Bookkeeping: 'Rising Tide' Performance Year 2, Week 1

Year 2, Week 1 performance of the mutual fund

Comments: Year 2 begins identical to Year 1 - in the hole versus the markets. Ever feel like you are on the other side of Russell Crowe's sword? See all those objects laying in the dust below - each represents one of our stocks of late.

This remains a bifurcated market - some groups work, some do not but the groups working the past 6-7 weeks have for the most part not been our groups. This is opposite to most of the previous year. I keep saying "on the positive side" our stocks keep getting cheaper as their prices fall and future earnings rise but I appear now to be talking to a wall, or a very belligerent microproccesor. So unlike most funds who will stick stubbornly to their positions and say "we'll continue to lose money hand over fist until the market sees it our way" we are taking actions to mitigate these multiple lacerations, until money flow returns to our favored stocks. I did a forward P/E analysis on all current positions; updated with the latest earnings for those companies that have reported, and some of the number simply seem unfathomable. I'm a P/E to Growth fan and from what I'm calculating there must be one epic global depression coming to justify this dislocation in price versus future earnings - the type where people won't need to eat since they've been wiped off the Earth. I can guarantee you in 6-9 months people will look back at charts for some of these stocks and wonder how stock prices ever got so low and will forget the quant computers relentless selling. But for now it is just punishment to hold these. Right Mr. Crowe?

We've been (mostly) punting a lot of the global growth names although when the selling has been extremely traumatic we've made some buys (late Tuesday of this week) but we are now filtering in names in healthcare and retail, and re-upped some technology exposure this week as well. Money has to go somewhere and even the days it goes out of banks it doesn't really flow into the former leadership stocks of the past year. We're still sticking to best of breed names we are ok owning over time, but diversifying far more into other sectors that are currently where the money is headed. This doesn't mean we don't believe in the global growth story, but we can't have 90% of our portfolio working against us for months on end. So we'll call this a restructuring but unlike our banking system I cannot just "write off" the past 6 weeks and say "it didn't happen". It is what it is, and we need to try to find ways to make money or at least not lose it hand over fist. Frankly I feel like a pretzel with the whipsaw action that does not relent week after week.

Actually the action is confusing on another level in that while I see the indexes up strongly some days, I see very little on my watch lists that are ramping along with it - and I have probably 400+ names out there. Here are 2 examples of the type of companies leading the indexes up - both members of the S&P 500 - broken stocks that are rallying very hard the past few weeks/month, and primary examples of why we are being left out of the party. One is a broken technology stock with a chart we'd almost never touch, the other I guess is rallying on the "Americans will have plenty of money to spend on discretionary items as the economy booms" or maybe the "people will change to motorcycles instead of cars - even though they don't need to because oil is heading to $60 anyhow". The point is, its an oversold broken stock rally - and trying to apply much logic to it will drive you (me) batty. I would just call this the "everything will revert to the mean over time" rally. I don't believe in the fallacy that oil to $100 (or $90 or $80) solves the nation's ills, but the stock market is speaking differently.


Another S&P 500 example - Monster Worldwide (MNT) rallying from $17 to $20 this week when we are finding companies cutting back across the board, bankruptcies rising, etc. I guess this is anticipating the "1st half 2009" recovery (here we go again for those of you who were around through the winter and spring). I'm not sure if these examples are all short covering or real buying. It just seems a bit incredulous and my personal super computer (located in my skull) simply does not compute :)

Volatility remains high with 1-2% moves becoming normal in the indexes. And many times in completely different directions in 24-48 hour periods. This has been the case for what seems many months now. However, Friday showed some promise - finally - for the bulls. The only question is which bulls? For now it appears the retail, financial, airline, technology, and healthcare bulls only. A true happy go lucky bull market will lift all boats so hopefully they send the Coast Guard to pick up the global growth stragglers someday. Oh how the worm has turned. ;) I picked up this quote off of Realmoney.com today and it really is spot on - we now live in a market of serious overreaction to every little line item... you can see that with how each day stocks gyrate around oil moving $1 this way or $2 that way - as if the world is different at oil $121 versus $118.

Some soundbite traders will have you buying consumer durables as aggressively today on a booming recovery as they had you buying defensive staples last week on the economic collapse.

This is why everyone is getting so whipsawed - the economic "thesis" is changing by the day if not hour nowadays. Just yesterday we had the End of Days on the AIG news and does ANYONE remember the 455K job losses? Fannie Mae and Freddie Mac anyone? But today with the dollar stronger the world is now ok and with oil headed to $110 its time to load up on retailers? Seriously? Yes. If you look at stock prices. It is all incredulous but this is 'fast money' trading showing its dominance. It makes little fundamental sense. And what day next week (Thursday I assume - when the next batch of jobless claims comes out) do we stress out over the economy? So we have to buy defensive stocks at 3:59 PM Wednesday, and then dump them all Thursday at 3:59 for the "oil is going to $60 - it's time to party" rally on Friday. Again *this* is what the market has come to right now, to make any consistent money. Complete arbitrary binary positions, which deviate many times 180 degrees depending on which way the wind is blowing.

Speaking of those "loser" global growth stories - even if the "global slowdown" does slash 10, 15, 25% off of earnings (which I don't believe to be true) across the whole lot, these stocks are very cheap on forward earnings considering their growth rate. But those are fundamentals, and we don't use the f word around here anymore. It's all about charts and momentum and the momentum has long left the building for these guys. I'd also like to add to all the "stronger" dollar cheerleaders - you do realize what the only thing that has been holding up the U.S. economy the past year correct? Exports? Mmmm I know... I know... details details - we can't be bothered with facts like a sustained move in the dollar would rip apart the only leg this stool is standing on. We are too busy buying stuff to worry about it. :)

For the fund, as we mentioned above we've morphing directionally - we're delving into some more healthcare, some new retail, and increasing for the first time in a long time some technology exposure. With the market changing its mind on which sector is the "right one" to run up every 48-72 hours, this should provide us with more balance if nothing else. It still did not help us this week, as Tuesday and Friday (ironically the strongest days for the market) - completely sunk the week. I still only count 2, or perhaps 3, stocks we own that could in any way shape or form of report what could be called "disappointing" earnings/guidance - but we've been taking devastating hits left and right post earnings on the vast majority of our stocks. Many of which raised guidance substantially - talk about adding insult to injury. It certainly is a new era; ever since I began you went into earnings hoping you at least "matched expectations" and as long as you surpassed it you were fine. Now it simply does not matter - only sector allocations matter. So we're adjusting on the fly to this "new truth". We did have one big winner with Fuel Systems Solutions (FSYS) but one does not make up for 18-20 post earnings losers.

The markets gyrated up and down viciously (again) all week, and through Thursday were flat - but ran off like a scalded monkey (ref: Macke) Friday. Which it also did Tuesday. Before being decapitated Thursday. But I digress. The S&P 500 gained 2.9% and the Russell 1000 was up 2.6%. Rising Tide Growth continues to trade in a parallel universe which it has been locked inside the past 6-7 weeks and fell 3.2%. That says a lot for the majority of the portfolio, considering our top position going into the day gained about 30% Friday. On the plus side we have 51 weeks remaining to attempt to reach our yearly goals. Ok I'm searching for silver linings...

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 now approaching $4 million pledged - thank you.

[Note: we are counting each year on it's own so this is the beginning of year 2 since its the 53rd week]

Year 2 Metrics

Price of Rising Tide Growth: $10.658
Year 2 Performance to date (vs Aug 1, 2008): -3.21%

Comparable S&P 500: 1296.3 (+2.86%)
Comparable Russell 1000: 707.9 (+2.55%)

Fund return vs S&P 500: -6.0%
Fund return vs Russell 1000: -5.7%

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 for year 2 is closing price August 1st, 2008.
SP500 : 1,260.3
Russell 1000 : 690.3

Please click here: fund performance for previous updates

*** Year 1 Results here: +10.1% vs -14.0% S&P (+24.1%)

ICON (ICLR) Gets Some Love from Investors Business Daily

ICON (ICLR) has to be the one company I constantly throw roses at, that I have yet to put into the fund. I keep waiting for that "selloff" that never seems to happen when I have my eye on this specific name. I have not been posting to the blog the individual earning reports of the Contract Research Organizations but most individual names continue to impress - for example Parexel International (PRXL) has put on 17% in 2 days post earnings.

• Shares of Parexel International Corp. jumped to an all-time high Thursday after the pharmaceutical services company reported a strong quarter, with results boosted by greater service revenue and a favorable tax adjustment.
• The Waltham, Mass., company said its profit more than doubled to $25 million, or 43 cents per share, from $10.4 million, or 18 cents per share a year earlier. Excluding a one-time tax benefit of $8.7 million, Parexel earned $16.3 million, or 28 cents per share. Revenue increased 31 percent, to $331.9 million from $254 million.
• On average, analysts had expected 26 cents per share in profit and revenue of $259.7 million, according to Thomson Financial. Those estimates usually exclude one-time gains and expenses.
• Parexel's service revenue increased 33 percent, to $272.2 million, and reimbursement revenue rose 23 percent to $59.8 million.

As I've said in the past this is a nice steady Eddie group (except of late when the hedge funds have moved wholesale into "healthcare") that does not have FDA exposure and I like - the valuations seem to be getting stretched however as more and more funds go there to "hide out" - we know how that ends. I own the one dog of the group (stock wise at least) as the much unloved WuXi PharmaTech (WX) spins in oblivion. But as the story states - foreign share of outsourcing will only grow - that was my thesis - I guess I need to wait a few more years for it to play out.

Investors Business Daily has a very rose worthy article on ICON this week.

• Icon has the kind of customer demand that many businesses these days can only dream about. The company (NasdaqGS:ICLR - News) manages clinical trials for drug and biotech firms, and its clients are clamoring, if not desperate, for its services.
• Drug firms are increasingly outsourcing at least some of their research and development work as part of ongoing cost-cutting moves.
• "(Clinical trial) volume is growing as drug companies are downsizing and consolidating," said Ken Getz, senior fellow at the Tufts Center for the Study of Drug Development. "So they're looking to hire flexible contract resource organizations (CROs) to manage the volume."
• At the same time, biotech outfits are looking to outsiders to handle clinical trials since they typically don't have the means to handle the work in-house. Many of the smaller firms, in particular, are entering their drugs for clinical trial for the first time.
• "Big pharmaceuticals need to outsource to save money. Biotechs have to outsource because they don't have an option," said analyst Eric Coldwell of Robert W. Baird.
• Demand for CROs will likely grow 16% a year for at least the next few years, a recent Tufts forecast said
• What's more, up to 65% of FDA-regulated clinical trials of the top drug firms will be done outside the U.S. within three years, up from 43% today, Tufts said in its report. The reason cited: lower costs abroad and ready access to large numbers of "treatment-naive patients." The latter are patients who don't take any prescription drugs and thus are best suited for clinical trials. Treatment-naive patients are more likely to be found in emerging markets outside of the U.S. and Western Europe.
• "Growth in this industry is increasingly happening in emerging economies like Eastern Europe, South America and the Pacific Rim," said John Kreger, an analyst at William Blair & Co. "This work is going where the patients are."
• Icon is there. It has 71 offices in 38 countries, including emerging markets in Asia and Latin America.
• Most of the top CROs have global operations as well. But unlike larger firms such as Covance (NYSE:CVD - News), Parexel (NasdaqGS:PRXL - News) and Charles River Labs (NYSE:CRL - News), Icon is based outside the U.S., in Dublin, Ireland.
• About half of the firm's revenue comes from outside the mature and slowing U.S. clinical-trial market.
• Icon's net business wins in the second quarter jumped 47% from a year earlier to $337 million. Total revenue in the quarter rose 48.5% to $218.3 million.
• The backlog at the end of June stood at $1.6 billion, up 56% from a year earlier.
• Icon is gaining on rivals, says Kreger of William Blair. "When we talk to people in the industry, we consistently hear them mentioned as the company that appears to be rising above the fray," Kreger said. "This is a service business, and they are doing excellent work -- on time, on budget, with clean data."
• Icon's core business as a project manager of clinical trials involves oversight of the physicians who enroll patients and the data that are collected. The firm also has a staffing business for clients who want extra help to self-manage their own studies and a central lab that processes lab tests.
• "The barrier to entry in this business is all about a track record," Kreger said. "A client is unlikely to hire a company that doesn't have a track record."
• Icon works in a broad number of therapies for most of the major drug and biotech companies. A little more than 20% of revenue comes from biotech firms. Oncology trials account for the largest portion of the firm's backlog, followed by heart disease.
• Awards are getting larger, CEO Gray said in the conference call. In the second quarter, 12 awards were over $5 million. "That's a feature of more phase three programs going on and the amount of data required," Gray said.

ICON trades at 33x forward estimates but since we no longer worry about fundamentals in these here parts we are looking to see if the chart below is a potential top top (negative) or has breakout potential (bullish) on a close above $85 or so. Valuation means nothing to these computers. It's all trend.


[Jul 22: ICON - they Never Miss and Give us a Chance at Cheap Shares]
[Apr 14: Keep an Eye on... Parexel International]
[Mar 12: WuXi PharmaTech - Very Good Earnings]
[Feb 21: ICON with a Solid Report]

Long WuXi PharmaTech in fund; no personal position

Bookkeeping: Second Batch of Research in Motion (RIMM) this Week

Technology is the new fertilizer! I mean the new healthcare! I mean new financials! ;)

I've looked at about 20 names and except for Qualcomm (QCOM) there is nothing I want to add to the portfolio so to increase my technology exposure I am simply going to add even more Research in Motion (RIMM). We added some Wednesday when I wrote

Haven't added to Research in Motion (RIMM) in ages - the chart says it all. We're moving it up from 0.3% to 1.9% of portfolio in the $126s.

So aside from all those myriad fundamental reasons, the chart is looking positive now - if the stock can break through $129, it should be relatively easy going until mid $140s. If it breaks back below $124 we'll cut back the position. This is a nice set up technically since it's not far below to set off the sell point, and the loss would be minuscule.

Today we are adding another large batch and taking this up to our top position @ 4.4% of the fund. This is a chart that screams HAL 9000 is buying me hand over fist. Actually this is a chart even someone in 1st grade technical analysis is buying.

As I wrote in Wednesday's piece I will add to Apple (AAPL) north of $170. Almost there. Most of the other stuff that is running in technology is of the 1999 big cap ilk - they of the 12% growth but 18 PE ratio type. Not that fundamentals matters. I'll have to beat the bushes again this weekend for another technology name - so few have any real growth. Intel (INTC), Dell (DELL) great charts - Google (GOOG) looks like its a coal stock or something.

Long Apple, Research in Motion in fund; long Research in Motion in personal account

S&P 1290 is our Moby Dick

1290 seems to be the impossible challenge the past few weeks - it is the markets current Moby Dick - a picture speaks louder than words. We were talking about this exact same level a week ago Wednesday [Signs of Hope? Bueller?] It actually appeared the week previous to that as well.

Then we visited it again the a week ago Thursday. Then again this Tuesday, then again this Wednesday, then again yesterday (before falling off the cliff) and lookee here - where are we again in this market with no memory from day to day? There appears to be a wall of Anti-Kool Aid @ S&P 1290. Much like we are ignoring all fundamentals on individual stocks we will completely forget about the economic fundamentals if technicals move in favor of the bulls (they've been teased constantly the past week and a half) Why ignore fundamentals? Just look at that chart the past 2 weeks - it has crazy volatility, mostly 1-2% type of moves in completely opposite direction

A week ago Monday: Sell everything!
A week ago Tuesday: Buy everything!
A week ago Wednesday: Buy everything!
A week ago Thursday: Sell everything!
A week ago Friday: Sell everything!

Monday: Sell everything!
Tuesday: Buy everything!
Wednesday: Buy everything!
Yesterday: Sell everything!
Today: Buy everything!

Notice a pattern? If you do - please email me ;) And for all that 'work' we made about +20 S&P points. It's the market on Ritalin. "Buy and Hold" is sooooooo Spring 2007.

As I said a week+ ago we need to break this level (1290), and then get through that 50 day moving average which is just north of 1300 now and you know what means? Yes it's that time time again....

Until then it's just stock market A.D.D. I've pulled back short exposure for the upteempth time the past 3 weeks in anticipation of the Kool Aid trade to really take off. So far it's been the wrong move each time as the Kool Aid man's Kryptonite re-appears. One of these times it has to work, no?

Not Bad - We Outperformed the Harvard Endownment Plan the Past Year

It looks like Harvard very famous Endowment plan has a mid year fiscal year; it ended in June - hence it is within 1 month of ours which essentially ended last week at the "end" of July (off by a few days). For the 11 months through June 30 we were up 21.1% pre-fees, and up 19.4% post-fees. [Jul 26: 'Rising Tide Growth' Performance v Peers] Harvard came in at 7-9%; considering the millions upon millions Harvard pays people to manage their huge amount of assets, we did it a lot cheaper to boot! (obviously it is much harder to manage $35 billion than a few million) I am sure they had a better July than us however ;) but all in all despite a demoralizing past 6 weeks, it's good to read these sort of statistics to see how tough it is out there and the relative performance is still exceptional.

• Score another win for the Crimson. With endowments and pension funds struggling in a down market, Harvard University's endowment notched a strong gain for the fiscal year ending in June, up 7% to 9%, according to people familiar with the returns.
• The endowment, worth $35 billion at the close of the 2007 fiscal year, was boosted by investments in commodities, Treasurys and some strong hedge-fund performers. It was below the endowment's average annual return rate of 15% over the previous decade.
• But during a year when the subprime crisis and plunging stock markets caused many institutional investors to deliver their worst performance in six years, those returns still put it at the top of its class. "That would be easily the best performer among the foundations and endowments that we track," says Craig Tome, of Chicago's Northern Trust, which collects endowment and pension-fund performance data.
• Mr. Tome noted that Harvard's returns would top any of the nearly ninety endowments and foundations that Northern Trust follows. The group -- with an average of $1 billion in assets -- lost an average of 3.1% last fiscal year, and only one in five notched positive returns. The performance was even worse for public and corporate pension funds, which lost 4.3% and 5.1%, respectively, according to Northern Trust.
  
• Compensation for Harvard's staff managers has been controversial. With the endowment's success, staff managers' paychecks have soared, sometimes into millions of dollars a year -- far more than the school's Nobel laureates or its deans get. Critics have argued that the university should outsource more of its asset management to save costs.

Bookkeeping: Reversing Tuesday's Buy in A-Power Energy Generation (APWR)

This is simply a technical trade. After my Tuesday afternoon rant ("they know nothing!") I made a series of buys which I was hoping to flip out in 3-4 days. Because that is just about the only way to make money in these stocks nowadays. Unfortunately the change in direction in this market has been even shorter than that - huge up day Tuesday, huge down day Thursday, huge up day Friday, etc. The commodities rallied a whole whopping 1 day. So I was not agile enough to flip out of the coal and fertilizer names which I bought near the nadir in the last hour Tuesday since they could not even put in 2 full days of rallying. Quite sad.

However A-Power Energy Generation (APWR) I was able to buy in the mid $19s and it is now $22 so I am simply going to take back the 400 shares I bought Tuesday. This takes us down from a 3.8% exposure to 2.8% exposure. I really like this name but that means nothing until it trades back above resistance. Fundamentals are for old guys - this is the new era baby. Looking at the chart we want to see this north of $24 - or add more near $18.

It is quite sad what is being done to this stock - if only the SEC would protect these small caps from naked shorting like it is doing for the heavenly financials. But then how would hedge funds make money? If you don't believe me look at the 1 day chart of action Tuesday. Slammed all day down from $22 to $19 (where did all that volume come from out of the blue Tuesday) and then within minutes after 3 PM? Magic! Notice the massive post 3 pm volume spike and huge short covering move upward.

(click to enlarge)


Ah the games they play... again we are just gnats on the behind of the big money. And the parlor tricks they do, the SEC could care less about - unless the guns are trained at the financials. Then you actually enforce the rules that are on the books - otherwise you don't bother. The longer you do this, the more you see this stuff (as seen above in the chart) ALL OVER the place. This market is not for capital raising for young companies - nope; it's just a way to churn out profits for those with heavy amounts of capital whose timeline is banking as much coin in every 90 day period. By whatever means necessary - regulators can't be bothered by this or investigating why huge amounts of puts are bought hours ahead of earnings misses or huge amounts of calls are bought hours ahead of an announced acquisition. Nope. Got better things to do - like put Martha Stewart in jail for making $60K on her Imclone. Yep, go after the "big fish" instead of the guys making billions off this stuff.

Anyhow - it's their game - we're just the sideshow and trying to get by. And no I'm not bitter -I literally type this with a very wry smile on my face - I just have to chuckle to self every time I hear about the efficient market or "even playing field". hah - good one!

Long A-Power Energy Generation in fund and personal account

McDonald's (MCD) Continues to Impress

McDonald's (MCD), along with Walmart (WMT) have been our 2 leading big cap names to take advantage of our "Pooring of America" theme [Do The Bottom 80% of Americans Stand a Chance] The theme here (for newer readers) is as the overextended consumer returns to reality and loses his many lines of credit, namely his house ATM - along with the return of real inflation - they will be forced to move downstream. [Sep 19: Tough Times Ahead - Restaurants?] Again, we were proposing this thesis before 98% of pundits were even saying a slowdown would happen - not to mention a "recession" (not that we're in one) ;)

I will readily admit, however, my thought process is generally anti-super large cap stocks because I assume they can't appreciate in value too much. Well both these stocks have proven me wrong the past year as institutional money has flown in.

You can see the nice chart from McDonald's below - the ONLY hiccup in this maniac market that is so focused on the short term was one month they reported same store sales below expectations and the "investors" sold them immediately as the "story was over". That is just the era we live in. Shoot first, ask questions later. It also came at a very trying time in the market - January 08 - but in retrospect a great buying opportunity.

More good news out today... it is sort of funny - both these stocks were considered past their prime and in a long tailspin not 4-5 years ago. Funny how a real recession can change things (plus the wondrous overseas story that is McDonald's)

• Despite a tough U.S. economy, McDonald's Corp. posted an 8 percent gain in July same-store sales on Friday as hungry consumers worldwide lined up for breakfast items and the classic Big Mac sandwich.
• Many consumers have cut back on eating out amid economic weakness and rising gasoline prices, but business at the Golden Arches held up well in July, especially in the U.S.
• The United States, where McDonald's gets about 45 percent of its sales, has been under pressure for the world's largest restaurant chain as cash-strapped consumers have cut back on spending.
• Same-store sales, or sales at stores open at least 13 months, grew 6.7 percent in the U.S.
• Total sales worldwide soared 15.9 percent. The world's biggest hamburger chain attributed the strong domestic performance to its focus on breakfast, chicken and drink items.
• International sales have typically been strong for McDonald's -- a trend that continued in July. Same-store sales jumped 7.6 percent in Europe, led by sales in Britain, France and Russia. And in the Asia-Pacific, Middle East and Africa region, same-store sales climbed 7.2 percent because of extended hours and menu items.

We've come to expect these great international results, but the results in the U.S. are bordering on extraordinary. But trust me, to some degree this is a forced migration as people in the bottom 40% are being priced out of higher fare places to eat. As cold hearted capitalists - we just cheer on McDonald's. But as people who observe what is really going on in this country for the many (who don't have a dime to invest in a mutual fund) - the domestic strength in these 2 companies does not bode well. And frankly if we (as I believe) enter into a global competition for natural resources (even after we exit this "global slowdown) inflation will remain high, and wages will continue to not keep up (continuing a trend the past decade), then I believe these current trends will continue for quite a long time even after we "recover" from the current malaise. Of course the under belly will be hidden by "aggregate GDP growth" and other such statistics that have been been hiding the migration of wealth into fewer hands the past 2 decades.... and a great many of our people simply will continue to be unable to "keep up". Most turned to credit to try to over the past 10 years, and now that is blowing up on them. Ah well, we'll just roll out stimulus checks every 4-6 months for the next 20 years to keep the party going and keep the sheep among us satiated so they don't get peeved enough to really cause trouble.

[Jul 23: Costco Warning & McDonald's Continues to Be Dinner of Choice for Pooring Americans]
[Apr 22: McDonalds, DuPont Continue Trend - Overseas Strength Mitigates Weakness at Home]

No position

Bookkeeping: Selling 1/3rd of Fuel Systems Solutions (FSYS)

I am only selling due to the horrid market - just about every stock we own has had just as good of a result as Fuel Systems Solutions (FSYS) but all the others have been hit with 15-35% losses as "reward". Well this makes us 1 for 20 this earnings season (not in good earnings, but in good reactions) For example, a certain deep sea driller who just posted 88% earnings growth is down 8% as we speak as "reward". Fun times. Better go buy some Fannie Mae (FNM) instead! Our 2 retailers we bought/added to yesterday are screaming up 4% meanwhile on the back of the US consumer ;) This is clearly a ludicrous market.

So I'm going to take 1/3 of the position off the table here at $48.20s as the stock is ramping 17%+. This reduces our holding to 2.9% of portfolio. If this was a bull market I'd just sit back and wait for $65 ...

I am surprised people are not saying "with oil heading to $50 who needs natural gas conversion kits anymore". That's the definition of a bear market - when you are floored by the ability of anything to work in your favor.

I'll obviously be buying the pullback...

[Aug 7: Fuel Systems Solutions - Monster Quarter but Impairment Charge will Confuse]
[Aug 4: Fuel Systems Solutions Garnering Attention]
[Jul 2: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Long Fuel Systems Solutions in fund and personal account

Bookkeeping: Limit Order for China Medical (CMED) Hit Yesterday

I highlighted the excellent China Medical (CMED) earnings Tuesday premarket [Aug 5: China Medical - Back on Track; Valuation Should be Higher] and was not at the computer most of Tuesday so missed the move up; Wednesday morning the stock was up 18% from where I had pointed it out so instead of chasing I wrote

I'll stick a limit order at the top of this gap and see if we can snag it on an inevitable pullback.

So instead of chasing it up in the $53s, or $54 - I placed a 300 limit share order @ $50.50 which hit late yesterday. I added another 100 shares this AM in a similar price level. Therefore China Medical is now a 1.9% stake in the fund as we continue to change the focus of our holdings. As you know healthcare (and airlines) are the new fertilizer. I'd like to add to this position in the mid $40s. It remains dirt cheap, even at $60+.

Long China Medical in fund and personal account

Atwood Oceanics (ATW) - Steady as She Goes

Atwood Oceanics (ATW) again provides the shortest earnings release of any company we follow [May 8: Atwood Oceanics Short and Sweet Beat]. Matched analysts estimates, and continues to prosper. Fundamentals say buy, technicals say sell/avoid/short - we'll stick to technicals. However, a very nice long term double bottom could be forming in the chart - once commodities come back as the flavor of the week.

• Atwood Oceanics, Inc., (NYSE: ATW - News) Houston-based International Drilling Contractor, announced today that the Company earned net income of $60,381,000 or $0.93 per diluted share, on revenues of $141,372,000 for the quarter ended June 30, 2008 compared to net income of $32,033,000 or $0.50 per diluted share, on revenues of $98,371,000 for the quarter ended June 30, 2007.

86% year over year earnings growth for a forward P/E of under 13. The Wall Street circus continues. We'll buy back (since we ignore fundamentals) when it crosses back over both the 50 and 200 day moving average - the 50 day is in the $49s and falling like a rock. Someone else can catch the knife and buy it at the $45s, $44s, $43s, $42s, $41s, $40s or wherever it ends up. Another methdology is to buy this double bottom somewhere around $41 and then stop out below $40 if it breaks that chart formation. However upside will be limited by the 2 major moving averages now acting as resistance...

If a P/E of 13 is not worthy maybe a P/E of 8 will be - we just don't know how far these will go (down).

Long Atwood Oceanics in fund; no personal position

EPA Denies Texas Governor's Ethanol Waiver Request

While fundamentals don't matter now that the charts are broken, one favorite reason for shorts to claim the GLOBAL demand for fertilizer will break is US ethanol demand. While that demand is about probably worth about 5% of the "cause" of fertilizer demand, it would be a huge sentiment change once the Jim Cramers of the world jump on the bandwagon and claim "death to the story". Again, this story does not matter but the EPA is doing what all good political... err independent bodies do and is denying the request to cut ethanol production in half. Far far far too many farmers in states that rely on corn, to ever allow such a measure ahead of a major election. C'mon now Governor Perry - you know how politics works. [Apr 28: States, CEOs Beginning to Snap Back at Ethanol - the "Administration" Holds Firm]

• The Environmental Protection Agency on Thursday denied a request from Texas Gov. Rick Perry to cut the federal ethanol mandate in half for a year.
• An energy bill passed in December required 9 billion gallons of ethanol to be blended into gasoline this year and about 11 billion gallons next year. Perry asked the EPA in April to drop the Renewable Fuels Standard requirement to 4.5 billion gallons because demand for ethanol is raising corn prices for livestock producers and driving up food prices.
• "I am greatly disappointed with the EPA's inability to look past the good intentions of this policy to see the significant harm it is doing to farmers, ranchers and American households," Perry said. "For the EPA to assert that this federal mandate is not affecting food prices not only goes against common sense, but every American's grocery bill." (sadly I agree with Perry - I've called this one of the greatest boondoggles the US has ever done, but the reality on the ground is votes have to be bought - damn the sense of it all. This bill quite beautifully summarizes all that is ill in our "decision making" process at the top of the country - doling of favors ahead of common sense)
• Between January and June, cattle feeders nationwide lost $1.5 billion, officials said. James Hunt, spokesman for the Amarillo-based Texas Cattle Feeders Association, said EPA's decision will mean cutbacks by cattle producers and higher priced beef in meat cases in about a year. (We've predicted this but have not yet been able to make money from it)
• On Capitol Hill, the decision drew mixed reaction.
• U.S. Sen. Chuck Grassley of Iowa, also a Republican, called the decision a "victory," saying it will allow farmers to "continue to plan for and meet the fuel and food needs of the future." (no comment)
• Corn growers agreed. David Gibson, executive director of the Texas Corn Producers Board, said consumers win as ethanol lowers gas prices and reduces America's dependence on foreign oil. (no comment) "Every independent study has confirmed that using corn to make this cheap, clean, American-made fuel has no significant impact on food prices," he said. (aye carumba)
• Perry came under fire early in July after it was reported that he filed his waiver request shortly after a prominent poultry producer donated $100,000 to the Republican Governors Association, which he chaired. (oh the plot thickens)
  

Oh politics!

Long iPath DJ Livestock ETN in fund; no personal position

Fuel Systems Solutions (FSYS) - Monster Quarter but Impairment Charge will Confuse

Fuel Systems Solutions (FSYS) just put out a huge beat, but there is a goodwill charge of $3.9M or $0.25 which will cause confusion. Adding that non-cash charge back to results and they made $.54. Analysts were in at $0.27. While America sits on its hands, other countries are providing incentivizes to their consumers to begin the switch over to natural gas.

• `The second quarter marks another quarter of growth. Revenue increased approximately 50% year-over-year, reflecting the rapidly expanding demand for alternatives to petroleum to fuel vehicles. Additionally, we drove gross margin improvements with successful engineering, production and distribution synergies developed in the past year. US-based Fuel Systems Solutions delivers alternative fuel solutions for transportation and industrial applications that reduce emissions, displace petroleum and generate savings. We are capturing the demand for our immediate, real-world solutions with our extensive reach in Europe, Asia and Latin America, where high fuel costs have long been a concern. As oil prices continue to rise and emissions concerns increase, we perceive important medium term opportunities in the United States for our transportation products and technology. We expect the macro environment to continue to drive growth, and we are excited about the future.''

Financial Results

• Revenue for the second quarter was $98.3 million, up 49.9% from revenue of $65.6 million for the second quarter 2007, driven by strong performance in the transportation business.
• Gross profit for the quarter reached $28.6 million and represented 29% of revenue, compared to $14.5 million, or 22% of revenue, in the second quarter 2007.
• In the second quarter of 2008, the company recorded a non-cash goodwill impairment charge related to the company's Australian operations of $3.9 million, or $0.25 per diluted share.
• Net income for the second quarter of 2008 reached $4.6 million, or $0.29 per diluted share, including the non-cash goodwill impairment charge of $3.9 million, compared to $395,000, or $0.03 per share, in the second quarter of 2007.

Outlook

• Based on its current assessment of near-term market trends, the and company is increasing its full year 2008 consolidated revenue guidance to $350 million increasing its gross profit margin to approximately 27% and operating margin to approximately 12%.

Guidance last time around was for $320 million in sales (so new guidance is up about 10%), gross margin at 24% (new gross margin guidance up 3%), and operating margins at 9% (new operating margins up 3%) The latter two are huge moves up for such a short time frame. Under promise. Over deliver. The know the Wall Street game.

It looks like the results are a bit better than the previous quarter (when they made .40), and obviously far greater than last year. The tax rate was lower this Q which led to some of the out performance in earnings. But they seem to be somewhat capacity constrained and hence revenue moving to the next level will have to wait for the completion of their expansion of the Italian manufacturing facility which will allow them to "more than double" 2007 levels of output.

Now if I know this market, since no one reads past the headline the stock will be down on disappointment of "only" beating estimates by 2 cents when in reality, the operations beat estimates by 27 cents aka 100% (analysts were estimating 27 cents) But that's the market for you and no one can be bothered with actually reading a press release. Can you imagine if Briefing.com put out the "FSYS beats estimates by 100%" headline if there was not an impairment charge this quarter? ;)

Next quarter analysts are still only in at .16 which (ahem) they will trounce. The full year estimate of $1.01 is also looking a bit silly considering they did 40 cents last quarter and (operationally) 54 cents this quarter or if you want to count good will, "27 cents". They could in fact be close to $2 of EPS by the end of 2008, not $1 (ex goodwill charge this Q), or $1.75ish with the goodwill charge. This is assuming similar output to this Q - I don't know exactly how much they will be able to expand production by the end of 2008... if they can double it by beginning of 2009, we might be getting some staggering EPS figures in 09. I'll hold off with my back of envelope numbers until I have a better idea when the new manufacturing comes online.

[Aug 4: Fuel Systems Solutions Garnering Attention]
[Jul 2: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Long Fuel Systems Solutions in fund and personal account

I.O.U.S.A. Movie Trailer

Thanks for a reader for pointing this out - looks like a great date movie! :) Should easily surpass Batman - the Dark Knight in its first week ;) Some of my favorite movie actors of all time - Alan Greenspan, Ron Paul, David Walker, George W Bush, Paul Volcker, Paul O'Neil (the administration buried this guy), Warren Buffet. And it's in a format more Americans can actually absorb - video ;) Here is the official site - looks like it did well at Sundance Festival.

Wake up, America! We're on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Throughout history, the American government has found it nearly impossible to spend only what has been raised through taxes. Wielding candid interviews with both average American taxpayers and government officials, Sundance veteran Patrick Creadon (Wordplay) helps demystify the nation's financial practices and policies. The film follows former U.S. Comptroller General David Walker as he crisscrosses the country explaining America's unsustainable fiscal policies to its citizens.

With surgical precision, Creadon interweaves archival footage and economic data to paint a vivid and alarming profile of America's current economic situation. The ultimate power of I.O.U.S.A. is that the film moves beyond doomsday rhetoric to proffer potential financial scenarios and propose solutions about how we can recreate a fiscally sound nation for future generations.

[Jul 28: US Budget Deficit to Half a Trillion]
[Mar 26: Annual Spring Entitlement Warning Falls on Deaf Ears]
[May 23: David Walker on CNCB this Morning]

Pawn Shops Starting to Hit Wall Street Awareness

It looks like the pawn shop thesis we've been advancing is starting to catch the attention of Wall Street. Always a bull market somewhere...

• There's a small segment of the retail space that's suddenly doing very well, according to Utendahl Capital Partners analyst Daniel O'Sullivan. It's the pawnshop business. He has several recommendations for investors.
• "Given the current tough economic times for the consumer, people are looking for reasonably-priced merchandise -- TVs, computers, electronics -- so that's really driven growth for them," O'Sullivan told CNBC. "Plus, we saw a benefit this quarter, too, with the economic stimulus checks helping out the pawn companies."
• He also notes that much of the inventory in pawnshops is in jewelry, which has gained greatly in value from soaring gold prices.
• His favorite pawnshop company is EZCorp

  EZCORP INC EZPW 18.42 0.53 +2.96% NASDAQ

  Quote | Chart | News | Profile

  [EZPW 18.42 0.53 (+2.96%) ]. "They are in the process of closing on an acquisition of privately held Value Pawn," he said, "I think that's going to add about $125 million in revenue next year...the company's done a wonderful job of moving into the Mexican pawn market."
• Other companies in the space on his list are Cash America

  CASH AMERICA INTL INC CSH 43.79 -0.73 -1.64% NYSE

  Quote | Chart | News | Profile

  [CSH 43.79 -0.73 (-1.64%) ] and First Cash Financial Services

  FIRST CASH FINCL SVS FCFS 19.22 0.06 +0.31% NASDAQ

  Quote | Chart | News | Profile

  [FCFS 19.22 0.06 (+0.31%) ].
  

Technically, these stocks have held up very well of late. After some huge moves they need to digest, we should see another move up as the economy continues to falter... err, umm... as the economy recovers any minute now. Only fly in the ointment is the cash advance side of their business, but the pawn shop side is where we really want to be.

[Jul 24: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP]
[Jul 10: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]
[Jul 7: Missed Opportunity in Cash America]

Long EZCORP in fund and personal account

Quick Look Around the Middle Class Retail Space

Before we get into this month's same store sales, every Thursday we have weekly job claims and since the government has a hard time messing with these numbers they might actually be somewhat accurate - we went over 400K last week and now have jumped to over 450K. Remember, all these bankruptcies in retail and restaurants we've been pointing out the past few months - those are all new (future) Walmart employees. Along with the auto makers, along with the airlines, along with the financial companies. Only in the monthly government reports do we see "job growth" in those areas - laughable.

But don't you worry, Wall Street constantly tries to find "hope" and tries to guess the "turn is here" and anticipates the pickup - they've been doing that for nearly a year now and will continue to try to find a sliver of hope in every data point - remember we rallied 300+ points just 2 days ago on a "better than expected" ISM number. That's the policy - ignore the bad reports and cling to the "better than expected" report (even when that report shows contraction) Hence your "it's time to buy airlines, retailers, financials, and consumer discretionary" rallies - the hottest parts of the market the past few weeks. I continue to charge that consumer discretionary spending is just in the early innings of a long tail spin [Apr 14: Stuff I've Been Negative on Since Last Fall] - I'll have a post up later about Whole Food Markets (WFMI) which has been one of my favorite shorts (I can't take advantage of it but I've pointed this out as a case example to short many times) and it's horrid numbers out later.

• The number of newly laid off people signing up for jobless benefits last week climbed to its highest point in more than six years as companies cut back given the faltering economy.
• The Labor Department reported Thursday that new applications filed for unemployment insurance rose by a seasonally adjusted 7,000 to 455,000 for the week ending Aug. 2. The increase left claims at their highest level since late March 2002.
• Among the companies announcing job cuts in late July or early August were: General Motors Corp., Weyerhaeuser Co., and Starbucks Corp. Bennigan's restaurants owned by privately held Metromedia Restaurant Group, are closing, driving more people to unemployment lines.

Today we have same store sales numbers - there are a few bright spots but I like to focus on "Middle Class" stocks to get an idea of what is going on there instead of reading Kool Aid government reports. Some favorite trend indicators are these 3 Kohl's (KSS), Target (TGT) and Abercrombie & Fitch (ANF). The first two are middle class America through and through (remember we outlined in December that this country is going to lose many of its Target shoppers as they are forced to move to Walmart) [Dec 26: Target Shoppers Turning into Walmart Shoppers] and the last name is an example of all things conspicuous consumption in the teenage (and early to mid 20s set). But mostly its teenagers taking parents money and wildly overspending for status symbols. But now their parents are increasingly unable to pay for such "luxuries" (note - I've owned ANF long many times over the years since frankly it's been a heck of a stock but now is not that time) But until I see "strength" in these type of names I'm not buying any "recovery" thesis that Kool Aid drinkers propose.

As I always say with same store sales

1. This is sales, not profit - if you are HIGHLY promotional (i.e. big discounts) your sales can go up, but that does not mean your profit will
2. Don't forget inflation. If you believe inflation is 3% than same store sales should go up 3% just for unit sales to be flat. If you believe it's 5%, than of course sales should be up 5%. If you believer higher inflation... then you get the picture. So any company showing less than 5% same store sales, in my book, is showing a contraction - due to inflation factors
3. July was the near the top of the bell curve for rebate checks - so imagine these numbers WITHOUT rebate checks and that will be the future. Until the next "stimulus plan"
   

Let's see how these 3 did:

Target Same Store Sales Down, Sees August Decline

• Discount retailer Target Corp (TGT) said on Thursday sales at stores open at least a year fell a more-than-expected 1.2 percent in July and it forecast another decline for August.
• Target said that in the month, sales were strong in electronics like video games and TVs, health-care items and food. (staycations and consumer NON discretionary)

Kohl's July Sales Down 10.4 Percent

• Kohl's Corp (KSS) said on Thursday that July sales at stores open at least a year fell a worse-than-expected 10.4 percent, hurt by lower inventories, and the mid-priced department store chain's shares fell 2.5 percent in premarket trade.
• Analysts on average were expecting Kohl's sales to fall 7 percent for the month, according to Thomson Reuters Estimates. (missed it by THAT much)
  

Abercrombie & Fitch (ANF) July Same Store Sales Down 7% Percent

• Teen apparel retailer Abercrombie & Fitch Co. (ANF) said Thursday same-store sales dropped 7 percent in July and missed Wall Street expectations.
• Analysts polled by Thomson Financial, on average, expected same-store sales to decline 1.4 percent. (missed it by THAT much)

I picked these 3 - there are a handful of others that represent the great wiping out of the middle class that you could pick and the results would be just about the same. Again, the spin on financial media will be "yes but that is backwards looking when gas was $4! Just wait now that gas is headed to $3!; that's going to help the consumer so much!" As if $1 of gas (or about $15-20 per fill up) is going to make up for job losses, housing values tanking, lack of confidence, and inflation of 12-15%+ (my figure not the governments) in most other areas (versus wages only going up 3-3.5%). Oh yes, "they" will also leave out the fact that these numbers are inflated by the stimulus check - that's BACKWARDs looking as well.

So again folks, don't buy the company line. These stocks will rally every so often, sharply and the breathless commentary will be *THIS* is the turn, the stock market is once again predicting the economy is back on track in 6 months. The same market predicting that in October 2007 (when it hit all time highs) and the same market predicting that in May 2008 (after a 7 week rally post Bear Stearns) There is no turn coming anytime soon. It's all about home prices and inflation. Again, we have MORE inflation coming this winter (in things we MUST have i.e. home heating) even if natural gas goes to $6 and crude to $80.

Areas of strength from what I see? Costco (COST), Walmart (WMT) [although "disappointing" versus expectation], BJ's Wholesale Club (BJ) <-- even better than Costco this month, Big Lots (BIG), and that's about it outside of the specialty retailer names in the previous post this morning. A few retail names with poor numbers are bouncing this morning because their "bad numbers" are "better than expected" but when you take into account inflation, and stimulus check - the numbers are just bad for those who people are trying to find a silver lining that is not there. Don't believe me? Here is what Mastercard (MA) had to say

• U.S. sales of clothes and shoes fell in July as cash-strapped consumers cut back spending further to pay for nondiscretionary purchases such as food and gasoline, MasterCard Advisors said in a report on Wednesday.
• Overall July apparel sales declined 0.8 percent from a year ago, with women's apparel sliding 3.3 percent, the eighth-straight month that sector fell
• "This is one of the weaker months I've seen in the last five years," said Michael McNamara, vice president of SpendingPulse, who said consumers are cutting back more on discretionary items since the U.S. government's tax rebate checks mostly cycled through the economy before July began.
• "We're continuing to see a divergence here in where the retail dollars are flowing," McNamara said. "They really seem to be flowing into the nondiscretionary areas like drugstores, food and gasoline, and it's really coming at the expense of some of these retailers such as apparel and electronics and appliances."

We called this scenario a year ago when everyone was telling us there would not even be a recession in America. Sadly, quite a few still cling to the "there is no recession" because the government reports say so. These people obviously do not mingle with normal middle class people and ask them the reality on the ground. As for the lower class? Just spend some time reading through what Walmart has been saying the past 4-5 months - literally they are seeing spikes of activity on Fridays (paydays) as people spend immediately and then have to pray they get through the next week - big dropoffs in shopping the days before payday as people cannot stretch their dollar for the entire week anymore. But not to worry - inflation is benign, contained, and nothing to worry about. So says the government reports. And we're also not in a recession. Yep. [Do the Bottom 80% of Americans Stand a Chance]

I'm still trying to find some thesis on what turns this ship (US economy) around - so I can get on the "US recovery is imminent" team (poms poms in hand)... hard to find something prominent enough to hang one's hat on short of a huge bout of deflation to make things affordable again. And that would make the upper 0.5% very mad (they don't like when their assets deflate). So Uncle Ben will continue to print money at a mad pace to make sure he defends the upper 0.5%. And away we go... recovery in 6 months. "They" just won't tell which 6 months...

Long Mastercard in fund; no personal position

Jeffires & Co Bullish on Goodrich Petroleum (GDP)

I sold the last of Goodrich Petroleum (GDP) yesterday - what timing. I did not even realize earnings were out post close - they were ok (hedging techniques bit them) but this morning an analyst came out and said GDP should be 83% higher. Gee thanks - you could of not told the world that anytime in the past month? :)

• A Jefferies & Co. analyst on Thursday estimated that shares of oil and natural gas company Goodrich Petroleum Corp. are worth about 83 percent more than their current value, despite the company's recently reported quarterly loss.
• Goodrich shares, which hit a high of $86.18 on July 2, closed Wednesday at $45.95.
• Jefferies & Co. Analyst Gary Nuschler Jr. rates the stock "Buy" with a price target of $84, citing Goodrich's report of encouraging results from two of the company's vertical Haynesville wells in East Texas.

I said the stock was dead to me until it closed back over $52... of course within 24 hours its back up over $52. Ah, markets....

We did not have a large enough position where this would of had a material impact but ... it's still ironic. I still think this whole complex is a hostage to oil which aside from flipping a coin heads or tail each morning I have no idea on the direction so I'm not adding back - just commenting. That's one thing about transparency - you're going to see some "ironic" trades along with some good ones.

• Independent oil and gas explorer Goodrich Petroleum Corp (GDP) posted an eight-fold increase in its second-quarter net loss as it was hurt by charges on derivatives trading.
• The company reported a net loss applicable to common stock of $39.0 million, or $1.21 a share, compared with a net loss of $4.8 million, or 19 cents a share, a year earlier.
• The Houston-based company said the latest second-quarter results include losses of $48.9 million on derivatives not designated as hedges, which include non-cash, unrealized losses of $46.9 million.
• Revenue more than doubled to $65.2 million, as production rose 64 percent to 6.1 billion cubic feet equivalent. Average sale price of oil doubled to $121.51 per barrel and the average sale price of natural gas rose 38 percent to $10.18 per thousand cubic feet.

It is sort of funny to see - I guess many people in the natural gas industry never assumed natural gas prices could spike as high as they did, because just about every company in the space I caught an earnings report on, reported massive hedging losses. Of course that does not change the base business but it appears you need to be a good commodities trader as well as run your operations to make money quarter to quarter in the natural gas space. ;)

No position

Bookkeeping: Initiating Position in Buckle (BKE)

Buckle (BKE) is a retailer I've been watching for most of 2008 - along with Aeropostale (ARO) it's been one of the few "youth" retailers to do well during the past year. (Urban Outfitters (URBN) is the other name working in this niche) Today it is down 10% in early trading on 21% same store sales - expectations were apparently higher as the stock is selling off 10%ish. I'm fine with it when most of its peers are reporting negative 7-10% same store sales. This is going into the yin versus our typical yang part of the portfolio - i.e. things that should rally when Kool Aid drinkers scream at us about the coming US recovery.

Technically, the stock has been range bound for a good 5 months. In the retail world that's considered a "breakout" :) (i.e. many peers are down 40-60% in the same time) So it is all relative. We can now buy on the bottom of this range with an easy stop loss below $44, its 200 day moving average.

Fundamentally is is trading at 15x forward earnings which actually makes it cheaper than the names we looked at yesterday. Also the chain is small enough that it has not saturated the U.S. unlike many of its larger competitors so we can get new store openings as another growth avenue. Now, taste in this space is fickle so we don't know how long we'll own it, but in these economic times it seems to be thriving. Earnings will be Aug 21.

We started with a medium sized 1.5% allocation into this name with a purchase at $46. Again it if begins to break down (below 200 day moving average of $44) we'll take our loss and scurry into something else that's working like an airliner ;) Or bank. Or auto maker. Ahem.

• The Buckle, Inc. (BKE - News) announced today that comparable store net sales, for stores open at least one year, for the four-week period ended August 2, 2008, percent from comparable store net sales for the four-week period ended August 4, 2007. increased 20.9. Net sales for the four-week fiscal month ended August 2, 2008 increased 28.7 percent to $57.0 million from net sales of $44.3 million for the prior year four-week fiscal month ended August 4, 2007.
• Comparable store net sales for the 13-week second quarter ended August 2, 2008 increased 27.8 percent from comparable store net sales for the prior year 13-week second quarter ended August 4, 2007. Net sales for the 13-week fiscal period ended August 2, 2008 increased 36.6 percent to $169.8 million from net sales of $124.3 million for the prior year 13-week fiscal period ended August 4, 2007.
• Comparable store net sales year-to-date for the 26-week period ended August 2, 2008 increased 26.7 percent from comparable store net sales for the 26-week period ended August 4, 2007. Net sales for the 26-week fiscal period ended August 2, 2008 increased 34.5 percent to $330.1 million from net sales of $245.4 million for the prior year 26-week fiscal period ended August 4, 2007.

Offering a unique mix of high-quality, on-trend apparel, accessories, and footwear, Buckle caters to fashion-conscious young men and women. Known as a denim destination, each store carries a wide selection of fits, styles, and finishes from leading denim brands, including the Company's exclusive brand, BKE. Headquartered in Kearney, Nebraska, Buckle currently operates 381 retail stores in 39 states compared to 362 stores in 38 states as of August 7, 2007. During fiscal July, the Company opened four new stores in the following locations: Virginia Beach, Virginia; Augusta, Georgia; Palm Desert, California and Pearland, Texas.

Long Buckle in fund; no personal position

Bookkeeping: Closing Pride International (PDE) on Earnings Spike

I am closing out ocean driller Pride International (PDE) to reduce exposure to oil - this is not my favorite name in the space but we specifically owned it hoping for a buyout bid based on evidence [May 2: Restarting Pride International as Takeover Bait] but it has now been 3 months and while there was smoke there is no fire. It might still happen but I want to reduce exposure and raise cash so I'm exiting with a small loss. The stock has a decent 5-6% type of pop this AM on earnings.

We sold the last of the position (0.5% stake) today in the low $41s on the spike post earnings. We've owned this name for 2 round trips in the fund and are up overall, but a small loss on the last iteration. Utilization rates on their midwater rigs were horrid actually, but we owned it for the deepwater rigs. But again, individual fundamentals mean nothing in this group - anything 6 degrees of oil trades with oil. Technically the stock bounced to the 50 day moving average and then was turned back on its initial probe there this morning.

• Oil and gas driller Pride International Inc (PDE) posted higher second-quarter profit, helped by increased dayrates for its deepwater and midwater rigs offsetting the lower utilization levels.
• Net income for the quarter was $187.7 million, or $1.07 per share, compared with $146.1 million, or 83 cents a share, a year ago.
• The company posted income from continuing operations of $151.6 million, or 87 cents a share, compared with $120.1 million, or 68 cents a share, a year ago. The company's latest quarter included a gain of 7 cents a share related to the sale of its platform rig fleet.
• Revenue rose more than 5 percent to $560.3 million.
• Analysts on average expected the company to earn 76 cents a share, before special items, on revenue of $557.6 million, according to Reuters Estimates.
• Average daily revenue for the company's deepwater rigs rose more than 26 percent to $298,400.Utilization for the deepwater rigs was 96 percent during the quarter, compared with 97 percent last year.
• Average daily revenue for midwater rigs rose more than 7 percent to $217,800. Utilization for midwater rigs was 68 percent, compared with 86 percent last year.

No position

Transocean (RIG) Solid Earnings

The same pattern we've seen in many oil service stocks played out in Transocean (RIG) yesterday. Solid earnings. Falling on deaf ears. Due to the mix of ships (they have a lot of shallow drillers who have much higher competition levels) I prefer some other names in the sector in the here and now, but for the long run RIG is bringing on the most supply of deep sea drillers which is where the real money is.

The chart is actually breaking out - unfortunately to the benefit of shorts, not longs. The 50 day moving average ($144) is quickly closing in on the 200 day ($136s) - the last thing you want to see is the 50 day to cross over and below the 200 day. This seems to be the fate unless things change quickly. For now, based on charts alone, this is a stock to be shorted/sold - not bought. In fact a very easy short with a nice stop loss over current resistance areas (I keep repeating that but many of these commodity charts look identical - i.e. broken) At $130 there is some support with March 2008 lows, but past that the next level down is $120 (January 2008 lows) and then it goes from there...

Despite providing a service that will be in demand at oil $60, $80, $100, $120, or $140 Transocean, like all the deep sea drillers simply seems to be a hostage to oil prices. In "theory" oil services should have some separation from direct Energy & Production companies, but theory only works well in the classroom. We'll keep track of the fundamentals just to keep ourself educated; also some word that cash flow is such that the company is seeking ways to return cash to shareholders (i.e. special dividend?)

Another company who provides extremely detailed earning reports. Hard to do apples to apples year over year comparisons due to the acquisition of GlobalSantaFe (GSF) last year.

• Transocean Inc (RIG), the world's largest oil and gas drilling contractor, said second-quarter profit doubled, topping Wall Street estimates, on strong demand for its offshore rigs.
• Transocean has seen rates for certain deepwater rigs top $600,000 per day as high crude oil prices prompt demand from exploration and production companies. Tight rig supplies have also helped push contract awards higher. The average daily rate paid for Transocean's drilling fleet rose 18 percent from a year earlier to $238,600 as contracts were renewed at higher rates.
• Second-quarter profit rose to $1.1 billion, or $3.45 per share, from $549 million, or $2.63 per share, a year earlier. Analysts on average had expected a profit of $3.30 per share, according to Reuters Estimates.
• Revenue more than doubled, soaring to $3.1 billion.
• Day rates increased 4% sequentially and 18% year over year. Utilization rates across all rigs was 87% (down from 91% last quarter).

No position

Gerdau (GGB) Stellar Earnings

Ah Gerdau (GGB) - they once loved you so [May 16: Brazil is Sexy] ... you used to appear on our top weekly performing stocks almost weekly. It is a shame the rest of the world will be entering a period of anarchy, rioting, famine and a return to lifestyles of the 1960s. Just in case the hedge funds are wrong on that thesis we will keep an eye out on you... this will probably be your last good quarter before the house of cards that is global growth implodes on itself, as America rightfully takes its place as supreme being and overlord.

• Brazilian steelmaker Gerdau (GGB) said on Wednesday its net profit soared 85 percent in the second quarter, lifted by red-hot demand for steel products around the globe and a big increase in output.
• Net income surged to 2.12 billion reais ($1.35 billion) from 1.15 billion reais in the second quarter of 2007 and 1.09 billion reais in the first quarter of this year.
• Gerdau, which has operations throughout the Americas and Europe, said strong demand for steel in all the countries where it operates helped propel sales sharply higher. (that all ends soon though, oil going to $100 means global pestilence and the End of Days)
• Net revenue rose 47 percent in the quarter to 11.1 billion reais, led by a 59 percent jump in sales in North America, where demand for steel remains robust despite the economic slowdown in the United States. (aha - proof of the coming economic rebound in the US - someone send this info to Mr. Kudlow - STAT!)
• A weak U.S. dollar allowed Gerdau's mills in the United States to increase exports significantly, mostly to Central America, the Caribbean, Asia and even South America.
• In Brazil, Gerdau's second-biggest market after North America, net revenue increased 47.5 percent, driven by robust demand from the construction and automobile industries.
• Gerdau also significantly increased production last quarter thanks to a slew of recent acquisitions and the inauguration of a new blast furnace at its Gerdau Acominas unit in Brazil.
• Output of raw steel products like steel plates rose 26.2 percent to 5.64 million tonnes, led by a 39.1 percent increase in North America, where Gerdau completed its takeover of Chaparral Steel. In Brazil, output climbed 15.8 percent.
• With Brazil's economy growing at its fastest pace in decades, Johannpeter said Gerdau is looking to increase production further to keep up with demand. Gerdau's board recently approved plans to invest $277 million to further expand capacity at its Acominas unit to 5 million tonnes annually in 2010 from 4.5 million tonnes currently, he said. (yes yes but this will create over supply in the coming End of Days scenario as we enter a post modern Mad Max world) [However it is positive for metallurgical coal - ahem]
• "The Brazilian economy is in a new phase of growth and this project fits into that outlook," Johannpeter said. (all lies - hedge fund computers can look ahead 6-9 months and see the end of the Brazilian party)

So once again let's review - the current thesis is "reverse decoupling" of America from the rest of the world. We will rebound, and the rest of the world will crumble. We use a ton of commodities but not enough to support prices like the rest of the world. Nope. So commodities will deflate since all they are is a bubble, and you need to sell the stocks.

Absurd? Perhaps. But that's the thesis and to go against it will cause you to lose money. Until "they" reverse the thesis and say "time to buy these darn cheap commodities". When will we know it's time to change course? The charts will tell us. And the chart below says "not yet" - each return upward to the 50 day moving average the past 5 weeks is simply a time to sell and then short. When that stops working - it's time to be bullish.

No position

Bookkeeping: Closing Yingli Green Energy (YGE)

I just had a tiny position left in Yingli Green Energy (YGE) so based on the non-reaction to earnings (which I thought were quite tidy) I closed it earlier today. The market simply hates solar right now and is to the point of pricing in every uncertainty short of extinguishment of the actual sun. (that would be bearish indeed) ;)

I sold the 0.4% stake in Yingli Green Energy in the mid $16s. We've lost about $1800 on this position; nothing enormous. We restarted this position in mid April and this is the second go around without much success with YGE. [Apr 21: Starting Stake in Yingli Green Energy] A few trades during the serious dips, and then selling off on spikes are the only things we could do to offset the primary trend (down).

I transformed from a focused (1-2 stocks) exposure to the solar sector to a more broad based exposure a few months ago due to the extreme volatility in the names. That said, I have 4 Chinese solar names which essentially trade in 1 group at times like this (I literally treat them as "1 stock" because the market does so) - so if the group falls back into favor the other names I hold will give me the same performance (or very similar) to Yingli. So in essence I have lowered my exposure to my "1 chinese solar stock" (even if its made up of 4 individual companies, now 3). While there are some pretty significant differences among the boatload of Chinese solar stocks the market does not seem to distinguish 80% of the time - they are either all "in favor" or "out of favor". Only when they are in favor do you see certain names separate from the rest. But guessing which will be in favor each time they run is anyone's guess.

If/when risk appetite returns to this market I expect this group to charge ahead but risk aversion seems currently ingrained. If/when the market can break through some key technical levels I believe that would bring more risk appetite and these are the type of stocks that can jump 40% in 2 weeks when the "mood" is correct.

To keep the "solar" exposure consistent instead of adding to the Chinese solars I've added to the best chart in the group, Energy Conversion Devices (ENER). So out from YGE and into more ENER.

A quick look at Yingli's results below - on first glance they impress me but the same boogeyman that haunt the polysilicon based producers continue to hover. The overall multiples given to this group continues to border on absurd in light of growth rates.

• Solar power company Yingli Green Energy Holding Co Ltd (YGE) said on Wednesday quarterly earnings more than tripled, and raised its revenue outlook for the year, on strong global demand for renewable energy.
• The company's stock, however, slid 7 percent on concerns that Yingli could be stuck paying high prices for its key raw material, polysilicon, while an expected pullback in government subsidies in Spain could hamper demand.
• Profit in the latest quarter was equal to $30.2 million, or 23 cents per share, Yingli said.
• Revenue was $289.7 million, above Wall Street analysts' average estimate of $234.27 million, according to Reuters Estimates.
• Yingli Chief Executive Liansheng Miao said the company benefited from operational efficiencies and demand from emerging photovoltaic solar markets including Korea, Italy, France, Belgium, the United States and China. (should help to offset all the stress from lower subisides in Spain that is battering the sector)
• Investors, however, are concerned that a cloudy outlook for key subsidies in Spain and the United States could create difficulties for solar companies, and Yingli said on Wednesday that its 2009 contracts have not been fully priced yet.
• "People are concerned that there is going to be sort of a tumultuous demand environment, married with their lack of polysilicon procurement," said American Technology Research analyst John Hardy, who has a "buy" rating on Yingli shares. "So they still could be having to pay expensive prices for polysilicon while the demand is less certain."
• Yingli said prices should start to move down in the fourth quarter, but the company currently has the highest polysilicon costs in the industry, according to Piper Jaffray analyst Jesse Pichel.
• Gross margin was 25.8% in the second quarter of 2008, up from 24.6% in the first quarter of 2008 and 22.7% in the second quarter of 2007. (I always like to review this figure especially for this industry - Yingli is now in Trina Solar range as leadership in gross margins - not that it has helped either stock)
• Foreign currency exchange loss was RMB 68.2 million (US$9.9 million) in the second quarter of 2008, compared to a foreign currency exchange gain of RMB 66.3 million in the first quarter of 2008.

This last point on currency helped goose earnings for almost every stock in the group last quarter except Trina Solar (TSL) - so now those gains from last Q reversed and held back earnings from surprising higher to the upside. Of course almost no one mentioned it last quarter (the positive effect) and just drove the stocks up on something that had nothing to do with operations. This is about a $20M swing for YGE or .15 - considering their EPS was .23 this quarter you can see the huge change currency is having on these solar stocks results.

[May 15: Yingli Green Energy Reports Good Quarter]

Long Energy Conversion Devices, Trina Solar in fund and personal account

Bookkeeping: Adding to Research in Motion (RIMM)

Haven't added to Research in Motion (RIMM) in ages - the chart says it all. We're moving it up from 0.3% to 1.9% of portfolio in the $126s.

If you are not familiar with the fundamental story it goes like this [this content has been deleted for use of fundamentals]

So aside from all those myriad fundamental reasons, the chart is looking positive now - if the stock can break through $129, it should be relatively easy going until mid $140s. If it breaks back below $124 we'll cut back the position. This is a nice set up technically since it's not far below to set off the sell point, and the loss would be minuscule.

Apple (AAPL) is also firming up but we want to see her north of $170 so HAL 9000 does not stab us in the back.

Technology is one of the anti-oils to HAL's microprocessor.

[Apr 2: Research in Motion Appears Excellent on First Glance]
[Feb 21: Research in Motion Raised Q4 Subscriber Additions ; Up 10%]

Long Research in Motion, Apple in fund; long Research in Motion in personal account

Bookkeeping: Starting Big Lots (BIG) - Interested in Walmart (WMT) and Polo Ralph Lauren (RL)

Trying to find a retailer to replace the homebuilder exposure we let go of this morning. The thesis here remains we need exposure to something that works when the "it's time to buy America as the rest of the world implodes" trade is on. Now the funny thing, is in retail most of the stocks doing well, even today, as "rotation" happens are the very low end or higher end - the great middle is still a chasm.

While the usual road kill rallied huge yesterday: Kohl's (KSS), Macy's (M), JcPenney (JCP) I am looking for something with a bit more reality behind it - i.e. will go up on more than "flavor of the day/week" to run up, and something we can hold for a while.

We lost Costco (COST) with its recent warning (but perhaps it formed a nice double bottom), but (similar but not as good as Costco) BJ Wholesale (BJS) seems to be recovering

Walmart (WMT) would be the easy, safe choice - it's been a favorite "Pooring of America" stock for a long time [Jul 2: 3 Muskateers of Pooring of America Retail] [Dec 16: Target Shoppers Turning into Walmart Shoppers] After basing for a few months, it has just broken out to a new high. I am interested and might get into this one soon. (as an aside how is the economy healthy or "will be soon" when Walmart is printing all time highs? Call me when Kohl's is making new all time highs and we'll talk economic recovery) There is not much growth here and a forward PE of 17 but valuation means nothing when the hedge funds want you in their portfolio.


With Costco potentially down (again it could be making a double bottom which is bullish) the other of our 3 muskateers was Big Lots (BIG) which is down today on a downgrade after an impressive 2 week run from the $27s to $34s.

• Shares of Big Lots Inc. fell sharply Wednesday after an analyst downgraded the company on concerns about a run-up in the stock price. Soleil Securities Group Inc. downgraded Big Lots to "Hold" from "Buy" due to the sharp recent appreciation in the shares.
• "There has been no news or developments that we are aware of to cause the run-up in the shares," he wrote in his note. (here is the development - hedge funds are moving in)
  

I'm going to start a position here and use the downgrade and 7% drop today to our advantage (I hope). I was debating adding it a few weeks ago when it fell to the $20s but the chart was giving me concerns - in retrospect all it did was fill "a gap". It seems to have held the 100 day moving average (most retailers are below the 200 day). It has a forward PE similar to Walmart at 17.

We're starting Big Lots (BIG) as a 1.9% stake buying in the $31.90s. I am strongly considering making this a 2 stock basket with Walmart as well....

Last, we have Polo Ralph Lauren (RL) which I have to admit I am impressed with; although most of its strength is in the dreaded "overseas" department (and from favorable tax treatment). After nearly 3 months of faltering, the stock gapped up on quite the earnings report this AM. Today's gap took it over both the 50 and 200 day moving averages in 1 fell swoop. It's a tricky chart and not one I normally buy... if it falls back to "fill the gap" it would break both the 50 and 200 day moving averages ... but if it runs without filling the gap that would raise some concerns. So I might hold off on this one until I see a better direction. If it rises past May's high in the $71s that would be a very good technical sign.

Some reaction to RL's earnings (again the irony is, we are trashing everything with exposure outside the US, yet where is the strength in all these earnings reports coming from? and why is it ok for some sectors to have strength outside the US and not others? boggling)

• Fashion company Polo Ralph Lauren Corp (RL) reported a much-bigger-than-expected increase in quarterly profit and raised its full-year earnings outlook on Wednesday, citing a higher gross margin and a lower tax rate and sending shares up as much as 8 percent.
• Polo's high-end customers are usually less wounded by the weak economy, but conservative planning and the strength of its brands has allowed the company to continue selling its clothes, shoes, handbags and home goods at full price, even as U.S. consumers as a whole are spending less in the face of soaring gasoline and food prices, falling home values and job insecurity.
• The company, whose brands include Polo by Ralph Lauren, Chaps and Club Monaco, said net income rose 8 percent to $95.2 million, or 93 cents per share, in its fiscal first quarter, which ended June 28, from $88.3 million, or 82 cents per share, a year earlier. Analysts on average were expecting 71 cents per share, according to Reuters Estimates.
• The lower tax rate in the first quarter -- 35 percent, down from 39 percent a year before -- added about 6 cents to earnings per share, while a lower share count added a penny or 2 cents, according to Needham & Co analyst Christine Chen.
• Even when stripping out those benefits, Polo delivered "an amazing beat ... in any environment, let alone this environment," Chen said. "They're one of the best operators out there. They managed their inventories very, very leanly so they didn't have to be as promotional as they thought they would. Business held up better than they expected."
• Net revenue rose 4 percent to $1.11 billion, with about half that increase due to the weakness of the U.S. dollar versus the euro, which boosted the value of international sales when converted to U.S. dollars. (egad)
• The gross margin at Polo, which supplies department stores and specialty retailers and runs its own stores, improved 2 percentage points to 57.3 percent in the quarter, due to the strength of international sales, which usually carry higher margins. (this we like)
• "While our new fiscal year is off to a good start, we continue to have a conservative view of the domestic retail environment," Farah said, adding that Polo is "well-positioned" for the upcoming back-to-school and holiday shopping seasons, since its inventory levels have been planned "conservatively."
• Retail sales rose 9 percent to $492 million, driven by a 3.9 percent increase in sales at stores open at least a year, a key retail metric known as same-store sales.
• Polo said it now expects to earn $4.00 per share to $4.10 per share in fiscal 2009, up from a prior forecast of $3.95 to $4.05. Its revenue outlook was unchanged, calling for an increase at a low-to-mid single digit percentage rate. Analysts on average were expecting 2009 earnings of $3.98 per share on revenue of $5.10 billion, according to Reuters Estimates.

This new guidance gives us a forward P/E of 16, falling near the other 2 we are considering.

Long Big Lots in fund; no personal position

Encore Acquisition (EAC) Pulls Itself off the Market

Just revisiting a name we owned in the natural gas play that has earnings out today, Encore Acquisition (EAC). One of the reasons we jumped in was the potential for a buyout offer as the company clearly stated [Jun 18: Will Encore Acquisition be Bought Out?]

• Onshore oil and natural gas exploration company Encore Acquisition Co (EAC) said on Wednesday it was exploring strategic alternatives, including a possible sale.
• The Fort Worth company, which has acreage in the Bakken, Haynesville and Tuscaloosa Marine shale plays, said Lehman Brothers Inc has been hired as adviser.
• "It is our belief that Encore's current share price is not reflective of our record operating results and our ability to efficiently fund these projects through our upstream master limited partnership, Encore Energy Partners," Encore Chief Executive Jon Brumley said in a statement

Buried in their earnings today was this update - and shareholders are not taking too kindly to it. I understand because that was part of our thesis for beginning a stake.

Jon S. Brumley, Encore's Chief Executive Officer and President, stated, “We have been studying strategic alternatives at Encore that would bring the most value to our shareholders. The Board and Management have decided that a sale or merger of the Company is not currently in the best interest of our shareholders. The energy and credit markets became very indecisive during the second quarter.

I understand the reasoning because the stock price has plummeted so if the executives believe in the long term in natural gas they would see no reason to sell at a 20-30% type of premium to today's prices because the stock was trading organically at those prices just weeks ago.

Luckily we capitulated as the stock first began breaking support below the 50 day moving average and exited just under $61 [Jul 25: Bookkeeping: Closing EOG Resources (EOG) and Encore Acquisition (EAC)] 10 days later? The stock fell to its 200 day moving average (and below) briefly in the mid $40s before "bouncing" to $49 and now it is down "only" 9% for the day.

Somewhere in here these stocks are good buys on valuation... but valuation means very little to this market. So I have no idea when value matters again. HAL 9000 continues to sell off these stocks. Playing with this fire is only suitable for quick traders jumping in and out by the hour(s).

No position

Priceline (PCLN) - Down 17% on Good Earnings?

Priceline (PCLN) surprised me with a very nice earnings report in May [May 8: 2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)]

They just continue to hit home run after home run. (Booooyah (tm)! beat by $0.16) My thinking has been as the pooring of America continues, Priceline has a bit of unique niche with their model and could sort of be the Walmart of travel booking... they sure seem to be feeling no ill effects from the economy, so this may be what is happening.

What a paradox this market is. If I still cared about (ahem) fundamentals I'd see a company that beat estimates, raised full year guidance, and now trades at 18x forward 08 earnings. Heck, it even deals with the booming airline and hotel industries - sectors sure to rip higher as the economy revvs up. (cough) Instead the stock is down 17% due to all the same factors ripping into every other "growth" story - there "might" be a slowdown in future growth. Yes, I get that - but I am simply amazed this pattern is repeating everywhere - companies which "might" slow from 40% growth to 30% are pummeled while people run to companies that are in the 7% growth area - especially when the 7% growers have the same P/E ratio. Ah... HAL 9000 strikes again.

Just an aside, we are supposed to sell Priceline.com on "troubles related to the economy" but we're supposed to buy autos, financials, retailers, and airlines who are ... I suppose immune to said troubles in the domestic economy. Or is it a case of "it's already priced in"? Got it. Because on negative earnings everything is "priced in" since you cannot value them on earnings ;) (so they'll come up with some excuse such as book value or price to sales or cash flow blah blah - anything to excuse the thesis)

As another aside, why any selloff at all? Now that crude is heading back to $60 - that should help the US consumer (and world consumer) and the same theories buoying other stocks (anti-oil trade) should help Priceline as well, right? Consumer will have more discretionary income and after buying autos, and new shoes at every major retailer will be traveling like mad (staycations? So spring 2008) See what I mean - this is called "selective reasoning" - we can run up stocks A, B, and C for theory X but stocks D, E, and F which would benefit from theory X as well - well we are selling those. ;) The difference? It's random. But you still have to figure it out in advance or lose 1/5th of your capital in position overnight.

We don't look at fundamentals anymore since they are useless but for historical reference let's look at the numbers

• Online travel agency Priceline.com (PCLN) on Tuesday posted higher second-quarter net income, but shares fell about 15 percent after the company warned of potential troubles related to the economy and airline capacity cuts.
• "Economic uncertainty and high fuel prices are affecting the broad travel market and significant airline capacity reductions in the fall will also have a negative impact," Priceline Chief Executive Jeffery Boyd said in a statement. (this came as a complete shocker - the travel market is suffering? someone page Kudlow)
• The company said its second-quarter net income rose to $54.1 million, or $1.08 per share, from $34.6 million, or 79 cents per share in the year ago period. Excluding one-time items, Priceline earned $1.55 per share, topping forecasts for $1.11 per share, according to Reuters Estimates.
• The company said its bookings amounted to $2.1 billion billion, a 71 percent increase over the year-ago period. Bookings on Priceline's international operations increased 80 percent, while domestic bookings increased 59 percent. Priceline's revenue rose 44 percent to $514 million.
• "The things that are propelling the business are that we had a very significant increase in airline ticket sales tied to our no-fee initiative and what we think is pretty effective marketing," Boyd told Reuters. Boyd was referring to its elimination of bookings fees on the purchase of airline tickets.
• Priceline also told investors that it is seeing "significant headwinds" in its rental car business as suppliers reduce their fleets. (ok this one I can at least justify as a problem - yet instead I'm supposed to buy the automobile companies or their suppliers who are seeing reduced volumes, including lower fleet sales. Gotcha. Very sensible)
• For 2008, Priceline said that it expects to generate about $7.55 billion to $7.9 billion in gross travel bookings. That forecast is consistent with previous guidance. The Norwalk, Conn.-based company boosted its full-year earnings outlook to between $5.50 to $5.85 per share, from its previous guidance range of $5.25 to $5.65 per share. Analysts expect 2008 earnings of $5.54 per share.
• For the third quarter, the company predicted a 44 percent to 65 percent increase in gross bookings from the year ago period.
• The company said it sees its third quarter revenue increasing 30 percent to 35 percent year-over-year.

But enough about those silly numbers. It's all about the chart, and if we look we see stock bottomed around $95 in mid July which is near to where the stock fell to at its nadir today. Below that is some minor support in the mid/upper $80s. If that breaks? I see a gap there in the mid $60s in August 2007. Might be another test of the "gap" theory. (most gaps in charts get filled) Simply too dangerous to apply capital unless you are a flipper who goes in, with a stop loss around $94 and try to flip for a quick dead cat bounce type of gain. Since that is not us, we won't do that here but just saying it. Buy and hold? Haha you jest. If it breaks upper $80s in fact, it would look to be quite a nice short. We can't do that either but just saying it. Would valuation dictate such a dramatic move down? No. But valuation means nothing.

Remember, in this market you want to buy the airlines who lose money on every flight - not the booking agent who makes money but might be in danger of making more money next year (albeit at a slower place than this year). Making more money next year is bad if its at a slower pace than this year; losing money next year is good if its a slower pace than this year. HAL 9000 says so. We must obey or lose our capital. On the plus side this opens up our choices of stocks to buy by a huge amount - there are countless companies losing money hand over fist. Now just to figure out which the computers love the most.

As for Priceline.com? Hopefully the resurgent economy of US 2009 brings back the rest of the world by say 2018. Then it's a buy.

No position

Bookkeeping: Closing Mercadolibre (MELI) and Goodrich Petroleum (GDP)

We own 2 stocks that are up today. You know what that means folks. We need to sell them immediately because tomorrow they will be trashed. Or maybe in the next few hours they will be trashed. Because the fundamental story is clearly changing 5-10-15% by the day.

We started Mercadolibre (MELI) Jan 7, 2008 after a huge pullback. Good thing we did not drink the Kool Aid in December 07 when the stock was near $80.

We are closing the remaining 0.4% stake and took a $4500 loss with a sell in the $35.30s. Considering the chart I consider that a minor miracle; we had some decent trades along the way to offset some quite large losses.


This stock is dead to me until it closes above $42 (on good volume), since it's dead to hedge fund computers until it close above $42.

We started Goodrich Petroleum (GDP) in mid July after a first pullback, on a huge run. That was an massive error since natural gas is now clearly headed for $1.00.

We are closing the remaining 0.8% stake and took a $5900 loss with a sell in the $44.60s

This stock is dead to me until it closes above $52 (on good volume), since it's dead to hedge fund computers until it closes above $52. It might be forming a base here above the 200 day moving average. Or not. I don't know nor care. I'll only buy on strength.

While all losses make us unhappy, these are "manageable" losses and until the charts show breakouts or breakdowns they are in limbo. The only things working are buying the few stocks in strong uptrends or timing a buy of a broken down sector nearly perfect knowing there will be short covering/rotation and then a short term lift. So these stocks are in neither of these 2 conditions. It is not so much I have a serious worry of a major breakdown in stock price - maybe they will, maybe they won't - but it is just sort of dead money for now. I'll be willing to pay up when HAL 9000 decides he wants to own these stocks in scale. Otherwise they just are taking up space. The less chances we have for HAL 9000 to blind side us the better in this environment. Someone else can be the hero. (To Mr. Shax - yes it's capitulation)

I won't bore you to death with fundamental reasons such as the fastest growing e-commerce play in Latin America or a jewel in the Haynesville shale and potential acquisition target in the natural gas space. We're not using the f word around here anymore. Frankly I think the move down in natural gas is probably 80% of the way complete, but even more frankly it doesn't matter until the chart improves. Even if nat gas and crude rebounds all people have to say is who cares - thats only this week, the global economy enters anarchy and rioting in 2009 - and HAL 9000 will obey and sell these off in favor of autos, airlines, retailers, Freddie Mac (oops did you see those awful earnings) and the like.

Why sell natural gas off and not coal / fertilizer? Because while oblivious to HAL 9000, there is a difference. But don't you worry - on the next pop up I'll be cutting any of those as well since their charts have now been corrupted by a virus... called HAL 9000. In fact everything I bought yesterday I should be selling today - they are almost all up. Why? Because tomorrow they will all be down - because as you know that's the new and improved market ;) But I'm still stubborn and hope the computers can give us a 48 hour rally instead of the typical 24 hour.

[May 14: Mercadolibre Reports]
[Mar 31: Mercadolibre with 3PM Spike/Forbes Article]
[Jul 16: Bookkeeping: Starting New Stake in Natural Gas Player Goodrich Petroleum]

No positions

Foster Wheeler (FWLT) - Solid Numbers

Some good news and bad news from Foster Wheeler (FWLT)

Good: results were very solid in a very lumpy industry (quarter to quarter), stock is cheap. US growth is slowing (why is that good? I don't know but anything to do with the US is now "good" and the rest of the world is now "bad")

Bad: the company does business with the rest of the world which is imploding, concurrent to the coming US rebound. This is now the REVERSE decoupling theory - i.e. in the fall we were assured as the US falters it would be ok because the rest of the world would be immune - which we said was a joke. We were correct. But now the exact opposite is being promoted by the same jokers who gave us the original decoupling theory. The rest of the world will now devolve into chaos, but the United States of Subprime will be just fine thank you - even though we are the epicenter of the problems of the globe. Got it! Makes sense.

Bad: CEO who we like is set to retire in 2009.

Since fundamentals are for old fashioned investors I'll start throwing them at the bottom of these posts since their importance is neglible. I might even have to start a parallel blog - "FundamentalsAreForOldFoggies.com" and post the fundamentals there. It will probably get 5 hits a day.

Just focus on the chart - it is horrid. Hence, even though we bought some late yesterday near the $49s we must dump this company growing 40%+ because the rest of the world is imploding or will be soon. Meanwhile we must clap like seals when Cisco (CSCO) reports earnings... a whopping 4% year over year growth rate. Bless it's heart - what a growth story. So I can get Cisco trading at a forward PE of 15, growing at 4% (ok I'll be generous, growing revenue at 8%), or Foster Wheeler for the same forward PE growing at 40% - but since the threat of a slowdown in growth to 30% is imminent I must sell the company growing 5x as fast to buy the slow growth one - aha - makes sense now. So repeat after me. Sell 40% growth rate, buy 4% growth rate. Clap for the US economy. Rinse. Repeat. (wait, doesn't Cisco have overseas exposure? Never mind that - details and facts can't be bothered with - take that stock up!)

Please note the gosh awful chart below - this is a terrible company which is eeking out a 40% growth rate. After the rest of the world succumbs to death its growth rate might drop to 35% or (avoid your eyes) 30%. At that time the forward P/E ratio of 15 that Foster Wheeler (FWLT) now sports will still seem too expensive. PEG ratio of 0.5 is far too overpriced. (in fact it's currently 0.375 PEG ratio) PEG = PE to Growth rate (below 1 is considered "cheap" for growth companies). Give me some Northwest Airlines (NWA) instead. See when you have NO earnings you never become expensive - hence airlines are awesome purchases - they never can get too expensive. I'll try to get out of this piece of junk (FWLT) somewhere around $57-$59 but maybe we won't get there and the stock can trade at $30 or so. It might even be too expensive there. Hopefully (if we are lucky) their earnings will go negative in 2009 and then this will be the type of stock people will favor. Unprofitable companies - the 2009 growth story!

For those few of you who are still so old fashioned to follow fundamentals I submit the remaining portion of the post - myself I'm typing it but I'm not reading it (ok I'm reading it but you shouldn't). This data doesn't matter - remember the world is going to hell in a handbasket and what today looks like 40% growth will really be -40% growth in a year as oil crumbles to $80. Or maybe $5.

• Engineering and construction company Foster Wheeler Ltd (FWLT) posted better-than-expected quarterly earnings on Wednesday, but said its power plant business in North America was slowing. (wait, everyone is telling me North America is the place to be!)
• Net earnings climbed to $160.8 million, or $1.11 a share, from $71.9 million, or 50 cents a share, a year earlier. Excluding an $18.3 million asbestos-related gain, the company posted quarterly earnings of $142.5 million, or 98 cents a share, topping analysts' average forecast of 84 cents per share, according to Reuters Estimates. (earnings growth nearly 100%? This is such a 2007 story, get me some auto stocks which are losing billions upon billions - that's where the action is - I don't want these lousy stocks with positive earnings anymore)
• Revenues rose to $1.7 billion from $1.19 billion. (yes, but falling 90% NEXT year... at least... maybe 95%)
• Foster Wheeler said its engineering and construction group booked $538 million in new orders during the quarter, bringing its backlog of work to $1.8 billion at the end of June, up 26 percent from a year earlier. (all this backlog will be cancelled except for US projects, so says the stock price)
• But its power group added $191 million in new orders, sharply down from the $550 million booked in the year-ago quarter, as North American customers deferred prospective projects because of increased environmental scrutiny, rising costs and fears about the economy. (oops, not so much on the coming strength in the U.S.)
• Backlog at the power group stood at $1.5 billion at the end of the quarter, up 10 percent from a year earlier. (so backlog still grew at the power group despite a big drop in North America - I wonder where the growth came from? Ah yes, the areas of the world that I am now told will be destroyed and cancel every project as crude goes to $5)
• "In our (global power group) -- consistent with our guidance at the end of the first quarter of this year -- we are seeing delays but not cancellations in some North American prospects," Milchovich said in a statement.
• The company would seek to offset that slowness by focusing on markets outside North America, he added. (no... no... no! Why? All those markets will be going back to living in the 1970s, sending the peasants back to their farms and shutting down their factories. The coming strength is in the United States - see all those airlines, autos, and retailers rallying? the stocks never lie - nope)

Now I see why the CEO is retiring. He is still of the mindset of 2007 - thinking there will be growth in the rest of the world. I pray the new CEO (hopefully under the age of 35 and an avid video game player) will realize the great growth potential of the United States - this is where the stock market should rebound, as domestic stocks are showing us the coming rebound in the domestic economy. The rest of the world is imploding as crude falling to $100 or less will show the rest of you soon. The hedge funds already know - watch what is going up the past 6 weeks. Hedge funds are far brighter than guys who work in the industry. All this silly talk of growth overseas ... psshflbt. Remember 2009 - the year the United States chugs along at 5% growth while the rest of the world devolves into chaos and anarchy. The stock market knows all and has telegraphed this to us (just like they telegraphed to use the boom of 1st half 2008 by taking the market to all time highs in October 2007). Get your airlines (but only ones which fly in the US), retailers (but only those that sell in the US), and auto makers (preferably those with 80%+ sales in the US). Because that's what the hot money is doing - so should you.

Long Foster Wheeler in fund; no personal position

China Medical (CMED) Flying Since Being Highlighted

When it rains it pours - I wrote the China Medical (CMED) piece premarket yesterday morning [China Medical - Back on Track; Valuation Should be Higher] and was not able to access the market until later in the afternoon due to travel. After a gap up this morning, this stock is up 18% from the $45 print I highlighted it at 26 hours ago. If not for that gap up this morning I was ready to buy on the breakout over recent highs at $50... now its in the mid $53s. Boy oh boy, not my day, week or month.

I'll stick a limit order at the top of this gap and see if we can snag it on an inevitable pullback.

The stock has fallen back to the 20 day moving average near $45 - if this stock was trading in a vacuum I'd be gobbling up shares hand over fist as we have a compelling story not reliant on banking or oil. However we don't exist in a vacuum and this very troubled market is stealing away capital like a thief in the night. At this point I'd like to buy the stock at either a pullback to its 50 day moving avergae (near $43) or on a newer high past its recent peak of $50 signaling institutional money is pushing in.

No position unfortunately

Bookkeeping: Closing DR Horton (DHI)

I bought 2 homebuilders in late winter for a specific reason that is not panning out at this time. In the previous 4 bounces post major correction (Aug 07, Nov 07, Jan 08, Mar 08) investors flocked into these stocks since the thesis was the economy "will rebound in 6 months". Even though I believed this (correctly) to be false that doesn't mean stocks in these 'early cycle' areas which are driven by short covering or rotation cannot rally significantly. So these were bought specifically for times like the last month - so I'd have something rallying when the market turned 180 degrees away from the "growth" stocks. Unfortunately, this time around the same suckers... err shrewd investors (and their computers).... who bought these stocks the last 4 iterations are not piling back in. Maybe it is finally hitting them in their noggin that there is no housing recovery coming. Now the current sexy theory is the consumer will be back (ex his house ATM of course) and the anti oil plays are the place to be - so one needs a car company (because people won't be buying homes but they'll be piling into car lots) or a retailer or an airline or any sort of road kill that will go from losing a lot of money to "less than a lot" of money and hence is a "great buy".

Whatever the reasoning - the housing stocks are not performing as they should be. They had a purpose in the portfolio - to run counter cyclical to the global growth story and to bounce when the others are being sold off. They are not doing the job. So I'm going to cut one of the two here, DR Horton (DHI) in the $11.10s with a $4000 loss. All that matters in this day and age is the chart and the chart shows a stock unable to rebound above the 50 day moving average even as oil drops and institutional money floods into to "consumer" plays (it's all sort of laughable - the same toxic junk a month ago is now the safe haven). If these stocks cannot rally in what I consider a beneficial environment for them it makes me scratch my head, when exactly they would rally.

Not that it matters but there was an earnings report earlier this week - I don't bother to read these anymore because earnings reports are now irrelevent to stock prices. All that matters is the sector allocation and charts. This is the best stock on the planet over $14. It's a piece of junk under $12. The new era.

No position

Cramer: Quants and their Machines

For those who have been around a while you know I constantly refer to the "supercomputers at the hedge funds" controlling things or at least being the marginal decider of prices. As a participant in markets for a while now I have to say some of the things we're seeing the past year or so are beyond compare. In the 2000-2002 bear market, 2002 was the worst year with a constant pounding and abandonment of hope - the market was almost constantly down except for a few major oversold spikes. So in some ways that is similar to this period but the big change now is the massive 180 degree flipping from 1 sector to another - i.e. "finding something to run up" (or maybe short covering) while other sectors are desecrated. Many times the desecrated sector was the one in favor a few days, or weeks earlier. This signifies a very different situation than 2002 when it was mostly a pounding across the board - and then the rebounds took most everything up; together.

My thesis has been the quantitative hedge funds really have changed the nature of the markets and trading. The most successful and famous is Renaissance Technologies, led by Jim Simons. The track record of success there has been fantastic, and it's all computer driven. Success begets copy cat behavior - and a flood of funds trying to replicate the grand chief have been born. Hence when I refer to "algorithms" dominating trading, I am speaking to this bevy of pooled capital, all doing (or trying to do) almost the exact same thing and taking stocks farther (both higher and lower) than makes any logical sense. And this, in my opinion, is simply crowding out people who use fundamentals or logic. The machinations of August 2007 really was the first time this hit me in the face as I was seeing action that were in no way explainable by any reasonable data point. Much of it was "liquidations" i.e. hedge funds over levered and much like an individual investors gets a margin call - so did they. So they had to sell what they could, not what they wanted to as many hold esoteric positions that had no market (hedge funds don't just own simply stocks and bonds). So they sold off the liquid parts of their portfolios. And once a selling begins, a waterfall effect hits as technical conditions are triggered in computer after computer throughout New York City (and in fact the world) and you get this cascading effect. A crushing selloff. The NyTimes actually had a good piece from a year ago (I remember because I had just started the fund and was getting similarly crushed to the current period)

• On Wall Street, there is a rage against the machine. Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month.
• The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models.
• “These guys all know each other, and they all have the same strategies,” said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. “They came from the same schools, and they get together for drinks after work.”
• As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply.
• Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed — the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month.
• Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion. “If all the models say buy, who is going to say sell? There is just not enough money on the other side,” he said.
• Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds.
• Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago.
• But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities.
• “You can build a computer model for anything that is tradable,” Mr. Chan said
• With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out.

And instead of mentioning the above, someone has to trot onto financial TV and explain it by saying "well prices are down for global stocks so this must mean China is slowing". Nonsense - that's quaint thinking - when fundamentals mattered. Much of the daily news coverage is like this. So Monday oil was down $1.25 and that was the cause of the selloff because it signals a contracting worldwide economy. Yet the very next day oil was again down $1.00 and that was the cause of a huge rally because it was better for the US consumer. Really? So $1.00 drop off in oil, 24 hours apart created such vastly different outcomes and conclusions? Again - nonsense - but people need to find "a reason" to explain random walks down Wall Street (prices) on a daily basis. The money flow (and computers) in my opinion now dominate what is going on every day but since its hidden you can't explain the algorithms.

One might argue - but hedge funds still control far less money then mutual funds (or pension funds) so why the fuss? Again it all has to do with trading volume - mutual funds are generally slow moving turtles who don't make massive daily transactions... so they control a lot more money but if there is little VELOCITY of money (moving in and out) who cares how much they control? As I wrote a few weeks ago:

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.

So I write this as my thesis, which Jim Cramer wrote a piece about last night echoing such thoughts. If anyone knows it is his him, because for all the criticisms he has run a hedge fund, he knows the players, he lives - breathes this industry. I am copying his piece below because when I say it, it sounds like excuse making, but truly this is not an investors market in my opinion and the only success nowadays is guessing what the computers will be apt to do. My hope is this is a relatively short condition (quarters/a few years) being exaggerated by a bear market. My fear is this is a permanent change in the future. If so, what we've grown up learning on how to invest is essentially on the road to uselessness.

Quants and the Machines

Could this be the exact opposite of last year, when all of the quant funds were in the financials and destroyed, causing huge losses? That's what happened last August.

They were caught and killed. Now it seems that all of the quant funds are caught in agriculture, coal, gold, oil and copper. They are doing exactly what they did last summer, indiscriminate selling because it is what their models tell them to do.

They are not allowed to deviate from their models so they have to sell their Archer Daniels (ADM) and Potash (POT) and their Schlumberger (SLB) and their Freeport (FCX) at whatever price there is. That's what their models say, that's what they do.

I cannot explain it any other way than that it is what they did last year when they were caught long, then caught short, and they just sold and bought all wrong. I had thought they had enough money taken away from them that they would not be able to cause this havoc. I believe I was wrong.

The more I check around, the more I hear that it is mechanics, mindless selling by quant funds caught in the wrong stocks. I should have realized I had seen this pattern just last summer, in another thin market where you would see them come in and blast down and blast up theoretically immune to price but in actuality, there isn't even a "they;" there is just a machine and its order is to sell FCX, period.

Everyone sees these clowns coming but can do nothing about it, and they finish with a little time left to go and you can see what happens. Everything lifts. Of course they never finish. They can't. There are too many of them. They all have the same parameters. They can take a POT down 100 once their models say it is no good. Same with FCX. I bet their models say sell it from now until kingdom come.

For many days now, people have been puzzled about who would make such bad sales, especially those of us who actually care about basis and exit prices. The machines. And they are running amok again. Getting it wrong again. Soon we will hear of big losses in these funds again. Usual suspects.

But their clients are so stupid, no one will care. Sometimes you just have to marvel at how often Wall Street can fool people.

Bookkeeping: "We're Getting Destroyed" Buys

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

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

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

I am making the following purchases - I'll update detail later

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

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

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

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

Yours in Rambling.

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

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

This story in today's Wall Street Journal dovetails nicely with the previous blog entry. I always say you are buying the fund manager, not the fund; the fund is simply the wrapper (although in certain fund families there is a deep research team of analysts which can help to some degree). While past performance is "no guarantee of future results", obviously it makes more sense to stick with someone who has demonstrated past success than failure.

• In a market where the mighty have fallen, it is hard for investors to separate the strong from the meek. As a result, they are ready to bail on any mutual-fund manager whose performance has faltered. While it certainly makes sense to abandon a fund that has fallen and can't get up, it is tough to tell just how much strength and vigor an issue has while the entire market is hurting. New research shows that there is a distinct benefit to sticking with a high-performing manager through a rough patch.
• That survey is good news for buy-and-hold investors who picked a management star and need a reason to hang around hoping for a comeback, but it doesn't make it any easier to decide whether a fund's performance problems are temporary or permanent.
• The study, conducted by Baird Advisory Services Research, looked at more than 1,300 funds, defining "high performers" as those that topped their benchmark by one percentage point annually over the 10 years ended in 2007. About 505 funds qualified.
• The key finding was that many of these top funds went through periods where they got killed by the market or their peer group. More than three-quarters of these high achievers had at least one three-year stretch where the fund lagged behind its benchmark by one percentage point or more. More than half of the funds experienced benchmark underperformance of three percentage points or more, and nearly one-third of them lagged behind by five percentage points or more in a three-year period.
• Despite those bouts of underperformance, the funds were able to be superior achievers over the full 10-year window.
• Tim Byrne, director of Baird's Private Wealth Management Research, Products and Services, said the moral of the study is that even the best money managers have periods where they don't look so good, but the longer an investor sticks with them the better the chances for success, for high performance over time.
• "The problem is that people buy a fund after the manager has proven that they are a high performer, but they sell the first time there's a problem," Mr. Byrne said. "They wind up chasing performance -- buying high and selling low -- instead of sticking with a manager who has proven that they can deliver if you give them enough time."
• The trick is in deciding which managers deserve a long leash. (bingo) Mr. Byrne said he looks to see if a manager has "proven that they can dig out of a hole, because you have to believe they can create return fast enough to help you catch up from any down period."

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

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

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

Bill Miller: "Toughest Market I've Seen"

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

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

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

Just like Ken Heebner is celebrated today, so was Bill Miller about 5 years ago. How quickly things can change. I disagreed (and continue to) with his insistence on sticking with the homebuilders, financials (obviously) but I still respect anyone who chooses to play against the typical mutual fund grain of buying 100s of stocks, which effectively makes you into an index destined to perform in a mediocre fashion. Running a concentrated portfolio means you will have a much better chance of shining through... or under performing. Fortune has a blurb on Miller this week...

• Shareholders of the battered Legg Mason Value Trust mutual fund won't find many answers in manager Bill Miller's second-quarter letter to investors.
• In his note this week, Miller, who famously beat the S&P 500 for 15 consecutive years until stumbling in 2006, deplores market conditions that continue to punish value investors, but doesn't discuss his strategy. His $9.7 billion LMVTX (LMVTX) fund has dropped 34% since last July, while the S&P 500 fell 12%, and suffered outsized losses as financial stocks plummeted.
  
• Investors have responded by pulling out $2.4 billion from the fund in the first six months of the year, according to Financial Research Corp. The impact has been felt throughout Legg Mason (LM), which announced its second straight quarterly loss last week. Miller is not only the firm's star manager, but also chairman and chief investment officer of its stock investing arm, Legg Mason Capital Management.
• Unlike his missive after the first quarter, in which he suggested the worst was over after the collapse of Bear Stearns, he also offers no timelines. (another in the "the worst is over" camp - unlike the pundits who scream it daily on TV for months on end, those who actually manage money have to put money where their mouth is, and you can see from his fund the results - it very easy to "say" it on TV or in the print media like many love to do)
• Instead he writes that the crisis around Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which have dropped over 65% this year, has convinced him that this market is the most difficult he's faced.
• Still, he seems to dismiss critics who suggest that his bad bets on housing and banking stocks were foreseeable, or that he should have anticipated the commodities boom driven by growth in China and India.
• While it's true that value investors - who look for beaten down stocks that they think the market has misjudged - have suffered this year, Miller has been hurt more than most. Large value funds have fallen an average of 16% since last July, according to Morningstar. The research firm lists LMVTX as a large blend fund, but Miller trails his peers there too: on average, those funds have dropped 11%.
• LMVTX has been so hard hit partly because the fund is highly concentrated, with only 35 stocks at present. When bets sour, as they did with Miller's large crop of financials, including Citigroup (C, Fortune 500) (down 33% for the year), the whole portfolio reels. Two of Miller's other top ten holdings, Unitedhealth Group (UNH, Fortune 500) and Aetna have also been pummeled this year, down 51% and 29%, respectively. (healthcare - get some, it's a "safe" place to hide)
• But there's another reason why Miller's losses have outpaced other value managers. He's never toed the traditional value line and is famous for scooping up high-multiple stocks like Ebay and Google, now two of his top 10 holdings. Both have fallen this year, with Ebay down 18% and Google off 26% (technology - get some, it's a "safe" place to hide)

I think a lot of people have very short memories - it was less than 8 years ago that we learned there truly is no "safe place to hide" in a bear market. It's just a matter of relative losses - where do you lose less. After my own scathing at the time, I remember vividly :) At least in this era those in IRAs and even regular accounts have very easy instruments to partially offset their long positions on the short side (short ETFs) so there is always some silver lining.

For those interested, the full letter is here.

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

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

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

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

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

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

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

After some perceived hiccups the last 2 quarters, which in retrospect proved to be a great buying opportunity as the market overreacted to a 90 day (quarterly) period of time, China Medical (CMED) appears to be back on track judging from yesterday's earnings. The stock has taken some lumps earlier this year, and the last time around a lower gross margin rate and higher tax rates raised some concerns. Some of those concerns seem to have been alleviated with yesterday's numbers. Even more interesting to me, is the subtle shift in revenue stream to diagnostic reagents versus medical equipment - we like to see this is any of our medical equipment stocks since "consumables" are reoccuring revenue (thinks razor blade versus razor).

• "We are pleased with the change in the Company's major source of revenues from selling medical equipment to selling diagnostic reagents which was achieved by the strong growth of our diagnostic reagent businesses," commented Mr. Xiaodong Wu, Chairman and CEO of the Company. "More than 95% of our revenues from ECLIA and FISH operations this quarter came from sales of ECLIA and FISH reagents which generated higher gross margin and were recurring in nature. We expect our diagnostic reagent businesses to continue their growth momentum in upcoming quarters."

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

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

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

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

Earnings

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

Outlook

• As the June quarter is the first quarter of FY2008, the Company maintains the current annual targets for FY2008. The current targeted net revenues for FY2008 range from RMB1,190 million (US$173.5 million) to RMB1,230 million (US$179.3 million). The current targeted adjusted net income excluding stock compensation expense and amortization of acquired intangible assets (non-GAAP) for FY2008 ranges from RMB585 million (US$85.3 million) to RMB605 million (US$88.2 million). The current targeted adjusted diluted earnings per share excluding stock compensation expense and amortization of acquired intangible assets (non-GAAP) for FY2008 ranges from RMB20.10 (US$2.93) to RMB20.73 (US$3.02) assuming a diluted number of ADS of about 31.5 million and excluding interest for convertible notes and amortization of convertible notes issuance cost.

Frankly this stock is dirt cheap compared to U.S. peer group - 70% gross margins, growing 50% in the US health care equipment stocks is in some cases generating forward P/E ratios of 40-70 as people "flee" to safety. Ironically, despite a huge market opportunity many Chinese stocks trade at a huge discount (this is the opposite of the situation last fall when China was the flavor of the day in US markets). At $45 China Medical (CMED) trades at a forward P/E of 15. And this folks is why the stock market can drive you batty.

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

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

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

No position but will be starting one shortly

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

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

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

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

I digress. He has an excellent interview (again) on CNBC which agree with much of what I think. Our leadership continues to fail us.... but are we every surprised with Fannie and Freddie being 2 of the top political donors? Nah.

• Uninsured depositors, including company payrolls, are the next "potential iceberg" for the U.S. economy, said Larry Lindsey, CEO and president of The Lindsey Group economic advisory firm. "All you need is one case where the uninusured depositors, the big deposits, don't get covered, and you have the potential that they start to run," he said

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

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

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

WSJ: After the Bubble, Ghost Towns Across America

Our continuing saga, courtesy of the Wall Street Journal

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

Anti-regulation folks are getting their wish - the free market will truly work in the end. But it simply did not have to be like this with some basic, common sense regulation (the evil "r" word).

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

Never preventative; always reactive - your leadership.

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

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

She is out in a few media outlets this morning - I cannot embed most video from CNBC but this is a most worthy 6 minute video from this morning in CNBC. I could not agree with her points more - even when the "recovery" happens you will have (in most cases) companies with very impaired situations. Another 8 minute video here discussing her rise to prominence - another worthy video. I urge readers to view both - it is worth your 15 minutes and it combats all the Kool Aid you hear almost daily about how everything is just fine and dandy or will be "soon". [Jul 29: The Bottom is in Financials - Version 23,472] Here are some comments via CNBC website focusing more on home prices, which of course we've been pounding the table with similar comments since last summer.

• Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.
• In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market. "There's one obvious area where the bad news isn't all out yet, and that's with home prices ... Home prices are going to fall much more than people expect," she said.
• "I think it's going to be well worse than 33 percent, and here's why: If you look at the futures market, it's indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you've got to put 20 percent down, and that's a lot of money for people," she continued. "Furthermore, then you've got to find a bank to lend to you, because, Countrywide's not lending to you."
• While a number of factors have generated the troubles for real estate, the industry is getting no help from banks, who have largely used Federal Reserve liquidity-raising efforts not to lend money but rather to bolster their damaged balance sheets.
• Whitney said banks originated $900 billion loans last year, but just $100 billion so far in 2008.
• "No one has capital (and) no one wants to sell when your stock's down 80 percent," she said. But more importantly, everyone's just holding on."

Whitney is also in Fortune - some excerpts

• The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue. Whitney, who audaciously - and correctly - predicted last October that Citigroup (C, Fortune 500) would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they've reported so far.
• The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the "incestuous" relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks' ability to recover.
• For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe. (we discussed this often last winter)
• With Moody's (MCO) and Standard & Poor's (MHP, Fortune 500) now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening. This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution.
• In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate. (again it's easier to be an analyst than a stock picker because if you went negative in late 2005 you were a year and a half early and would of suffered serious losses, but let's give her kudos for being early as an analyst which is their supposed job - although many have turned into cheerleaders) :)
• Whitney's current concern is that banks aren't slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years. (so no recovery in "6 months"? hmmph - what a downer you are Whitney - but don't worry the financials will rally strongly again sometime in the next few months on "hope" that the turnaround is not too far off)
• Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it.
• She also argues that banks need to "get real" about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar. (nah, it's a lot better to leak out bad news slowly, quarter after quarter while constantly reassuring investors it's the 7th to 8th inning of the credit crunch - that's how it works!)
• Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk. (clearly! She got the first part completely correct but she has now lost her touch. Thanks for the input Kool Aid touters - let me listen to you, most of which completely missed the entire first part of the credit implosion while you were trying to sell me Citigroup at $55 or Merrill Lynch near $100)
• Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.
• "I do not think we are near the end of write-downs," she tells Fortune, "so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower." (Bingo, but not before ripping off the shorts ahead a few times as the government intervenes to try to prop up a "very sound" system that is in the "8th inning" of the correction)
  

WSJ: Time to Buy Consumer Discretionary?

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

Ironically unlike the previous 4 corrective cycles (summer 07, November 07, January 08, March 08) there is little post correction bounce this time around - it's been segregated mostly in the financials. Perhaps because whomever bought those last 4 cycles promptly got their head handed to them for drinking red, cherry flavored liquids. I find that interesting. And telling. The Wall Street Journal asks if investors should be interested in these names...

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

Out Fishin'

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

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

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

Fuel Systems Solutions (FSYS) Garnering Attention

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

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

Investor Business Daily: Maker of Fuel Kits Rides High on Interest in Alternative Fuels

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

I'd copy the Cramer comments here, but they are almost verbatim from the IBD article out Friday morning.

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

Long Fuel Systems Solutions in fund and personal account

One for the Radar - Thoratec (THOR)

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

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

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

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

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

Let's take a closer look at the financial data

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

Guidance

• Revenues are projected to be between $285 million and $295 million. GAAP gross margins are expected to be between 58% and 59%, with non-GAAP gross margins between 59% and 60%. GAAP EPS is expected to be between $0.20 and $0.26, while non-GAAP EPS is expected to be in a range of $0.47 to $0.52.

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

AP Report on Friday

• Shares of heart device maker Thoratec Corp. climbed to a two-year high Friday after the company blew past earnings expectations in the second quarter, and raised its 2008 forecasts. In February, the company projected 36 to 40 cents per share, excluding one-time charges, and $255 million to $265 million in revenue. Analysts expected 38 cents per share on $265.1 million in sales.
• Analysts had lower expectations, forecasting a profit of 9 cents per share on $64.2 million in revenue on average, according to Thomson Financial.
• The HeartMate II is designed for patients awaiting heart transplants, and is approved only as a temporary treatment. But RBC Capital Markets analyst Ryan Bachman said the larger market for the product is in "destination therapy," or patients with end-stage heart failure who are too ill for a transplant. He said the HeartMate II could be approved as a destination treatment in mid-2010.

This is quite a widely followed stock with 9 analysts covering - and they've quickly moved consensus up from 38 cents to 46 cents (it's a non GAAP world). Even at the high end of guidance of 52 cents Thoratec, post the 22% gain Friday, has become a quite expensive stock at 44x 2008 estimates. But as we know, healthcare is the new fertilizer so there is no price too high to pay for these companies. [Jul 25: NuVasive - At What Price Growth? It Seems "Any" Price] I say that a bit tongue in cheek watching companies we own growing twice as fast as Thoratec trading at 20-35% of the valuation. :)

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

No position

Relative Strength of Portfolio Stocks

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

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

Another example

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

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

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

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

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

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

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

(C) Broke all key support levels

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

A few notes

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

Bookkeeping: Weekly Changes to Fund Positions Week 52

Week 52 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

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

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

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

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

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

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

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

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

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

The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows

Fund Holdings Earnings Preview for the Week

Here are our holdings that report earnings this week; as always we look at a lot of different names in various industries (that we don't own) for company specific and economic signals; this is the last enormously busy week and then it will slow down a bit. There are quite a few interesting names in the retail space especially which I'd like to see how the market reacts to. Also we'll be through most of the larger companies (S&P 500 types) by the end of the week. So far we've missed any earnings blowups of note, but good results have not mattered much either as our stock holdings have for the most part been sold off post earnings.

Monday
None

Tuesday
Home builder DR Horton (DHI) - I expect continued bad news, but this is a counter cyclical holding for us - i.e. something that works to the upside when global stories get punished by the markets.

James River Coal (JRCC) - not my favorite coal name but it's been a fast moving stock when the sector is in favor. Unlike the other 3 coal stocks we own, this one I could see potentially missing some numbers. (I'm not saying it will, but I prefer the other 3 names from a purely fundamental basis - this stock is more of a "trade" stock) We won't have a large holding going into Tuesday.

Wednesday
Global infrastructure name Foster Wheeler (FWLT) - this name has been beaten to smithereens and this sector is notorious for its "lumpy" quarters which does not jive well with Wall Street's demand of "promise this number and then beat it by X% or we'll sell your stock back to the stone ages". If you believe in charts, we'd assume something negative is in the offing. Short of large scale cancellations, the stock is becoming very cheap vs peer group on a forward basis.

One of our remaining natural gas stocks that we've cut back on as the chart has degraded, Goodrich Petroleum (GDP) - quarter to quarter results mean little - these trade almost directly with natural gas futures.

Solar stock Yingli Green Energy (YGE) - these stocks are always the most difficult going into earnings because you can be +/- 20% in an instant. On the plus side the sector has been beaten down tremendously so perhaps expectations are low enough so we have some positive upsides.

Thursday
Ocean driller Atwood Oceanics (ATW) - another of these names that crude at $70, $90, $110, or $130 should not matter to from a business perspective but since it's all "just one big trade" it trades up and down with oil.

Ocean driller Pride International (PDE) - see above

Friday
None

Peter Schiff July 28 2008 on Glenn Beck

The latest from Peter Schiff - he had an entertaining interview on Cavuto (Fox Business) this week but I cannot track that video down anywhere. This is an 8 minute interview but the first 4 minutes is Glenn Beck enjoying his own voice; although he does talk about the things we talk about each week.