 percent of the world's seaborne coal used in steel-making, Peabody said.
• The miner said China has idled more than 60 coal plants because coal inventories have shrunk to less than three days supply. China also has trimmed its coal exports by more than 8 percent this year and announced plans to lower or eliminate its coal import tariffs, Peabody said.
• Peabody also said India will need 78,000 megawatts of new coal-fueled generation by 2012, meaning an additional 265 million tons of coal use in that country.

So once again - no change in long term thesis; but we're simply getting hammered in the past week and a half on the stock prices since as we all know commodities are all the same, and since crude has fallen from "all time highs" all the way down to "near historic highs", everything must be cut to shreds in the commodities complex. Until "fast money" wants back into this space, we can expect more of the same, no matter what the fundamentals. That could be tomorrow, 2 weeks from now, or in 2 months. Depends on when the algorithms of the quant hedge funds say it's time. That's just the new era of the stock market where quarterly performance is everything.

[Jul 20: Even Persian Gulf States, Sitting on Gobs of Oil, are moving to Coal]
[Jul 9: Sell Coal Stocks! The Dollar is Up 0.00002%]

No position

Experts Tell Congress What I've Been Telling Blog Readers for a Year

CNNMoney.com: U.S. Middle Class 'On the Edge' This article sounds vaguely familiar ;)

I'm glad the 'experts' are catching on and telling the leadership what it is really like for those not in the upper 3rd of the country. [Dec 8: Do the Bottom 80% of Americans Stand a Chance?] For long time readers - no need to read the article - it is almost verbatim from the blog. We used the first half of the decade using our homes to cover the shortfall (house ATM) that has been slowly growing (erosion of living standard) - now its the credit cards. Once that goes - so will come the rise in personal bankruptcies (which Congress has also made much more difficult to declare on behest of lobbyists group of financial corporations - it's all quite circular).

I cannot stress enough, this is an era very similar to right before the Great Depression - the highest % of wealth in the upper 0.5% and the highest proportion of national output in form of corporate profits (versus workers wages). Not saying we will be entering a new Great Depression but simply saying it will be a struggle for the great many if trends stay intact - even if they continue sideways (they do not need to degrade). I always repeat this stat since blog readers, by virtue of having disposable income to invest, probably do not fall into this category but the MEDIAN income in America is roughly $38K. Meaning half live below that. Thats $730 a week... gross; not net. So $20 more a week for gas, and $30 more for groceries at that income level means everything. I continue to believe if trends persist, social acrimony will finally become a major factor in this country as it has in many others. The pressure is slowly filtering up the economic strata food chain and capturing more and more families. When it hits critical mass is anyone's guess.

• America's middle class is growing increasingly squeezed by sagging incomes and soaring expenses, experts told Congress on Wednesday.
• Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007, said Elizabeth Warren, professor at Harvard Law School
• At the same time, the average family is spending $4,655 more on basic expenses, such as gas, housing, food and health insurance.
• Families with children saw their child care costs soar. Those with children under age 5 spent an additional $1,508 a month, while after-school costs for older children rose $622.
• To cover these soaring expenses, many people have had to turn to credit cards. Nearly 10% of total disposable income in the United States goes to paying off such debt
• "There have never been since the Great Depression so many families standing right on the edge," Warren said. "Families have tightened their belts. They have cut down on every discretionary area they possible can."
• "These costs are tearing a hole in the family they simply can't make up," she added. "You can't cut out enough lattes to pay for health insurance in America."
• Increasing economic inequality is to blame, testified Jared Bernstein, senior economist with the liberal-leaning Economic Policy Institute. While the middle class is contributing to productivity, the rewards are increasingly going to the wealthy.
• Warren and Bernstein also called for more regulation and oversight of the financial markets, particularly the credit industry, to avoid abuses that lead to bubbles. The last two or three economic downturns were caused by such run-ups.
• These bubbles are "a major contributor to the middle class squeeze," Bernstein said. (they have been incredible transfers of wealth from the many to the few)

Back off of soapbox...

Bookkeeping: Cutting Goldman Sachs (GS) Exposure

I have no idea what that was this morning, but it "felt" like a major hedge fund either being blown up or at the least being cornered and needing to puke up incorrect positions - everything financial was squeezed up, and everything commodities imploded. Almost 1 for 1. Just unbelievable action and really what does it say about our system when our major banks are moving 30% a day, and 100% in a week. Whatever is happening out there right now... it really has very little to do with investing. We should just move these exchanges to Vegas to reflect the current state of affairs.

Anyhow, I said yesterday I wanted to see that Ultrashort Financial (SKF) get down to the 200 day moving average of low $110s and we got there this AM. It has now lost just about 50% of its value in just over a week. Truly amazing. I began rebuilding it in the mid teens, but am a bit shell shocked by the action so I am treading slowly; I've taken it up to 1.9% of the portfolio - in the past this has been as much as 7% of the portfolio. This instrument could be $140 or $80 in a week the way things are going and odds could be 50/50 on either direction - hence no advantage. The viciousness of these reversals is something I've never seen.

Along with that I took another layer out of both the homebuilders (not a ton) but some and also cut back Goldman Sachs (GS) severely as it now approaches its 200 day moving average of $190. I sold in the upper $180s reducing the position from 1.2% to 0.3%. We made a nice profit here and these are the only things that have been working for us the past week or so. If it breaks through $190 and begins to gallop we will buy it back but I am assuming the financials need some sort of breather here. I could be wrong.

Frankly these moves have nothing to do with fundamentals anymore - simply huge short squeezes and huge transfers of money from 1 pocket to another. So you know just as much as I do what will happen in the next 5 minutes or 5 hours. It is completely random action and the magnitude both up and down is jaw dropping. In fact you have a lot more flexibility than I do, since I have a lot more positions and trading out of 20 global growth positions and into 6 financials, and then reversing the whole trade 2 hours, or 2 days or 2 weeks later is just not my thing. But that is all that is working right now. This market seems very dysfunctional to me. The market usually has inefficiencies but whatever is going on right now, is beyond me.

With my positioning I am still net long financials but barely. If you consider the homebuilders financials than I suppose I am more long and since everything is being traded as one big monolith these days I guess homebuilders might as well be financials.

At this point with the crazy action I would not be surprised if at some point in the next week the commodities did a move very similar to the financials, and they reverse roles. Or maybe some of these financial stocks, up 100% in 5 days, can put on another 100%. Why not, anything is possible in our socialized markets.

Long Goldman Sachs, Ultrashort Financial in fund; no personal position

A-Power Energy (APWR) Signs $300M Contract with Thailand

I continue to believe this is an undiscovered gem, and despite the harrowing daily stock action I buy every dip, as I did yesterday. Another great long term contract announced today; essentially 3.5 years and $300M. Considering they only are slated to do $400M in revenue for all of 2008, that's a very nice frosting on the cake.

• A-Power Energy Generation Systems announced today that it has signed a Memorandum of Understanding with the National Power Supply Co., Ltd., a subsidiary of Advance Agro Public Co. Ltd., a large Thai-based conglomerate, to develop a 600 MW distributed power generation system worth approximately $300 million in Chachengsao Province, Thailand.
  
• The project is expected to begin in August, 2008 and will be completed in approximately 42 months.
• Mr. Jinxiang Lu, A-Power’s Chairman and CEO, commented, “This project represents a significant milestone for A-Power as it will be our largest distributed power project and second major project with National Power Supply in Thailand. National Power Supply is a major provider of electricity to Thailand’s state-owned power grid and we are excited to announce our expanded relationship with them.
  
• Based on our performance on the contract we signed with them in April to construct a 300MW distributed power system, we have reached an agreement to construct this new 600MW system and are in discussions for multiple other opportunities.”
• Mr. Lu continues, “Thailand and other Southeast Asian countries continue to struggle to provide a consistent and adequate power supply to feed their growing economies and based on our track record, efficient distributed power system design and ability to quickly develop new high-quality systems, A-Power is well positioned for major contract wins in this region.”

[Jul 14: A-Power Energy Generation Systems Hot and Heavy with Press Releases - Up Another 7%]
[Jul 9: A-Power Energy Generation Up 15% on Announcement of Completion of Largest Wind Turbine Plant in China]
[Jun 27: New Position in A-Power Energy Generation Systems to Create Alternative Energy Mini Basket]

Long APWR in fund and personal account

Bookkeeping: Closing Mechel (MTL)

There is a lot of drama going on at Mechel (MTL) right now, and I don't like drama. On top of my findings from this weekend [Mechel Profits Appear to Be Coming Under Scrutiny] was yesterday's news that (without an analyst report to read over) in my eyes looked like Mechel succumbing to the government pressure and "concluding long term contracts" with Russian steelmakers. In my eyes that means - lower profits and forced to stay in the domestic market as opposed to selling their coal in the global marketplace. I could be wrong but without access to an analyst who follows the company week in and week out that is how I read it.

• Mechel OAO (NYSE: MTL - News), one of the leading Russian mining and metals companies, announces that it has concluded long term contracts to supply coking coal to a number of Russian customers and expects to secure additional contracts in the future.
• Mechel has concluded agreements on supplying coking coal to major Russian steel plants for a fixed price for the third quarter of this year. Signing such agreements increases the transparency and predictability of the market, and has benefits for both coking coal producers and consumers. Currently, Mechel is considering the possibility of concluding even longer term contracts on the domestic market.

Even worse is that last sentence. Not only are they beholden for the next quarter they are "considering" even longer term contracts on the domestic market. Again, this has the hands of the government all over it and hurts profitability in my eyes. I don't know the terms of said contracts but I can only conclude they are lower than the open market prices. With the stock now breaking below the 200 day moving average of $38, we appear to have a broken stock if there is not a quick rebound back above this key support level.

Mechel is among my favorites but that assumed they would be able to maximize profits as a freely run company. These recent news items, in my opinion, appears to be a structural change. That does not mean in the long run this company won't prosper or in fact this is a small bump in the road - I could be misreading it. But with the chart breaking down and with what appears to be a material change in my outlook, I am going to stand to the side for now until the smoke clears. Again, for all I know I might be selling at the bottom but I don't want to hemorrhage money and better safe than sorry - I always would rather give up potential gains than kiss away capital. Even with my "favorites" - no room for emotions in the stock market. Perhaps *I* am marking the bottom with my sell, being one of the biggest bulls in this name, or "all the bad news" is now priced in. Even if they drop from 60% growth to 30% growth, this is still a sub 10 PE stock. We can always buy back at a higher price once things clear up. For all I know that could be tomorrow if the chart improves.

We've owned Mechel since Nov 5, 2007 and despite the recent demolishing of the stock price walk away with a $18,000 profit. We're selling at the ridiculous price of $37.50s.

No position

Bookkeeping: Closing Sterlite Industries (SLT) & DryShips (DRYS)

I am closing the last Indian position out with the sale of miner Sterlite Industries (SLT) - much like the sales of the Indian banks last week (which immediately went up because they are "financials") I think this will be a "poor" decision over a 5 year time horizon but over the next 6 months, I have no conviction. In a broader portfolio sense I have absolutely no feel what this market wants to do - it simply seems like a market beholden to financial writeoffs versus oil prices and almost nothing else matters. It is very difficult to position a portfolio for anything longer than daytrades in this market so I am going to raise some cash, and once some trends fall into place that last longer than a week, we'll redeploy. This is not a market that plays into my strengths and short of turning the portfolio over 100% every 6-7 days it's not an environment for investors; only very short term traders. So more cash for now and all about time horizon. I am willing to let go merchandise I like for the 3-5 year time frame because the 3-5 week or 3-5 month time frame is completely vague.

Despite a gosh awful chart we actually made $1500 on Sterlite due to harvesting profits on earlier runs (have I mentioned this is not a buy and hold market?) So we'll close out the last 1% here at $15.00. We've held this position since Oct 15, 2007.

[Apr 29: Sterlite Industries Reported this Weekend]

I also closed out the last tiny piece of DryShips (DRYS) - just 25 shares. I sold the majority of it last week so this is simply a cleansing of the portfolio of some crumbs at the bottom. Essentially the same reasons I outlined above.

Again, I need to stress I am not making "bearish" calls on either of these names, nor the Indian banks last week - this is simply a rudderless market with a lot of random action and does not play to my strength. So these moves are characterized more as "portfolio management" than "stock specific" issues. Until we see any sustainable trends emerge that last for more than a week or two, it is not our wheelhouse and raising cash is a viable option. Most of the things "working" right now are not ideas I see lasting for more than a few weeks, so without 180 degree portfolio flip now, and then repeating that 100% flip back in reverse in 2-3 weeks, we'll just raise some cash until things become more clear.

No positions

Costco (COST) Warning & McDonalds (MCD) Continuing to be Dinner of Choice for Pooring Americans

Now that's a bit of a shocker - this was one of the "safe" havens in retail. But that's ok folks because past results are backwards looking and one must "look ahead" - and as we look forward to an era of $3.40 gas the consumer will be back, stronger than ever. ;)

• Costco Wholesale Corp. said Wednesday fiscal fourth-quarter and full-year profit will miss Wall Street expectations, as the warehouse club operator expects higher energy costs to crimp its bottom line.
• For the fourth quarter, analysts polled by Thomson Financial expect $1 per share in profit, and Costco said it expects earnings "well below" this estimate. Analysts expect full-year earnings of $2.99 per share, according to Thomson.
• "Factors negatively affecting our fourth quarter earnings outlook arise largely from inflation, particularly as to energy costs," Costco Chief Financial Officer Richard Galanti said in a statement. (inflation? what inflation - we don't need to worry about energy or food because it doesn't count - the government tells me this)
• The outlook reflects weakness in the company's gasoline operations and slightly lower-than-planned merchandise profits as the company holds back on price increases to drive sales. (so you are saying inflation is a tax on all things, producer and consumer - and if producer cannot pass along costs to consumer, than producer profit margin gets crunched which leads to lower stock price. Hmmm, I've read that somewhere)
• "This move is highly unexpected," said Brian Sozzi, an analyst at Wall Street Strategies. "Consumers are drilling down to ask, 'Do I need that big container of 10 pound soup?'"

Meanwhile McDonalds (MCD), one of our top 2 choices for Pooring of America 101 (along with our friends at Walmart) continues to hum along as more of the middle class is forced to eat there for economic reasons along with the "Americanization" (i.e. exporting obesity) to the rest of the world ;) [<--- video enclosed on how Japanese government is fighting this trend]

• McDonald's Corp (MCD), the world's largest restaurant chain, posted a higher-than-expected second-quarter profit on Wednesday, boosted by strong overseas sales, sending its shares up 2.6 percent in premarket trading.
• McDonald's overseas sales have outpaced domestic results for some time, and its emphasis on low-priced menu items, and its Dollar Menu have helped it weather the economic downturn, luring cash-strapped consumers away from higher-priced, sit-down restaurants.
• Revenue rose 4 percent to $6.07 billion, helped by a 6.1-percent increase in global same-store sales.
• Same-store sales, which track sales at its locations open at least 13 months, rose 7.4 percent in Europe, while they were up 8.8 percent in the Asia/Pacific, Middle East and Africa segment.
• The United States posted comparatively modest growth of 3.4 percent in same-store sales. (now that's strength! Anyone who can show growth in the U.S. now has the holy grail)
• But investors are beginning to get more jittery about an overseas slowdown as higher costs for food and fuel put more pressure on consumers around the world.
• Yum reported in its most recent quarter that rising inflation had dampened profits from China, a key growth driver. Analysts said McDonald's has fewer outposts in China than Yum, so it is less exposed to troubles there.

[Apr 22: McDonalds, DuPont Continue the Trend - Overseas Strength Mitigate Weakness at Home]
[Dec 26: Target Shoppers Turning into Walmart Shoppers]

No positions

American Express (AXP) Weakening

This week's earning report from American Express (AXP) quite frankly substantiates much of what we've been warning about for a long time. It is just taking longer to hit the "upper middle/lower upper" class. [Jan 10: Credit Card Warnings Here, Credit Card Warnings There] Remember our thesis - credit cards are the last major lifeline many Americans are clinging too. The real defaults in this group have only just begun - many should be able to make the minimum payment for a while, maybe 9 months, maybe 15, maybe 21 - but eventually without their home ATM to use as a lifeline, they will be out of places to juggle debt. And that's when the personal bankruptices begin to fly up the charts. So we use Capital One Financial (COF) for normal folk, and AXP for the upper 10-15%. Keep in mind this is in a time where rebate checks were being handed out by your grandchildren to stave off such data as we are starting to see below...

• American Express Co. said Monday its second-quarter profit tumbled 38 percent, well below Wall Street's forecast, as consumer spending slowed and the number of loans that had to be written off as unpaid increased beyond the lender's expectations.
• The company, known for catering to some of America's wealthiest consumers, said the effects of the weakening economy were evident even among its more established members with excellent credit.
• The results include a $374 million addition to credit reserves, reflecting higher credit losses and the expectation for increased write-offs in the third and fourth quarter.
• Results were hurt by a $1.5 billion provision for loan losses, up from $640 million in the 2007 quarter.
• The net loan write-off rate, including both on-balance-sheet cardmember loans and off-balance-sheet securitized cardmember loans, was 5.3 percent, compared with 2.9 percent in the prior-year quarter.
• "Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations," Chenault said. "The scope of the economic fallout was evident even among our longer term, superprime cardmembers." (thats SUPERprime not SUBprime)
• American Express executives said the company has begun to notice problems even among cardholders with credit scores ranging from 650 to 750, and those who hold mortgages on multiple properties. As a general rule, those with a credit score above 650 receive the lowest interest rates.
• The pinch felt by American Express' superprime cardholders mirrors a similar trend among borrowers at JPMorgan Chase & Co. The bank said last week that even its more creditworthy borrowers are now failing to make their mortgage payments -- the charge-off rate for prime mortgages nearly doubled from the first quarter to the second.
• "We now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trends," said Dan Henry, Chief Financial Officer. (2nd half recovery? not so much?)
  
• Revenue from its international card services division increased 20 percent to $1.3 billion, due to higher cardmember spending and borrowing. (again, thank god for non Americans)

Again folks - every 8-12 weeks we have these oversold rallies in the worst of breed - I have contended each time that these are simply times to rebuild shorts at much more attractive levels once the animal spirits peter out. I continue to advocate that position. How will these Americans already struggling - without rebate checks to help them this fall/winter be contending with the lagged effects of food inflation, and home heating - even if their gasoline drops to $3.40 or heck $3.00. There is no 2nd half 2008 economic recovery and when the pundits start to spin the 1st half 2009 economic recovery, that's a bowl of Kool Aid too. Maybe with oil $75 (if/when) we can talk 2nd half 2009 recovery but only if home prices crash quickly and let the new cycle begin anew. I'm thinking it won't be that early. We'll revisit in 2010 ;)

No position

Healthcare Companies that Start with the Letter "I" Outperform

Last night was a good one for health care companies whose name start with the letter 'I'. Both remain very 'rich' in valuation but a quick review of each

Illumina (ILMN)

• Genetic analysis company Illumina Inc. said Tuesday its second-quarter profit rose 66 percent on a surge in product sales, prompting the company to boost its third-quarter and full-year outlooks.
• The company earned $15.4 million, or 23 cents per share, compared with profit of $9.3 million, or 16 cents per share, during the corresponding period a year prior. The per-share results reflect a 5.5 percent increase in the number of outstanding shares in the 2008 quarter. Excluding stock compensation expenses, a manufacturing equipment write-off and other charges, the company said it earned 44 cents per share.
• Revenue rose 66 percent to $140.2 million from $84.5 million last year.
• The majority of the company's revenue came from product sales, accounting for $128.6 million, while service and other lines contributed $11.6 million.
• Looking ahead, the company said it expects third-quarter profit between 42 cents and 45 cents per share, on revenue between $142 million and $147 million. Analysts forecast third-quarter profit of 31 cents per share on revenue of $136.7 million.
• For the full year, Illumina expects profit between $1.65 and $1.75 per share on revenue between $550 million and $560 million, while analysts expect $1.21 per share on revenue of $535.5 million.

Huge increase in guidance versus analysts expectations but the stock has priced much of this in... full earnings release here.

Intuitive Surgical (ISRG)

• Intuitive Surgical Inc. on Tuesday said its second-quarter profit jumped 66 percent as sales of its surgical robotics soared.
• For the three months ended June 30, the company reported net income of $51.2 million, or $1.28 per share, compared with $30.7 million, or 79 cents per share, in the corresponding period a year earlier.
• Revenue climbed 56 percent, to $219.2 million from $140.2 million.
• Analysts polled by Thomson Financial, on average, expected profit of $1.18 per share on revenue of $208.6 million.
• Intuitive Surgical said its revenue growth was driven by wider adoption of robotic procedures, and higher sales of both instruments and accessories and its da Vinci Surgical System. Product sales rose 58 percent to $189.8 million, while service and training revenue jumped 44 percent to $29.4 million.

This company has that excellent razor and blade model, and in the end the blade will be the real winner - it's starting to really show. Full earnings release here.

This is the conundrum that is investing in this sector - the few companies with true growth, and without FDA risk (unlike drug companies) are priced at stratospheric levels. So one must either ignore traditional valuation measures, or not own them at all. At least with over achieving results like this, they get a bit less expensive.

Long Illumina in fund; no personal position

Things You Would of Never Said 8 Days Ago

"Thank god for financials and homebuilders - without them my portfolio would be a disaster!"

For all those who think shorting is easy, ask the fellas who stuck around too long in Ultrashort Financials (SKF).

5 weeks of gains erased in 5 days. Even within the day today this position went from $150 to $120! Talk about an intraday reversal - a terrible start in financials, followed by a day long rally. Remember the SEC has banned naked short selling in 19 major financial firms. I did not write about this last week because frankly it makes one who follows the market for years, quite peeved. (to be judicious) Technically naked short selling should be banned period (from all securities) but it's been allowed on a wink wink basis. Why? Because the same 19 financial firms have trading desks (and clients) that have used it to great benefit for years on end. Only now when their stocks have been targeted have all the King's Horses (and Men) found an issue with it. It's such a corrosive system I don't want to even get into it because I'll create a 10,000 word entry. When the foxes guarding the hen house get the guns aimed at them, they run to mother (nanny state) and ask for help. Being the large political donors they are, mommy is happy to oblige.

Anyhow that is neither here or there - this is a ban lasting until July 29th and seeing how great it has worked (already) in the financials just on the "threat" (last week) it would not be surprising to see it extended for another 30 days. We shall see. Why this rule has not been extended to all stocks is beyond me, but I guess we need to let these 19 firms continue to make money naked shorting the heck out of defenseless small cap firms.

So where we stand now is that S&P 1275 level we've been pointing to is now here. This was a long term support level that broke down in the recent thrashing of the market, so we'll see if this previous support level has turned into resistance or if the market can rally right through it.

The major banking indexes, after a tremendous move up have also now rallied to a key resistance level - they poked their head over late today.

While it is tempting to begin building the Ultrashort Financials in scale here, we have seen how being off just by a few days in Ultra Financial (UYG) can cost a lot of dough in the near term.

So I'm still sticking to a Friday time table for really beginning to layer in this position (the "rotational rallies" of January and March lasted from 6-15 days and Friday would be day 9) but if we see SKF back in the $110s tomorrow? (50% fall off in just over a week!) we might start throwing layers in. And start to draw out of (sell) its inverse, Ultra Financials (UYG). Any rally led by worst of breed is not one to be trusted as those who bought these stocks off their huge oversold bounces in late January and March can attest too. The thesis "then" was the 2nd half 2008 recovery and the thesis "now" will be "gas is going to $3.40 and the consumer will be back in full force". Remember, for stocks to rally for a few days/weeks/even months - thesis does not have to be correct - it only requires enough billions/trillions of pooled capital believe it and move stocks in the right direction. The open question and unknoweable is how long this "perception" remains before the inevitable return to reality.

And to close out our backwards world, Washington Mutual (WM) just reported a loss of $3.34 instead of analysts $1.05, and early indications show the stock up on the great news. ;)

This has continued to be a wacky time for the fund - up 3% yesterday in a flat market and gave it all back today in an up market. No sense. No rhyme. No reason. Just traders flowing from 1 sector to another. You simply have to suspend all logic at this moment or the market will send you to the insane asylum right quick. Our "barbell" approach (owning a few of the things we have zero belief in to counterbalance things we do believe in) is finally paying off - but that side of the barbell is so minor, it is not helping us much; just creating a few offsets to some big losses in the global growth names.

Long Ultrashort Financial, Ultra Financial in fund; no personal position

Amazon.com (AMZN) for Gamblers

Thanks to a reader for pointing this chart out - it will an interesting report in Seattle tomorrow for sure.

On the pro side for this company - we have the thesis that pooring Americans, when not walking the aisles of Walmart (WMT), will save money by shopping at Amazon.com (AMZN) - no shipping costs (for orders over $25) and no gas usage by said consumer to actually get to the store.

On the con side -well that was the thesis for Ebay (EBAY) as well, and that did not work out so well. And it was the thesis for Overstock.com (OSTK). Err, not so well there either - but that company has a lot of specific situations onto itself. Also, on the con side are hints of slowdown on internet usage and click throughs via the Google (GOOG) report (poorer Americans even having to force themselves not to click on fun things to buy off the internet).



The reason this stock is interesting is despite the pullback in shares it STILL trades at 44x forward estimates AND the chart. You know we love gaps. But the farther back the gaps are the less likely they will get filled. However, let's peak at Amazon's - first near term

.... and then longer term


In the near term you see March 2008 lows of $61ish. In the longer term you see a massive "gap" in the chart between $45 and the mid $50s area. Must it fill? No. Could it? Yes. Especially if a disappointing quarter sends this stock down below that $61 level of support post earnings. As much as the business model of Amazon.com is in many ways superior, it's still at its core a retailer - and 44x forward estimates for a retailer is ahem... rich. I know, I know - they are unique, they deserve the premium, blah blah and blah. That's the same thing people were telling me about Whole Foods (WFMI) a year ago when it traded at massive multiples of other supermarkets. How did that work out?


Behind almost every bad stock the past year is 1 consistent - the American consumer. I'm not calling for this massive breakdown (at least with money on the table), but if something goes amiss in this earnings and that $61 level is broken, watch for potential fireworks. (aka hedge fund feeding frenzy)

No positions but short the American consumer in the general sense

ICON (ICLR) - They Never Miss and Give Us a Chance at Cheap Shares

Agh! Yes, I want to be in the "healthcare is safe" joy ride, but only with a handful of selected stocks - ICON (ICLR) is one of them. But they had to, yet again, provide an outstanding quarter; with yet another increase in guidance and yet again not allowing me in at cheaper valuations. (couldn't they miss, just once?) Now I like healthcare as much as the next guy (ok, not really) but even with the newest guidance this stock trades at 33x forward estimates. But perhaps that is the price we pay for 'safety' in this day and age.

• Net revenues for the quarter were $218.3 million, representing a 48.5% increase over net revenues of $147 million for the comparative quarter last year. Year-to-date, net revenues were $419.6 million, representing a 48.2% increase over the same period last year.
• Income from operations was $24.4 million, compared to $16.1 million for the same quarter last year. Operating margin increased to 11.2% from 10.9%. Net income was $18.8 million or 62 cents per share on a diluted basis, compared with $13.3 million or 45 cents per share last year. (+38%)
• “It was another quarter of excellent bookings, which were $393 million gross and $337 million net” said CEO Peter Gray. “As a result of these strong business wins we continue to expand our global capability through opening new offices and hiring new staff and we now have in excess of 6500 staff working in 71 offices in 38 countries.
• The strength of demand for our global services has led us to increase our revenue guidance for 2008 to $870 - $890 million, and our EPS guidance to $2.46 - $2.52.”

• On average, analysts reporting to Thomson Financial expect a profit of $2.44 per share on $852.7 million in revenue.
• In December, Icon forecast a 2008 profit of $2.27 to $2.36 per share on revenue between $750 million and $770 million. After reporting its first-quarter earnings in April, it raised those expectations to $2.35 to $2.45 per share on revenue of $840 million to $860 million.

[Feb 21: ICON with a Solid Report]

No position but gnashing teeth

Bookkeping: Closing Ciena (CIEN)

I cry uncle on Ciena (CIEN). I reintroduced this name to the portfolio as we searched for a new tech name to take advantage of the stupidity of "each time oil goes down $3, hedge funds run into technology". [Jun 20: Adding Tech Exposure with Ciena] I thought the logic of that thesis was utterly stupid but it was what was "working" at the time, so my logic was I wanted something to go up (a sector or some names) when oil corrected.

Now with the Google, Microsoft, Sandisk, Texas Instruments, even Apple (although I disagree with the panic sell in that one on "conservative guidance"- shocker eh?) blowups in the past few sessions, my thesis that safety in tech was a misnomer is coming to fruition. Thankfully we didn't believe the hype and didn't have much exposure to the sector. Even stocks that were breaking out and showing relative strength a few weeks ago - such as Qualcomm (QCOM) or Marvell Technology (MRVL) - have now reversed and broken down. This once again exemplifies the hedge fund hands at work - "everything is a monolith" - all tech is bad or good - it's all the same "stock" - there is no fine tune discernation. It's good. Or bad. The most simplistic of analysis. It's all just "one big stock" to "them".

Safe? Breaking out 2-3 weeks ago? Relative Strength?

The Bear says no. If you bought these breakouts you were crushed. No Soup for you.

I. on the other hand. went for what I considerd a "value" play in Ciena - I could buy a tech stock well below it's growth rate. What a steal! But the market doesn't care and the stock simply drifted endlessly down before putting in a minor bounce here of late (we let some go last week into the bounce) but this (for now) appears all we are going to get. Now, I did not buy this stock as one of my "favorites" but simply as a way to hopefully capitalize on this dumb thesis of "safety" (that I didn't agree with). Now that the thesis has been blown up i.e. technology is not safe just because it does not have exposure to oil as an input - I don't have as much reason to own this. Plus the stock is not behaving well, but frankly after the demolishment of the commodity complex of late - it is hard to find anything doing well for more than a few days at a time. So I'd rather have cash and am out of the remainig 1.6% of Ciena in the $22.50s. No sugar coating this one, it was a bad position for us - a quick 13% loss in just a month. I still think it's cheap but logic means nothing in this market so I'll build up cash until i figure out a trend that lasts for more than a few days.

Long Apple in fund; no personal position

Bookkeeping: Adding to A-Power Energy (APWR)

The world no longer needs wind because crude is falling to the $120s. The hedge funds told me. I am going to stick my hand out, and ignore them, to catch the falling knife that is A-Power Energy Generation (APWR) - which is filling a gap in it's chart at $23. The stock is currently at the $23.30s range so that is close enough for me. This was the name that I did not cut back on in the low $30s last week, trying to curtail trading velocity in the fund, but this market smirked at that decision as all gains must be harvested, lest said gains are quickly demolished within a few days.

As the stock has fallen, it's dropped to a 3.5% stake intraday, so I'm pushing it back up to 3.9% with a few hundred share purchase. Next purchase will be down at $21 range if it gets there. I suppose if crude gets back to $110 the Chinese will stop all wind turbine projects since they are no longer needed.

Long A-Power Energy in fund and personal account

XTO Energy (XTO) Picks a Bad Day to Announce Earnings

XTO Energy (XTO) put out a bevy of good news today but since crude oil is down a few bucks today - the supercomputers and their trader friends running this market will have nothing of it. Down 8-9%.

Let's review all the good... err... bad news

Earnings up 33%

• XTO Energy Inc (XTO) on Tuesday said second-quarter earnings rose 33 percent on higher production and natural gas prices. Net income in the quarter rose to $575 million, or $1.11 a share, from $432 million, or 91 cents a share, last year. Excluding one-time items, the company said it earned $1.07 a share in the quarter. Analysts, on average, had expected the company to earn $1.04 a share, according to Reuters Estimates.
• Natural gas and oil production in the quarter rose 29 percent from last year to 2.20 billion cubic feet equivalent per day.

Production Growth in 2009 targeting 22%

• XTO Energy Inc. (NYSE: XTO - News) announced today that the Company is increasing its 2009 production growth target to 22% based on projected development activities and acquisitions already announced in 2008.
• In order to achieve this production growth, the 2009 development budget is estimated to be $4.6 billion. The Company plans to utilize about 120 operated drilling rigs.
  
• Another $700 million will be allocated for pipeline infrastructure, compression and processing facilities.
• Executive Bob Simpson said XTO could double in size over a four-year period.

Even more acquisitions for this asset hungry company

• XTO Energy Inc. (NYSE: XTO - News) announced today that it has entered into definitive agreements with multiple parties to purchase producing properties located in its Eastern and San Juan Regions and acreage positions in the Marcellus, Fayetteville, Barnett, and Haynesville shales, for a total of about $1.3 billion, of which $1 billion closed during the second quarter.
• From the producing properties, XTO Energy's internal engineers estimate proved reserves to be 185 billion cubic feet of natural gas equivalent (Bcfe) of which approximately 60% are proved developed. Starting July 1, these acquisitions add 20 million cubic feet of natural gas equivalent per day (MMcfe/d) to the Company's production base.
• Bob R. Simpson, Chairman and Chief Executive Officer. "With the transactions announced today, including our Barnett Shale acquisition, XTO has now committed to a total of $10.6 billion in assets this year which complement and expand our operated positions across the nation. Through diligence, discipline and hundreds of transactions, we are acquiring the equivalent of a very high-grade unique company. This handcrafted company contributes a portfolio of properties in our legacy basins and adds expansive undeveloped acreage in all the premier emerging shale plays. As a result, the new XTO is a better franchise with more growth firepower for the future."
• Acquisitions in 2008 represent over 2.3 Tcfe of proven reserves today and another 6 to 8 Tcfe in upsides

But Mr. Simpson, natural gas is down a % or two today, who cares about the long term - it's time to trash your stock. After all this is just "one big commodity trade" - forget the fundamentals. Your chart is now broken and it's our job, as the hedge fund community, to short you as if you are a subprime lender - after all we have to make our number this quarter. You deserve at least a $50 price for your insurgence - doubling your size in 4 years? When natural gas is down the past 3 weeks? What sort of hair brained idea is that. Further, at 12x forward earnings you are an overbloated pig and if natural gas falls another 10% you deserve a 6 multiple. It's only a trade Bob - you're just a 3 or 4 letter symbol we trade in and out of on a daily basis to make our quarter - no hard feelings, I hope. One day (heck maybe tomorrow) we'll reverse course and take you back up. You're in our back pocket now Bob - now we have to go find a good technology stock to go long, since they are safe as they don't have natural gas exposure - so we can't talk any further. Have a nice day.

Long XTO Energy in fund; no personal position

Bookkeeping: Raising Cash with Some Sales of Yingli Green Energy (YGE)

Simply as a cash raising exercise I am cutting 600 of 1400 shares of Yingli Green Energy (YGE) in the $16.10s range. The last 600 shares of this name were bought on Jul 2 in the mid to upper $14s so we'll take this 10%ish gain out in this layer and build some cash reserves. This takes our stake down from 2.0% to 1.1% in this specific name. Nothing specific to this name which I find very undervalued. But it is part of a larger basket and at 2% of the portfolio doesn't need to be quite so large a part of the portfolio into the hedge funds "bless" this sector as "an area we can run up 60% for no good reason before we short them back down 50%".

Unfortunately right now we are in perhaps the worst garbage of a market I've seen. Hostage to oil on one side and hostage to financials on the other. The fund was up 3% yesterday for no good reason, just like it was down 2% last week for no good reason. Coal stocks are trading up and down 8% a day - for no good reason. Same with fertilizer. Same with natural gas. This is just daytraders and hedge funds run amock and ruining the market. The "very smart money" has such deep thinking algorthims as

"When crude oil price today GREATER THAN crude oil price yesterday by 1.5% buy buy buy everything in commodity space"

OR

"When crude oil price today LESS THAN crude oil price yesterday by 1.5% sell sell sell everything in commodity space"

And for this they are paid the big bucks. It is complete garbage and trends are useless. The value of these things are not changing 7-10% daily - it is simply fast money chasing in and out, in and out, every day and creating havoc. There is no use for logic or sense. Just squeeze out a gain here, and sell it off and scalp daytrades every day - sending billions in this direction one day, and billions in the complete opposite direction the next. Very little joy in this market because using your brain is worthless. My only joy right now is seeing their stupid technology - aka Microgoogle "tech is safe" trade blow up in their faces, along with their stupid healthcare bets (hi Merck) in the face of a Democratic majority also blow up in their face.

Simply wake up every morning and place your red or black chips and then go home after you have "provided value" by pocketing a "scalp" based on if oil is up or down 2% or if Fannie Mae is going to be socialized or not. A lot of "analytical" work being done out there. Not. Our Ritalin era of children from the 80s now are pervading the trading desks of America and we are all "better" for it.

Long Yingli Green Energy in fund; no personal position

Jacobs Engineering Group Earnings

Another solid report from global infrastructure company Jacobs Engineering Group (JEC). This sector is always a risk going into earnings, even more so than the typical earnings risk, because despite great long term fundamentals they have very large contracts and the "lumpiness" between one quarter and another does not work well with Wall Street's infatuation with "must hit the number perfectly or we will destroy your stock to the tune of 20% down".

Technically this is quite a clear chart, both the 200 day and 50 day moving average are very close in the low to mid $80s and we want to see the stock break above $84 to move into a stronger position. The stock is up 2% this morning to $85; in a bull market this would be a place to add to a position; but in this market I don't have any urgency as our stocks do not trade in a vacuum.

Solid results

• Construction services provider Jacobs Engineering Group Inc. said late Monday its fiscal third-quarter profit jumped 45 percent, crediting strong demand for its services.
• For the quarter ended June 30, Jacobs earned $108.7 million, or 87 cents per share, compared with $74.8 million, or 61 cents per share, for the same quarter last year.
• Revenue rose 40 percent to $2.92 billion from $2.08 billion in the year-ago period.
• The results beat Wall Street predictions. Analysts polled by Thomson Financial expected, on average, a profit of 82 cents per share on $2.75 billion in revenue.

Backlog continues to explode (which is a key indicator in this sector for me)

• The company's backlog at the end of the quarter rose $7.3 billion, or 65.8 percent, to $18.3 billion. About $1 billion of the increase was related to a significant jump in scope of services for a North American upstream oil and gas project, the company said.
• This is up from $11.0 billion and $5.9 billion, respectively, a year earlier.

Boost in guidance

• Boosted its fiscal-year profit guidance, citing strong third-quarter results and a backlog increase.
• Jacobs forecast a 2008 profit of $3.15 to $3.40 per share, up from its previous prediction of $3 to $3.30 per share. Analysts polled by Thomson Financial expect a profit of $3.25 per share.

I keep saying I believe we have the right companies; we are just in a terrible market. While "smart money" chase in the "technology is safe" trade (and I am glad to see those people being blown up) or "healthcare is safe" (and those people are also being blown up) we'll continue to buy the quality merchandise and although hedge funds run away from these stocks if oil drops $10 or $15 or $25 or $45 - the story is not changing. Just the hedge fund computers algorithms who have no rhyme or reason other than "sell ABC when crude oil drops X%" (or vice versa). Remember where the money is. [Jul 12: Where is Your Gas Money Going?] [Jan 21: A Tour through the Middle East]

Long Jacobs Engineering Group in fund; no personal position

Add Mervyn's to Our Growing Litany of Retailers Headed to the Great Sunset

We've predicted the great demise of US retail for a long time in the blog; we simply have overbuild our consumer culture based on a national savings rate of zilch. I can't short individual REITs so I am stuck with Ultrashort Real Estate (SRS), but I would prefer to focus those REITs who focus on malls and strip centers.

After Linens 'n Things [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer] came Steve & Barry's [Jul 10: Another Retailer (Canary in Coal Mine Down]. Now Mervyn's looks like it's on the fast track - coming from the auto industry I can tell you when "key vendors halt shipments" you are essentially done. Now Mervyn's has been weak for a long time, but like any herd - the sick and diseased will go first. And another group of future Walmart workers, federal government workers, and healthcare workers is born.

But don't worry folks, as oil pulls back and gas heads "down" to $3.40 the American consumer will be back! CNBC promised.

• Mervyn's LLC, the long-struggling California department-store chain, is fighting for survival as some of its vendors have halted shipments to the company and key lenders have pulled financing, according to people familiar with the situation.
• In recent days, Mervyn's executives have been trying to persuade vendors to ship merchandise to the retailer for the crucial back-to-school season. If that effort fails, the company could be forced to file for bankruptcy protection as soon as this month and shut down, according to these people. Mervyn's operates 177 stores in seven states, mostly in California.
• A Mervyn's liquidation would deliver another blow to the nation's mall owners, which are suffering through a torrent of store closings. Linens 'n Things, Goody's Discount Clothing and Sharper Image are just some of the chains that are closing stores or shutting down for good this year.
• It would also be an embarrassment to Mervyn's owners. Private-equity firms Cerberus Capital Management and Sun Capital Partners, along with three other partners -- including real-estate investor Lubert-Adler -- acquired the chain from Target Corp. in 2004 for $1.2 billion. The group put up about $400 million in equity and financed the rest. [embarrassment yes - but still lucrative - see below]
• But while thousands of employees would lose their jobs and their vendors would get hurt in a Mervyn's liquidation, the private-equity buyers wouldn't stand to take much of a financial hit. That is because when they bought the company they structured the $1.2 billion deal as two separate transactions -- one for the retailer and a second one for the retailer's real estate. [aha, the barbarians at the gate ARE smart after all - generally most of these private equity firms buy these companies and load them up with debt and make sure their firm is paid through the nose - yet another example of heads we win, tails we still win - as long as they can find a new set of suckers... err, shrewd investors to offload debt on]
• The real-estate arm has been a lucrative investment, according to people familiar with the deal. It leased many of the stores to Mervyn's and has sold and leased certain properties to other retailers. And through sale-leaseback transactions and the appreciation of real-estate values over the past several years, the buyers have more than doubled their money on the real-estate investment. Those profits have far exceeded losses on the retailer, according to these people. In a bankruptcy of the store operations, the real-estate arm would become a creditor. [I just have to laugh at that last point - so one part of the private equity business becomes first in line to receive money from the bankruptcy of the other part - what a system folks!]
• Two retail experts familiar with the bankruptcy planning at Mervyn's said the retailer's sales began to tumble quickly as the real-estate slide began in California and Arizona. Mervyn's tried to cater to Hispanic consumers, many of whom have been hurt by the downturn and job losses in the mortgage and home-building industries. [everyone assured me in spring 2007 not to worry about housing - it is only 4.5% of GDP; a pittance]
• In the spring Mervyn's lender CIT Group Inc., which has severely cut back on its business loans overall, stopped providing financing to the chain, according to people familiar with the matter. This caused Mervyn's vendors to get nervous, and many began withholding shipments to the company.
• Among Mervyn's largest landlords is Macerich Co., a Santa Clara, Calif.-based real-estate investment trust that owns 72 U.S. malls.

If you are ever interested on how gamed the system is you should read this story [BusinessWeek - April 10: Where's the Beef?] on what private equity has done with Burger King - they are "brilliant" in the fact they have created a system where they win no matter what. As long as new suckers are born every day, these guys will win. This was an eye opener for me when I first read it a few years ago.

Long Ultrashort Real Estate in fund; no personal position

FT.com: US Food Groups Plan Hefty Price Increases

Remember, my thesis for the 2nd half is food inflation, or what I call agflation, will replace energy inflation as the major gripe. (I've told readers to stock up on any foodstuffs that can be stored all year) That said, I need to qualify that with the provision that home heating costs this winter will be a "shock and awe" issue for American consumers, most who will be blindsided. If not for the fact this is a regulated market and does not reflect market supply/demand in full, it would go from a crisis to a disaster. Just do a google search on term 'natural gas prices' in the "news" tab, and you can see utility after utility submitting substantial price increases to their state regulators. Thankfully inflation is only 5% (cough) or I'd be worried.

Back to agflation the current trick if you are not in the know is the food companies have kept prices flat in many cases - while shrinking the boxes and/or amount of product in said packaging. Oh Mr. Lincoln, it does appear you can fool a lot of the people, a lot of the time - until it reaches a simply egregious stage.

If I could only buy a futures contract on American anger I'd be so long on that instrument..

• US food companies are preparing another round of hefty price increases as soaring commodity costs force them to pass on rises to consumers.
• Sara Lee, maker of meat products such as Jimmy Dean sausages, said costs would compel it to push up prices on meat lines by up to a fifth later this year.
• Kraft Foods, Kellogg’s, ConAgra and Tyson are also pushing through increases, which are expected to contribute to inflationary pressures in the US. (but the type of inflation that does not matter - after all food is volatile and therefore doesn't count to the Federal Reserve)
• The increase in food prices was steep in June, when they moved up 0.8 per cent compared with 0.3 per cent in May.
• In June, meat prices surged to a 22-year high because of record costs for corn and soybean, food crops for livestock. The US Department of Agriculture expects pork production to fall 3 per cent in 2009, against a 1 per cent fall for chicken and beef.
• Bill Lapp of Advanced Economic Solutions, an agricultural consultancy in Omaha, said higher prices looked set to prompt the biggest decline in meat consumption for 27 years. (demand destruction as the pooring of American rampages)
• Kraft Foods, which has said it will push up its prices by 12-13 per cent this year, said some of its cheese categories could rise 25 per cent.

We have placed investments in certain food categories but thus far the commodities have not worked out anywhere as well as the fertilizer investments.

Catching Up with Manpower (MAN)

Last quarter we stumbled upon Manpower (MAN), which previous to now I had thought was simply a US centric temporary staffing agency. [Apr 21: Manpower as a Weak Dollar Play? Who Knew] Since we know the US Bureau of Labor Statistics provides ridiculously faulty labor data (along with other forms of data) we are always on the lookout for data from important companies to tell us what is really going on. Not only does Manpower give us an inkling on how things are going domestically but they have a lot of data points from Europe as well. In fact most of their business (surprised me last quarter) is in Europe. Verdict? Not so good.

• Employment services company Manpower Inc (NYSE:MAN - News) said on Friday that business was slowing in large Western European markets, including France, its biggest operation, sending its shares down 11 percent.
• Manpower also reported lower quarterly earnings, but still topped expectations, and gave a disappointing forecast for the current period.
• Chief Executive Jeff Joerres said on a conference call that its business in Germany, Italy and Spain was soft. "We do believe we will see further softening in Europe in the third quarter," he said.
• He said the company did not see the U.S. market gaining any strength in the near future. Milwaukee-based Manpower generates the bulk of its business in Europe.
• Helped by the weak dollar, revenue rose 17 percent to $5.90 billion from $5.03 billion in the same period a year ago. But without the effect of the favorable currency comparison, revenue increased just 5 percent, the company said. (and once again the US Peso is helping to create an illusion of "some strength")
• Goldman Sachs analyst David Feinberg reiterated his "Conviction Sell" rating on the stock, noting that June labor statistics saw a decline in temporary payrolls of 7 percent and 7.5 percent respectively from the U.S. and France.

No position

It's Goldman Sachs World - We Just Live in It

Long time readers know my views on Goldman Sachs (GS) - the company that has people placed in key positions throughout both Wall Street and Washington D.C. At this point there is not even an attempt to hide the interconnections anymore ;) I guess that means the system they've helped to create to milk has cracked. For that that don't know- U.S. Secretary of Treasury Paulson used to be the CEO of.... Goldman Sachs.

• Goldman Sachs Group Inc.'s most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis, according to people familiar with the matter.
• The Treasury and Federal Reserve are grappling with how to respond to the threat of bank failures, flagging capital levels and crises of confidence in important institutions such as Fannie Mae and Freddie Mac.
• President George W. Bush made a personal call to Mr. Wilson in recent days, asking him to assist Mr. Paulson.
• Mr. Wilson's appointment is the latest in the ranks of Goldman employees who have moved into public service.
• And it reflects the seriousness of the issues before the Treasury, which is trying to instill public confidence in the financial system without pushing the federal government into a posture of expensive public bailouts.

[Jul 3: Invisible Hand Video]

Long Goldman Sachs in fund; no personal position

WSJ: Export Boom Fuels Factory Town's Revival

Always on the look out for slivers of good news; perhaps the administration's goal is to lower the value of the US peso to the point that the country will return to its roots as low wage, very cheap place to locate manufacturing ;)

• This is a town manufacturing once deserted -- and is now reviving. On a blustery January afternoon in 2003, nearly 900 workers at the town's second-largest manufacturer, a cookware factory, switched off their machines and were told the company was moving operations to Mexico.
• Today, many of those workers are back at the same plant making pots and pans for new bosses. At a factory next door, workers are churning out energy-efficient industrial light fixtures. Across town, one company is using a former shipyard to produce 250-foot-tall steel towers used for wind turbines.
• Sons and daughters who had abandoned the town are returning with business degrees and breathing new life into old factories. Among them is Tim Martinez, who left Manitowoc to study economics and business in Milwaukee. He bought the pots-and-pans plant, reopened the aluminum foundry and later brought in Brazilian cookware maker Tramontina to restart the assembly lines.
• "America got tired of manufacturing," Mr. Martinez says. "But it remains a great way to make money." A rugged cadre of producers like these in Manitowoc have survived a decades-long shakeout of American manufacturing -- and are now leading a largely overlooked revival.
• The economic forces working in favor of U.S. manufacturing include a weaker dollar, which is helping drive sales for exporters and their suppliers. Rising transportation costs are encouraging companies to buy and produce more goods closer to home. An infrastructure and mining boom abroad is boosting orders for the huge cranes made by Manitowoc Co., one of the town's oldest companies. At the same time, rising labor costs in some countries are starting to make outsourcing less attractive. [Econ 101 - all themes we've been pointing to]
• To be sure, American manufacturing has deep problems. Inflation and a sharp slowdown in the U.S. economy are hurting a wide array of producers. Nationally, only about 10% of the U.S. work force is currently employed in manufacturing. That's down from a peak of about 42% in the early 1940s, and about 18% in the 1980s.
• Last year, the U.S. exported about $1 trillion worth of goods, up 39% from 2002, when the dollar started its decline.
• The comeback has been helped in part by what Manitowoc doesn't make: Few companies here are tied to cars or home construction, two ailing sectors. Instead, its diversified base churns out parts for Israeli smart bombs, the ice-cream machines found at most Dairy Queens, and the pipes that carry oil to shore from offshore platforms. Not to mention malt for beer, sausages, and air horns for ships. (you can never go wrong servicing sausages hah)
• Like many global producers, Manitowoc Co. sets prices in Europe in euros. Each time the dollar drops, the price tag on a crane sold there translates into more dollars. With demand for cranes red hot, the company says it has no incentive to offer discounts. Last year, Manitowoc saw its sales grow 37% to $4 billion. The company recently reported its backlog of orders for cranes had climbed to $3.3 billion, up 72% from the same time a year ago.
• As the largest private employer in town, Manitowoc Co.'s success has rippled through the local economy. Manufacturing tends to have a larger economic "footprint" than other sectors, meaning strong orders for one company foster strong orders for its suppliers.

[May 21: Who is the World's Largest Merchandise Exporter? Not China. Or the U.S.]

Bevy of Earnings - Monday on Tap

The next 2 weeks have an enormous amount of earnings data - most days we're going to have to break this out daily to keep up. There is a lot to look at but I'll try to focus on a key few names that readers might be interested in.

For our fund holdings here is the breakout for the week

• Monday: Apple (AAPL)
• Tuesday: Illumina (ILMN), Jacobs Engineering Group (JEC), XTO Energy (XTO)
• Wednesday: Baidu.com (BIDU)
• Thursday: Cabot Oil & Gas (COG), Vale (RIO), Potash (POT)
• Friday: N/A

Now on to Monday specifically...

First of all Apple (AAPL) the serial "underpromiser" - the question each quarter is how the market reacts to this underpromise. I say every quarter add 15 cents+ to whatever they say. 2 quarters ago they said 94 cents - and the stock was absolutely obliterated (and we went along for the ride). I said nonsense - in Apple years 94 cents means $1.10 but it's like talking to a wall when hedge funds go wild. What did they end up reporting? $1.16 [Apr 23: Apple Nice Solid Result] But using "logic" didn't help us from avoiding a massive plunge in the stock and our account value in this name.

So now they have guided to $1.00, I wrote in April that means $1.22; analysts have them at $1.08. Let's see how it plays out . Either way I've cut back exposure as you know I believe "tech is safe" is a ridiculous thesis, even though I like a few names like Apple the best. But with expectations high and the stock at a premium valuation I'd rather let this play out and hope the market panics on a conservative guidance so I can buy lower. If not, we have plenty of other opportunities.

Outside of the portfolio here are some major names I am watching

• American Movil (AMX) - powerhouse telecom company in Latin America; valuation has come in quite a bit from the past few years and growth is still solid. Chart has been very weak though.
• American Express (AMEX) - always on the look out for further delinquency data, and of course they deal with more of the higher end customer
• Bank of America (BAC) - as we wrote in the weekly position update, the behavior of the financials early this week will be telling. Specific to BAC, how is the absorption of Countrywide Financial and that mess of mortgages they took on affecting them?
• Homex Development (HXM) - we just closed out this Mexican homebuilder position to raise cash late last week
• Schering-Plough (SGP) - a former holding that was sort of a snoozer; with the move to healthcare as a safety valve sector how will the market react and/or what is the company specific news to this former favorite who has fallen on hard times
• Steel Dynamics (STLD) - if I wrote this 3 weeks ago it would be "steel is great, hedge funds like steel - buy steel". Now I write "steel is awful, China doesn't need steel and the story is just an overblown mirage - sell steel." Of course the truth is somewhere in between.

Bookkeeping: Weekly Changes to Fund Positions Week 50

Week 50 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: 1.1% (vs 0.0% last week)
56 long bias: 89.7% (vs 89.2% last week)
9 short bias: 9.2% (vs 10.8% last week)

65 positions (vs 67 last week)
Additions: Goodrich Petroleum (GDP), Kinross Gold (KGC)
Removals: Core Laboratories (CLB), Homex Development (HXM), ICICI Bank (IBN), HDFC Bank (HDB)

Top 10 positions = 34.1% of fund (vs 34.6% last week)
47 of the 65 positions are at least 1% of the fund's overall holdings (72%)

Major changes and weekly thoughts
A very busy week in the markets, and the first move up after 6 weeks down. It was a bit of a frustrating week for us because while "timing the market" overall is a fool's game overall, it has been a necessity the past year as huge convulsions either upward or downward have been the order of practice, and our stocks do not trade in a vacuum. The reason I say it was frustrating is because last week in our summary we wrote

At 89% long exposure this is the farthest we've been "unhedged" since week 24, which was mid to late January. Since then, the only similar positioning was week 33, at 84% long, which was mid to late March.

So positioned perfectly in terms of "aggression" but still had our hide nailed to the wall, as even being 89% long we lost 2% for the week as our stocks were not the flavor of the week. Somehow we lost money being nearly 90% long and our #1 position being subject to a takeover - that requires a certain level of skill. (ahem) And this, my friends, is the reason stock markets are an ever challenging puzzle. It is amusing to see the same people who a week ago would not touch stocks calling for the upteempth bottom and how bullish they are after this reversal. Human psychology is half the battle (or more) in the near term.

Our "global growth" stocks were trashed this week, as commodities are viewed as a monolith. By that I mean corn = oil = iron ore = nickel = natural gas = potash = insert anything and it's all the same to hedge funds. Aside from this being ridiculous, one could actually make a case some commodities should BENEFIT from others weakness. For example, a large input into nitrogen fertilizer is natural gas. So as natural gas prices fall - why would nitrogen fertilizer stocks falter? No good reason - but that is like talking to the mob. Logic has no place when billions upon billions are fleeing into financials, retailers and homebuilders. (or at least short covering) Myself, I don't have an idea where oil is going but again, the same folks touting it as the ultimate place to be, now are cowering and calling for $70. And they call John Kerry a flip flopper. Not 3 weeks ago I wrote 'Can a Top in Oil be Far Away?'

Shall I say the near term top is in for oil when OPEC calls for $150-$170 crude? I'm already on record saying food will replace energy as the inflation of choice in second half.... let's see if I can extend this winning streak - we'll revisit on Labor Day.

The irony is I have purposely been avoiding oil exposure (ex Petrobras (PBR)) because I felt it was parabolic and needed a strong pullback, but here we are getting punished because again nitrogen fertilizer = crude oil. :) The one area we are susceptible is natural gas since people do tend to trade these two together but the traditional ratio of natural gas to crude is 7:1, meaning crude $130 = natural gas $18. Natural gas is in the mid $10.00s. But these markets trade on technical patterns so with some break down in their charts, the speculators, err the natural laws of supply & demand might cause more weakness in the near term. But again oil at $80, $100, $120, or $140 should not effect demand for oil rigs or other services, but since this is all "one big trade" - those stocks also took punishment this week.

As for the market as a whole, I still remain quite antsy and in fact with a 10%ish hedged position (+2% for gold) feel underweight my "insurance". I was hoping some of my top holdings would pop when the market bounced, and I could layer out of some exposure and rotate it into more short exposure but something about the best laid plans... Earnings should continue to dominate and the market reaction to Bank of America (BAC) Monday, and Wachovia (WB) and the death spiral that is Washington Mutual (WM) on Tuesday will be telling. The latter is the largest Savings & Loan in America and frankly appears headed for IndyMac status. If "bad news" is ignored and or this fantasy of "the results are horrid but we expected putrid" pushes the stocks up, then we can become more constructive near term. But in no way shape or form am I buying a coast is clear signal in this sector and am hoping to see Ultrashort Financial (SKF) - which we began rebuilding slowly on Friday - fall to the $110s so I can reload. (cannot believe this thing hit $200+) On the flip side, we'll see how long this commodity rotation lasts - in the past corrections this year, it's been a 6 to 15 day phenomena (each iteration lasting a shorter amount of time) so by the end of this coming week, if this rotation does continue into the early cycle stocks I'll be more aggressive in building the short ETFs betting against them. Doing it now risks getting your head chopped off as shorts who pressed their bets found out this week. Also keep in mind our government is now creating a halo effect (for this week at least) banning naked short selling on 19 financial securities. I could write 20 entries on that topic, but I'll spare you.

We had a VERY busy week in transactions as we took advantage of this reversal to cut back positions that actually were up this week (after being beaten into the ground for much of the past month), and rotated the exact opposite direction to the market - buying the leaders of the past few months as they were pummeled.

The larger weekly changes (chronologically) to the fund below:

1. Monday, nothing material outside of some changes in Ultrashort allocation as all the King's Horses and all the King's Men pulled an all nighter Sunday to save Humpty (again) - it's now happening every 3 months.
   
2. Tuesday, we closed our long held position oil service stock Core Laboratories (CLB) to raise cash to apply to other bargains being created in the market. This worked out obviously in retrospect as the oil/nat gas complex was creamed later in the week, but it was just fortunate timing for us.
3. I meantioned Tuesday we were finally getting fear, and that I was looking for some combination of (a) S&P 500 falling to 1170 (b) Google filling its gap down to $460 and/or (c) the Haynesville 4 natural gas plays to finally fall apart. Well it almost all happened but later in the week - S&P ended up at psychological level 1200 instead of 2005 lows of 1170, Google broke down post earnings Friday and fell to $470s, and the Haynesville 4 were torched later in the week.
4. Warburg Pincus took a 5% stake in WuXi PharmaTech (WX) and since this is one of my few healthcare names I added some exposure through the week in small increments. On a side note, Intuitive Surgical (ISRG) of course took off this week after we let go of it last week - healthcare after all. Earnings are Tuesday, and I said I'd buy it back on a re-emergence over its resistance levels which it achieved Friday. So we'll re-assess after earnings - it could pop or not post earnings, not worth the risk for me.
5. Mosaic (MOS) sold off a major nitrogen plant which I view as a positive long term - I added a small layer of this name during the week as it weakened, along with Cleveland Cliffs (CLF) in the $106s, and A-Power Generation Systems (APWR)
6. Lo and behold the next morning we received word of our #1 position being bought out for a nice premium by another of our positions - great news! Err, not so much. Now it's just a big mess. I did add some Cleveland Cliffs (CLF) early in the morning in the $98s and then later in the day Alpha Natural Resources (ANR) which after popping to near $120 - fell down to $103. That didn't seem sensible - something must of been amiss. If only I knew.
7. To raise funds for the Cleveland Cliffs purchase I had to close out a minor position in Homex Development (HXM). Which of course popped Thursday/Friday - it would not of affected us much dollar wise - but it still was bemusing to watch every transaction blow up in our face. Are we having fun yet?
8. To raise funds for the Alpha Natural Resources purchase, we had to reduce some exposure in LDK Solar (LDK) as it hit technical resistance. Not that solars respect technical conditions most of the time - a very "sentiment" driven group.
   
9. Our Haynesville 4 finally started breaking down Wednesday so we chose one - Goodrich Petroleum (GDP) - and began a starter position around the 20 day moving average, hoping to eventually layer in at the 50 day moving average which was nearly 15% lower. Little did we know we'd have a chance the next day.
10. Wednesday, we continued to add some natural gas exposure as we had held off during this entire correction - this was the literal last group to sell off - so we added to Encore Acquisition (EAC) and EOG Resources (EOG). Now if natural gas does indeed weaken further there could be further weakness in these names but compared to where these names have traded over the past 4-6 weeks we are getting some solid prices. Compared to where they traded 6 months ago, still very elevated prices.
11. Thursday after a 2 day spike in finacials, homebuilders we begun layering out of DR Horton (DHI), Lennar (LEN), and Ultra Financial (UYG) - frankly among the few winners we had this week. If/when they continue their oversold bounce we'll continue to layer out of exposure.
    
12. After losing a third of its value in 60 days we decided it was time to begin rebuilding Vale (RIO) - the Brazilian mining giant. Still a relatively minor stake at 1.2% of portfolio.
13. I cut (to raise cash) a lot of the remaining Blackrock (BLK) after a stellar earnings and even more importantly the news that Merrill Lynch (MER) won't be selling its stake at this time. I still have some doubt that they won't be forced to sell some of their position to stay afloat as we get into 2009. Let's see how it works out.
14. We added to two of our service names (the last 2 we own actually) in the oil patch that we had cut back on earlier rallies, Atwood Oceanics (ATW) and National Oilwell Varco (NOV). Again it makes little sense for these to sell off when there is a literal shortage of deeper sea oil rigs as these guys print money at oil $80, 100, $120, or $140.
15. Mechel (MTL) reported another great earnings early this week, and on Friday as the stock continued to weaken to $40, I said I'd like to pick some more up near $38 or it's 200 day moving average. The stock fell there later in the day and we added some. Unfortunately there is now news that the Russian government is not happy that Mechel management is so smart as to position themself as a global powerhouse, and it's time to reward some of their not so smart peers by limiting profit potential at MTL. This could be a game changer or a lot of fluff - I don't know. If Mechel does break down below its 200 day moving average I just have to cut back the stake until more clarity is offered even if its a terrible price. It is hard to sell a stock at forward PE of 8-9 growing at 60% on the bottom line but if the chart corrodes, I won't be the only one. Even IF all these government changes happen you probably still would have a company growing at 25-35%, and the P/E would still be ridiculous.
16. I closed our mini basket of 2 Indian banks simply because I have some worries out the Indian story - on a 5 year time horizon I believe this is a terrible price to sell, but on a 3-6 month time scale I don't know. Since I don't know, and I have more conviction elsewhere I sold.
17. I took some profits out of technology as the "technology is safe" thesis blew up in the hedge funds face - as both Mercadolibre (MELI) and Ciena (CIEN) bounced into resistance off very oversold conditions we took some off. I am *hoping* they have another bounce in them so I can layer out at higher prices but somehow feel doubtful.
18. Since the mood of the market changes by the day/hour/minute I am not sure what exactly will be loved next week and what will be hated - so to have some hedging but without having an idea of what to hedge - we added back an old position to the portfolio Kinross Gold (KGC).
    

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

Even Persian Gulf States, Sitting on Gobs of Oil, are Moving to Coal

Thanks to a reader for sending this article... quite fascinating really when you sit and think about it. Especially the fact the Gulf countries, sitting on piles of dead dinosaurs, are moving into coal. We've been talking a lot about this sector of late, almost as much as fertilizer in the fall. Hopefully the drama in this sector modifies soon and we can move into calmer times where fundamentals trump paranoia.

I can sum up this thesis very succinctly - economics trumps environment. Unfortunately in a bottom line business of making investors money, I can only worry about the economics.

• Der Spiegel, the German newsmagazine, explained earlier this month why the Persian Gulf states are switching to coal. “[They] may be sitting atop massive oil reserves,” the magazine said. “But with prices for crude skyrocketing, it makes more sense to sell it than to use it. Instead, the Gulf states are turning to coal for their own energy needs – to the detriment of the climate.”
• “Demand for coal plants,” the magazine says, “is growing rapidly across the globe.”
• Abu Dhabi (largest of the seven UAE emirates) has announced that it will switch to coal-fired power plants.
  
• Dubai (the second largest) is already building four of them – with a combined output of 4,000 megawatts – as a first-phase investment in coal.
  
• Apart from the United Arab Emirates, Oman (widely regarded as “the next Dubai”) has signed a contract with South Korea for the construction of several coal-fired plants.
  
• Beyond the Gulf, Egypt proposes to build its first coal-fired plant on the shores of the Red Sea.
  
• Russia has announced plans to build more than 30 coal-fired plants by 2011.
• China connects a new coal-fired plant to its electrical grid every 10 days – and intends to keep doing so for several years. Less known is China's decision to construct a massive coal-fired plant in Inner Mongolia that will convert the region's vast coal reserves into oil.
• The coal-to-liquid process used by this plant will consume twice as much coal and produce twice the CO{-2} emissions as the simple burning of coal in a conventional power plant.
• The Kyoto Protocol, incidentally, classifies the Gulf states as developing countries – meaning that they are under no obligation, oil revenues notwithstanding, to reduce CO{-2} emissions.
• They have opted for coal for a single compelling reason: cost. They can produce a megawatt-hour of electricity using Australian coal, Der Spiegel calculates, for $17.49 (U.S.). Using natural gas, the cost rises to $41.34. Using oil, the cost rises further to $79.50.
• One of the ironic differences between Germany and the Gulf states, Der Spiegel observes, is the absence of solar energy investment “in the sun-baked Gulf states.” Germany produced 1,300 megawatts from solar installations in 2007; the Gulf states combined produced 36 megawatts. (that's beginning to change)
• Other German Greens are championing – you are ready for this, right? – coal. “The more strident of the anti-nuclear politicians in Germany are now advocating new coal and gas plants to ward off a certain electricity supply crisis,” Mr. Aplin says. “Why is coal in this mix? It is cheap and domestically available.”
• Two days ago, though, Germany's Finance Ministry issued a remarkably candid public statement. It conceded that Europe's proposals for reductions in greenhouse gases – without the participation of all major contributors worldwide – will be pointless. (Bingo - for every light you turn off in your house or change from 22 mpg to 27 mpg auto, entire cities are being built in other countries - without everyone cooperating there is no "saving the Earth" - and you know how well countries cooperate. The U.S. won't even enter these agreements, and is the biggest pollutant, and China has other issues to deal with - although her people are choking on the air)

Takeaway: Sell coal. The charts say you must, and it's time to go long Macy's instead, since gas will drop to $3.25 and the malls will be teaming with Americans deprived for well over 3 months from buying a new pair of shoes. Heck, they'll probably fly to Las Vegas to shop at the Macy's there since the commodity bull is dead. CNBC told me. Die coal die.

Long a whole lot of coal in fund and quite a bit in personal account