59 Stocks Returning 9%+ this Week

This week's list of top performers marks a return of some of our holdings, but mostly because they were disemboweled so cleanly over the past few weeks/month - many are simply bouncing to where they were a few weeks ago. I continue to not see any clear trend in terms of sector - it is sort of a hodge podge, but quite a few "broken" stocks are bouncing.

Criteria

1. Market capitalization $1.75B+
2. Average trading volume 100K+
3. Stock price $10+
4. Return this week 9%+

Green names we own, blue names we have owned in the past or discussed in the blog. ImClone (IMCL) (Martha Stewart fame for those who remember) was a takeover candidate. Wachovia (WB) is making an impressive run here and is now challenging its 50 day moving average - it did poke through Friday. Ever since new CEO Bob Steel took over, the stock has been on a run - imagine that, another ex Goldman Sachs (GS) employee filtering through the upper portion of our financial/political system ;) As we mentioned AK Steel (AKS) had a buyout rumor, and Alpha Natural Resources (ANR) had a second rumored buyout suitor. I've been debating adding Priceline.com (PCLN) on and off for many months now as it seems to be thriving as the "Walmart" of online travel, and last quarter's earnings really impressed me. They report again this upcoming week. After looking as if it would break down technically, one of the "pooring of America" retailers, Big Lots (BIG) made a satisfying move upward to regain a nice trajectory on its chart.

Symbol	Company Name	% Price Change 1 Week
IMCL	ImClone Systems Inc	40.9
WB	Wachovia Corp Ord Shs	30.9
WLT	Walter Industries Inc	23.8
AKS	AK Steel Holding Corp	23.3
IP	Interational Paper Ord Shs	21.8
ANR	Alpha Natural Resources Inc	18.1
CVC	Cablevision Systems Corp	18.0
AVP	Avon Products Inc	17.1
FIG	Fortress Investment Group LLC	16.9
LKQX	LKQ Corp	16.7
SUN	Sunoco Inc	16.7
AMGN	Amgen Inc	16.4
OCR	Omnicare Ord Shs	16.3
PCLN	Priceline.Com Ord Shs	16.0
BRKR	Bruker Corp	15.6
NATI	National Instruments Corp (Texas)	15.4
TKC	Turkcell Iletisi Depository Receipt	15.4
CNQR	Concur Technologies Inc	14.5
ALXN	Alexion Pharmaceuticals Inc	13.9
TFX	Teleflex Inc	13.8
OC	Owens Corning	13.3
FMC	FMC Corp	13.2
TRN	Trinity Industries Inc	13.1
ZION	Zions Bancorp Ord Shs	13.1
CF	CF Industries Holdings Inc	13.1
NLC	Nalco Holding Co	13.0
MFE	McAfee Inc	12.9
BAC	Bank of America Ord Shs	12.7
TCK	Teck Cominco Ord Shs Class B	12.5
GRA	W.R. Grace & Co	12.3
MRO	Marathon Oil Corp	12.3
YGE	Yingli Green Energy Holding Co Ltd	12.1
BIG	Big Lots Inc	12.1
MS	Morgan Stanley Ord Shs	11.9
GPRO	Gen Probe Inc	11.6
DRC	Dresser-Rand Group Inc	11.6
SYMC	Symantec Corp	11.6
WY	Weyerhaeuser Co	11.5
AG	AGCO Corp	11.4
FULT	Fulton Financial Corp	11.3
SNDA	Shanda Interactive Entertainment	11.2
BOH	Bank of Hawaii Corp	11.0
KSU	Kansas City Sthn Ord Shs	11.0
AMTD	TD Ameritrade Holding Corp	10.7
SLT	Sterlite Industries (India) Ltd	10.5
JAH	Jarden Corp	10.4
THG	Hanover Insurance Group Inc	10.4
ACV	Alberto Culver Co	10.0
UB	UnionBanCal Corp	9.8
ARLP	Alliance Resource Partners LP	9.7
VSEA	Varian Semiconductor Equipment	9.7
EME	EMCOR Group Inc	9.6
STI	SunTrust Banks Ord Shs	9.6
TWC	Time Warner Cable Inc	9.5
LEH	Lehman Brothers Holdings Ord Shs	9.4
OB	OneBeacon Insurance Group Ltd	9.1
BMS	Bemis Co Inc	9.1
KFT	Kraft Foods Inc	9.1
UTHR	United Therapeutics Corp	9.0

Bookkeeping: 'Rising Tide' Performance Year 1

Weekly data

Despite a massive amount of volatility this week, the indexes didn't end up far from where they started. Both the S&P 500 and Russell 1000 gained 0.2% this week. Rising Tide Growth, despite a defensive posture, high cash/short exposure - continued to milk off money as just about all long positions continued to take losses, and finished with a 0.9% loss.

Week 52 / 1 year data

For the year we put in a 10% gain, which is very good overall considering the atmosphere and comparables but we were much happier in June when we were over 20% gain for the year. The market finally dragged us back after we managed to avoid it much of the year.

Quite a few people have emailed me over the year about my "goal" about beating the S&P 500 by 15% a year. Now, I have to say no mutual fund is going to be doing that over the "very long run" (i.e. 10 years) and many of the best fund managers would be thrilled to beat their indexes by 3-5% a year over the long run, knowing some years they will trail the index and some years surpass it. But if you have high goals, even if you fail hopefully you will still surpass the pack and hence why I state that as a goal. We were to surpass that goal this year, even with the falloff at the end of the year.

Further, as of June 30th we would of been ranked as the #1 fund in our category of mid cap growth funds. In about 3 weeks I'll update this entry with how we ended the year - #1 overall might be at jeopardy after a July such as this, but a top 10 finish will be assured. Out of 1800 funds in our group, that's another accomplishment to enjoy.

Overall this has been a very tough year to make money - the toughest since that 2000-2002 period. I don't expect roses and victory parades in the next 12 months either, but we'll continue to pick our spots, try to outperform the weeks or months when the market spirits act rational, and try to protect capital otherwise. At some point in the next year I expect a lot of "hope" to be wrenched out of the market and apathy to take over - that's what marked the bottom in end 2002/beginning 2003. Unfortunately we still have the serial bottom callers out there so until they quiet down I don't believe a real bottom will be in place - I still think rough sledding for 12-15 months more. We would be correcting much quicker in these otherwise efficient markets, if not for the constant interventions by the powers that be, but they won't allow us to rip the band aid off quickly so this will be a much more drawn out (in terms of time) correction in my book.

The NAV of $11.01 below, as well as the closing prices for the S&P 500 and Russell 1000 will be our start points for year 2 comparisons.

Price of Rising Tide Growth: $11.011
Lifetime Performance to date (vs Aug 3, 2007): +10.11%

Comparable S&P 500: 1260.3 (-13.98%)
Comparable Russell 1000: 690.3 (-13.30%)

Fund return vs S&P 500: +24.1%
Fund return vs Russell 1000: +23.4%

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

Bookkeeping: 'Rising Tide' Performance Week 52

Week 52 performance of the mutual fund

Comments: Year 1 ends with a plop. The market had vicious up and down moves all week, but ended up not too far from where it began. Once again - the only people making money are daytraders who flip in and out of positions on a daily basis, as no trend lasts for more than a few days. It is not an investors market. I have to say on a personal note - this was a dispiriting week. There are other week's we've lost more money, or trailed the market performance by a much wider margin... but this week was a lot harder to reconcile for completely different reasons. The fun in investing is finding opportunities and watching companies / stocks blossom as the potential is unfurled. But this market for many weeks is no longer about that - it simply random events and fundamentals mean little. So the quest to find good stories is useless and it is akin to running into a wall. Even the people calling for a "change in character" or a "rotation" are not seeing that play out in a consistent basis. There is no "leadership" aside from some financials (how long will that last?) or health care but even some names in that sector have had enormous blowups this week. Elan (ELN) down 50% today or Biogen (BIIB) down 30% interest anyone in 'safety' or 'leadership' or 'rotation'?

I cannot remember another time or week like this where company after company I follow announced stellar earnings/guidance (many beating by huge margins), and the reward was selloff after selloff, or at best muted sideways action or slight marginal poof upwards (before selling off the very next day) Sohu.com (SOHU), CF Industries (CF), Walter Industries (WLT), Mosaic (MOS), Alpha Natural Resources (ANR), National Oilwell Varco (NOV), Cummins Engine (CMI), First Solar (FSLR), Visa (V), Flowserve (FLS), Cleveland Cliffs (CLF), Exactech (EXAC), Massey Energy (MEE). Thats 25% of our portfolio. Today was just the latest example with Massey Energy - a quick spike up only to bleed off it's gains throughout the day and end with a thud. Embraer (ERJ) which we don't own but highlighted this morning beat by a huge margin, and after its pike all it did was sell off all day. Over and over - the same pattern. I'd consider the majority of the above to be blowout earnings, and yet the rewards are sparse and in fact punishments handed out in many cases. And it is not like these stocks (for the most part) ran up ahead of the earnings to create a "buy the rumor, sell the news" reaction - most had been beaten down even going into earnings... so it appears to be "sell the rumor, sell the news".

Usually we worry about "earnings season" for completely different reasons - we want to avoid stocks having earnings misses or guidance that did not make the minions happy but that has not been the case this time around ex-Mastercard (MA) which was a minor position for us. It is simply a case where any & all news in our stocks has been used as a selling opportunity. Even as we try to find new ideas in "non global growth" sectors - we are finding those being punished along with the rest. In the long run, stocks have always been rewarded for outperforming on the earnings line. But in this short/middle run, there is no current reward and hence putting the work in to squirrel out the best ideas, is proving to be a wasteful exercise. I'll have to bring out my trusty dart board for new ideas, because it would probably outperform the portfolio nowadays. And save me a lot of time.

There was not much to say about this week. Bulls were trying to find silver linings where there are none. Oil determined the fate of about 400 global growth stocks across the commodity chain AND across areas such as global infrastructure (many contracts signed when oil was below $70 apparently now will be cancelled as oil falls to $120 or $100). Stock prices were random events this week based on oil or hope. Not much to hang one's hat on, and it's been like this for a while now. I just don't see much to buy out there anymore; when fundamentals mean little and most charts are weak. We had a 2 day rally Tuesday/Wednesday and just when the technical picture "could" of changed for the better, those darn facts reared their ugly head the next morning and the market sold off heavily. I don't have any insight into this type of market. It's random. And the names on my watch lists seem to be selling off much more than the indexes. Due to all the above reasons I see no reason to change from a very hedged position (short and long positions quite balanced) with high cash levels. It is boring, but it is the current necessity. For excitement or "calling the bottom" I'll refer you to other sites. We're going to (try) to preserve our capital until things change. It seemingly just is bleeding away piece by piece on a daily basis right now.

Since this is the end of our year 1, I am going to do the weekly and yearly performance into 1 separate post which I'll put up tomorrow. We've had a good rookie year, we beat all our goals versus the indexes, we've beaten all (or near all - we'll know in a few weeks when the data comes in) of our 1870 future peers [Jul 26: Rising Tide Growth Performance v Peers July Update], but we've had some concentrated periods of underperformance and this past month has taken the cake.

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 are quickly approaching $4 million pledged - great news and thank you for continuing to pledge during this month of misery.

Mish's Take on July Employment Report

I've suspended analysis on this monthly report, because analyzing fiction is not worth it, but we'll just copy over Mish's good works. And I'll add a few snide comments - here is my take on last month's report if you are new. Also keep in mind the underemployment effect [Apr 2: The Underemployment Rate is Rising]

Here is the latest chart per Shadowstats.com on what the unemployment rate would look like (blue line) if the government had not started to make (ahem) "adjustments" since the early 90s. The red line is what you are told and what Kool Aid drinking pundits who love the bullish story point to. Unfortunately most of the mass media also uses it... this is why the great disconnect between "official figures" and consumer confidence, and reality we read about and post on the blog each and every day.


I post this data not to be "controversial" but to show as many people as possible what really is going on, since its very insidious. Not in a Black Helicopter way, but simply administration after administration wanting to paint the rosiest picture possible way and with an extra change here, or a little change there - it's added up to an avalanche over 2 decades. Further, with "reality" we can make a lot better assessment of where to invest - if we went off government reports we would of piled into retailers, restaurants, and heck financials last fall - since everything is so rosy.

On a personal level, I like presenting this so as many people as possible (who stumble upon the site) can understand why the numbers do not jive with their "anecdotal" evidence from talking to friends, neighbors, and co-workers. And we have the same fictional world in our "official inflation" figures. Another area I've stopped "analyzing".

Back to the July employment report - key points are the birth/death model (not birth/deaths of people but of small businesses "too small" to count) It appears January and July are two months they try to "guess" at what corrections they need to make to the previous 5 months of "guesses" but for example, in this figure the government still shows February through July, constant growth in "small" construction firms - all these new employees - in the most protracted countrywide housing depression we've had. Fantastic. Sounds logical to me.

The other numbers are similar in absurdity. We're posting almost weekly now new retail & restaurant chains going out of business and many cutting 10,000+ jobs across their national footprint yet the Bureau of Labor Statistics believes new restaurants, retail outlets, and stores (too small to survey) are popping up across America - to the tune of 350K jobs since February. I could go on, but I'll spare you - and this is why this report is complete trash (among other reasons) Also note wage growth - still below even government's version of inflation - Americans are getting raises in the 3-3.5% range while inflation is growing at (government) 5% or (reality) 13-18%. So the great middle and lower class fall behind more by the day... but at least jobs are plentiful.

(click to enlarge)
Mish's comments below

This morning, the Bureau of Labor Statistics (BLS) released the July Employment Report. Jobs were negative for a 7th consecutive month. My target of 6% or higher stated unemployment by the end of the year remains on track. Here is a synopsis of that report.

The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.

Highlights

• 22,000 construction jobs were lost
• 35,000 manufacturing jobs were lost
• 17,000 retail trade jobs were lost
• 24,000 professional and business services jobs were lost
  
• 5,000 service providing jobs were lost
• 1,000 leisure and hospitality jobs were added
  
• 25,000 government jobs were added (my note - always healthy when your main job driver is government jobs - again)
  

A total of 46,000 goods producing jobs were lost (higher paying jobs), and for the first time this year service sector jobs were lost. Government, the last pace one wants to see jobs, added 25,000 jobs or the service sector would have contracted more.

These are clearly recession totals.

Birth/Death Model Absurd Once Again

This was a very weak jobs report. And once again the Birth/Death Model assumptions are absurd. However, they are back in orbit this month, somewhere near Mars, from deep outer space where they have been since February.

Every month I say the same nearly the same thing. The only difference is the numbers change slightly. Here it is again: The BLS should be embarrassed to report this data. There is a difference this month. The data is back in the solar system. I expected a massive negative revision downward this month (my call was -425,000) and the reason is that January and July are the months that the BLS makes some effort to catch up with past ridiculousness.

And there is a ton of past ridiculousness to catch up on, especially in the construction, financial activities, and professional & business service categories. Note the January number of -378,000. I expected another month similar to that, but it was not to be, not this month anyway. The economy is clearly in contraction and the BLS model still has the economy expanding, although just barely.

Repeating what I have been saying for months now, virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report.

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Table A-12
Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look

(Click to enlarge)

If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number jumped to 5.7%, but U-6 (the most inclusive number) rose .4 to 10.3%. To the average Joe on the street unemployment feels more like 10.3% (if not 15%) than 5.7. Both numbers are poised to rise further. We are easily on pace for my 6% target by the end of the year.

Looking ahead, I expect the service sector to weaken considerably. Bennigan's and Mervyn's both went bankrupt this week, Starbucks is closing 600 stores, mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

*********************
My comment: So the report is now out of the way - the financial punditry is happy because hey, unemployment is below 6% which in the old days was considered full employment. Unfortunately they fail to mention that in the old days the measurement of these numbers had not been "adjusted" like it is in the "new" days. But it's all good - we can't be lost in the details. And the 2nd half 2008.... err 1st half 2009 recovery is back on track.

We'll check back in 30 days to see how "on track" it is in August. In the meantime we'll keep posting the truth via company reports.

Bookkeeping: Selling Some Massey Energy (MEE) Into Dysfunctional Market

I hate doing this but the only way to make any dime in this market is to rapid trade. Since that is not what you can really do in a mutual fund we're sort of stuck - flailing aimlessly until the market lets stocks continue in 1 direction for more than 3 days in a row.

With Massey Energy (MEE) we bought a lot going into earnings late yesterday and now ONLY because the market is horrid and if crude falls a few bucks this will go right back to the low $70s, I am going to sell some of what I bought yesterday to lock in a quick 10% gain. If this market had any sense and saw the long term potential for the stock I would not do this, but hey oil is up slightly so its ok to buy commodities again -- unlike yesterday when you had to sell them because oil was down -- unlike Wednesday when you had to buy them because oil was down -- unlike Tuesday you had to sell them because oil was up. See how inane this market is? I keep saying this is a trendless market and the only people making money are people who did what I just did. Buy whatever is beaten down, knowing the market will reverse 180 degrees within 24-48 hours. And then sell it immediately. Because in the next 24-48 hours the market will turn another 180 degrees. And your gains will be vaporized.

It sounds pathetic but it is what it is. We'll lock in a few gains and once sense returns to the market we'll be loading back up on this name. I cut Massey Energy (MEE) back down to a 1.5% stake (from 2.5%) with sales in low $81s (we bought yesterday @ $73). Note - I did not sell off the full stake I bought yesterday because the story here is simply too good. I expect if oil drops a few bucks for Massey to lose its entire 10% gain, and I can buy it back in low $70s. Because crude oil prices determine the fate of all the world. Or so say the quant hedge funds. And they rule the market.

One day this pattern will break. And we can actually hold a stock for more than 24-48 hours before watching all our gains disappear. I'll be happy to be wrong if Massey just runs up and up and up as it should. If the stock can get back over $85 maybe we'll see a divergence in coal from crude, since a higher high will have been formed. We'll see - I don't go against a pattern until the pattern breaks.

I repeat - this current market only works for daytraders. No one else.

Long Massey Energy in fund; no personal position

Embraer (ERJ) - Impressive Earnings

Three weeks ago when the stock was in the low $27s, I asked [Jul 8: Has Embraer Hit Bottom?]

But he got me thinking about the one Brazilian stock that has been in freefall - Embraer (ERJ). This is actually one of the older Brazilian stocks out there - it was trading publicly before Brazil was the place all the cool kids hung out. They make (mostly) commercial and executive jets - if they ONLY did executive jets I'd actually be all about the stock as the top 1% in the world are doing just fine thank you. [Some Parts of the Economy are Booming - Like Yacht Building]

Now with oil in the $140s, all things aircraft have been in free fall, but if you believe (like I do) this is a parabolic move in crude that is due for a correction (in a much longer path upward) you might be interested in such a stock.

So those were in the days of crude oil $140 (ah, seems like a lifetime ago) and with everyone convinced oil is now heading for $20... err $10... err $1, the stock has shown a lot of life. Now many of the gamblers in this market run to the airline stocks because instead of losing $2000 on every flight, those companies will only lose $800 on every flight ... and that's a MUCH better business, but perhaps this is a safer way to play the same "cheap oil is back" play.

As I wrote in that piece, the stock is dirt cheap...

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

The stock has since rallied and is now near $32, up nearly 20% in the 3 weeks since I pointed it out. Unfortunately like almost every stock in my watch list or in the portfolio it is a broken stock that has only rebounded to hit a resistance level. My standard operating procedure (which I've been executing over and over the past 7 or so days) is to (if I own such stocks in charts like this) sell down a positio, when it approaches such resistance and then wait - if it pulls back we can rebuy lower OR if it breaks through we can buy back higher, confidant that the market is favoring that stock again. But right at resistance the stock is simply in no man's land and it's best to sell.

So in theory, I should of bought a few weeks ago, and I should be booking my near 20% gain this morning. But at that point the same people shrilly calling for oil $70 were yelling for oil $200. Lesson - never listen to people who scream at you through TV. Here is Embraer's full earnings report - summary below. I like how executive jets are more and more of the backlog... as flying becomes more of a thing for the upper class or those in countries whose middle class are not being decimated, the demand for executive jets should continue unabated while the demand for commerical jets (at least in the "West") might hit some potholes the next few years. Uhh.. unless the "1st half 2009" recovery is just around the corner.

• Brazilian aircraft manufacturer Embraer said Thursday that profits more than doubled in the second quarter, driven by strong sales of midsize commercial jets and the company's new, popular executive jets.
• Empresa Brasileira Aeronatica SA, the world's fourth-largest plane maker, reported second- quarter profits of 176 million reals ($110 million), up 120 percent from 80 million reals ($50 million) in the same period a year ago.
• Profits hit 0.24 reals ($0.15) per share, compared with 0.11 reals ($0.07) per share in the same quarter of 2007. Diluted earnings per ADS of US$ 0.74 (vs analysts $0.59)
  
• Net revenues for 2Q08 totaled US$ 1,635.0 million, a 47.3% increase over the US$ 1,110.0 million in net revenues for 2Q07, basically due to the increase in deliveries.
• Embraer said its backlog hit a record $20.7 billion as of June 30, including $6 billion in orders for executive jets
• Embraer delivered 52 aircraft during the quarter, up from 36 in the year-earlier period. The company also reaffirmed its estimate that it will deliver 195 to 200 jets this year, including 10 to 15 of its hot new Phenom executive aircraft.
• Embraer said the acquisition of new clients such as ETA Star group of Dubai and Brazil's TRIP Linhas Aereas had led to an increase in firm orders. (yes, we want customers who have unlimited petrodollars - welcome Dubai)
  
• Embraer said in June that it is in preliminary negotiations to sell the U.S. government eight 314-B1 Super Tucano light attack and training planes for use in Iraq. (war is a growth industry in the United States)
• The company also confirmed that it sold one of the propeller-driven planes to a subsidiary of Blackwater Worldwide, the world's largest security contractor and the target of harsh criticism for its conduct in Iraq. (if you ever want some good weekend reading, I suggest doing some Google searches on Blackwater - your eyes will really open to the "behind the scenes" action in America)

So I'm looking strongly at this name as an offshoot to our normal fare - so as oil devolves to $5 again we have something that will benefit. Or wait, will the global depression mean no one will buy jets and hence this is not a good buy either? Frankly its hard to find anything to buy in the global depression scenario...

No position (yet)

Massey Energy (MEE) With Blow Out Earnings (ex - Charges)

Massey Energy (MEE) has also reported one heck of a number, but has a very big charge for a legal dispute which is marring the quarter. Again these are 2009 stories, not 2008 so anything now is "cake". Analysts were in at $716M revenue and $0.77 EPS. Both revenueand the bottom line was a smash hit. With the charge for accrual for litigation with Wheeling-Pittsburgh Steel Company they lost a whole lot of money. Ex-charge the results came out like this...

• Massey Energy Company (NYSE: MEE - News) today reported a year over year increase of 38 percent in second quarter produced coal revenue and an 8 percent increase in produced coal tons sold, highlighting the strength of the Company's expanding operations in Central Appalachia.
  
• Produced coal revenue for the quarter was a record $710.3 million compared to $516.2 million in the second quarter of 2007. (total revenue $827M)
  
• Produced tons sold reached 10.8 million in the quarter compared to 10.0 million in the second quarter last year.
  
• In addition to the higher volume, the increased produced coal revenue was driven by an 83 percent increase in export shipments and a 36 percent increase in metallurgical coal sales.
  
• This combination resulted in average produced coal revenue per ton of $65.78, up 28 percent compared to the second quarter of last year.
• For the second quarter, net income excluding the WP litigation charge was $92.2 million or $1.15 per share compared to net income of $34.9 million or $0.43 per share in the second quarter of 2007.

Litigation Charge

• During the quarter the Company booked a pre-tax charge of $245.3 million related to the ongoing litigation with Wheeling-Pittsburgh Steel Company ("WP litigation charge" - see note 2). This charge offset the strong operating results of the quarter. Including the WP litigation charge, Massey reported a net loss of $93.3 million or $1.16 per share for the second quarter of 2008.

Coal Market Overview

• Eastern U.S. steam coal prices increased dramatically during the second quarter, driven by continued strong demand from the export market. Pricing for prompt delivery NYMEX spec coal increased approximately 85 percent from March 31 to June 30, ending the month and quarter at nearly $140.00 per ton.
• Bench mark prices for metallurgical coal have been established at $300.00 per metric tonne, FOB terminal. Massey has been able to sign supply agreements at this price. (nice)
• "During the quarter we made extensive visits to some of the world's most rapidly developing countries," Blankenship added. "Based on discussions with customers and potential customers, and visits to several power and coke construction projects, I came away convinced that the world's need for coal will continue to grow at a rapid rate. (hedge funds disagree - oil down $3, coal stocks must be sold)
• The high quality and diversity of the coal we produce as well as our leading market position in Central Appalachia will enable us to compete effectively to serve these growing export energy markets. We are particularly pleased to have reached agreements on several multi-year deals to supply coal to Asian customers."
• In spite of all-time high prices, Central Appalachian coal production declined by an estimated 0.7 percent in the first half of 2008 after being down 4.5 percent in 2007 according to the U.S. Energy Information Administration.
• Total U.S. exports of metallurgical coal have increased 55.5 percent year-to-date with over half of the increase being shipped through Southeast Atlantic ports.

Hint Hint?

• Vertical integration by steel producers has and will continue to drive consolidation within global metallurgical coal production and could result in additional supply constraints. [Jul 18: Wilbur Ross Believes M&A Activity in Coal Will be Unprecedented in Next 12 Months]

Guidance

• The Company continues to project 2008 produced coal shipments will be between 41.5 and 43.0 million tons, with average produced coal realization between $65.00 and $66.00 per ton. Excluding the WP litigation charge, average cash cost per ton for the full year 2008 is expected to be between $47.00 and $50.00. Other income is expected to be between $20 and $100 million. (doesn't matter - tell me about 2009)
• For 2009 Massey expects produced coal shipments to be in the range of 46.0 to 48.0 million tons, 13.0 to 14.0 million tons of which will be metallurgical coal. For the total tons shipped, the average price is expected to be in the range of $84.00 to $92.00 per ton. (so a 50% increase over 2008 levels)
• The Company currently has approximately 6 million unsold or unpriced tons for 2009, substantially all of which are of metallurgical quality. (so a bit under half your metallurgical coal is unpriced, and this product is selling for $300 I hear? Nice)
• Cash costs for 2009 are expected to be in the range of $52.00 to $60.00 per ton.
• Based on current coal market conditions and the Company's expansion plans, Massey expects to ship approximately 50.0 million tons in 2010, 15 million tons of which are expected to be metallurgical coal. (Thanks for the data but hedge fund computers don't think that far out)
• The Company has approximately 30 million unsold or unpriced tons for 2010, of which approximately 12 million tons are of metallurgical quality. (shiver me timbers - 60% of all production is unpriced and 80% of met coal is unpriced)
• While it is difficult to accurately project pricing 2 years in the future, the Company expects strong pricing for its remaining unsold 2010 tons. Current expectations are that 2010 average price realization will be in the range of $115.00 to $132.00 per ton. (so you're trying to sell me a fish tale that prices will be double 2008 levels? Nah, don't believe it - hedge funds say the story is over soon and it's time to sell commodities - it was a fun ride while it lasted - time to buy banks and retailers. Nice try Massey.)

So there is a lot of information above. I'd even consider it bullish. But.... NONE of it matters. If crude is down, these stocks are to be sold like the rubbish they are. If crude is up, these are the best stocks in the universe - you better get yourself some.

And that folks, is the simplistic thinking the hedge fund programmers have built in their highly automated quant driven computers. It really is... as simple as that. For now. One day sense will return.

Disclaimer: if Asia decides it no longer wants to move into the 21st century and ships all its newly urbanized citizens back to their rural hinterlands, shuts down its factories, returns to electric grid levels of 1980s, returns to 1970s levels of factory production, the above stock must be sold along with all other coal socks, and in fact any fertilizer stock. Also Brazil will devolve into a 2nd world country with rampant inflation, a disappearing middle class, and less than AAA credit rating... like say the United States

Long Massey Energy in fund and personal account - knowing fundamentals mean little nowadays - I'll win if crude goes up, I'll lose if crude goes down - because obviously they share the same color and thus coal is no different than crude - and every day we just wake up and roll the dice at the giant craps table called "crude oil price", and all the fundamentals of our global stocks matter little. And yes it's getting old if you haven't read between the lines

FT.com: Mittal (MT) Considering Bid for Alpha Natural Resources (ANR)

Thanks for a reader for highlighting this to me We so deserve this ;) Somehow we are the only investors in America whose top position lost its value after getting bought out.

I wrote [Jul 16: Thoughts on Cleveland Cliffs (CLF), Alpha Natural Resources (ANR) Deal]

If other bidders emerge, Alpha Natural Resources is a massive strong buy for obvious reasons

Folks, I've written multiple times on how I differ with Ken Heebner on playing the steel trend - I've chosen to play the inputs (metallurgical coal/iron ore) versus the actual steel producers where he is overweight. I think both strategies work, but I think the inputs have some inherent advantages as I've written out multiple reasons, including takeover potential. [Jul 6: Is the Buck Finally Stopping in Steel?]

Ironically, I think I've written at least 5 times that I've been amazed that Cleveland Cliffs (CLF) has not been taken over and still remains an independent company. [Jul 9: Cleveland Cliffs Up 15% on Guidance and Starting a Dividend] So to see them actually be the acquirer is sort of funny. I still think a combined Cliffs Natural Resources - if the merger goes through - would be a very attractive target for one of the major steel players such as Mittal (MT).

Lo and Behold... tonight we hear

• ArcelorMittal is considering breaking up the $8.8bn (€5.6bn) takeover of US coal miner Alpha Natural Resources by Cleveland-Cliffs with a counter-bid
• ArcelorMittal, the world’s largest steelmaker, is also looking at waiting for the deal to either fall apart or create one digestible takeover target. ArcelorMittal indicated it was willing to make an all-cash offer for Alpha in June, prompting the target company to seek other higher bids, said people close to the companies. They said ArcelorMittal’s approach was pegged at or near $110 a share.
• Alpha was able to drum up a higher cash-and-stock offer from US iron ore miner Cleveland-Cliffs, and then returned to gauge whether ArcelorMittal would top it. Rather than besting Cleveland-Cliffs’ bid, however, ArcelorMittal pulled back to evaluate the few other large North American coal assets on the market. That left Alpha matched with Cleveland-Cliffs, and the companies announced a deal on July 16.
• Their proposal has run into a significant snag, however. Top Cleveland-Cliffs shareholder Harbinger Capital opposes the transaction, and holds enough shares to make the two-thirds vote needed to approve the deal difficult to win.
• Unless Cleveland-Cliffs can change Harbinger’s mind, the companies may have handed ArcelorMittal, a key Cleveland-Cliffs customer, an advantage.
• “It’s safe to say their (Mittal's) strategy of buying smaller coal assets in central Appalachia has been tougher to execute than expected, so they’ve got to go for the big guys,” one merger adviser said.
• Rather than entering into a bidding war, ArcelorMittal or another steel or mining giant could potentially buy either company more cheaply if the deal falls apart. As one of many foreign companies shopping for assets in the US, ArcelorMittal may also want to avoid generating the impression that it broke up the deal, one person close to the company said.
• If the deal wins approval, the company, which would currently have an enterprise value of about $18.5bn, could still make a target. Iron ore and metallurgical coal are steel’s two key ingredients and demand for both is hot. (to everyone but Harbinger and hedge fund computers)
  

A fascinating snippet from the article (boggling!)

• A Cleveland-Cliffs spokesman said the company had not heard from Harbinger since it initially rebuffed the deal.

Summary: Boo Yah. I really am amazed that a hedge fund is stepping in on management's toes like this and ruining their strategic deal in their quest for maximizing profits. I believe this will be a trend that happens more and more as more and more capital flows to these "dark pools" of money. But it is sort of sad that companies are beholden to 1 shareholder to this degree. As I've said - the combined company would be a powerhouse, even if I believe Alpha Natural Resources should wait it out since it will be a $200 stock on it's own in a year.

Very interesting folks. Keep your popcorn warm - this should put a floor under the stock price of Alpha Natural Resources. EVEN IF CRUDE falls $110 from here. ;) But it could take quite a while to play out - especially when Harbinger is not even returning phone calls. Nice.

I still believe our other 2 metallurgical focused coal stocks will also be in play in the coming year. Or sooner. I really need my real mutual fund up and running so I can take advantage of these deals and profit potential. Ugh.

Long Alpha Natural Resources, Cleveland Cliffs in fund; long Alpha Natural Resources in personal account

Schwarzenegger Orders Cuts Amid Fiscal Crisis - Workers to Minimum Wage

We'll see how much of this is theater versus reality but some interesting developments happening across the United States of Subprime. This is one of our big calls not as much for THIS budget year (summer 2008 to summer 2009) but NEXT budget year (summer 2009 to summer 2010). Remember, California if it was a free standing country would be the 7th biggest economy in the world.

[Jul 25: States Slammed by Budget Shortfalls]
[Apr 25: Shoes Beginning to Fall in the States]
[Dec 16: California in a State of Emergency - Coming to a Theater Near You]

Normally I'd worry when I read a story like this but since Jim Cramer has called the bottom in the stock market, we have nothing to fear but reality itself...

• With California's cash dwindling and legislators still debating a new budget, Gov. Arnold Schwarzenegger eliminated 22,000 part-time and temporary state positions Thursday and ordered that 200,000 state workers receive the federal minimum wage.
• His signing of the executive order had been expected since last week but stood as a stark illustration of the cash problem facing the nation's most populous state. Schwarzenegger apologized to state workers but said he had no choice.
• Lawmakers have yet to agree on a spending plan a month after the state's fiscal year began, leaving California without the ability to pay for contractors, the higher education system and legislative employees.
• As of June, more than 30 states faced deficits totaling a projected $40 billion, or more than triple the gap of the previous year, according to the National Conference of State Legislatures. ($40 billion? Can't you just write it off?? - works for our banking system - that's not even 1 good earnings season for our banks. That's peanuts! Uncle Ben - to the presses! Pronto!! Oh wait, you only do that to bail out the executives at our banks - never mind then - let the states and their people suffer. Suckers.)
  
• Schwarzenegger also cited a 2003 California Supreme Court ruling allowing him to slash the pay of regular full-time employees when the state lacks a budget. By law, those workers must be paid at least the federal minimum wage of $6.55 an hour and will be reimbursed once a budget is approved.
• The administration estimates that immediately terminating the contracts and suspending overtime would save the state about $80 million a month. The deferred wages would take several weeks to implement, saving the state $300 million to $400 million a month starting in late August.
• The governor's order is certain to be challenged. The state controller has said he will not comply, in part because he said the move is likely to invite lawsuits from employee unions. Controller John Chiang, a Democrat, has said will issue employees their regular paychecks, setting up a potential legal skirmish between his office and Schwarzenegger's.

Just a canary in the coal mine. Give it 15-20 years at the federal level and even with the ability to continuously print new money to devalue the paper in our pocket, at some point the bleep hits the wall. Such as when $1 of every $4 of GDP in this country goes to pay for health care. [May 23: David Walker on CNCB this Morning] We're just doing the previews of the real national emergencies here in the next year or two at the state level. [Mar 26: Annual Spring Entitlement Warning Falls on Deaf Ears] States are limited by the fact they cannot print money out of thin air. Federal government can still get by for another decade or perhaps two on this "printing" option... until the rest of the world balks on subsidizing us since we've become a high risk i.e. subprime customer. [Apr 15: Could the US Lost its AAA Rating?] I wonder what our FICO score would be? 400? 450?

Now about that next stimulus plan to spend money we don't have....

Bookkeeping: Adding to Massey Energy (MEE)

It's been a very busy day for transactions...

I normally don't add to a stock before earnings because there is a 50/50 chance of reaction either way. And it might not really matter what Massey Energy's (MEE) earnings are tomorrow because all that matters anymore in the commodity space is the price of oil. Of which I've been a near term bear. [Jun 26: Can a Near Term Top in Oil be Far Away?] I just did not expect every commodity within 6 degrees of Kevin Bacon to also be systematically destroyed with oil. Lesson learned. That said (ok maybe lesson not learned) I still believe in the coal and fertilizer stories. So I'm going to increase my exposure to Massey ahead of earnings tomorrow pushing the stake up from 0.6% to 2.5%. Purchases in the $73 range.

The stock is down 8% which can be attributed to (a) oil is down hence every commodity must be destroyed and/or (b) Consol Energy (CNX) laid an egg. One thing about Consol is they are notorious for production problems, lawsuits, or some problem here or there. Luckily we exited [May 30: Closing Consol Energy] but really it does matter - stocks that have given great earnings and guidance are being hammered just the same... Kevin Bacon after all. These are again 2009 stories but the market obsession with quarterly earnings has befallen CNX.

• Shares of Consol Energy Inc. fell sharply Thursday after the coal mine operator said its second-quarter profit dipped 34 percent as productivity problems pushed up costs.
• Consol said revenue and other income totaled $1.21 billion in the second quarter, compared with $1.06 billion in the same period last year.
• The results fell well short of Wall Street's expectations. Analysts polled by Thomson Financial were expecting Consol to earn 80 cents per share.
  
• Shares of Consol fell $12.64, or 14 percent, to $75.86 in midday trading.
• Chief Executive Brett Harvey pinpointed productivity problems that left highly productive longwall mining sections idled for lengthy periods as miners prepared new mining areas for problems in the quarter. In coal mining, lower productivity forces up costs per ton, eating into profits.
• The result was essentially flat production at higher cost. Consol said it produced 16.6 million tons during the quarter, compared with 16.4 million tons in 2007. Operating costs per ton rose to $32.03 from $25.46 a year ago.
• Currently, Consol is seeing 2009 prices ranging from $100 to $110 a ton for lower-quality coal for electricity generation to $265 a ton for high-quality metallurgical coal used to make coke for steel mill blast furnaces, Harvey said.
• As a result, Consol is hoping to increase annual metallurgical coal production by 3.5 million to 5 million tons over the next five years, Harvey said. "That's where we're focused right now."

It's been an interesting quarter for coal - most of the names have performed well in earnings, but two have laid eggs. And again, it has not mattered because even those that have performed have been punished with the fall in crude. But I believe there is a better than average chance that Massey will fall into the better than expected group. And as you can see from the statements from Consol, metallurgical coal is the focus - which is a strong area for Massey. And for a few of the other names which have outperformed this quarter. I've cut back my coal exposure overall and with other companies embroiled in buyout talks, this leaves us to focus on Walter Industries (WLT) and Massey Energy in the metallurgical space. It is interesting to reconcile the recent price action with the reports and articles of shortages of coal in certain parts of the world, but the market is the market. Money flow and perception is all that matters in the near term.

As a side note (thanks to reader for sending this to me) the rumor mill is heating up around AK Steel (AKS) as a buyout candidate. I point this out because that's part of my thesis for the metallurgical coal (and in fact perhaps all coal) producers - with the cheap U.S. peso we're giving away our farm piece by piece. AK Steel actually has been the subject of takeover rumor for 8 of the past 5 years, but I think there could be some truth to this one. The time is ripe to strike and consolidate the sector even further. And 4 names at once? Hmmm....

• U.S. steelmaker AK Steel Holding Corp (AKS) is looking to sell itself and has had talks with several parties, according to a dealreporter.com article published on the Financial Times website on Thursday.
• The company is seeking an all-cash deal, mergers and acquisitions website dealreporter.com said, citing unnamed sources.
• The website said ThyssenKrupp AG, Evraz Group SA, CSN and Severstal were interested in AK Steel.
• This is not the first time AK Steel has been a rumored takeover target. Over the last two years, United States Steel Corp (X) and Arcelor Mittal (MT) have also been named in various reports as possible suitors for the company.

Long Massey Energy, Walter Industires in fund; Massey Energy in personal account

Bookkeeping: Restarting Millicom Cellular (MICC)

When last we left Millicom Cellular (MICC) in early April we had a nearly $100 stock [Apr 8: Closing Millicom Cellular] The stock ran up after we sold to $120 but about a week ago Monday was back to exactly where we sold (did I mention this is not a buy and hold market?) But after an earnings miss a week ago Tuesday, the company has traded down to low $70s during a violent sell off.

• Shares of Millicom International Cellular SA declined sharply Tuesday after the Luxembourg-based wireless carrier reported second-quarter sales and profits that failed to meet Wall Street expectations.
• Millicom shares fell $22.02, or 22.6 percent, to close at $75.48.
• The company said earnings rose to $1.22 per share, up from 98 cents per share in the year-ago period. Revenue jumped 37 percent to $843 million, up from $613 million.
• However, analysts polled by Thomson Financial expected, on average, income of $1.34 per share on revenue of $864 million.
• Millicom provides cell phone service mostly in developing regions in Latin America, Africa and Asia that have little or no wireline infrastructure.
• Also Tuesday, Millicom said it has agreed to buy Amnet Telecommunications Holding Ltd. for $510 million, giving the company a boost in Central America, its most important region with 43 percent of worldwide revenue and 38 percent of subscribers.

I still like the story - the company is still growing at a rapid clip - it simply missed analysts expectations. The company is now very cheap on every metric; 2008 estimates have dropped from the $5.75 range to $5.50 and 2009 from the $7.15s to $6.75. I don't expect the future growth rate to be quite as stellar as the past few years, but 20-25% growth rates for a forward PE of under 14 should give us some leeway here.

This market seems to sell strength and buy weakness, but only if you time your entry into the "weakness" well. So MICC fits in that mold of a beaten down stock. Technically the stock is potentially forming a nice double bottom from levels last seen in September 2007. This is not the type of chart I normally buy because falling knives can remain falling for weeks, months, quarters on end. But we'll give this one a try - the past few days the stock has bounced around the $70-$74 range and volume has dried up significantly which hopefully means sellers have been exhausted.

If the stock does bounce we'd probably see a move to the mid $80s before there is any major resistance as this is where the "gap down" began. I might simply take the money and run there or see if they can provide a more reassuring report in 3 months time and see if we can get $100ish. If the stock breaks down below $70, we'll probably take the small loss and exit since the next support level is .... in a galaxy far far away.

We restarted Millicom International Cellular (MICC) into the fund today with a 1.7% stake in the $75-$76 range. The company has no subprime exposure (although I believe that would be a good thing in terms of what the hedge fund computers like to buy now) and last I checked does not have potash, coal, natural gas, crude oil, iron ore, wheat, corn, nickel exposure. But it does have foreign exposure and as you know - when the U.S. sneezes every consumer the world over turns in their cell phones and says "we don't need this anymore". Or so says the hedge fund computers.

Millicom International Cellular S.A. and its subsidiaries provide mobile telephony services in Central and South America, Africa, and Asia. The company offers prepaid services using mass market distribution methods; and broadband Internet, fixed wireless telephony, and public telephony, as well as operates an international gateway, a high-speed data business, and a television station. As of December 31, 2007, it had approximately 23.4 million subscribers and interests in 16 mobile operations in 16 countries. The company was founded in 1968 and is based in Leudelange, Luxembourg.

[Nov 7: Starting a Position in Millicom Cellular]

Long Millicom Cellular in fund; no personal position

Bookkeeping: Initiating Flowserve (FLS) Position

The market continues to not reward these global growth companies for stellar earnings. As I wrote this AM, Flowserve (FLS) posted some fantastic earnings and a huge guide up on 2008 estimates [Flowserve Mighty Impressive Earnings]

After gapping up to the mid $140s, the stock is back down to $137s... to completely fill the gap it would need to go down to $135, but I'm willing to put a stake in the ground here. Beginning with a 1.3% position and willing to build on pullbacks. $115-$120 would be a nice area as this is where the stock has bottomed twice in the past month. Considering they just raised 2008 estimates by $1.25 it wouldn't make much sense to see such a fall, but what has been making sense of late. Throw a conservative 15 P/E ratio (for 100% earnings growth) on this extra $1.25 of 2008 earnings and you have +$20 in stock price. Instead we get +$3. I guess "it's all priced in"

EDIT 12:15 PM - that didn't take long. The bear market sneered at us for daring to buy anything. Already down to $130. So the gap is now fully filled and the stock is right back at its 50 day moving average. Folks buying in the mid $140s this morning are already enjoying a quick trip to the house of pain. Off in the distance a bear could be heard laughing. I'll take it up to 1.6% stake here with another smaller purchase. Next addition will be down in $115-$120 range. Which might be in a few hours. Just imagine if they had dared to miss ;) Let me guess - oil is down $3 so every stock that was loved yesterday when oil was up $3 must now be sold. Got it.

I have to tell you this weakness in the global infrastructure names is mind boggling to me - Fluor (FLR), Jacobs Engineering (JEC), and Foster Wheeler (FWLT) are acting as if the world will end as oil falls to $120 (or $100). If you read the press releases on the type of contracts these names are putting out on a weekly basis it's an embarrassment of riches (wind, gas, petroleum, solar - they're everywhere), but the hedge fund computers prefer banks I suppose.

Flowserve is not the exact same type of company but off the same theme - yes the globe will slow but those with money (petrodollars and huge trade surplus) will continue their advancement. [Jul 12: Where is your Gas Money Going?] [Feb 27: $2 Trillion of Petrodollars Needs a Home this Year] We'll continue to purchase companies out performing in this period of market madness. But we won't make large purchases until the market acts rational and technicals improve.

Flowserve Corporation develops, manufactures, and sells precision-engineered flow control equipment, as well as provides a range of aftermarket equipment services. It operates in three divisions: Flowserve Pump, Flow Control, and Flow Solutions.

1. The Flowserve Pump division offers engineered and industrial pumps and pump systems; submersible motors; replacement parts; and related equipment primarily to industrial markets. Its products include centrifugal pumps, positive displacement pumps, and specialty products and systems, such as hydraulic decoking systems, reactor recycle systems, and cryogenic liquid expanders.
   
2. The Flow Control division designs, manufactures, and distributes industrial valve products, including actuators and accessories, control and ball valves, lubricated plug valves, condensate and energy recovery systems, pneumatic and electro pneumatic positioners, smart valves, steam traps, manual quarter-turn valves, valve automation systems, valve/actuator software, nuclear valves, and quarter-turn actuators.
   
3. The Flow Solutions division offers mechanical seals, sealing systems, and parts principally to process industries. Its products include cartridge seals, dry-running seals, metal bellow seals, elastomeric seals, slurry seals, split seals, gas barrier seals, couplings, and accessories and support systems.

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

Bookkeeping: Cummins Engine (CMI) Trade Working Well - We're Adding Back

We scooted out of most of our Cummins Engine (CMI) last week and then immediately after an excellent earnings report yesterday [Cummins Engine Continues to Quietly Execute] with the last of the position sold out at $74. I wrote

Now as much as I like this story we see a potential top forming and everything good is to be sold in this trecherous market; all gains are erased quickly. So I'm taking this down to a 0.1% holding position and selling the remaining portion around $74. Frankly I didn't hold much since I sold on that spike to low $70s last week. And we will buy back on a pullback... or if the stock continues upward through the $75 level we'll buy on "technical" strength. Right now good results are not keeping stocks up for long so until that pattern changes we'll obey the markets wishes and sell strength.

So we got our pullback as the stock is in the $68s this morning where I am going to rebuy a solid stake here and take Cummins Engine back from a 0.1% stake to 1.5% . It could potentially go lower since there is a "gap" in the chart to fill in the mid $66s, but we made some decent change by exiting through the low to mid $70s and getting back in 5-8% lower. It doesn't sound like much but in this market where pulling teeth is the order of the day, it's something.

The overall market is shrugging off bad news for now so we have to look to be somewhat constructive...

Long Cummins Engine in fund; no personal position

Bookkeeping: Adding to Mastercard (MA)

Got my wish for some weakness in Mastercard (MA) stock post earnings, so added some this morning in the $240s. I haven't had time to look at the earnings but whatever the fuss is (I am sure it's a "slowdown" of one sort or another) I am ok with for the long term. I am not adding a ton here because this was a gap down in the chart, and there is better support in the $220s, but since we cut this name back sharply from our portfolio I'm willing to begin to layer back in with today's 10%ish haircut. We bought in the mid to low $240s and have taken our stake up from 0.8% to 1.4%.

I'll edit this post later in the day with some earnings commentary. But essentially everything I said for Visa (V) last night applies to Mastercard (MA).

Long Mastercard in fund; no personal position

Bookkeeping: Beginning Exactech (EXAC) Position

Interesting.. Exactech (EXAC) which we highlighted yesterday is being pummeled on what I considered to be excellent earnings. As it falls over 15% this AM I am going to begin my position with a 850 share stake in the low to mid $25s. As I wrote yesterday [Potential Portfolio Idea - Exactech (EXAC)]

The company reports after the bell tonight so the gambler would buy ahead of earnings hoping for the pop. I'm not the gambler. So we'll watch tonight to see how they do after the bell.

So this worked out very well for us in retrospect... without access to an analyst report I can only assume the slow growth in the shoulder segment (up only 4%) might be causing a fuss. But the overall numbers continue to track well and they are still shooting for $0.94 to $0.98 in EPS for the year.

• Exactech, Inc. (Nasdaq:EXAC - News), a developer and producer of bone and joint restoration products for hip, knee, shoulder, spine and biologic materials, announced today that revenue for the second quarter of 2008 increased 38% to $43.7 million from $31.6 million in the second quarter of 2007. Organic growth, excluding acquisitions and distribution terminations, was 28%
• Diluted earnings per share for the quarter was $0.24 based on net income of $3.0 million. This compares with net income of $1.4 million or $0.12 diluted EPS a year ago. Net income increased 115% to $3.0 million. Exactech’s second quarter 2007 net income included an impairment charge of $1.5 million. Excluding this charge, the second quarter 2008 diluted earnings per share was $0.24 compared to $0.20 in the second quarter of 2007.
• Knee implant revenue increased 21% to $20.5 million
• Hip implant revenue increased 4% to $5.7 million
• Biologic services revenue increased 21% to $4.7 million
• Shoulder implant revenue increased 69% to $3.9 million
• Exactech President David Petty said, “U.S. sales grew 24% to $28.8 million from $23.3 million in the comparable quarter in 2007. Our international business received a boost from the contributions of our European distributor start-ups, with second quarter sales increasing 79% to $14.9 million from $8.3 million in the second quarter of 2007. International sales for the quarter represented 34% of total sales, compared with 26% in the same quarter last year.”
• Chief Financial Officer Jody Phillips said, “Gross margin percentage for the quarter was 62.6% compared to 62.7% for the comparable quarter last year but was ahead of our expectations due to higher manufacturing volumes.

Guidance

• Looking forward, the company said it anticipates 32% to 36% revenue growth for the full year 2008, targeting a range of $164 million to $169 million and diluted earnings per share for the year 2008 in the range of $0.94 to $0.98. For the third quarter ending September 30, 2008, the company targets 23% to 33% revenue growth to the range of $37 million to $40 million and diluted earnings per share in the range of $0.21 to $0.23.

For now, we have started a 850 share position in the much loved "healthcare industry" with a 2.1% stake in Exactech. The stock is down about 20% from recent highs with today's visit to the woodshed. There should be good support in the $24-$25 area from where this stock made its most recent breakout.

Long Exactech in fund and personal account

Oh, Facts!

Darn those facts - they keep getting in the way of a rally attempt.

For those of you new to the blog I encourage you to read my December 2007 predictions and how they have turned out so far [Jul 14: Reviewing December 2007's Roadmap & Views] I find it ironic that the "market" is supposed to be the best predictor of the future yet last fall (September/October 2007) the market shrugged off the embryonic stage of the credit crisis and pushed to all time highs. Somehow its predictive powers missed multiple stages of stock price implosion, especially that of the November 2007, January 2008, and March 2008 kind. It missed the need for the Federal Reserve to take historic actions, and create unprecedented financial bailouts. Then the "best predictor of the future" once again went on a 2 month rally after the Bear Stearns bottom, rallying in April and most of May 2008. Why wasn't it predicting the June 2008 stock market implosion (one of the worst months in history), 7 out of 8 weeks straight down, the Fannie Mae, Freddie Mac bailout, and the like.

This is the problem with the market - those of us who have been calling it correct can be swooshed away in one of these big rallies and to remain short and inflexible will lead to a lot of short term losses during times of heavy Kool Aid drinking by market bulls. I remain fully negative on this economy but cognizant that periods like early fall 2007 and late spring 2008 when the market rallies on any whiff of "hope" can obliterate short positions. Even if intellectually these rallies are garbage. Hence why one must remain a flip flopper - the punditry are looking for ANY silver lining to run this market up. ANY - the latest are things such as "yes house prices are falling at historic rates - the like of which we've never seen but in 7 of 20 cities surveyed they fell LESS than last month - the bottom must be here any moment" Etc.

So the reason I am bringing this up is a few figures out today - first the GDP which is Gross Domestic Product. This number is published, and then revised constantly and even then I doubt it is very accurate. But as we look back we had the seals clapping all over financial TV and media that fourth quarter GDP was positive and the doomsdayers were creating lot of fuss when none should be - well that "positive" GDP just went negative as the revisions started coming in - now Q4 2007 is -0.2% instead of the +0.6% all the bulls were waving in our face as a "resilient economy".

Next we move onto 1st quarter 2008 which is going through its first revision and is already losing steam, its down to +1.0%, and folks that number is pure garbage - to find out why read this [May 1: Is it an Official Recession? NY Post Says it Should Be] The Cliff Notes version is "official inflation" is 4.0% at the time; but the government agency who creates GDP says, nah it's only 2.6% inflation - so lo and behold instead of a negative GDP we had a positive GDP since we had a 1.4% swing. Not withstanding that 4% inflation is also a corrupt joke - we had negative GDP in Q1 2008 as well, if the government had used 4% inflation.

So the "official" definition of recession? Two back to back quarters of negative growth - we just had them in Q4 2007 and Q1 2008 (reality version). This quarter? Positive 1.9%. Awesome - the economy is back! Not so much. This quarter's GDP strength was brought to you courtesy of your grandchildren's hides. They will pay for this quarter's strength with the $160B tossed into this economy from the stimulus check. So make sure to thank them the next time you see them (if you have any). And this number will be revised lower over time - be sure of it... even with all the stimulus we threw at it.

Now tomorrow we have the monthly employment report which is a farce in itself - I try to restrain myself from talking about it too much and just refer people to another site who breaks it down each month for the illusion it is. Again if you are new to the website (within past 30 days) I'll refer you to last months posts [Jul 3: A Quick Word about the Unemployment Report] Cliff Notes version - the government created a Birth/Death model of jobs that are "too new" to measure so creates numbers out of thin air to juice this report - lately they've been creating a whole lot of jobs in the construction, financial, and retail areas - areas we are seeing bankruptcies and job losses across most of the country. But nevermind that - the government is seeing jobs no one else does. Further the main jobs being created? Federal government. Healthcare. The two areas we should be cutting jobs because they are creating a national strain of epic proportions.

We do have a weekly jobless claim figure and traditionally when it goes over 400K people get worried. We've been assured for months on end "why the fuss" it's only in the mid 300s to upper 300s. Of course people do not realize the massive US economy is not a like a video game where someone with a controller can change direction in a 15 day period. It's more like a ship... let's say the Titanic for example... that takes a while to turn. Why all the fuss by the doomsdayers? Because weekly unemployment claims just hit 448,000. And continuing claims? Approaching 3.3 million.

But not to worry - the same people who throughout late winter and spring 2008 were telling us this too shall soon pass and the "2nd half 2008 recovery" is soon upon us, are back out there today saying.... not to worry. So again the market, the "greatest discount mechanism" in the world could be up, could be down - I have no idea. But I am sticking by my guns that this economy is degrading and all you need to do is read company reports... and ignore the vast majority of the government's data, especially those with multiple inputs that can be "adjusted" - those are the ones full of "silver linings".

Summary: Don't worry. Be happy. Find a silver lining. And drink your Kool Aid.

Cleveland Cliffs (CLF) with Blow Out Earnings

I am purposely using the same headline time after time this week - "(insert iron, coal or fertilizer name here) with Blow Out Earnings". It's been a heck of a performance for these names... Cleveland Cliffs (CLF) simply continues the train. I know, I know - I should be getting some restaurants because as gas drops to $3.25 they will roar back, and I'm looking backwards instead of forwards. Sorry, I just can't tear myself away from 100%+ growth, and punishing analysts estimates. Full report here.

Contra thesis? As China devolves into slowdown, and takes all the world with it, there will be little need for steel, or fertilizer, or coal. YET, I am to believe the U.S. is set to recover in early 2009. So we can have it both ways, correct? The global growth thesis is dead ... but the U.S. (which last I checked is the largest consumer of almost anything on this planet) rebounding (as the pundits tell me) won't be good for said consumables. Hmm... somehow the logic escapes me. Now if you are in the camp that the world is completely doomed and all countries will be devolving into recession - you have a point to be bearish. But too many people are having their cake and trying to steal our cake too.

• Cleveland-Cliffs Inc (CLF) Inc said on Wednesday its second-quarter rose sharply, helped by higher margins in its iron ore business. Cleveland-Cliffs said its net income rose to $270 million, or $2.57 per share, from $86 million, or 83 cents per share a year ago. Excluding adjustments to first-quarter sales related to the timing of international pricing settlements of iron ore, the company earned $2.21 per share, above the analyst consensus estimate of $1.99 per share, according to Reuters Estimates.
• Cleveland-Cliffs, which earlier this month announced plans to acquire Alpha Natural Resources Inc (ANR), said it is receiving positive feedback about the proposed deal from the majority of its largest shareholders. (except for 1, the big 1)
• Consolidated second-quarter revenue for the Cleveland, Ohio company rose 84 percent to a second-quarter record of $1 billion. The jump in revenue was the result of the strong market for iron ore and metallurgical coal.
• For 2008, Cleveland-Cliffs said it expects to realize an average per-ton price of $90 for North American iron ore in 2008, up from its previous estimate of $85 per ton.

So from the update we received in today's full earnings report it appears everyone wants this deal to go through - both companies, most major shareholders - except for 1 party. Jul 17: High Drama at the Cleveland Cliffs Corral]

Long Cleveland Cliffs, Alpha Natural Resources in fund; long Alpha Natural Resources in personal account

Flowserve (FLS) Mighty Impressive Earnings

We've danced around this kinda, sorta global infrastructure play for the past year but never devoted an entry to it. Based on these sort of earnings from last evening, it is time to begin taking a more serious look. Granted, when the "global growth" stocks sell off (with oil) this just goes down with the rest so it would not really provide any non correlation with many other parts of the portfolio but it's quite a story. While sales were "only" up a quarter, profits doubled - that's quite a feat. Full report here.

• Flowserve Corp (FLS), which makes industrial pumps and fluid handling equipment, almost doubled its second-quarter earnings, helped by strong demand, and it raised its outlook for the year.
• The company posted net income of $122.9 million, or $2.13 a share, compared with $63.2 million, or $1.11 a share, a year earlier.
• Sales rose 24 percent to $1.16 billion
• Analysts on average expected earnings of $1.49 a share, before special items, on revenue of $1.13 billion, according to Reuters Estimates.
• The company said it continues to see strength in its large project infrastructure business globally in the oil and gas, power, chemical and water markets. (sounds a lot like our global infrastructure stocks that absolutely get destroyed each time crude drops even $5, as if all these projects suddenly get cancelled)
• Backlog increased 34% to a record $3.05 billion from $2.28 billion at December 31, 2007.
• It raised its 2008 earnings outlook to a range of $7.20 to $7.50 a share, compared with its previous forecast of $5.90 to $6.20 a share (wow) Analysts were expecting the company to earn $6.31 cents a share, before items, for 2008.

To put that in perspective analysts already had $7.50 in estimated earnings for Flowserve....

.... in 2009.

And just like that the company went to under 20x 2008 earnings.

That was a nice upgrade by BMO Capital on July 7th

• Charles Brady raised the Irving, Texas, company to "Outperform" from "Market Perform" in a client note early Monday. Shares are trading at a "compelling" price following a sharp decline last week, he said, and there is no weakening in demand among its oil, gas, chemical and power markets.
• In addition, Brady said Flowserve is positioned to continue to see strong bookings and sales growth. The company should also enjoy improved operating margins through 2010 thanks to better pricing, aftermarket sales and efficiency.
• "We believe Flowserve is in the midst of a multiyear uptick in top-line revenue growth, margin expansion and earnings growth," Brady wrote.

I realize the airlines, retailers, and banks are "compelling valuations" but really with such performance in so many sectors despite the doomsdayers - I don't understand the compulsion by people to run into fractured businesses, when we have incredible secular growth stories without 90% of the headaches. We have a 10-20 year once in a lifetime global industrialization/modernization movement and people are fussing because oil is $80, $100, $120, or $140. Whatever. This should bode well for our global infrastructure names...

No position other than "impressed"

Visa (V) Rings Up Very Good Earnings - Should Bode Well for Mastercard (MA)

We don't own Visa (V), but we do have Mastercard (MA) which reports tomorrow. I'll repeat every quarter people do not realize the international opportunities these 2 companies have. Visa was very solid tonight

• Visa Inc.'s profit rose a better-than-expected 41 percent in the most recent quarter, as more money changed hands using its credit and debit cards -- particularly outside the United States.
• Visa it earned $422 million, or 51 cents a share, for the April-to-June period. That is up from $299 million in the same period a year ago, before the company went public.
• The results, reported Wednesday after the market closed, included litigation and restructuring costs. Excluding those costs and other items, earnings per share amounted to 59 cents. Analysts had anticipated 48 cents per share, according to Thomson Financial.
• Operating revenue rose to $1.61 billion, above the average analyst forecast, from $1.37 billion a year ago. The driver was a 19 percent jump in payments volume, or the amount of money spent using a Visa-branded product, to $652 billion.
• Visa's payments volume -- one of the company's key performance measures, along with transactions -- rose 19% to $652 billion in the quarter. Total volume rose 22% from a year earlier to $1 trillion.
  
• The number of total payment transactions on Visa cards rose 15% to 10.7 billion.
  
• The company now has 1.6 billion cards carrying the Visa brand, it says.
• The April-to-June quarter, Visa's first full quarter as a public company, saw defaults and delinquencies surge in a growing swath of consumer debt. But Visa, like MasterCard, processes card payments for banks and other institutions, and takes a cut from the purchases made on the cards. The banks are the ones that lend the money to cardholders, and take the losses when they default. (important to note this economically, not important for Visa or Mastercard specifically)
• "Despite a challenging economic environment in the United States and a softening in traditional credit card spending, the strength of Visa's debit business drove solid growth in the region," Visa's CEO Joe Saunders said in a statement.
  
• He pointed to strong expansion in the Asia Pacific region, Latin America, Canada, Central and Eastern Europe and the Middle East.
• The United States accounts for about 63 percent of Visa's total payments volume. U.S. payments volume rose nearly 12 percent to $388 billion, while payments volume outside the United States rose more than 31 percent to $264 billion.
• "Greater use of cards leads to increased transaction fees, and zero extended credit shields Visa from any default risk," wrote Celent analyst Red Gillen in a note. "Whether consumers pay off their credit cards or not, Visa's skyrocketing growth is not affected." (Bingo was his Name-O)
• Some analysts have noted that banks' decision to pare back credit lines to consumers could lead to lower spending volumes for card processors like Visa. (always a risk)
• It raised its outlook for adjusted operating margins for 2008 to the mid-40 percent range, up from the low-40 percent range. And Chief Financial Officer Byron Pollitt said during the analyst conference call that the company is considering a share repurchase program as early as 2009.

I'm not sure why people are paying nearly 25% more in valuation for Visa over Mastercard, but we've had Mastercard and we'll continue to keep it, although the businesses are of course very similar. Similar growth, for cheaper valuation, always is something I like. I was hoping for some kind of miss from Mastercard so we could cheap up shares cheaper but it appears this won't be happening.

Long Mastercard in fund; no personal position

First Solar (FSLR) - You Can't Stop Them; You can Only Hope to Contain Them

Another fantastic result from First Solar (FSLR)... they keep justifying their sky high valuation [Jun 17: Energy Conversion Devices Now Trades at Par with First Solar] This is one of the few names in the space not constrained by the polysilicon shortage and they've taken full advantage of it. We don't own this name anymore but I added a bit to Energy Conversion Devices (ENER) today (also not affected by polysilicon prices) earlier in the day in anticipation. First Solar has yet to really disappoint in its public life, unlike its brethren, some of which make it a habit to do so. I won't name names to protect the innocent.

We'll see how the stock reacts, but on a cursory glance of fundamentals, everything looks quite juicy. Remember it's not the news, but the reaction to the news. Keep in mind analysts estimates $217M revenue, $0.58 EPS. Much like the fertilizers at some point you get so large the PERCENT increase cannot keep up with previous quarters, but the magnitude of the numbers are still impressive. If all I did was read earnings reports of stocks we own or follow in our sectors you'd think this market would be at Dow 20K!

They do have one of the shortest press releases out of any company I follow - short & sweet. Astounding 36% sequential revenue growth, and 247% year over year growth. For earnings the numbers were 49% sequential growth (wow) and some mind numbing number that blew up my calculator when you do year over year (excluding tax benefit) Gross margins now up to 54% from last quarters 53% - staggering in comparison to polysilicon based peers. I keep thinking this stock is too expensive and "next quarter" will be the one where expectations get too high and it will fall flat. First Solar keeps telling me "No soup for you". Bravo.

Only fly in ointment is no guidance so everyone has to hold their breath to see what they say so the market lemmings can react violently one way or the other the minute it is uttered.

• First Solar, Inc. (Nasdaq: FSLR - News) today announced its financial results for the second quarter ended June 28, 2008. Quarterly revenues were $267.0 million, up from $196.9 million in the first quarter of fiscal 2008 and up from $77.2 million in the second quarter of fiscal 2007
• Net income for the second quarter of fiscal 2008 was $69.7 million or $0.85 per share on a fully diluted basis, compared to net income of $46.6 million or $0.57 per share on a fully diluted basis for the first quarter of fiscal 2008. Net income for the second quarter of fiscal 2007 was $44.4 million or $0.58 per share on a fully diluted basis, which included a one-time income tax benefit of $39.2 million that resulted from the reversal of valuation allowances against previously established U.S. deferred income tax assets.

Classic double bottom formation - why didn't my on staff technician notify me? Wait, I am the on staff technician. Bah.

[Apr 30: First Solar Keeps Doing Enough to Satisfy Shareholders]
[Feb 13: First Solar Out with Another Great Set of Earnings]
[Nov 7 - First Solar (FSLR) Impressive Numbers]

Long Energy Conversion Devices in fund and personal account

Signs of Hope? Bueller?

Financials Up. Oil and the Commodities Up.

On the same day.

That's new.

A handful of stocks I like, instead of falling back from support, are breaking through. Also positive.

Also with 10 minutes to go we have a chance to close over S&P 1280. Also positive.

I've cut back short exposure materially here in the past 30 minutes. Still heavy cash but if we can continue I might actually be buying something tomorrow ... and with a "better than expected" GDP "in the bag" tomorrow that might be the rocket fuel (i.e. Kool Aid) the market needs. Friday is a complete wildcard - if there is a bad number and the market rallies you know it is happy time. It's not the news; its the reaction to the news.

If we break last week's high (1290ish) shortly I'm going to get more bullish. If we break the 50 day moving average in the low 1300s, I am going to make Larry Kudlow sound like Peter Schiff. ;)

At this point in the market the only thing I am trusting are technicals so we'll shed the bear skin and move to grabbing the red cape ----> if technicals say it's time go "turn". And we could (?) be at the cusp... at least a short respite Mr. Market?

If we break back below S&P 1230, this post never happened. ;)

The following message was brought to you by the team from Kool Aid.

Bookkeeping: Cutting Some Goodrich Petroleum (GDP)

With natural gas stock Goodrich Petroleum (GDP) up 16% I am going to let some go here at $51 for a loss. So oil is up $3 and these stocks now rule; whereas yesterday's favorites the airlines are demolished. More day to day lunacy.

I am cutting it back from 1.6% of fund to 0.8%.

Normally I'd say something about fundamentals or technicals but none of it matters anymore. If crude goes up this stock goes up. If not, it goes down. It's as simple as that. So if someone could flip a coin and tell me what oil will do tomorrow I'll have a good idea if this will be a bad sell or a good one. Since my crystal ball is broken - I'm cutting some exposure back.

I do like the action (perking up) in coal and fertilizer but those are all just one big oil trade nowadays. If oil is up tomorrow - they can go up. If oil is down they will get trashed. That's all the market is now. Fun.

Even infrastructure stocks are now proxies for oil - today they ramp, after being trashed for weeks. When oil is up $3 construction programs live. When oil is down $3 construction programs die. This market would be very simple if someone could tell me what oil will do every morning at 9 AM by the time it closes.

Long Goodrich Petroleum in fund; no personal position

Are You Struggling?

So today oil is up $3 so it's time to pile into all the same stocks that have been hated for weeks. And then in 2 days when oil is down it's time to sell them all? Is it really that simple to the hedge fund computers? Is that all the market has become? It seems so.

If you are struggling in the market don't feel too bad - I keep saying this is a market lacking in any serious logic and very little works for extended periods of times. Many, many (and I mean many) sites/writers I've been reading for years (including the bear of 2000-2002) have similar words to Robert Marcin on Realmoney.com

This is one of the most complicated markets I can remember in my career. Many stocks are down and cheap with solid fundamentals. These usually represent attractive longs. Also, sentiment is a bad as it gets. That also usually means a bottom.

Yet fundamentally, things are deteriorating with the potential to get much worse. The uber bear case has a spreading global recession and still expensive stocks in the case of a global economic meltdown.

Therefore investors are shooting economically shares first and asking questions later. Bullet proof stories or defensive plays, ie expensive stocks are gaining at the expense of cheap ones. That makes life tricky for a deep value guy like myself.

I am limiting my bets in this type of market. I believe that the big bottom will come this fall on a deteriorating economy(no more rebate checks) and negative political sentiment from a democratic administration. In this environment, small/mid caps drop more than large caps, the VIX hits 35, and you hear "it's not too late to sell" form the talking heads on CNBC.

At that point, I hold my nose and buy like crazy and pray I am not too early. Til then I stay more defensive than not.

Position: none

So if you are struggling you are not alone. I've read the same sentiments countless times. No trend lasts for more than a few days - market down 2.5% Monday, and then up 2.5% Tuesday? Banks great one day, oil great the next? It's so simplistic in the thinking - and its all based on random events of a bipolar nature. Until trends last for more than 3-4 days this market has no place for investors - only traders ....and daytraders at that. Everything now is complete randomness; you ride the trend of the "day" and then get out. Because tomorrow could be 180 degrees the opposite.

Quite possibly the brightest mind of our era is down nearly 20% this month in his mutual fund. Berkshire Hathway is down 25% for the year. Safety stock is just a code word out there.

I remain defensive until something begins to work for more than 5 days in a row. Despite all the end of world talk Monday and yes, we've finally got a bottom in financials Tuesday - we've gone nowhere in the big picture - almost exactly where we left off Friday with a lot of volatility thrown in the mix. I'll keep repeating the mantra - when a sustained move happens we'll miss the beginning of it and catch up later. Until then, there is no reason to get excited by 24, 48, or 72 hour moves no matter how breathless the CNBC anchors become. Someone else can be the hero and "catch the bottom" - many have been trying for 12 months now and constantly blowing up their investors capital.

Tomorrow? Another random 2 sided event - 2nd quarter GDP. Friday? Another random 2 sided event - employment report. Even if I *KNEW* what the numbers were for each, I could not tell you how the knee jerk reaction in this market would be. The world is not changing every 24 hours but you could not tell if you only looked at the stock market. As they say, when in doubt - sit it out. Monday when the market crumbled we were up 0.6%. Yesterday when the market sung alleluiah - we were down 0.8%. So I'd say we are quite perfectly hedged. Yes we're going nowhere fast, but either is this market. We're not going 100% cash, but we're "sitting out" as much as possible until things clear up - whether thats in 24 hours, 2 weeks, or 2 months. Until then, it is just gambling. And you can go to Vegas for better odds. If your time frame is 2 hours or 2 days you will act very differently than I will; but that's not our time frame.

Those who actually have their capital left when the market returns to some semblance of normal will prosper. Most others will be sitting on huge losses they just hope to make up. We don't want to be in the latter camp. And that's my strategy at this time in a nutshell, agree or disagree - you will see what I'm thinking and why.

Bookkeeping: Cutting Ctrip.com (CTRP) on its Mysterious Rise

Chinese online travel stock Ctrip.com (CTRP) is acting strange today - it's suddenly shot like a rocket up nearly 9%. In a bull market I'd say "someone knows something" and is getting in ahead of an official announcement. In this market I simply say "thank you, I'm cutting back". This chart should look very familiar - its the same chart across a multitude of names I've cut back into on any stock surge. Broken down stock, revisiting a resistance area.

So I continue this defensive measure into a stock market I don't believe in. We've done with with about 20 stocks the past week. All these stocks are in prove me stage, until shown otherwise and I continue to be ok with giving up upside to protect capital until the indexes overall improve. A lot of leadership stocks I look to are showing no signs of life other than oversold bounces when the Kool Aid is hot and heavy. No sustained excellence from them. Hence I don't believe in this rally, and I'll take the "other side of the trade" of the CNBC pundits.

I've cut Ctrip.com down to a holding stake of 0.1% down from 1.2%, with a sale around $47. I continue to build cash in this environment which I don't trust. Again, as I repeat daily now, if I am wrong (which has a 50% chance) and this is the beginning of the next leg up, we'll miss the beginning of the move and trail the market. If I'm right (50% chance) you'll thank me later as you watch your other mutual funds implode ;)

[Feb 28: Ctrip.com Continues to Impress]
[Jan 5: Zachstocks on Ctrip.com]

Long Ctrip.com in fund; no personal position

Potential Portfolio Idea - Exactech (EXAC)

As I wrote in this weekend's summary, after a good 11 months to start the fund's life, we've been disemboweled in the month of July, so I wasted a nice Michigan weekend (they are rare, trust me) scrounging through the underbrush to find ideas that ARE working in this environment. There must be something working. By "working" I mean down less than 15% in the past 2 months (it's all relative). And further - trying to avoid names the hedge funds won't ruin - which means smaller than our normal fare. I found a few ideas but the smaller you go the more risk (and potential reward) you have. Two of the companies I found report tonight and since I am risk averse I won't buy ahead of earnings but the first I am interested in (I've actually had this on a watch list for a few months but have not had time to research it until I got peeved with the rest of the portfolio this weekend) is $350M market cap Exactech (EXAC).

For those of you who follow the orthopedic market, you would be familiar with a Stryker (SYK) or Zimmer Holdings (ZMH) which used to be great growth stocks. Still solid stocks but slower growers nowadays. Exactech (EXAC) might be thought of in the same vein but of a much smaller variety- or we could place it into a very broad category which would include NuVasive (NUVA) another name of similar ilk (but much more specialized) [Jul 25: NuVasive - At What Price Growth? It Seems "Any" Price] Again, this is in a "favored" sector (healthcare), does not have FDA risk like a biotech (a few of which I also found this weekend), and is of the size that hedge funds are not smashing or pumping it (and reversing course) on a weekly basis. It's off the beaten path.

From the company website:

Exactech, Inc. is an orthopaedic company that develops, manufactures, markets, distributes and sells orthopaedic implant devices, related surgical instrumentation and biologic services to hospitals and physicians in the United States and internationally.

Product list here

I don't want to recreate the wheel when others have already done a good job so I will point out this excellent summary on SeekingAlpha from last fall - The Long Case for Exactech

• Exactech (EXAC) is a micro cap orthopedic implant device manufacturer with strong management and large insider ownership that is primed to reap the rewards of the aging populations in western cultures. Supported by a growing research and development entity and a strong sales force, Exac has what it takes to compete with larger firms in this ever growing industry. Management has a lot on the line since 41 percent of the company is owned by insiders
• Exactech’s business is very simple: they make orthopedic implant devices. Orthopedic implant devices are used to replace or repair a movable joint such as knees, hips and shoulders. These orthopedic implant devices, help people with damaged joints gain back strength and range of motion. Even though the company’s end consumers are the patients, Exac’s real customers are the orthopedic surgeons who decide which product the patient needs. Additionally, this Florida based company’s biggest business is in knees, but they also have large sales in hips, shoulders, and other products such as biologics (don’t worry, we’ll talk about this below). Instead of analyzing the business as a whole, it would be easiest to dissect (sorry) the company’s various sections.

(click to enlarge)

So we have knees, hips, shoulders, and biologics - again I won't copy it all here - the article did a wonderful job presenting each consumer line. The biologics business is interesting and something I had never heard of before encountering this company.

So on to our main concern when a little guy is competing with big fish - what are the competitive advantages - they don't have size or scale to compete, so either they need to be a unique niche (such as NuVasive in the spine arena) or some other "differentiation". Mr Lutz believes

Given this information the question is how does Exactech compete with the larger firms? After all, these bigger companies must have access to much greater resources compared to a small Southern company such as Exactech. The answer lies in Exactech’s superior product quality and increasing innovation. All of the products Exac has on the market right now are extremely competitive and the company is continuously pumping out more and more innovative ideas. In 2006 alone they launched five new products. Additionally, the company has been increasing R&D substantially (more on R&D later). Exactech protects its products with a patent portfolio, which should help differentiate Exac from its competitors. Also, Exactech can make major market share gains in areas that the big boys overlook.

Now that could be true - or not true. Every company would feed you that line. But what I use for "truth serum" are the earnings reports ... and the chart. Unlike company management, revenue growth and charts rarely lie to us. ;) err, I mean stretch the truth.

Some highlights from their last earnings report

• Exactech, Inc. (Nasdaq: EXAC), a developer and producer of bone and joint restoration products for hip, knee, shoulder, spine and biologic materials, announced today revenue of $39.8 million for the first quarter of 2008, an increase of 34% compared to $29.6 million for the first quarter of 2007. (note, that was not all organic growth - some was due to acquisition)
• Knee implant revenue increased 18% to $18.5 million (knees dominate the current revenue mix)
  
• Hip implant revenue increased 16% to $6.4 million
• Biologic services revenue up 34% to $4.7 million
• Shoulder implant revenue increased 132% to $3.7 million
• Initial revenue of $2.0 million in spine product sales from Altiva Corporation
• Net income for the quarter was $2.8 million, or $0.23 per diluted share, a gain of 49% from the $1.9 million, or $0.16 per diluted share, in the same quarter a year ago. First quarter diluted earnings per share included a gain of $0.03 due to a forward currency call option and a loss of $0.01 per share due to Exactech’s minority investment in Altiva prior to the acquisition.
• Gross margins decreased to 62.9% in 2008 from 63.3% in 2007, primarily as a result of strong international sales growth. (still a solid number in the low 60s)
  
• Exactech President David Petty said, “The start-up of new distributors in Europe spurred a 67% increase in our international sales to $11.5 million from $6.9 million during 2007. International sales for the quarter represented 29% of total sales, compared with 23% in the same quarter last year. (we like that)

Guidance

• Looking forward, Exactech continues to anticipate 30% to 36% revenue growth for the full year 2008, targeting a range of $162 million to $169 million and diluted earnings per share for the year 2008 in the range of $0.92 to $0.98. For the second quarter ending June 30, 2008, the company targets 27% to 36% revenue growth to the range of $40 million to $43 million and diluted earnings per share in the range of $0.22 to $0.24.

The chart? A thing of beauty. Yes it has come a long way in a year but most important is the relative strength of late. Not even flinching in all this market turmoil. We like that.

The company reports after the bell tonight so the gambler would buy ahead of earnings hoping for the pop. I'm not the gambler. So we'll watch tonight to see how they do after the bell. Will this be a name rising 150% in a year? No. But we've been spoiled by some of these commodity runs - we can live with 20-30% yearly type of gains. Especially in this market. My personal hope is some sort of disappointment so I can get in at a level closer to the 50 day moving average in the low $28s. The stock has built a base for nearly a month now...

No position

Cummins Engine (CMI) Continues to Quietly Execute

Cummins Engine (CMI) has been beaten down with the rest due to its subprime (err, that's not it)... due to its natural gas (err, that's not it)... well I don't really know why other than it opens on the stock exchange every day and hence should be sold. I continue to like this long term story, and earnings continue to shine through. The is a prototypical stock we want to own as it increasingly avoids America - overseas exposure continues to be very under estimated by the investing community. The stock is up 10% this AM. Full report here.

Folks at this point about 1/3rd through earnings season, this could be the best our stocks have performed in any earnings season since we launched - we are seeing impressive stuff across the board, even outside the commodity space. But this is the worst our fund has performed in any earnings season since our stocks are not the flavor of the day. Only on Wall Street... only on Wall Street. I shudder to think what would happen if one of our stocks dared to miss if this is how they are treated when they are all smashing earnings estimates. That is usually the fear I have going into an earnings season - but now we are being punished even on good earnings. Even the gains are short in nature and quickly reversed.

Frankly this is why it is hard for me to get bullish for more than a 48 hour period. If we are not rewarded for standout earnings, than we have to buy the junk of the market. Stuff that only rebounds for a short time before they continue their wayward swirl down to the sink. With our time horizon, it's not in our playbook to do that on a consistent basis. So we have to remain patient and eventually stocks are a reflection of their earnings power. But certainly they are not in the short run. But on a fundamental basis, I am absolutely thrilled with what our companies have been reporting. Our stocks continue to get "cheaper" as prices fall or flatten as earnings increase. While the "flavors of the day" continue to get "more expensive" as prices increase on falling earnings. But this is the market of today, and in due time - it will reverse. But it doesn't feel too swell right now to watch this unfold. July 2008 - the month that will go down in infamy for Rising Tide Growth fund! Bah.

• Cummins Inc (CMI), a U.S. maker of engines and power generators, said its earnings in the second quarter rose a better-than-expected 37 percent as strong international sales overshadowed weakness in some key North American markets.
• Cummins reported a second-quarter net profit of $293 million, or $1.49 a share, up from $214 million, or $1.06 a share, in the same period in 2007. Analysts' average profit forecast was $1.23 a share, according to Reuters Estimates. The results included a $6 million charge related to damage to several facilities caused by this summer's flooding in the Midwest. Ann Duignan, an analyst at JP Morgan, estimated that cost the company 2 cents a share. "Without this, EPS would have come in at $1.51," Duignan said.
  
• Sales at the Columbus, Indiana-based company rose 16 percent to $3.89 billion, ahead of an average forecast of $3.86 billion.
• Some of the sales growth came from strong sales of its commercial generators to customers in the developing world, including the Middle East, Latin America and China.
• Cummins said sales outside the United States accounted for 61 percent of its business during the quarter, up from 54 percent in all of 2007 and 57 percent in the 2008 first quarter.
• Sales of its more consumer-related products in the United States tumbled during the quarter as falling home prices, tight credit markets and rising energy costs soured consumer confidence and kept buyers out of truck and motorhome showrooms.
• Cummins said sales of diesel engines to Chrysler for the Dodge Ram heavy-duty pickup fell more than 60 percent, and RV engine sales fell nearly 40 percent.
• Looking forward, the company expects full-year sales to grow 15 percent, up from a previous forecast of 12 percent.

Now as much as I like this story we see a potential top forming and everything good is to be sold in this trecherous market; all gains are erased quickly. So I'm taking this down to a 0.1% holding position and selling the remaining portion around $74. Frankly I didn't hold much since I sold on that spike to low $70s last week. And we will buy back on a pullback... or if the stock continues upward through the $75 level we'll buy on "technical" strength. Right now good results are not keeping stocks up for long so until that pattern changes we'll obey the markets wishes and sell strength. No change to the story fundamentally - in fact it improves each quarter. I'm not the best technician but this appears to be a chart every hedge fund computer would buy north of $75 (on strong volume).

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

Long Cummins Engine in fund; no personal position

Federal Reserve Continues Its Historic Actions

Not a surprise but the Federal Reserve is going to continue its corporate welfare - i.e. "exchange the banks junk for US Treasuries" program, and is now adding very long term loans (3 months instead of 1 month) for the commercial banks. So we continue to exchange lower grade mortgages, auto loans, credit card loans, student loans - just about anything, and trade it for US Treasuries. So the junk sits on the balance sheet of the US Taxpayer and the liquid Treasuries go to the banks. It's good to be a bank CEO - too bad they screw it up with greed once every 8-10 years and send the economy into recession. And we wonder why they continue to take such outsized risks? Because we cannot let them fail. At least the big guys. And sometime in December I am sure they will say - well we are extending this junk for Treasury program out again to summer 2009... despite the "1st half 2009 recovery".

• The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy.
• The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
• Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said.
  
• And, it also will let commercial banks, in a separate program, be able to bid on cash loans that last longer -- for 84 days, besides the 28-day loans now available (why don't we just end the charade and make it 3 years? We should be "healed" by then)
• The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent." (fragile? Everyone told me Merrill Lynch offloading their assets yesterday at 22 cents on the dollar marked the bottom and its all upside from here? Hmmm... )
• The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans.

Again, where it the "welfare" for the peons of the country... you know... individuals. I'd like to trade my mortgage in for a nice horde of US Treasuries. And then keep rolling that over every 6 months and say "well I'm just not ready to take my mortgage back, I'm still under stress - you keep it Mr Bernanke"

[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]

Bennigan's, Stake & Ale Close - File For Bankruptcy Protection

I really need to start a new category for the blog: bankruptcies. It really is a shame these companies are closing their doors in the midst of the long awaited 2nd half 2008 recovery. I mean... it really is a shame these companies are closing their doors as we are looking forward to the 1st half 2009 recovery. However, I don't know what we even have to recovery from since the economy is fine, not in a recession or even close, and its just a few stumbles in an otherwise sound system (source: GWB)

So we'll add these 2 names to our growing list - and trust me a lot of mom and pop type places in strip mall complexes i.e. non chains - are going to be drowning and they won't be getting any press so they'll just go quietly in the still of the night. Because the small business sector is BOOMING if you read the unemployment reports that come out every month (a new chapter of fiction this Friday) - they're adding jobs like mad if you listen to the government report, right OfficeMax?

• Adjusted earnings beat Wall Street estimates, but executives cited a "difficult sales environment" that hurt results.
• Small business owners have cut back on spending in the weak U.S. economy, hurting results throughout the office supply sector.

Hmmm that doesn't quite jive with the birth/death model in which the Bureau of Labor Statistics somehow finds hundreds of thousands of "small business" jobs that no one else can find. But I digress - the point is if you think its bad at the retailers and restaurants who at least have some size and scale just imagine what its like at the 1 off mom and pop places.

I've ignored most of the smaller airlines which already went belly up to focus on retailers and restaurants. Ironically I expect these latter 2 groups to have a huge run sometime in the next 6-9 months as the Kool Aid of the economic recovery flows hard and fast. Remember, gas at $3.25 makes all the other problems disappear into the ether - the hedge fund computers say so. Watch for it.

1. [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer]
2. [Jul 10: Another Retailer (Canary in Coal Mine Down]
3. [Jul 21: Add Mervyn's to our Growing List of Retailers Headed to the Great Sunset]

• National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees. (even more workers for Walmart, healthcare and federal government jobs)
• It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open. (riddle me this - these 2 chains have survived for decades in bad times and good, but all government economic reports show things really aren't "that bad" so why would they shut down now.... hmmm... hmmm..... hmmmmMMmMmMmm)
• Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.
• The pub-themed Bennigan's had 310 restaurants in 32 states. It was founded in 1976. It is heavily concentrated in states like Texas, Illinois and Michigan. It posted U.S. sales of $542 million in 2007, according to Technomic Inc., a food-industry research and consulting firm.
• The filing is the most extreme sign yet of how midpriced sit-down restaurants are undergoing one of their worst periods in decades. High ingredient and labor costs are eating into profits, and several years of rapid expansion by bar and grill chains has left a glut of locations in the market. Pressures on consumer spending like high gasoline prices and dwindling home values have prompted consumers to eat out less often or switch to cheaper fast-food meals. (all conditions we prediced as the blog was launched - 70% of Americans living paycheck to paycheck and used to living in an easy credit, house ATM world with lower inflation would not adjust well to this new era. We're overbuilt - we have enough for a society of 500 million people, let alone 300 million)
• Earlier this year, the parent companies of the Bakers Square, Village Inn and Old Country Buffet filed for Chapter 11 bankruptcy protection, citing falling sales and rising food costs. (oops I missed those - darn I wondered what happened to Old Country Buffet)
  
• A host of other chains -- from Outback Steakhouse to Ruby Tuesday -- are also struggling. (Ruby Tuesday's you say? Yep - nailed 'em --> Jan 11: 3 Months Later Let's Look Again @ Ruby Tuesdays)

See, we were negative on restaurants way back in the day - a few of these on the short side of the ledger sure would of helped propel our fund even higher - but we can't. So we didn't. But we did say it... [Sep 19: Tough Times Ahead - Restaurants?] Remember this was in the era of "no slowdown, just a few blips in the subprime market - the financials have now thrown the kitchen sink quarter out there and we're fine from here".


Just for kicks I looked at Kona Grill (KONA), another smaller chain last night, and according to Briefing.com they pretty much hit the trifecta - misses (current Quarter) guides lower (next Qquarter) guides lower (full Year) - Pretty sweet. Must be a buy since it does not have potash, coal, iron, or natural gas exposure. Those areas "stink". Exposure to US consumers? Not a problem! Gas is going to $3.25 and the world will be fine.

4:02PM Kona Grill misses by $0.01, reports revs in-line; guides Q3 EPS below consensus, revs below consensus; guides FY08 EPS below consensus, revs below consensus (KONA) 7.45 +0.00 : Reports Q2 (Jun) loss of $0.08 per share, $0.01 worse than the First Call consensus of ($0.07); revenues rose 4.5% year/year to $20.2 mln vs the $20 mln consensus. Co issues downside guidance for Q3, sees EPS of ($0.09)-($0.13) vs. $0.00 consensus; sees Q3 revs of $19.5-20.5 mln vs. $22.67 mln consensus. Co issues downside guidance for FY08, sees EPS of ($0.43-($0.58) vs. ($0.28) consensus; sees FY08 revs of $80-82 mln vs. $85.29 mln consensus.

National Oilwell Varco (NOV) - Another Solid Result

We've exited a lot of pure "oil" plays - well frankly we never had huge positions in direct oil plays but we've had some exposure over the year to the oil services space due to the fact that with oil at $60, $80, $100, $120, or $140 they should thrive. National Oilwell Varco (NOV) is one of those names and they put out yet another quality quarter today, and it seems to be absorbing it's acquisition of Grant Prideco quite well [Dec 17: National Oilwell Varco is Buying Grand Prideco]

• National Oilwell Varco Inc (NOV), an oilfield services company, said on Tuesday its second-quarter profit rose 32 percent, exceeding Wall Street estimates, as high energy prices lifted demand for its drilling equipment.
• The company cited two areas of robust growth -- the offshore market where rig supplies are tight, and onshore North America, where exploration companies need new rigs as they expand rapidly in shale plays like the Haynesville in Louisiana.
• Pete Miller, the chief executive, told analysts on a conference call. "I think you'll continue to see backlog over the next foreseeable future be very good." (we like strong backlog - especially the $10.8 billion variety)
• Bill Herbert, oilfield services analyst with research firm and investment bank Simmons & Co International, characterized the results as "exceedingly strong" in a note to clients. (hedge funds disagreed - sending the stock up a whopping 1%)
• Profit in the quarter soared to $421.7 million, or $1.04 per share, from $318.5 million, or 89 cents per share, in the same quarter a year earlier. Profit, excluding one-time items related to its April merger with Grant Prideco Inc and a tax provision, was $486.5 million, or $1.20 per fully diluted share.
• On that basis, analysts, on average, expected a profit of $1.13 per share, according to Reuters Estimates.
• Revenue jumped 39 percent to $3.32 billion.
• Backlog for capital equipment orders for the company's rig technology unit as of June 30 increased 9 percent to $10.8 billion, with record new orders during the quarter of $2.2 billion. (but this does not compute - oil is down $25 in 3 weeks, how can business remain strong? My hedge fund computer says sell, sell, sell - story is over)
  

Another company growing 30-40% with a whopping forward multiple of 15. The "cyclical company" P/E curse continues to hover over these names - until/when/if people believe higher energy costs are here to stay it seems this will remain the issue.

[Feb 6: National Oilwell Varco - Solid Quarter]
[Oct 24: National Oilwell Varco Continues to Execute]

Long National Oilwell Varco in fund; no personal position

Bookkeeping: Cutting some Solar Exposure

Cutting back on 3 names in the solar basket as they all have the identical chart - broken down stocks that just surged 10%+ to the first resistance area, the 20 day moving average or close to it. Yingli Green Energy (YGE) was the only one of the 3 to push through. Instead of focusing on any 1 of these very volatile stocks I've changed tactics the past 8 weeks, and created a basket and consider them to be "one stock" especially those of the Chinese variety because that seems to be how the market treats them, despite their obvious differences. I have not touched Energy Conversion Devices (ENER) because its one of the few stocks in this market holding its 50 day moving average through thick and thin.

For Trina Solar (TSL), Canadian Solar (CSIQ), and Yingli Green Energy (YGE) the plan is identical - either buy back on a retrace to lower levels and or pay up if this is indeed a "real move" over and above the 50 day moving average. I'll post one chart - but they all look very similar.


Crossing north of the 200 day moving average would signal real strength but for most of these stocks, that level is located in a different universe. All this weakness must be due to all their exposure to subprime mortgages - that's the thing with this market - 100% growth at 15 PE ratios don't even protect you - every stock has subprime exposure I guess.

As a "basket of 3" I've cut these from 4.0% to 3.1% of fund. Despite what I assume must be breathless excitement on CNBC all we've done this week is get back to where we closed Friday in the markets - one huge day down, one huge day up ... and that pretty much summarizes the random walk down Wall Street of late. Nothing changed in 24 hours except Merrill signaled to the rest of the financial system you have some huge write downs coming. And that is "good news" because it's now clear that the end of the write downs are here (for the 98th time). No conviction, no direction. Until we get north of S&P 1275 we are going nowhere fast. I continue to build cash in every stock that rallies that shows the "broken" formation above. One day these stocks will continue to chug upward and going to cash will be the "wrong" decision, but when a real sustained move happens, we'll miss the first part and catch the rest of the move.

As I keep saying, until a trend forms that lasts for more than 3-4 days this is a market only for daytraders. I do expect Thursday to bring "excitement" as I am sure the Gross Domestic Number will be "better than expected" and then Friday is the random wild card that is the useless labor report.

Long all names mentioned in fund; long Trina Solar in personal account

Beggers Can't be Choosers - Some Minor Solar Deals

These aren't heavyweight deals but with all the fuss about Spain (and if its not Spain, its Germany, and if its not Germany its the US, and if its not US, they will find something), it's nice to see some deals with a brand name in Italy for both Suntech Power (STP) and Trina Solar (TSL). I had to hit refresh on my screen about 8x to make sure the quote was correct on the latter - I believe the last time it was up 5%+ might of been the Carter administration. Ok, I exaggerate.

• Chinese solar companies Trina Solar Ltd (TSL) and Suntech Power Holdings Co Ltd (STP) have signed separate supply agreements with a unit of Italy's biggest power company, Enel SpA , the companies said on Tuesday.
• Suntech said it would supply Enel.si with 30 megawatts of photovoltaic solar modules later this year and in 2009.
• Trina said it would supply the company with 17 MW of modules starting this year.
• Enel is a world leader in generating electricity from renewable sources. It plans to spend 7.4 billion euros on such investments by the end of 2012.

I continue to be flummoxed by the action in this sector - it simply seems like a group that requires the retail trader confidence to be high for the names to move; maybe institutions still do not believe in the story. It's coming; investors seeded $148 BILLION into solar, wind, and other renewables in 2007. In fact as I think about what the next bubble, pumped up with Uncle Ben's easy money policies, would be (we need one every 3-4 years to keep the mirage that is "economic health" in the US going), this looks like the perfect future target.

As for the U.S. - we are always reactive, not proactive but once an emergency slaps us across the face and you get us riled up, we really do things right - U.S. Solar Market could Surpass Germany by 2011. Frankly we don't even need "America" - we just need California.

• “It’s got roughly half the population of Germany, twice the incident sunlight and about one-tenth the market of Germany [today],” Johnson said of California.

And probably most important, the smartest kids in the room are snapping up land quietly throughout the U.S. Southwest.

• Solar prospectors tend to be as secretive about their land as forty-niners were about the veins of gold they discovered. Most bids are placed by limited-liability corporations with opaque names that conceal their ownership. And no one has been as quick to move into the Mojave - or as tightlipped about it - as Solar Investments.
• That entity, it turns out, is Goldman Sachs’s solar subsidiary. The investment bank’s designs on the desert are a topic of intense interest and speculation. Goldman declined to comment.

Long Trina Solar, Smartest Kids in the Room in fund; long Trina Solar in personal account

Political News Break: Ted Stevens Indicted

One down, another 300 or so to go.

This guy is famous for the "bridge to nowhere". Most of where our leadership is taking us should fall somewhere in the area of "crimes against American humanity" ;)

• Sen. Ted Stevens, the longest-serving Republican senator and a figure in Alaska politics since before statehood, has been indicted on seven counts of falsely reporting hundreds of thousands of dollars in services he received from a company that helped renovate his home.
• The 7-count indictment comes nearly one year after federal agents raided Stevens' home in Girdwood, a resort town about 40 miles south of Anchorage. The Justice Department has scheduled a press conference for 1:20 p.m. to announce the indcitment.

What's the bridge to nowhere? A symbol of a federal government run amuck.

• On Friday, Alaska decided the bridge really was going nowhere, officially abandoning the project in Ketchikan that became a national symbol of federal pork-barrel spending. The $398 million bridge would have connected Ketchikan, on one island in southeastern Alaska, to its airport on another nearby island.
• U.S. Sen. Ted Stevens and Rep. Don Young, both Republicans, championed the project through Congress two years ago, securing more than $200 million for the bridge between Revillagigedo and Gravina islands. Under mounting political pressure over pork projects, Congress stripped the earmark -- or stipulation -- that the money be used for the airport, but still sent the money to the state for any use it deemed appropriate.
• "It was a symbol of federal spending" that's out of control, said Sen. John Cornyn, R-Texas. "There's not going to be a lot of tears shed for the bridges to nowhere."
• When Sen. Tom Coburn, R-Okla., tried unsuccessfully last month to cut funding for the two bridges, an angry Stevens declared that he would resign his Senate seat if the bridge funding was dropped. (insert whiny noises here) On Wednesday, Stevens said he didn't plan on leaving the Senate after all. (thought so!)
  

Tom Coburn we keep; but for every Coburn we need to purge 50 others.

Note to new readers - I'm independent; this allows me to make fun of both sides of the ridiculous aisle.

We return you now to your regularly schedule market tomfoolery.

Alpha Natural Resources (ANR) - Blow Out Earnings

I'm like a broken record here - Alpha Natural Resources (ANR) with blow out earnings. However, hedge funds urge you to buy health care stocks with 7% growth so please sell these immediately and run to those. Thank you for your time. (US Steel (X) is also absolutely incredible on the earnings front this morning)

Just a quick bookkeeping note - I am selling some ANR into this spike @ $97 range simply because this market is putrid and hedge funds don't want coal or fertilizer. This is my favorite coal name and one day it should be back to a major stake in the fund - but until money flow returns to the sector I am selling spikes - down to a 1.9% stake. I have been tickled to death with the earnings reports from our portfolio thus far - our stocks are absolutely destroying estimates, pushing guidance up and making us very happy from a fundamental standpoint. But as I keep repeating, until the market cares (and I don't count these oversold spikes as real buying) I am selling spots of strength. When the next real move happens in these spaces they will be sustained multi-month moves. If we miss the first week or two of it, we'll live. Protect capital is job #1.

Back to Alpha Natural Resources who again I believe the story is just beginning [May 5: Alpha Natural Resources Booming Earnings - Just the Start]

• Coal mine operator Alpha Natural Resources Inc. on Tuesday reported record earnings on improved margins and increased metallurgical shipments. Alpha said profits for the second quarter increased to $74.3 million, or $1.04 per share, compared with $4.7 million, or 7 cents per share, in the year-ago quarter. The latest quarter included several special charges worth a combined 42 cents per share, and an income tax benefit of 16 cents per share.
• Revenue increased to $732.2 million from $435.3 million. (+68%)
  
• Analysts surveyed by Thomson Financial expected earnings of 53 cents per share on revenue of $571.4 billion.
• The company's coal margin per ton rose 130 percent in the quarter to a new high of $21.85.
• "Persistently strong demand for metallurgical coal from steel producers worldwide is having a profound impact on our financial performance," Michael Quillen, Alpha's chairman and chief executive, said in a statement. (I love these new words I am starting to see in the fertilizer and coal earnings reports - we had miserly and now we have profound)

Forecast

• For 2009, the company expects net income of $1.0 billion to $1.3 billion and coal revenue of $3.7 billion to $4.4 billion.

Translation - $1.0B to $1.3B on 70M shares = $14.30 to $18.50 in 2009 EPS. I estimated in April back of envelope $10-$15 without 1 single analyst report and just reading news and using this profound instrument called a calculator. While analysts who follow 1 sector day in and day out and know 10,000 times as much about the sector since this is as a full time job for them, were telling us it would be somewhere in the $3s range. Another job well done. [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In]

When you really think about this earnings power - much like the fertilizer - it is reaching the point of humor that hedge funds are fleeing this group because "the world will be ending" and "crude oil might go to $100 or gasp $80". But that's the markets for you. We're just the gnat on the big money's behind.

Full report here which has a lot of detail I don't have time to break down in the blog. Synopsis: It's good. Very good. And just the start.

As I said, I hope Harbinger gets its way and forces Cleveland Cliffs (CLF) to break up this deal, because Alpha Natural Resources on its own is going to be a $200+ stock in 2009. [Jul 25: More Drama at the Cleveland Cliffs Corral] As I wrote - I thought $130 was complete thievery on the part of CLF but the hedge fund who controls nearly 1/5th of Cleveland Cliffs disagrees. How they think $130 is a bad deal is beyond me, but what do I know - they have an army of super computers and CFAs and MBAs. I'm just one dude trying to raise funds for a mutual fund.

Long Alpha Natural Resources, Cleveland Cliffs in fund; long Alpha Natural Resources in personal account

The Bottom is in Financials - Version 23,472

Finally Merrill Lynch (MER) did the dirty deed; selling off assets at 22 cents on the dollar. You can almost hear the shuddering across the other banks as this now marks "fair value" on this junk. Folks, some of these guys still have assets market at the full dollar because they are guaranteed by Ambak (ABK) and MBIA (MBI) and their "triple A rating" which are essentially neutered. It's all a big joke.

Already CNBC has on their home page for the upteempth time "Is the Bottom in Sight?" It has now been a YEAR since the first calls for the "kitchen sink quarter" and "the bottom is in sight". Keep saying it folks and one day you will nail it! While I think this is actually a good transaction because (a) it rids MER of risk and (b) it was not a government bailout and (c) Lone Star Funds is going to make a lot of money because even if the assets are only worth 44 cents on the dollar they will make 100% (plus Merrill is guaranteeing some kickbacks).... this points to the hypocrisy on the Street. John Thain has promised us over and over and over that the firm did not need to raise more capital. Even 2 weeks ago during earnings report when they sold off Bloomberg instead of Blackrock. [Jul 17: Blackrock Earnings Excellent as Usual; Merrill Lynch Won't Be Selling] What did I say at the time, having zero access to Merrill's balance sheet and not being the CEO? Just a few days later in our weekly summary I opined

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.

So the CEO was assuring us everything was fine, most analysts are clapping about the "bottom in financials", and some random blogger (namely me) who has zero financial industry experience was doubting the veracity of one iota of this hot air. Who ended up being correct? Again - simply a lot of nonsense out there in pundit/analyst world and anyone who actually manages money listening to these people will simply have destroyed their invetor base's capital.

Anyhow this came at a cost of 40% dilution for current Merrill Lynch shareholders which is a beef I've had with the 'buy financials' crowd - even WHEN everything bottoms - the earnings PER share power is going to be decimated. In one fell swoop last night the share count grew by a massive amount. So just to have flat earnings per share with 48 hours ago, earnings would have to increase by the amount of the share count increase - just to be flat. And this is why the earnings power for these companies will simply be decimated for a long time. But... better to sell off coal and fertilizer and buy these stocks because they are "great value". So while "great news" for Merrill and their shareholders, the reality is these are the type of steps many other firms need to do. Effectively castrating themselves to stay alive. Those are exactly the type of stocks I want to be in. Not.

• Merrill Lynch & Co., in a broad move to clean up its troubled balance sheet, said Monday it will sell a big slice of its toxic asset-backed securities and issue new stock to raise $8.5 billion of fresh capital.
• The world's largest brokerage, struggling to right itself as the credit crisis continues, said it will issue more than 200 million new common shares as part of the deal. Merrill said it will write-down $5.7 billion because of additional losses on the sale of mortgage securities and hedging contracts. (kitchen sink quarter fellas! Get those buy orders in!)
• The latest move comes just over a week after Merrill reported a $4.6 billion second-quarter loss, where he raised $8 billion of much needed capital from asset sales instead of diluting the stock by issuing more shares.
• Perhaps the biggest benefactor in the deal is Temasek Holdings, the Singapore sovereign wealth fund that is already one of Merrill's biggest investors. The firm agreed to buy $3.4 billion worth of shares at a yet-to-be determined price, a potentially large percentage considering shares of the brokerage are down 54 percent this year.
• In a sign of how toxic Merrill's debt holdings have become, it has agreed to sell $30.6 billion of collateralized debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds, for just $6.7 billion, or about 22 cents on the dollar.
• William Smith, president of Smith Asset Management Inc in New York, said Merrill fetched a "horrendous" price for the CDOs in the sale announced on Monday.
• "What is happening to Merrill and others is death by a thousand cuts. It's painful to see it happen over and over again," said Daniel Alpert, managing director at investment bank Westwood Capital.
• On a July 17 conference call, Thain said: "Right now we believe we are in a very comfortable spot in terms of our capital." He has made a series of similar comments over the past seven months.
• The brokerage said it is also paying Temasek $2.5 billion to reset some provisions on a previous stake sale. The most recent round of capital raising was particularly bruising because of provisions Merrill agreed to when it raised money in December and January. Essentially, the investment bank said it would give the investors in those raisings extra compensation if it later issued equity at a lower price.

That's how poor the situation has become. Temasek bought a stake in Merrill about 8 kitchen sinks ago [Dec 31: Merrill Lynch Tapped Singapore - Next China and Middle East] and there was a guarantee that if they issued more shares they'd have to make up the difference to Temasek. So now they have to pay up. Remember, we were told all fall "smart money" (Oil money, sovereign wealth funds) was buying stakes in these financials, so therefore YOU SHOULD too. Right! That was about 18 kitchen sinks ago. Except you don't have a guarantee that if your investment loses another 50% of its value Merrill Lynch (or Citigroup or Bear Stearns or this, or that) will pay you back for your losses. All you have is the punditry pounding the table on how great of a value these stocks are. As they are today. Eventually the squirrel will find the nut.

Last question - where would the United States of Suprime Financial system be without the printing press of the Federal Reserve and the largess of foreign investors? [Jun 10: Where Will U.S. Banks Beg Next?] Answer: Destroyed.

Conclusion: The 23,472nd kitchen sink quarter is here. Buy financials. They're a great value. Again.

No positions

Mosaic (MOS) with Blow Out Earnings

Coal down, fertilizer to go...

blah blah, there is panic in the air, Mosaic (MOS) said volume targets of potash would be hard to reach for 2009, end of the world - pricing power will go away, valleys of corn will spring up throughout the world, competing with wheat, and Kool Aid will rain down from the heavens - instead of making $14 in 2009 they might make $13.25 - growth will slow from 150% to 90% and the end of the story is afoot - please give me my pacifier. Mosaic beats by 24 cents but again, who cares - let's go get us some financials that only lost $3.27 instead of the anticipated $3.87 and came in "better than expected". Fertilizer is SOoooOOoo 2007.

This company is selling potash @ $355 per tonne this quarter and the the whining is launching from the rafters because volumes won't ramp up in 2009 - meanwhile pricing is exploding - but that's ok, it's all priced in and time to get some Kohls (KSS). That 2nd half 2008 recovery... err 1st half 2009 recovery is just around the bend.

[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]

• The Mosaic Company (NYSE: MOS - News) announced today net earnings of $862.5 million, or $1.93 per share, for the fourth quarter ended May 31, 2008. These results compare with net earnings of $202.6 million, or $0.46 per share, for the quarter ended May 31, 2007.
  
• Net earnings for Mosaic's fiscal year ended, May 31, 2008, were $2.1 billion, or $4.67 per share, compared with $419.7 million, or $0.95 per share, in fiscal 2007.
• Net sales in the fourth quarter of fiscal 2008 were $3.5 billion, an increase of $1.8 billion, or nearly double the amount posted in the same period a year ago.
• Mosaic's gross margin for the fiscal 2008 fourth quarter was $1.3 billion, or 37.1% of net sales, compared with $456.2 million, or 27.1% of net sales, a year ago.
  
• Fourth quarter operating earnings were $1.2 billion, compared with $359.8 million for the fourth quarter in fiscal 2007. (that's not a typo - it's simply a sickeningly staggering increase)

Remember, the nitrogen business is exiting stage left [Jul 15: Mosaic Sells Nitrogen Plant to Yara International for $1.6 Billion] so we'll focus on the 2 nutrients that make Mosaic one of our favorites.

Phosphates

• Net sales in the Phosphates segment were $2.0 billion for the fourth quarter, which more than doubled net sales of $959.7 million a year ago.
  
• Phosphates' fourth quarter gross margin was $851.6 million, or 41.8% of net sales, compared with $266.9 million, or 27.8% of net sales, for the same period a year ago.
  
• Operating earnings were $797.4 million compared with $234.3 million for the same period last year.
  
• Operating earnings growth in the fourth quarter of fiscal 2008 was driven by significant increases in selling prices and a 5% increase in sales volumes to 2.4 million tonnes.
  
• These positive factors were partially offset by higher sulfur and ammonia raw material costs.
• The average fourth quarter DAP price, FOB plant, was $754 per tonne, which is a $416 per tonne increase compared with a year ago and a $267 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise, as do raw material costs.

Potash

• Net sales in the Potash segment totaled $860.5 million for the fourth quarter, an increase of 74.2% compared with a year ago.
  
• The Potash segment's gross margin increased to $342.4 million in the fourth quarter, or 39.8% of net sales, compared with $174.8 million a year ago, or 35.4% of net sales.
  
• Operating earnings were $331.3 million during the fourth quarter, an increase of $169.1 million, or double compared to the same period last year. The increase in operating earnings was primarily a result of the higher selling prices.
  
• This increase was partially offset by significantly higher Canadian resource taxes and royalties, the impact of a 4% decrease in sales volumes and a stronger Canadian dollar on operational costs. (wait, they had a 4% decrease and still posted blowout numbers? wow... better sell this off because 2009 is going to be flattish in volume, even as prices more than double next year)
  
• The average fourth quarter MOP price, FOB plant, was $335 per tonne, which is a $181 per tonne increase compared with a year ago and a $114 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise.
• The Potash segment's total sales volume of 2.4 million tonnes was at the high end of Mosaic's guidance range for the fourth quarter and compares with last year's fourth quarter volume of 2.5 million tonnes. The reduction in sales volume compared with the year-ago quarter was primarily due to the lack of sufficient inventory to fully meet customer demand. (there are worse problems to have than having so much demand you cannot fulfill it all, but someone will twist this into an End of Days scenario - even though these guys say the same thing every time they open their mouth)

Industry Outlook

• Global grain and oilseed stocks remain at low levels despite record crops in 2007 and 2008. The latest USDA statistics released on July 11, 2008 show that inventories of the sixteen leading grain and oilseed crops will increase a measly (you do this long enough and see the first occurance of the word 'measly' in an earnings report - hah) 4.4 million tonnes this year and stocks as a percentage of use will decline to the lowest level since the early 1970s. (but... but...crude oil is down $20 and could go to $110!! no one needs fertilizer in that environment - CNBC told me)

Financial Outlook (this is the "scary" stuff - better take this name back to $20 - the story is over)

• Sales volumes for the Phosphates segment are expected to range from 9.0 to 9.4 million tonnes for fiscal 2009. This increase is contingent upon sourcing an adequate supply of sulfur, operating mine and plant sites at high operating rates, and restarting certain previously indefinitely closed phosphoric and sulfuric acid production in the second half of the fiscal year. The restart of this phosphoric and sulfuric acid production will permit Mosaic to utilize excess granulation capacity at one of its existing plants.
• Potash segment sales volumes are expected to range from 8.2 to 8.6 million tonnes in fiscal 2009. Previously announced potash capacity expansion projects will be underway in fiscal 2009; however, production from the first of the expansions will not come online until fiscal 2010. This volume estimate assumes, among other things, operating the potash facilities at high operating rates and continued successful management of the brine inflow at the Esterhazy mine. Mosaic is beginning fiscal 2009 with extremely low inventory levels, especially in Potash, compared with the inventory levels a year earlier. This will make it difficult to achieve increased sales volumes in fiscal 2009. (flat volume? the horror - stock cannot be worth more than $24 - 2x forward earnings at most)
  
• Mosaic's realized DAP price, FOB plant, for the first quarter of fiscal 2009 is estimated to be $1,020 to $1,080 per tonne. (vs this quarter $754 - better sell this stock, the rate of growth cannot continue - End of Days is here, I mean at 25% sequential growth from here to 2011 fertilizer will cost more than platinum but that's ok - we demand this pace continues or the stock will be sold to $18) Partially offsetting the benefit of these higher projected prices will be higher raw material costs, principally ammonia and sulfur.
  
• Mosaic's first quarter fiscal 2009 average realized MOP price, FOB plant, is estimated to be $460 to $510 per tonne (vs this quarter $335 - again the rate of growth is unacceptable to my hedge fund's computer - the story is over - declining growth rates means the stock should go to $14 - did I just say $18? I was being generous - maybe $10 is more fair, 1x earnings seems fair). Partially offsetting the benefit of these higher projected selling prices will be higher Canadian resource taxes and royalties.
  
• Both estimates assume farmer economics remain robust and that management has accurately estimated the mix of forward versus spot sales. (well there is the rub, as oil falls to $100 or *gasp* $85, the farmer economis will be ruined. How's that? I don't know - it doesn't make sense but let me ask the super computer to come up with a thesis so I can sell the stock off)

Note sarcasm prevalent in above commentary but as you can see, the boogey men under your bed are out to get you. Folks, no company can grow at the rates these companies have on and on and on and on. Mosaic now trades at 10x next year's (too low) estimates. If this were a 40x forward PE let's talk nightmare scenarios. As growth 'slows' from 150% year over year (or 400% or whatever metric you want to use) to even half that I believe 15-20x P/E is not out of the question. And once the debt is retired, the cash spin off machine will begin. Even lousy financials are getting 9-10 PE Ratios. I believe it would not be too much to ask to share such a multiple for the fastest growing sector in all the market. I know, I know, fertilizer is a "backward looking story" and the bright light that is financials, housing, and retail is 'forward looking' so it's time to buy those! But I'm not "quite" ready to call the death knell for the industry like we'll hear this quarter, or the next, or the one after that, or perhaps the one after that. All white noise. The death knell brought to you by the same people who missed the entire story on the way up [Oct 23: Analysts Still Doubting the Fertilizer Stocks]

But... until the hedge fund computers return to the thesis we'll wait for selloffs to add, or better chart formations - just like coal. Otherwise we are just marking time.

Long Mosaic in fund and personal account

Walter Industries (WLT) with Blow Out Earnings

We are alternating blow out numbers between coal and fertilizer, and ironically they just keep selling off. On to Walter Industries (WLT) which is mostly a metallurgical coal company but also has a housing component - I know, I know - strange [May 1: Walter Industries - the Most Fascinating Company] Since all news is bad news, I have cut back this position but again we are keeping our mental shopping list of names with superior fundamentals and waiting for them to either be sold off harder and or show some strength on their charts. Walter Industries beat by a measly 37 cents (yawn) - frankly these coal names are beating estimates by a far wider margin in 2008 than I estimated; again these are 2009 stories in my eye. But I'll take it; even as the market spits on it. Until good news is rewarded (or stocks sell off significantly from here), there is no reason to buy merchandise in this market.

• Walter Industries, Inc. (NYSE: WLT - News), a leading producer and exporter of U.S. metallurgical coal for the global steel industry, today reported net income of $50.8 million, or $0.94 per diluted share, for the quarter ended June 30, 2008 compared to $18.1 million, or $0.34 per diluted share, in the second quarter 2007. (analysts at $0.57)
• "Our overall financial performance in the quarter was outstanding, particularly in our core Natural Resources and Sloss businesses, which reported their best quarterly performance ever," said Walter Industries Chairman Michael T. Tokarz.
• Net sales and revenues for the second quarter 2008 totaled $370.0 million, up 24.8 percent from the prior-year period, driven by higher metallurgical coal and coke pricing, as well as improved sales volumes of both mined and purchased coal.
• Operating income from continuing operations for the second quarter 2008 totaled $82.3 million compared to $33.0 million in the second quarter 2007. Operating income in the current period was higher primarily on strong metallurgical coal and coke pricing, as well as increased sales volumes.

This is just so funny that we are talking about the same company but....

• The Financing & Homebuilding group reported second quarter revenues of $90.9 million, compared to $123.2 million in the prior-year period. Revenues were lower primarily as a result of fewer unit completions and a $4.2 million increase in the discount on instalment notes originated in the quarter.

[Dec 6: Coal Stocks Quitely in a Bull Market]

Long Walter Industries in fund and will be much longer once the market acts normal; no personal position

U.S. Budget Deficit to Half a Trillion

... and that is with the war costs in an off the balance sheet account (just like our banks... and Enron - no I'm serious) Heck we just sent out $300B in the housing bill, with another $160B this spring so Americans would stimulate the economy and now Hank Paulson has an unlimited bazooka gun over and above the $300B to deploy into Fannie and Freddie - what's not to love?

And it assumes a recovered economy in '09. If you care about the long term health of the country (fiscally) and are a newer reader I recommend these 2 posts [May 23: David Walker on CNCB this Morning] & [Mar 26: Annual Spring Entitlement Warning Falls on Deaf Ears]

For those of you who have been around a while, away we go (is anyone shocked by this?)

• The government's budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.
• The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. The White House in February had forecast that next year's deficit would be $407 billion. (missed it by THAT much)
  
• That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn't include, and the total could be higher yet if the economy fails to recover as the administration predicts. (translation: it will be higher yet)
• The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.
• Neither campaign is backing off campaign promises -- McCain to cut taxes and Obama to expand health and education programs -- in light of the bleaker new figures. (of course not - promise the American voter whatever it takes to get into office) "There's a total disconnect between today's report and what we're hearing on the campaign trail," said Robert Bixby of the Concord Coalition budget watchdog group.
• But Democrats controlling Congress suggest that will have to change once President Bush's successor takes office. "Whoever becomes the next president will have a very, very sobering first week in office," said Senate Budget Committee Chairman Kent Conrad, D-N.D.
• The administration said the deficit was being driven to an all-time high by the sagging economy and the stimulus payments being made to 130 million households in an effort to keep the country from falling into a deep recession. But the numbers could go even higher if the economy performs worse than the White House predicts
• Monday's figures capped a remarkable deterioration in the United States' budgetary health under Bush's time in office.
• The administration actually underestimates the deficit since it leaves out about $80 billion in war costs. In a break from tradition -- and in violation of new mandates from Congress -- the White House did not include its full estimate of war costs.
• "The nation's economy has continued to expand and remains fundamentally resilient," said the budget office report.

Sure when you make the numbers fit your agenda the prose is even easier to create sweet whispers of wonderful songs of Kool Aid. [May 10: Finally Some Mainstream Reporters are Figuring Out the "Spin" from Government] [May 1: Is it an Official Recession? NY Post Says it Should Be]

The last post above is a good read in anticipation of the upcoming "better than expected" GDP report for 2nd quarter we are sure to receive as a blessing. When you jack around the input numbers to whatever you want, you can make the output land to wherever you wish. That's called "science" in this era...

Position: disgust

CF Industries (CF) - Another Huge Beat

This is starting to get boring with CF Industries (CF) - all they do is demolish analysts estimates every quarter - at some point we start re-using the same hyperbole to describe these quarters. Now for those who have been long time blog readers you know this was once our top position [Oct 29, 07: #1 Position CF Industries (CF) Monster Quarter] and while the stock had a decent pop, it didn't last too long. In other quarters it demolished the number [Feb 7, 08: CF Industries (CF) Monster - AGAIN] and actually did ok post earnings. Something about a random walk on Wall Street....

Now again, despite what are eye popping numbers we are in an environment where very little matters. So most likely we'll file this piece of news away in our head and realize how much cheaper this stock just became on a trailing earnings basis (and forward). EPS of $5.02 vs analysts $3.60 will do that for you. However, as always CF has some mark to market (hey it's not just banks) in it's natural gas hedges which generated 92 cents of the $1.42 in excess of analysts. And oh yes, a slight (ahem) "miss" on revenue... they'll find something to raise a fuss about a stock when the sector is out of favor.

Once more all we can do now is continue to monitor the companies in our portfolio or watch list that are exceeding expectations and wait for them to return back to favor in the market. No amount of good news is being rewarded in most cases. Let's take a closer look.

• Net sales rose to best-ever $1.16 billion, up 37 percent from second quarter 2007, as substantial price increases for all products more than offset volume impact of adverse weather conditions in U.S. Midwest
• Operating earnings totaled $452.1 million, up from $159.4 million in year-earlier quarter
• Net earnings totaled a record $288.6 million, or $5.02 per diluted share, compared to $93.6 million, or $1.65 per diluted share, in second quarter 200. The results are three times its earnings in the second quarter of 2007, when the company earned $93.6 million, or $1.65 per diluted share.
• Second quarter results included $83.2 million in non-cash, pre-tax unrealized gains, or $0.92 per diluted share on an after-tax basis, from mark-to-market adjustments on natural gas derivatives. In the year-earlier quarter, CF Industries reported $36.3 million in non-cash, pre-tax unrealized losses, or $0.41 per diluted share on an after-tax basis, from mark-to-market adjustments
• “The cold, wet spring resulted in lower volumes in our nitrogen and phosphate businesses. However, that impact was more than offset by record high prices for all major fertilizer products, which helped us achieve our first-ever billion dollar sales quarter,” Wilson added.

CF Industries is a nitrogen and phosphates producer so we always break down their business into the 2 pieces - phosphates being our more favored of the two.

Nitrogen

• Significant increases in average selling prices for all of the company’s nitrogen products more than compensated for increased natural gas costs and lower volumes, driving sharply higher net sales and gross margin compared to the second quarter of 2007.
• Nitrogen net sales totaled $848.6 million, up 26 percent from $671.5 million in second quarter 2007. During the 2008 quarter, CF Industries sold 2.12 million tons of nitrogen fertilizer, down 5 percent from the 2.24 million tons sold in the year-earlier period. The cold, wet spring delayed plantings and limited farmers’ ability to apply fertilizer.
• Second quarter 2008 nitrogen gross margin, including the segment’s mark-to-market gain, was 42.7 percent of sales, compared to 18.3 percent in the year-earlier quarter. (I love this statistic, although the mark to market does not make it a clean number)
• “China’s imposition of a substantial increase in their tax on fertilizer exports during the quarter clearly helped tighten the market for nitrogen, especially for urea,” Wilson noted.

Phosphates

• Net sales of phosphate totaled $312.4 million, up 76 percent from the $177.4 million reported for second quarter 2007. Volume was 456,000 tons, down from 510,000 tons in the year-earlier quarter. Volume in domestic markets approximated last year’s level, despite the reduction in corn acreage. However, export volume fell by 55,000 tons, due in part to timing of shipments to customers in India, Brazil, and other Southern Hemisphere markets.
• Gross margin was 34.5 percent of second quarter phosphate sales, up from 30.9 percent in second quarter 2007. Gross margin also improved sequentially from 32.1 percent in 2008’s first quarter, despite a second quarter increase of approximately $200 per ton in the cost of sulfur, a key component in phosphate fertilizer production. (so in English this means despite a substantial increase in their input costs they were able to pass along even higher prices, and their gross margin expanded)
• “The global supply/demand balance for phosphate, already tight going into the second quarter, tightened further when China increased its tax on fertilizer exports. There are published reports that recent earthquakes may have damaged a portion of China’s phosphate production capacity, which could further limit global supply,” Wilson pointed out. (notice a theme?)

Dividend (just the start of many for the cash flow machines that fertilizers will be even if prices drop 20-30% from here in the coming years)

• On July 23, 2008, the company’s Board of Directors declared the regular quarterly dividend of $0.10 per common share. The dividend will be paid on September 2, 2008 to stockholders of record on August 15, 2008.

Expansion into Peru

• In July of 2008, CF Industries Holdings, Inc. and the Block 88 Contractor Companies (B88CC) reached agreement on a natural gas term sheet. The B88CC is developing Perú’s Camisea gas fields, which would provide the feedstock for a world-scale nitrogen fertilizer complex that CF Industries has proposed building in that nation.

Quite a Detailed management Discussion on Outlook - a piece below on what is the biggest concern

• The CF Industries executive also addressed questions about the potential impact of today’s fertilizer price levels on farmers. “Current high crop prices encourage farmers to maximize acreage and yield, and that means optimizing their use of fertilizer, here and around the world. Prices have responded to the tight global supply/demand balance. Fortunately, increases in crop prices have so far outpaced increases in fertilizer prices, so crop economics remain positive for farmers.”

As always these fertilizer makers produce some of the most detail oriented press releases during earnings season - always worth a read.

[May 27: WSJ: Lofty Prices for Fertilizer Put Farmers in a Squeeze]
[May 5: Senators Call on EPA to Reconsider Ethanol Output Mandate]
[Apr 24: CF Industries Earnings]

Long CF Industries in fund; no personal position

Tyson Foods (TSN) Continues to Struggle with Higher Input Costs

I continue to believe food inflation (agflation) will replace energy inflation as the "beef" (pardon the pun) of choice in 2nd half of 2008, mostly due to the delayed effects of high input costs making their way through the "food" (sorry) chain. We've been on this beat very early [Aug 29, 2007: Inflation in Groceries - Fed Between a Rock and a Hard Place] [Sep 5: Tyson Food Warns] [Nov 12: Tyson Foods Continues to Point to Food Inflation] but unfortunately we really have not benefited financially in this part of the investing spectrum - iPath DJ Livestock ETN (COW) has been listless at best, and the grain ETFs available to US investors are combinations of multiple commodities, some of which are going down while others go up - hence cancelling each other out sometimes. Corn has fallen quite precipitously along with crude oil (since it's all the same to speculators), and much better weather the past month in the US Midwest. This might bring some relief for this year's crops but again the world food production system has low stockpiles across the board, and we remain in constant perilous condition and having to hope for good weather.

Tyson Foods (TSN) out with another bad earnings report - to offset higher inputs they will have to raise prices as we've long predicted.

• Tyson Foods Inc., the world's largest meat company, said that third-quarter profit plunged 90 percent on the rising cost of grain to feed chicken and that it may take until next year to turn the trend around.
• The company earned $9 million, or 3 cents per share, compared with $111 million, or 31 cents per share, in the year-earlier period. Revenue rose to $6.8 billion from $6.6 billion.
• A survey by Thomson Financial, which generally excludes items, showed analysts expected Tyson to earn 12 cents per share on revenue of $6.99 billion in the period ended June 30.
• Tyson expects overall costs to increase an estimated $1 billion this year because of the skyrocketing costs of grain and other staples. Grain costs with which to feed chickens rose $140 million in the quarter, and are expected to jump $550 million for the whole of 2008, the company said. (no inflation in the US, move along - nothing to see here)
• Tyson has had problems raising its prices fast enough to cover the jump in feed grain expenses, but the company said it will continue to hike prices "over the next several quarters."

I continue to furrow through companies reports to find "real inflation" versus the fiction reported monthly by the government reports.

p.s. notice the folly of simplistic logic below in the chart over the past few weeks - wow, when crude drops $20 and gas drops 25 cents it's time to buy companies that have been hurt by inflation since everything will be "fine". Not so much.

Long iPath DJ Livestock ETN in fund; no personal position

Bookkeeping: Cutting Back Atwood Oceanics (ATW)

I am selling 300 of 350 shares in the $46.60s to retain only a holding position in one of my favorite drillers in the energy patch, Atwood Oceanics (ATW). This reduces our stake from 1.4% of portfolio to 0.2%.

This is, once again, the EXACT same pattern we have detailed in the weekly overview and especially last Friday. You should recognize it by now - stock price broken below support, now drifting back upward to test previous support (now resistance). If it breaks through, fine - we'll miss a few points of upside. But I continue to marvel at how many charts both in the portfolio and my watch lists look like this. Which leads me to be anxious about both the stocks and the market as a whole. We'll cut back and re-assess when the chart either breaks down or strengthens. If we lucky and the market really tails off we might be able to pick this back up in the mid $30s where it has some old support levels. Not counting on it, but now that we are mostly out of it, I wouldn't mind. ;)

No change to fundamental story; on 2009 estimates of $5.61 (their year end is September 09, not December) the valuation is becoming absurd but this is not the first name I've written that about the past month. In 2002 nearly every stock had an absurd valuation.

Long Atwood Oceanics in fund; no personal position

Fund Holdings Earnings Preview for the Week

As always we'll be looking at a smorgasbord of earnings, but with such volume it is hard for me to make time to do a daily preview. I am reviewing about 25-30 names a night in various industries to see what the "reality" is out there versus relying on government reports or the punditry spin.

For now, here are our holdings for the week; as usual I generally cut back positions going into earnings because of the 2 sided random risk. Sometimes I make exceptions. This causes us to miss those pops off of "surprises" but generally keeps us out of the way of major blow ups. Last quarter in fact we did not have a single substantial "oops our guidance is 1 cent less than the analysts wanted so our stock dropped 30% in the first 10 minutes of after hours trading". I'd like to keep it that way but probability says with 50 some long positions we will get slammed somewhere along the line....

Monday
Fertilizer makers CF Industries (CF), Mosaic (MOS) - we know earnings will be tremendous but it is not the news, but the reaction to the news that we care about

Sohu.com (SOHU) - had tremendous earnings and guidance upgrade this morning, and the market reacted by selling it off. Again, this market simply does not reward fundamentals and until that changes it is hard to get excited by the long side. But we are going to make shopping lists of these names with extraordinary results and purchase as the market punishes them.

Tuesday
Coal name Alpha Natural Resources (ANR) - see comment above re: fertilizer. However at this point this name is going to be tied more to what Harbinger Capital does more than anything. Just like when the stock dropped from $120 to $103 within a matter of hours post buyout on "no news" (why is the SEC not looking into this type of stuff?) we will be the last to know what sort of decisions are being made behind the scenes. We'll just have to follow the price action.

National Oilwell Varco (NOV) - oil at $60, $80, $100, $120, $140; there is a shortage for their customers rigs. I realize hedge funds don't care but this is a wonderful long term story. Unless oil goes back to $18.

Wednesday
Iron/coal name Cleveland Cliffs (CLF) - see ANR comments above

Cummins Engine (CMI) - still love this name as an international powerhouse who has been in India/China well before it was the cool thing to do. Curreny will favor them as well. Unfortunately, chart is (stop me if you've heard this before) breaking down.

Thursday
Massey Energy (MEE) - another favorite in the coal space, same comments as fertilizer group. Reaction to news is important; chart needs to show better strength.

Mastercard (MA) - chart has been degrading here as well; I am praying for a "miss" or "guidance" that does not make people happy so I can load up at lower levels. No creditrisk, and an emerging global powerhouse in a world where 80%+ never have seen a credit card. Of course the crowd will fuss over the weakening US consumer - which I've argued since last fall is a BOON to this company, not a negative. Cash strapped consumers now paying for basic necessities with credit cards instead of cash means more transaction volume. That said if it continues for 2-3-4 years of course some of these customers will be going bankrupt.

Friday
None

Sohu.com (SOHU) - Another Hit Earnings and Gaming Unit IPO Spinoff

Another quality quarter from Sohu.com (SOHU) and an interesting ploy to extract value from the market by a proposed IPO of its gaming unit Changyou.com. As in the recent past [Apr 28: Sohu.com Crushes Estimates - Up 15%], the advertising arm did well but the gaming arm did stupendous. This should bode very well for our pure play Chinese gaming stock Perfect World (PWRD). I cut back the position recently ahead of earnings as I normally do... the stock is up 4-5% in pre market, despite crushing earnings estimates. Frankly it's a bit disappointing to see such a lack of response, but not surprising anymore. We'll see if it can hold for the next week or if the market will steal away all it's gains, despite lack of exposure to subprime, oil, or the U.S consumer.

I should also note that last we noticed China passed the United States in terms of internet users. Penetration rates are only 19% in China versus 71% in the US... have I mentioned demographics are destiny?

• Sohu.com Inc., a popular Chinese Web portal, said Monday its quarterly profit rose 600 percent over the same period last year on strong advertising and online games revenue ahead of August's Beijing Olympics.
• Sohu, the official Web portal for the games, also announced plans for an initial public stock offering for its online games unit, Changyou.com.
• Sohu's quarterly profit rose nearly seven-fold to $40.2 million, or $1.02 a share, from $5.7 million, or 15 cents a share, a year earlier. Excluding share-based compensation expenses, it earned $1.07 in the latest second quarter. It said revenue rose 162 percent from the year-earlier period to $102 million, exceeding its highest forecasts.
• Analysts on average expected Sohu to post earnings of 70 cents a share, before special items but including stock-based compensation, on revenue of $97.2 million, according to Reuters Estimates.
• "We expect that penetration of the Internet in China will be escalated to an even higher level with the Beijing 2008 Olympic Games and that, combined with our technological advancements and portal strength, will help us to continue our success for the remainder of 2008 and beyond," co-President and Chief Marketing Officer Belinda Wang said in a statement.
• Quarterly advertising revenue rose 53 percent over the year-earlier period to $41.7 million, while games revenue rose more than 11 times to $47.9 million, the company said.
• Sohu said it will submit plans to U.S. securities regulators for an IPO by its games unit, Changyou.com. Sohu said that would let the parent company focus on its other businesses while Changyou focuses on games. Sohu said it would remain Changyou's majority shareholder.
• China's population of Internet users has risen to 253 million people, surpassing the United States to become the world's biggest, the official China Internet Network Information Center reported last week. Nielsen Online, a research firm, estimated the U.S. online population at 223.1 million Internet users in June.

Guidance well ahead of earnings estimates

• For the third quarter, the company forecast profit of $1 to $1.05 a share, excluding the share-based compensation expense, which is expected to reduce Sohu's reported profit by 6 cents to 7 cents a share.

Full earnings report here

[June 23: Sohu.com - Analysts Rush to it's Defense]
[Jun 20: Sohu.com Sees Ad Revenue Slowing in 2009]
[Feb 5: Initiating Sohu.com Starter Position]
[Feb 4: Sohu.com Also Impressive]

Long Sohu.com, Perfect World in fund; no personal position

Barron's Cover Story on Intuitive Surgical (ISRG)

Quite a comprehensive story via Barron's on Intuitive Surgical (ISRG) - worth a read. Touches on a complaint I've been voicing of late - how few true growth opportunities there are outside the now hated commodity complex... which means one must "really pay up" for other growth opportunities.

Specific to ISRG the question has always been, one past the "saturation point" with the prostate market, what are the new growth opportunities? Once growth slows in a momentum growth stock, the resulting affect in your portfolio is usually quite painful. But again, as other countries grow in wealth, this could become quite the international story as a phase II of its growth cycle. Yet the question is what exactly is the amount of robots that could be placed worldwide? The answer will determine how long this remains a hyper growth company.

• At 322 each, the shares now go for more than 75 times trailing 12-month earnings, giving Intuitive one of the handsomest multiples in the Standard & Poor's 500. That multiple reflects the alacrity with which surgeons have adopted the company's da Vinci robot, a four-armed marvel the doctor controls from an operating-room console. Patients have less bleeding and scarring, and can get back on their feet without a long, expensive hospital stay.
• But Intuitive's volatile and pricey shares also bespeak the desperation of investors mobbing a quality growth story in a lousy economy and stock market. That momentum mob seems heedless of how suddenly this expensive stock could become a victim of the robot's success.
• About 40% of the country's large hospitals already have at least one da Vinci robot. When Intuitive (ticker: ISRG) finishes placing its robots, it will see a falloff in the systems sales that have contributed more than half of its revenue.
• Sales of disposable instruments and accessories for each operation will continue, but the growth rate of those revenues will also decline once the da Vinci gets its share of the relatively fixed number of surgical procedures performed each year.
• In its report last week, Intuitive allowed that procedure growth has slowed for the kind of robotic prostate surgery that I had last fall. The robot took seven years to garner the majority of the 90,000 prostate procedures conducted annually.
• Robotics is gaining share more quickly in the rather larger market for hysterectomies and other surgeries performed by gynecologists. But after that, there are only a handful of remaining high-volume procedures in the U.S. and abroad.
• What stock multiple investors would put on such steady-state earnings is harder to predict. Shares of profitable medical-device makers that saturated their markets, like coronary-stent maker Boston Scientific (BSX), have settled into earnings multiples in the high teens. Even if that earnings arithmetic proves too stingy, Intuitive shares could fall by at least 25% once most people get their surgery robotically, as I did.
• The company and its fans say growth is far from slacking. "We don't think we are anywhere near saturation in anything," says Intuitive's vice president of finance, Benjamin Gong.
• da Vinci procedures have burgeoned. About 55,000 fellows around the world went under the da Vinci in 2007. With other kinds of da Vinci surgeries, there were a total of 85,000 robotic operations last year, an increase from 2006 of almost 75%
• That demand drives hospitals to invest in robot systems. The worldwide installed base of da Vinci robots grew 42% last year, to almost 800, with about 600 of those in North America. A system sells for more than $1.3 million. The hospital pays another $135,000 a year for service and support. Each procedure consumes $1,500 to $2,000 in disposable instruments and accessories.
• Gross margins on both systems and consumables are 70%. Operating margins are almost 35%, and if you add back noncash charges for stock options, cash margins from operations approach 45%.
• The thousand largest hospitals in the U.S. (those with more than 325 beds) should be good for three systems each, says the company. The next thousand hospitals could have one da Vinci apiece. Hospitals in the rest of the world could buy 2,000 more, Intuitive says, for a worldwide total of 6,000 robots. Through June, the company had sold 946 da Vincis worldwide, so Intuitive thinks it has penetrated only 15% of the hospital market.
• THE COMPANY'S MEASURE OF THE MARKET FOR ROBOTS may be far too optimistic. Jose J. Haresco, an analyst at Merriman Curhan Ford in San Francisco, thinks there's room for about 1,800 da Vinci robots in the U.S. and 600 more abroad. Intuitive's dream of three robots in every big hospital isn't yet supported by the evidence.
• Finance V.P. Ben Gong, and bulls like Deutsche Bank's Tao Levy, are quick to change the subject to hysterectomies. There are an estimated 600,000 performed in the U.S. each year. Many of these procedures already qualify as minimally invasive; gynecologists pioneered surgery through laparoscopic key-hole incisions. Yet Intuitive thinks surgeons could use the da Vinci for about 250,000 complex hysterectomies currently done with open incisions.

[Jul 23: Healthcare Companies Starting with the Letter 'I' Outperform]
[Feb 1: Intuitive Surgical Very Impressive]

No position

Bookkeeping: Weekly Changes to Fund Positions Week 51

Week 51 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: 18.9% (vs 1.1% last week)
50 long bias: 52.0% (vs 89.7% last week)
9 short bias: 29.1% (vs 9.2% last week)

59 positions (vs 65 last week)
Additions: EZCORP (EZPW)
Removals: Ciena (CIEN), Sterlite Industries (SLT), DryShips (DRYS), Vale (RIO), Mechel (MTL), Encore Acquisitions (EAC), EOG Resources (EOG)

Top 10 positions = 38.9% of fund (vs 34.1% last week)
32 of the 59 positions are at least 1% of the fund's overall holdings (54%)

Major changes and weekly thoughts
The month of July continues to frustrate us. As we spoke about last week, trying to time the "market" is much much much more difficult than making assessments of individual stocks but frankly the market has dominated trading the past year; as I like to type - we don't exist in a vacuum. Of the past 52 weeks I'd estimate the market's vicious up and down action has dominated at least 30 of them. And individual stock selection becomes nearly meaningless as the "everything must go" or "buy anything" mentality has dominated, with an obvious focus on the former over the past 12 months. Most of our outperformance has come during the "quiet" periods where the market is relatively listless and or at least not going up (or down) 2% a day, and individual company dynamics win out. Buying fundamentally good companies and allowing them to appreciate gradually is the market we thrive on, but that market has been absent for much of the past year. I've never seen some of the things we've been experiencing both from a governmental viewpoint and from a market viewpoint; many professional investors I've been reading for many years have written as much. As much as we tease Mr. Cramer some words from him this week that parallel much of what I am reading from many people I respect over the years.

New world: 5%, 10%, even 15% price swings don't mean much. Your screen is a snapshot that means little. You almost have to expect a 25% move in either direction in a financial over a couple of days. An airline doubles, halves. Oils slough off 25% in three sessions.

It's tough to own a financial and a resource company right now, the moments of elation so fleeting, the moments of depression so devastating. You almost have to trade them, which is way too hard for most people.

Here's where the real problem is. These stocks, like the financials, are not reflecting anything other than hedge funds buying and selling them. Should Chesapeake (CHK) have lost 40% of its value in a couple of weeks? Yes, if you think that natural gas is going back to $4-$5. No, if you think natural gas is going to be a fuel that will bridge the gap between carbons and naturals.

Yes, if you think that we will stop heating our homes and factories. No, if you think it will one day get cold or business will continue albeit at a lower level.

So as we've been saying most of the year - it is simply not a buy and hold market; heck "hold" doesn't even work on a weekly basis anymore because what goes up, gets demolished if not within months, then weeks... sometimes days. This is not my strength - my strength is finding stories early and riding the trend before the masses get there, allowing the ups and downs, and knowing I'll get it wrong some of the time. That is not this market. This market is waking up each day, knowing any position could be down 15%, and then tomorrow? Another 15% down or UP 25%. Totally random. This has simply taken a quite raucous marketplace where the house has the advantage but the individual can slip between the cracks to overcome and made it "Vegas" - total random toss of the die. I have my theories why which I've outlined in the blog, but "why" is not as important to me as "what". And it is "what" it is. We're trying our best to adapt with hopes one day we return to normal where fundamentals mean something.

Random statistic of the week - Berkshire Hathaway (BRK) is down 20% year to date. Many "safe" (non financial) healthcare, industrial, consumer non discretionary "grandma and orphan" stocks are down more. It's not easy being green - or staying so.

We've been calling for a global slowdown for a long time. The market sneered for a while, first denying there would even be a US slowdown last summer/early fall, and then when the pundits finally relented and said "minor slowdown but don't you dare call it a recession" the next sexy theory was decoupling - the rest of the world is immune to the U.S.. Considering the UK is a mini US, and Spain is making our housing bubble look like cake, we knew W. Europe would be toast, especially with a central banker who takes his job of price protection seriously. So that left us the emerging markets ... and with inflation rearing its ugly head there (remember inflation is not allowed to cross US Borders so we have very little here - ahem), the consumer in much of the rest of the world would be stressed. So here we are - the global slowdown we've been predicting for a long while has finally crossed over to consciousness to those who trade the billions upon billions of capital on a daily basis. Further, as more areas of the world weaken we've been saying much of this story of late (global growth) is based on the thesis that China will pay any price for any product - which they seemed able to do, but the first whiffs of drop off have been happening [Jul 6: Is the Buck Finally Stopping in Steel?] [May 17: Fast Rising Steel Prices Set Back Big Projects] [Jun 15: LA Times: Even the Chinese Expect Subsidy Decrease post Olympics] [Jun 26: Can a Near Term Top in Oil be Far Away?]

So the question with a thesis aside from whether you are correct or not is (a) when will the market finally wake up to it and (b) when it does wake up how much will it panic and overdo things? As an example we were negative on financials right from the beginning of the blog... but the market, after the first knock to the knees last summer, went racing off to new highs in September and October 2007 on confidence of the "Federal Reserve will save us - don't fight the Fed" and "this was the kitchen sink quarter in financials - it's all good from here" and "smart money aka sovereign wealth funds - are buying, so of course it's safe to buy financials". So we were routed in our positions betting against the financials. Because perception is reality. Were we "wrong"? Technically yes (prices went against us for a while) - but conceptually, heck no. So even those who are right intellectually can be destroyed in these markets if you bet against the herd in the near term. As a famous economist once said "the market can stay irrational far longer than you can stay solvent". So moving to the world economies (which obviously I've believed the pundits to be too positive on) - we're switching from "decoupling" to "no building or consuming will be taking place as the world shrivels into a ball" Many times there is very little middle ground in the market - people take things to one extreme or the other. The "shriveling" in China might take it to 7% growth rate, perhaps even (shudder) 6%. Growth rates we'd dream of. But we live in a day to day, week to week, month to month, and for hedge funds quarter to quarter world. People paid on the quarter only care about the next 90 days and exploiting gains in those 90 days. So we have to be aware of that and I contend technical analysis must go to the forefront over fundamental analysis in this environment. Because overreactions are replete and capital can be destroyed quickly in such situations. We are just mice dancing between the elephants of capital and their super computers. Just this past week, we found out that hedge funds have passed mutual funds in terms of volume of equity trading, despite controlling far less money. This is their era and the "marginal consumer" dictates the price - and they are the marginal consumer.

Keeping this in mind, and seeing charts that don't look too healthy we culled back a lot of exposure. 2 weeks ago we went to our largest long exposure since January 2008 (nearly 90%) since the market was down 6 weeks in a row and we anticipated All the King's Horses and All the King's Men would get their bailout hats ready for Fannie/Freddie this time (does that not rhyme? sorry). Guessing the market is a fool's game, but this one seemed obvious - we were correct. But we did not hold much of what the market ran into and managed to lose money on a oversold bounce week. Then this past week we lost money again in a flattish market. This does not make one too pleased. So we "called" the bounce but did not participate.

Now we need to see if we are at the beginning of a new trend or simply out of favor for a few weeks. We won't know until looking back a month or two from now but going with the technicals over fundamentals, things do not look promising in a lot of our favorite names. So we err on the side of caution for now willing to give up potential upside in the sake of capital protection. We'll have some great early tests this week with our favorite idea in fertilizer, Mosaic (MOS), reporting Monday and our favorite idea in coal, Alpha Natural Resources (ANR), reporting Tuesday. While coal is more of a 2009 story, we know the fertilizer story is booming so as always it is not the news, but the reaction to the news we care about. Will good news be ignored (bearish) or rewarded (bullish). Or will it even matter as economic reports (first revision of 2nd quarter GDP Thursday and the fictitious monthly labor report on Friday), oil prices, and the drudgery that is the banking system dominate the action. And with the "bounce" relieving an oversold condition we are back to where we were 3-4 weeks ago - not too happy of shape economically and a lot of stocks looking very troubled. As always an interesting week ahead...

Moving to a more defensive posture and seeing some of our favorite ideas breaking down we had another busy week in transactions (seismic shift actually), mostly built upon the idea of creating a larger pile of crumbs (cash). I've spent a very nice Michigan weekend trying to find new ideas that the hedge funds have not piled into, and its slim pickings out there - much of what is working of late outside of healthcare does not have what I'd consider "promising" fundamentals, but that is where the money flow has been. We do have a few ideas in the smaller cap arena which we'll present this week, and I might add some to the portfolio since frankly despite some warts they are where the money is flowing.

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

1. Monday, little action of material value
2. Tuesday, sold down about half our Yingli Green Energy (YGE) stake - we have a winning position here from the last purchases so I wanted to lock that in, as wins are brief in this market and the chart is not doing so well. Plus we entered the week low on cash. Solar has really underperformed for a long time; if its not fretting about one thing it's another. I still contend once Bush is shown the exit, even McCain is going to seem like a tree hugger and the mood will improve but for now we reduce some exposure to this group which is not working. The valuations in the smaller solar names are bordering on ludicrous but valuation means nothing to a bear.
3. I added to a name the hedge funds have not ruined yet - A-Power Energy Generation (APWR) on a classic pullback to support, while filling a gap. Within 24 hours we were rewarded, as APWR signed a very material long term contract with Thailand, and the stock surged. While this is currently our largest (long) holding, I took some off the table late in the week simply because (sing along with me kids) everything gets sold off in this market. For all I know this could fall 30% from here if/when someone decides to naked short it (still not enforced outside of 19 financial stocks baby!) just for fun and games (and to make their quarter). So if the chart breaks I'll break away. This is still a 2009/2010 story for me, but we are happy to make some money in the here and now.
4. I closed optical networking name Ciena (CIEN) as we caught an oversold bounce and my thesis of buying a "value" name in technology to take advantage of the "hey oil is going down $2, let's all buy a tech stock" institutional thinking that been going on of late, did apparently not apply to Ciena. I still find the valuation absolutely compelling but once again bears could care less about valuation and I'm going with charts for now.
5. Wednesday, I closed Indian mining name Sterlite Industries (SLT) and dry bulk shipper DryShips (DRYS) - the former as I exit India, and the latter as it was a minor position and the chart was not improving. DRYS chart is indicative of many names, a break below support, drift back upwards but beaten with the ugly stick each time it makes an attempt to break through. Until we see these stocks make strong moves through resistance I consider every burst upward a selling opportunity.
6. I closed Mechel (MTL) because as we discovered last weekend the government was raising some fuss about pricing and early this week Mechel was "happily" announcing new long term contracts in mother Russia. Which means profit opportunities were vaporized in the dust. As the stock broke down below its 200 day moving average I said goodbye. Little did I know the carnage to come the next day. This name is really a shame because it is one of my top long term ideas, and I was hoping to have this name in the portfolio for many years to come. But right now there is zero visibility - the CEO could be in jail in a few months and the company taken over or this could just be a "love spat". I have no idea. When I have no idea, I leave.
   
7. Tuesday I was remarking on the potential for Ultrashort Financial (SKF) to make a 50% retracement, in just over a week. Amazing. It happened Wednesday and the stock fell to its 200 day moving average where I picked a bit up, but not a ton because markets can overreach and if $111 why not $90? I did add a bit more later in the day while also pulling back from some of my "barbell plays" (i.e. stocks in sectors I don't believe in that bounce like mad every so often during times the rest of our portfolio is trashed) - so I cut back on Goldman Sachs (GS), and a bit out of the homebuilders which we began lightening late last week on their bounce.
8. After stellar earnings from Baidu.com (BIDU), the stock bounced a good 15% Thursday AM where we let go most of our position. Could it run another 25% from here? Of course - but locking in gains is prudent in this "not buy and hold" market.
9. I cut back Gafisa (GFA) to a holding stake (0.1%) as it approached multiple resistance. I am saying this constantly but once again, dirt cheap stock that no one seems to want anymore. Much like DryShips, the EXACT same chart - broken stock bouncing to resistance - I don't care about the stock, sector, or symbol - I sell those and am willing to pay back a higher price if the stock proves me wrong.
10. I closed Vale (RIO) at (all together now) a ridiculous valuation. I was hoping the January 2008 lows would hold and there is still a chance. This is one very oversold stock and I could be selling this name in particular at a bottom. A chance I am willing to risk to be cautious.
11. I started a beginning position in EZCORP (EZPW) - pawn shops are the new fertilizer. Ahem. I usually don't buy something right ahead of its earnings, but the company has preannounced earlier in the month. I guess when Big Lots (LOTS) and Costco (COST) begin to break down we can sing the praises of the "recovering economy" - people are abandoning these names and heading to places to hock their gold. Great. That won't stop CNBC from clapping and cheering at the government rebate induced "better than expected" Q2 GDP coming this week.
    
12. Friday, I closed 2 natural gas position Encore Acquisition (EAC) and EOG Resources (EOG) - both fine companies trading at cheap valuations but the market is dismantling natural gas These now trade at levels last seen when oil was trading in the $70s. So just imagine if oil goes to $100, maybe these stocks can fall to levels seen when oil was $25. Did I mention things are irrational out there? We lost a bit on these stakes but nothing major - mostly we lost a lot of unrealized gains.
13. Same theme on the Cleveland Cliffs (CLF) chart - need to see more strength and a break above key moving averages - until then, it's back down to a holding stake. Aside from this another name with a lot of drama surrounding it with its top shareholder fighting the management.
14. Same Bat chart, same Bat theme - 2 coal names bouncing towards resistance - cut back both Massey Energy (MEE) and James River Coal (JRCC). Let me emphasize if hedge funds decide its time to get back into coal early this week these stocks could be up 15% in 10 minutes. I don't know. But until trends begin to last for more than 5-6 hours this is not my type of market. I'm still a conceptual bull on coal.
    

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

'Fund My Mutual Fund' in Barron's

We had a nice writeup in this week's Barron's Magazine; the interview was a few weeks ago so obviously I wish we had been published at that time when results were shining even more positively in this horrid market. :)

2 notes

1. This is a pseudo name, not real last name - the prospectus will have the accurate info but for job security reasons I'm keeping a low profile.
   
2. On the fee structure as laid out in my Frequently Asked Questions when/if we ever scale up to a large asset base in which expenses can be spread over a lot more money, I am planning on bringing the annual fee down to some degree since of course it counts against my yearly performance. With that said, many funds with lower annual expense ratios have loads either on the front or back end so it's a bit deceiving to just look at annual costs as the fund industry tries to "sell". But either way, being smaller and without economies of scale it is more expensive to run things than for a huge fund family.

Here is the article for those of you without access...

*********************************************************

It has become a common occurrence, but it's still always surprising how the Internet can upset the status quo, and open new doors for investors and service providers alike.

Trader Mark-a.k.a. Mark Smith- had no idea he could grow up to be a professional money manager back when, as a teen, he began doing it for family members. But now, at the tender age of 35, armed with an economics/finance degree and a couple decades of market experience, he's decided to start his own mutual fund.

Since August 2007 he's been using his blog, Fund My Mutual Fund (www.fundmymutualfund.com), to line up the $7 million in assets he figures he needs to break even operating an equity fund. He has garnered $3 million in pledges so far, on the strength of his Rising Tide Growth virtual portfolio on Marketocracy (http://marketocracy.com), where he is Mark73. The fund has returned 15% since its launch last August; the S&P 500 fell by about 13% during the same span.

"If I can make alpha in this market, I'll do better when we return to a bull market," he reasons. His portfolio also shows up on other social networking sites like Reuters Social Picks (http://reuters.socialpicks.com/tradermark), while his investing strategy and tactics get an airing on blogging sites like iStockAnalyst (www.istockanalyst.com) and SeekingAlpha (www.seekingalpha.com).

Why not just take the traditional route to the manager's job by starting, say, in the mailroom of Fidelity Investments (www.fidelity.com)? Because then he'd be just another manager trained to swim after the same big-cap momentum stocks, he says.

"A lot of equity funds are closet index funds," he maintains. "If you own 300 of the S&P 500's names and just shift their order around, you're pretty much doing what the Vanguard 500 (ticker:VFINX) does, but with greater risk."

Institutional managers are hamstrung, he says, by the need to trade in lots so large they affect prices, or to sell off good positions just to boost returns for end-of-quarter shareholder reports.

He'll take the same secular-growth approach as his RTG portfolio: finding the best companies in the most promising sectors using fundamental analysis and timing trades using technical analysis. His fund will stay at least 60% long, with up to 25% short exposure through exchange-traded funds.

Whether or not you decide to toss a few bucks his way ($2,500 minimum), his approach makes for some interesting comparisons to the current 8,700 U.S.-based equity funds. For example, although the Investment Company Institute (www.ici.org) says U.S. equities funds have an average expense ratio at a tad over 1% per year, Trader Mark's fund will need a 1.75% annual charge to cover fixed costs like SEC documentation, brokerage and clearinghouse fees, audits and investor reporting.

Naturally, large fund families like Fidelity, Janus Capital Group (https: //ww4.janus.com) and American Funds (www.americanfunds.com) enjoy certain economies of scale in back-office expenses. They've responded to a highly diverse and competitive market by shaving 50% off the average expense ratio since 1980, reports ICI. Vanguard (https://personal.vanguard.com/us/home), for one, advertises an average expense ratio of 0.20% across its 150 domestic funds-lower even than most ETFs.

Trader Mark promises not to charge front or back loads, or 12b-1 fees. But increasingly, investors seem willing to pay such charges in return for consultation, notes Russel Kinnel, director of mutual fund research for Morningstar (www.morningstar.com). And, while sales loads are often advertised at 5% or higher, it's entirely possible to negotiate them down, he says. ICI reports that the industry average for actual loads paid is below 1.5% for those making a sufficiently large investment.

So, what does Trader Mark offer that you can't get with a more established firm? Transparency, for one thing. It's the rare fund that reports performance and changes to its holdings more often than quarterly-and usually a month or more after a quarter closes. Given portfolio turnover, a fund's current holdings could be very different from those in its reports. Typically, an actively managed equity portfolio turns over half its holdings annually, says Kinnel, with many funds completely changing all holdings once, twice or even more often annually. Tracking fund holdings is extremely challenging, but you can find detailed information on most SEC-registered funds for free at MFFAIS (www.mffais.com) - along with quite a bit of editorial comment.

Trader Mark plans to post his positions weekly, supported by an interactive discussion on his blog of the reasoning, as often as the SEC allows. He also plans to eat his own cooking-putting his own money in the fund. Morningstar research shows that almost half of U.S. equity managers don't have a dime invested in the funds they manage.

"The number of managers showing no faith in their process is staggering," says Kinnel. Managers who invest in their own funds are seven times more likely to land on Morningstar's Fund Analyst Picks than on its Fund Analyst Pans list, because a lack of conviction tends to go hand-in-hand with higher costs and generally disappointing stewardship, says Kinnel. Premium Morningstar subscribers have access to in-depth analyst reports, along with a wide range of fund screening tools for prices starting at $17 a month.

You can also research fund families for free, at the Website of the Financial Industry Regulatory Authority (www.finra.org), a nongovernmental oversight group for all 5,000 U.S. registered securities firms. The site has a free fund-expense analyzer and a variety of other investment calculators and educational resources.

Also, while a relentless critic of mutual funds, The Motley Fool (www.fool.com) nonetheless offers an excellent Fool's School on fund investing. Although asserting that "approximately 80% of mutual funds underperform the average return of the stock market," The Fool still provides the tools and information that could help you find the 20% that outperform.

Or, you could give Trader Mark a shot just to see if he can keep trouncing the market.

e-mail: mike@mikhogan.com

44 Stocks Returning 11%+ this Week

There were still a lot of financials who after running up 30,40,50%+ gave back a lot late in the week that filled up this list in the 7-10% gain area so I moved up the threshold this week to 11% to focus on those that went up mostly on merit rather than decisions to enforce rules that should be enforced all the time. This list continues to be full of names that have (for the most part) not been participating this year. So the question now is short term headfake, or lasting change in character? We won't know for quite a while....

Criteria

1. Market capitalization $1.75B+
2. Average trading volume 100K+
3. Stock price $10+
4. Returns 11%+

Green names we own, blue names we have owned in the past or discussed in the blog. Many this week are earnings driven. The top 2 names were acquisition targets (it must be nice when you are acquired and your stock actually goes up, instead of down - as we enjoyed last week) Qualcomm (QCOM) had a long standing patent dispute with Nokia (NOK) settled. The rest of the list is littered with former holdings of ours that did not do much in 2007 but have been beaten to such levels that the market finally is finding some value. I almost wrote a piece a week ago about former holding CNH Global (CNH), an agriculture equipment maker (along with some industrial business) which was beaten down and trading at valuations that made no sense to me, but the chart was so horrid I was fearful of touching it. It's still dirt cheap even after this huge run this week. Another former holding NII Holdings (NIHD) looks like it is coming back from the dead after a dreadful 2007. Unfortunately this market has been so brutal you don't even want to buy breakouts like NIHD because most people doing that have been beaten over the head with a club within a few days.

I don't remember any other week when we only owned 1 name on this list. I've usually considered only having 4-5 names a bad week. Perhaps we've been spoiled most of the last year.

Symbol	Company Name	% Price Change 1 Week
PHLY	Philadelphia Consolidated Holding	71.3
FDRY	Foundry Networks Inc	32.3
TDY	Teledyne Technologies Inc	21.4
RSH	RadioShack Corp	21.2
CNH	CNH Global NV	21.0
QCOM	Qualcomm Inc	20.5
NIHD	NII Holdings Inc	19.8
WGOV	Woodward Governor Co	18.8
NUVA	NuVasive Ord Shs	18.4
JNPR	Juniper Networks Inc	17.8
DNA	Genentech Inc	17.3
TKR	Timken Co	17.2
PAS	PepsiAmericas Inc	16.8
PCX	Patriot Coal Corp	16.2
GOL	Gol Linhas Aereas Inteligentes SA	15.9
ESI	ITT Educational Services Inc	15.8
AXE	Anixter International Inc	15.6
JNS	Janus Capital Group Inc	15.6
GR	Goodrich Corp Ord Shs	15.5
ICE	IntercontinentalExchange Inc	15.0
UNH	UnitedHealth Group Inc	14.9
AMLN	Amylin Ord Shs	14.5
WLP	WellPoint Inc	14.4
HNT	Health Net Inc	14.1
BIDU	Baidu.com Inc	14.0
LVS	Las Vegas Sands Corp	13.7
CSL	Carlisle Companies Inc	13.6
AMZN	Amazon.com Inc	13.3
QLGC	QLogic Corp	13.1
VAR	Varian Medical Systems Inc	13.1
TLK	Telkom Indonesia ADR	12.8
CW	Curtiss-Wright Corp	12.6
MOG.A	Moog Ord Shs Class A	12.4
IDC	Interactive Data Corp	12.4
BUCY	Bucyrus International Inc	11.8
WB	Wachovia Corp Ord Shs	11.8
ISRG	Intuitive Surgical Inc	11.6
EMC	EMC Corp	11.5
ABC	AmerisourceBergen Corp	11.4
AET	Aetna Inc	11.4
ZNH	China Southern Airlines ADR	11.2
TNB	Thomas & Betts Corp	11.0
LM	Legg Mason Ord Shs	11.0
HUM	Humana Inc	11.0