MSN: How Amazon.com (AMZN) is Beating up Ebay (EBAY)

A very interesting article via MSN Money. I've abandoned Ebay (EBAY) as an investment many years ago as it's now a "value play" instead of growth, but have always said I'd love to get a piece of the action of PayPal if they ever spun it off in it's own entity. It's essentially a Mastercard (MA)/VISA (V) clone. It is now up to 1 of every 4 dollars of revenue for Ebay and why they don't create value by doing a PayPal IPO is beyond me. Amazon.com (AMZN) on the other hand has some interesting things going - they are a player in "cloud computing" and now this, a frontal attack on PayPal? Hmm... that makes them quite appealing to me, I just wish the valuation was significantly lower. We were hoping for a miss from Amazon.com last earnings report [Jul 22: Amazon.com for Gamblers] so we could get in far cheaper, but the company "disappointed" us by reporting solid numbers. The charts of the 2 companies over the past year, show the divergence.

• Since the dawn of Internet shopping, bargain hunters have reveled in the thrill of the hunt for deals at eBay (EBAY, news, msgs), the online equivalent of an auction house. But the thrill is going, going, almost gone. And eBay's losses are Amazon.com's (AMZN, news, msgs) gains in this battle to sell the most stuff on the Internet -- a battle that is about to take a turn for the worse for eBay.
• Busy shoppers are already skipping eBay's time-consuming auctions, which they might lose at the last second when a computerized shopping bot slips in a bid. Instead, they're opting for "everyday low prices" via the Internet and, in particular, at Amazon.
• Amazon, once just an online bookstore, is easy to use, and it offers a range of products along with good prices and cheap shipping. You're more likely to find rare and obscure items via Amazon these days than ever before, as the retailer has opened its site to more than a million outside merchants. Those often small merchants might otherwise be setting up virtual eBay stores.
• Now Amazon is taking aim at eBay's remaining jewel: its PayPal payment system. With Amazon already stealing potential sellers as well as buyers, trouble with PayPal would be another huge hit to eBay. And for investors, that makes Amazon the retailer to buy now.

Here is a comparison of metrics between the 2 companies last quarter

• Amazon's sales jumped 35%, and that's after the impact of currency changes was stripped out. In contrast, eBay's revenue was up just 13%.
• In North America, Amazon's revenue was up 35%, or nearly three times the growth in overall Internet retail sales tallied by comScore. In contrast, eBay's North American revenue grew 12%, simply in line with the market.
• Amazon finished the quarter with more than 81 million active customers, up 18% from a year ago. The number of outside merchants on its site also grew 18%, to 1.42 million. In contrast, active registered users at eBay crept up only 0.7%, to 84.5 million. For the past five quarters, the number of active users at eBay has shrunk or grown by less than 1%.
• Amazon's global page views increased 4% in June, while eBay's were down 11. Visits to eBay's U.S. Web site have been down in nine of the past 11 months.

On to PayPal and the new threat

• The biggest significant source of growth inside eBay is the payment-services division known as PayPal. It's used by eBay buyers and sellers, and by outside Web sites, to handle payments for purchases.
• PayPal revenue jumped an impressive 34% last quarter, which explains why analysts such as Youssef Squali at Jefferies consider PayPal to be eBay's jewel. PayPal contributed 26.4% of revenue in the quarter, up from 23.7% a year ago.
• But late last month, Amazon began offering its payment technology to outside merchants for use at their own Web sites.
• Can Amazon really take down PayPal, which is deeply embedded in online retailing with more than 62 million users? Skeptics cite the failure of Checkout, a Google (GOOG, news, msgs) payment system, to make any inroads as a reason to write off Amazon's attempt. If Google can't beat it, who can?
• But unlike Google, Amazon already has a relationship with millions of consumers. "We think that the competitive threat to PayPal may be much more serious this time around, given Amazon's e-commerce expertise for more than a decade," Deutsche Bank analyst Jeetil Patel says. "Amazon's customer base is roughly 80 million consumers, the bulk of which enjoy a highly trusted relationship with the company around payments."
• That's not to say millions don't trust Google. But there's a difference between using a search engine to look up old high school buddies and turning your private credit card information over to a company that keeps it on file for future transactions. That second relationship involves a lot more trust.
• Plus Amazon's system is easy and convenient, which should cut down on the number of buyers at partner sites who drop a purchase midway through because they get fed up with filling out forms. Customers can store data such as credit card numbers and addresses with Amazon and retrieve them at any store using their system.
• Goldman Sachs (GS, news, msgs) analyst James Mitchell thinks that in time Amazon may up the ante by offering discounts to merchants for transactions that transfer money from places other than credit cards, such as bank accounts. Those kinds of transactions are cheaper to process. Amazon could pass the savings on to merchants, something PayPal does not do.

Other

• Amazon is a lot more than just a Web site, though that's all it may appear to be for most consumers. It has more than 30 "fulfillment centers" around the world. It collaborates with outside merchants by letting them ship pallets of goods to these Amazon locations, to be sold and shipped through Amazon's network.
• Amazon also has a division that assists outside merchants in developing their own Web sites.
• For its next acts, Amazon is challenging Barnes & Noble (BKS, news, msgs) with its Kindle electronic book gadget and Netflix (NFLX, news, msgs) with its rollout of downloadable movies.

Long Mastercard in fund; no personal position

41 Stocks Returning 10% this Week

This week's list of top performers has high exposure to retail and solar; areas we have been moving into the past few weeks with greater weightings.... but more into solar than retail for the fund. This list continues to show us that "beaten down" merchandise from the past year is the market's favorite right now. At the very bottom of the entry I also posted the top returners in the $1B to $1.75B range of market capitalization since we are increasingly buying some smaller fare

Criteria

1. Market capitalization $1.75B+
2. Average trading volume 100K+
3. Stock price $10+
4. Return this week 12%+

Green names we own, blue names we have owned in the past or discussed in the blog. Longs Drugs was an acquisition target; and in a miracle of miracles (not) Bill Ackman of Pershing Capital (hedge fund) bought a huge slew of Longs in late June through July at prices of $40.47 to $45.92 - within 6 weeks of his first purchase the stock is acquired @ $71.50. Surely just by chance ;) And that makes your year right there. The 2nd name on this list is Elan (ELN) which was absolutely pummeled first from a negative result on an Alzheimer drug and then more bad results from its multiple sclerosis drug Tysabri; the same thing happened a few years ago with Tysabri and Elan was similarly punished. I almost bought this for a trade since it leveled out for 2 weeks and was not heading lower, but almost gets you nothing in the stock market.

The airlines continue to mock those who believe losing $900 per flight is no better than losing $1500; same story with General Motors (GM) I suppose as people will be lining up to buy their trucks/SUVs now that gasoline has plummeted from $4.19 to $3.79 (on the way to $3.49). Along with flying to Las Vegas to gamble, and buying premium coffee along the way.

Hansen Natural (HANS) - makes of energy drink Monster and a retail investor favorite for many years, is a target of the 1021st "takeover" rumor and had a nice run. This rumor comes out every 8 weeks like clockwork. NVIDIA (NVDA) another case of a beat up stock that reported "we plan to stay in business for a few more months" and that was enough for investors to drive it up - same story on the retailers. Mechel (MTL) seems to be rallying now that Putin is busier with some other minor business (Georgia). NRG Energy (NRG) was revealed to be a new Warren Buffet holding (this is the company that filed to build new nuclear plants in the US - which should take a good decade to get through all the legal loopholes) - the lemmings jumped right in when the Buffet stake was made public. Ctrip.com (CTRP) was also an earnings play.

We had pointed out the reasons for the LDK Solar (LDK) spike (earnings) and the Sunpower (SPWR) spike (huge deal potentially with California utility) and I continue to have my eye on Embraer (ERJ) - the stock is finally poking its head over resistance - I am gun shy however because this seems to be a market to buy the carnage and sell the breakout. So I'm still debating this name we highlighted a month ago as a dirt cheap stock [Jul 8: Has Embraer Hit Bottom?] - I thought it would rally more since the airlines are so in favor and it builds planes. It has rallied from $27s to $32s since the July 8 piece. In retrospect the answer to the question in the title of my entry is a resounding "yes".

Symbol	Company Name	% Price Change 1 Week
LDG	Longs Drug Stores Corp	37.2
ELN	Elan Depository Receipt	31.7
MBI	MBIA Ord Shs	30.9
LDK	LDK Solar Co Ltd	27.8
UAUA	UAL Ord Shs	27.4
HANS	Hansen Natural Corp	23.3
CTRP	Ctrip.com	17.8
NVDA	NVIDIA Corp	17.8
CY	Cypress Semiconductor Corp	16.8
CREE	Cree Inc	14.6
UB	UnionBanCal Corp	14.4
WEN	Wendy's International Inc	14.3
NTES	Netease.com Inc	14.3
ONXX	Onyx Pharmaceuticals Inc	14.1
HTV	Hearst-Argyle Television, Inc	14.0
DRYS	DryShips Inc	13.4
STP	Suntech Power Holdings	13.2
FOSL	Fossil Inc	12.1
EL	Estee Lauder Ord Shs Class A	12.1
MTL	Mechel ADR Rep 3 Ord Shs	11.9
DISCA	Discovery Holding Series A Ord Shs	11.8
STX	Seagate Technology	11.7
JCP	JC Penney Co Inc	11.7
PBEGF	Petrobank Energy and Resources Ltd	11.6
GA	Giant Interactive Group Inc	11.5
GM	GENERAL MOTORS	11.5
CVC	Cablevision Systems Corp	11.5
ENER	Energy Conversion Devices Inc	11.2
WFR	MEMC Electronic Materials Inc	11.2
IHS	Information Handling Services Inc	11.0
GNK	Genco Shipping & Trading Ltd	10.7
PENN	Penn National Gaming Inc	10.7
ERJ	Embraer-Empresa Brasileira de Aeronautica	10.7
NRG	Nrg Energy Ord Shs	10.7
TOL	Toll Brothers Inc	10.6
OTEX	OPEN TEXT CORP	10.5
KSS	Kohl's Corp	10.5
LVS	Las Vegas Sands Corp	10.5
SBUX	Starbucks Corp	10.4
LII	Lennox International Ord Shs	10.0

Below are the stocks in the $1.0B to $1.75B range who returned 13%+ this week - 16 names. Solar names continue to pop up here - and lo and behold a few dry bulk shippers and energy names.

Symbol	Company Name	% Price Change 1 Week
SOL	Renesola ADR	30.4
EXM	Excel Maritime Carriers Ltd	22.1
IRF	International Rectifier Corp	21.2
ENS	EnerSys	18.9
PETD	Petroleum Development Corp	17.8
PDC	Pioneer Drilling Co	15.9
TEN	Tenneco Inc	15.7
GEO	Geo Group Inc	15.3
ALK	Alaska Air Group Inc	15.2
AIXG	Aixtron ADR	14.9
TSL	Trina Solar Ltd	14.2
CLWR	Clearwire Corp	13.9
WINN	Winn Dixie Stores Inc	13.5
ESC	Emeritus Corp	13.5
ASCA	Ameristar Casinos Inc	13.5
IOC	INTEROIL CORP	13.0

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

Year 2, Week 2 performance of the mutual fund

Comments: This week we worked on stopping the hemorrhaging. All things considered, aside from a bad day Monday, it was successful. We're still not making money, but we didn't give away a bunch of our previously achieved gains again this week, and took a minor loss. The markets went nowhere, but there was a lot of sector rotation and individual stock movement. Bad news was rewarded in retail.... when exactly the thesis changes from "lower oil is a great thing for the consumer!" to "hey, what is lower oil really signaling (bad economy)?" is an open question. But when that moment hits I expect the market to tank (again). Until then - despite looking promising early in the week for a break over the 50 day moving average - we could not sustain a movement over. A bull would say "building a base, just give it time"; a bear would say "well, duh". I'm still in the latter camp until proven otherwise, but you do have to respect a series of 5 higher lows. We should have an inflection point either way in a short time from now, making the path forward more clear.

Credit markets continue to devolve into the abyss, as the smart guys who once owned pocket protectors say "hey equity guys did you already forget what happened when you didn't listen to us in October 07, December 07, and May 08?" And it's Friday night so you know what that means, a greater than 70% chance the federal government will be shutting down a bank somewhere across America. But don't you worry - that is a sign of strength (healing and all). The economic figures continue to stink - housing, credit, and inflation but when bulls want to they simply explain it all away as "backwards looking". They pulled that line out fall 07, winter 07-08, spring 08, so why not use it now? The only thing backwards is their use of Kool Aid to justify their "economic view". In the metro Detroit area gas has now fallen from $4.19 to $3.89 - if I could only convey how full the malls are now, and houses are selling like firecrackers. I can only imagine what would happen if eggs fell by 5% in the next month. It might be the second coming of China around here. I am sure it's the same nationwide. The nasty thing about inflation is once producers pass through price increases, they sure don't want to give them back (good for Wall Street, not so good for Main Street)

For the fund, a day like today (Friday) as we were positioned a week or two ago would of led to substantial losses - instead we were down 0.1%. Progress. Especially considering we own so little retail, no airlines, no auto companies - all the sexy sectors ;) (how quickly things change - just imagine saying that 8 weeks ago) We are, however, quickly becoming Rising Tide Healthcare & Solar Fund of late. This market continues to be a "reversion to mean" market with the most heavily beaten down stocks gaining and driving the indexes upward. It is very hard to get on the bandwagon of most of these stocks for a sustained period unless you believe the economy will show a serious recovery in 6 months. Obviously, we're not in that camp. Next step after bandaging areas of major blood loss (hemorrhaging) is figuring out a way to return to making money in a sustained manner. Still working out that part.

Ironically in this "buy the carnage" environment, I'm going out on a limb and saying we should be due for an oversold bounce in commodities soon. After the prescient call in oil in late June made us 6 for 6 on major turning points (not that it helped us escape the carnage) [Jun 26: Can a Near Term Top in Oil be Far Away?] I'm going with the group think that $110 or at worst $100 should provide an intermediate floor in oil. And with that the panic will subside (for a while at least) in all commodities. Other reasons? First, only 1 person emailed me today to ask if I was buying fertilizer. So most people have given up :) always a good (anecdotal sign). Second, we are starting to see the complete opposite of what we saw 2 months ago - (then) commodity price going up but stocks not following (oil/natural gas) (today) commodity price going down but stocks not being decimated. The next step will be commodity prices flat or down and stocks flattish to slightly up - look at the chart for XTO Energy (XTO) for example.

And the coal prices and fertilizer prices simply are not going down; so unlike natural gas down 40%, and oil down 20% - these have been the babies out with bathwater. But fundamentals don't matter - only quant hedge funds programmed trading. But that will end at some point and the hordes will scurry back. At least for a trade so they can goose their quarter. Now with that said, the charts are gosh awful in some... err many.... err most cases, so we'll see how sustained the rally is. Last point? Valuation. Mosaic (MOS) now trades at just over 6x May 2009 earnings. But they say in commodity land, sell when valuations are cheap and buy when they're expensive, so one could explain that away too. Maybe when Mosaic starts trading at 2x May 2010 earnings we can sell even more - because it will be even cheaper ;) But we do see some charts that appear to be bottoming - could it be Mosiac (MOS) made the 2nd part of a double bottom today? Too soon to tell.

So long story short - I actually am warming up to these guys again but not trying to catch the exact bottom. And I have no idea how sustained the move will be, when the reversal inevitably happens. Aside from the hedge fund liquidations the velocity of this sell off just was 'shock and awe' and in my mind, even a slowly drifting downward (for natural gas or oil) environment will eventually be fine for these stocks - but this initial leg was so traumatic people just want out. Understandable. But even for long term secular bears - nothing straight up... or down. Just ask bank investors over the past year. We had some major oversold rallies in a major downtrend, and even if you believe fertilizer is the next subprime lender - it won't be a straight shot down, and the oversold rallies in banks provided some huge moves. I expect the similar movement here since to quant funds these are all just random stock symbols - the fundamentals of each group mean nothing so if we can drive up Bank of America (BAC) 40% in 2 weeks, why not Massey Energy (MEE) - they both have 3 symbols and make my microchip happy.

The S&P 500 gained 0.1% and the Russell 1000 was up 0.3%. Rising Tide Growth had a putrid Monday but kept pace with the markets in a general sense otherwise, but gave back 0.5% this week. Most of our best gains were in retail, health care, or solar this week. Commodities continued to punish us.

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. I'll have an update out Monday on newest totals.

Year 2 Metrics

Price of Rising Tide Growth: $10.602
Year 2 Performance to date (vs Aug 1, 2008): -3.71%

Comparable S&P 500: 1298.2 (+3.01%)
Comparable Russell 1000: 709.9 (+2.83%)

Fund return vs S&P 500: -6.7%
Fund return vs Russell 1000: -6.6%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of July 2008.

Basis for indexes 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%)

Bookkeeping: Cutting Back Apple (AAPL) and Research in Motion (RIMM)

Making money in this market is a complete grind. What's hot today? Retailers who reported quite pathetic numbers and guided down for the year. Many ramping 7-8%. Gotta love it.

We do seem to have quite a change in character even on the technical side - if you are not in the "blessed" sectors you simply cannot buy breakouts anymore. Because by the time the stock "breaks out" it is 80% done with the move and you are left with table scraps. I am seeing this time after time with my buys in the past 4 weeks. That does not apply to retail, healthcare or airlines but most everything else. This is a big divergence from the past and speaks to the fact one must buy heavy dips (although that can cost you money if you time it a few days early) and then flip out, expecting breakouts to fail. This is a very difficult way to make market because your margin for error is nearly zero.

For example - let's look at Apple (AAPL). We're "happily" taking out about $4 (stock price) worth of gains in - a whopping 2% on this last trade as we bought the "breakout" instead of the "breakdown". So you buy on the breakout in the lower $170s to sell in the mid to upper $170s; that is not a way to make money. The problem is the breakouts are not extending as they normally would - again buying the breakout means you are 80% done with the move.

So the easy answer is "hey just buy the dip, you dip!" Sounds easy on paper but ask all those dip buyers in commodities (hand raised). Apple dropped from $180 to $153s the last time around - whose to say $175 was not the "dip to buy". Or $170. Or $166. Or $160. Etc etc. So it simply is a grind right now to find profit opportunities in the "wrong" sectors. Even technology which is a "sorta right" sector is proving tricky.

I am simply not taking chances anymore and instead of taking a layer in and out approach, at first sign of weakness I'm cutting hard and fast - to me Apple is now in a prove to me area. If it can get back over $180, and then $190 we'll see real strength. Otherwise this reversal from $180 to $175 can turn into $180 to $155 very quickly. I am not predicting that but at this point the trade becomes hard in this market environment - we'll cut Apple down from 2.5% to 0.4% of portfolio and watch it from here.

Research in Motion (RIMM) is in sort of a better position but not by much. I am cutting some here and taking it from 2.5% to 1.5% of the portfolio but again - I'm in take no prisoner mode. Once again, if you buy that double top breakout in the low $120s (we did) you got a whopping $10 of gains at most - not very much.


If this gets to $123 we're going down to a much smaller stake. If it can break back over $135 than we see strength. In between those two - we see confusion and white noise.

So it appears to me right now if you don't make cars, fly airplanes, sell clothing or drugs - you cannot "buy strength" - everything else must be "buy the carnage" and then flip out when you get your gain - again, a much harder thing to get correct, because bottoms are endless in this market and if you are "early" by a few days you will be down 10, 15, 20, 25% right quick. Ironically if anything, the COMMODITIES are now in the "buy the carnage" stage but you could of said that anytime in the past 2-3 weeks as well and it does not work out. Showcasing why I say this strategy is much more harder to execute than "buy strength" and ride the trend. But at some point they get oversold and are worth another buy - but it will unfortunately be nothing more than a trade in this type of market.

These are the type of times you think going to cash would just be a much simpler exercise.

Long Apple, Research in Motion in fund; no personal positions

Bookkeeping: Continuing to Build ReneSola (SOL) Into Earnings

I usually do not add exposure going into earnings; instead doing the reverse but for the 3rd time this week we are increasing our position in ReneSola (SOL) - this time from 3.0 to 3.7% of portfolio. You can see quite a breakout occuring here and we've been layering in on each jump up.

Monday evening after LDK Solar (LDK) crunched estimates we wrote

The most direct parallel to LDK Solar is ReneSola (SOL) which should benefit directly from such fantastic results. SOL is trading at a whopping 11x forward estimates.

We added it early the next morning to the portfolio - we wrote

As I said last night ReneSola (SOL) is most like LDK Solar, in that its an "arms supplier" - both supply wafers and both mostly sell in country (to China) so they don't have much currency exposure. Therefore I've initiated ReneSola with a 1.8% stake, with purchases this morning in the $14.50s. For that last position there are some caveats - I expect some serious earnings growth in a pure dollar sense, but they did a dilutive offering and hence the share count will be up. Further, they are somewhat capacity constrained until 2009 so upside might be somewhat limited but as of last night it was trading at 11x forward earnings for triple digit forward growth. Ridiculous. ReneSola reports August 19th.

So the one key here is that SOL sells mostly to customers in country - hence there is a lot less currency risk than the module makers right now. As we've seen with both Yingli Green Energy (YGE) and Canadian Solar (CSIQ) - they were goosing earnings the last few quarters with some huge currency gains. No one cared to analyze it and as long as Briefing.com shouts "beat by XX cents!!" everyone rushes in to buy - but there is a difference between OPERATIONAL gains and CURRENCY gains. The latter has nothing to do with how well a company is performing. So that currency gain reversed this quarter and it beat the momentum guys (those who only read headline numbers) who piled in right ahead of earnings on the butt. Anticipating that we had reduced Canadian Solar going into earnings which was a good short term move as the stock proceeded to drop 8% immediately after announcement.

As discussed a quarter ago many of these module makers were getting a huge currency benefit; people didn't care that this had nothing to do with their operations - they just saw the headline press release and saw big numbers and ran up the stocks. Yingli Green Energy showed the effects of what happens when currency goes against you as they had a $20M swing from 1 quarter to the next which is equivalent in their case to $0.15 of EPS (on a $0.23 base) - for that reason I am cautious on Canadian Solar (CSIQ) going into earnings tomorrow so I've cut back that position on this morning's 8%+ spike. I am cutting back the position to 0.4% of the portfolio and will determine after I see earnings tomorrow if it will remain part of the basket. While I like these module makers for the long run, speculators run in and out of them based on how much they beat earnings (as you can see from LDK Solar this morning)

Now neither Yingli or Canadian Solar suddenly turned into poor companies - but in this momentum chasing era people pile in and out of stocks based on expectation of an earnings beat - so I took that into account and seeing that the chance for an upside "surpise" could be hurt by currency exposure, took the calculated chance that people will be "disappointed" and cut back exposure. So to ignore that behavorial fact is to leave a tool in our tool belt. I find the valuation in both these names to be very attractive here, but they've been left to die on the side of the road since everyone judges these guys on 90 day increments and if they don't "beat" by a huge amount they might as well go to purgatory. It is all sort of pathetic that this "Vegas" behavior is how it works, but it is what it is.

Anyhow the point is not to brag about a solid short term move - but to point out that ReneSola (SOL) should not be impacted negatively due to where their customer base is mostly located; since most transactions are within China - obviously there is no gain or loss from currency for selling within the country. While I don't expect the same level of beat as LDK Solar, ReneSola presents (to me) the safest Chinese earnings play this quarter due to not being blindsided by a large currency hit that makes earnings look worse than they really are. That does not mean they cannot "miss" or "disappoint" - it simply a case of less chance of it happening with SOL than the module makers.

So along with a chart that is busting out we are increasing our position and will be victims of either lemmings charging in or out of the name post earnings. I'm just crossing my finger they don't announce a dilution or something like that since we've been blindsided by these type of events in the past. Even with this huge move during the week the forward PE ratio has only jumped from 11 to 14. For triple digit growth. This entire group is sadly undervalued by a market chasing into financials and retailers and unprofitable airlines.

On a related note - analysts, who have been very short sighted in solar; constantly bashing the companies over incentives here, there, or everywhere - i.e. Germany, Spain, or the US - finally cried uncle on Sunpower (SPWR) at least. These guys (analysts) continue to "cry chicken little" in one of the fastest growing sectors on the planet. Our Congress remains a complete disaster.

• However, analysts noted the deals are contingent on Congress extending expiring income tax credits for solar energy. "The commitment by PG&E is a wake-up call for Congress to act on extending the ITC when it returns from recess," Calyon Securities analyst George Kotzias said in a note to investors Friday. "We feel that acts like this are exactly what is needed to light the fire under the feet of our federal policy makers."
• Calyon rates SunPower shares a "Buy" with a price target of $100. Merrill Lynch on Friday raised SunPower to "Buy" from "Hold."
• Citigroup analyst Timothy Arcuri was not quite as upbeat on the prospects for SunPower. In a note, Arcuri said it appears SunPower "is racing to sign big deals -- even at the eventual expense of margins -- ahead of lower-cost suppliers" like First Solar Inc. (always a negative to throw in - so they sign a huge deal and they are "racing to sign big deals" - in what other industry is "signing big deals" a negative?? Classic stuff) Arcuri rates SunPower "Hold" with a $90 price target.

Long LDK Solar, ReneSola, Candian Solar in fund; long LDK Solar, ReneSola in personal account

Bookkeeping: Initiating Millipore (MIL) Position

Millipore (MIL) is yet another healthcare company that we are starting into this week. Company description as follows; company website here

Millipore Corporation, a life science company, provides technologies, tools, and services for bioscience research and biopharmaceutical manufacturing industry. It operates in two segments, Bioprocess and Bioscience.

1. The Bioprocess segment develops, manufactures, and sells consumable products and hardware, as well as provides related services used principally in the development and manufacture of therapeutic products.
   
2. The Bioscience segment manufactures and sells instrumentation, consumable products, and services used in drug discovery and other laboratory applications.

This is a solid, if relatively unexciting company - but it is in the "right" sector. With the right chart - in a word, it is "working". We see a double top breakout happening today, so in we go.

I found this name through J over at Marketfolly as a matter of fact - a few months ago he was showing a lot of hedge funds buying this name, along with a few others of similar ilk. I went to go look at the company back then and was uninspired. But fundamentals mean nothing and money flow means everything - so when the horde moves we are going to follow along with them. What kills you is the company had an ok earnings report - but a warning to guidance, yet the stock is being bid up. Meanwhile companies performing way above expectation but in the "wrong" sectors are being completely trashed. Ah, markets.

• Revenues for the second quarter grew 8 percent, to $414.2 million. Excluding an 8 percent benefit from changes in foreign currency, revenues in the quarter were unchanged from the previous year. (which in English means no growth at all)
• Millipore’s Bioscience Division revenues grew 9 percent, offsetting a 7 percent decline in revenues from the Company’s Bioprocess Division.
• Millipore’s second quarter net income grew 42 percent totaling $40.3 million, or $0.72 per share, compared to $28.4 million, or $0.52 per share in 2007. Non-GAAP net income grew 15 percent in the second quarter to $51.0 million, or $0.92 per share, compared to $44.4 million, or $0.81 per share, in the second quarter of 2007.
• Although we expect our Bioprocess Division and the overall company will report year-over-year revenue growth in the second half of the year, we do not anticipate spending from these large, U.S. biotech customers will stabilize until the end of 2008. Therefore, our Bioprocess results will continue to be negatively affected for the remainder of this year.

I find it all surreal but it is what it is... this is where the money flow is going. So to make any money we need to run with the herd.

We started this today with 1.4% stake buying in the upper $59s.

As an aside on a related healthcare note, earlier this week we bought generic drug maker Mylan (MYL). As we wrote in that piece, consolidation has been happening in the sector. Luck has not been with us of late, as the other major name in this space I was considering, Watson Pharmaceuticals (WPI) is up 10% since Wednesday on speculation of a takeover bid. Right sector, wrong company for us it appears. I flipped a coin and Mylan's chart was more appealing to me at the time.

• Options action on Watson Phamaceuticals (WPI) indicates that traders think it might be a takeover target, according to one options experts.
• "During the past month, call open interest -- which is the number of open call position contracts to buy Watson stock -- has increased 77 percent, so that tells us there's a rising litany of bulls on Watson Pharmaceuticals, and this is going to be an interesting stock to watch, even though there's not a specific rumor right now."
• Despite flattish share price action (shares closed flat at $28.35), call volume set a 52-week high Wednesday, with overall option volume coming in about 14 times the normal level.

As we've been saying, when it rains it pours - a 10% 2 day move in this space is akin to a solar company rising 80% in 2 days. Bah and humbug.

Long Millipore, Mylan in fund; no personal position

Harbinger Seeks to Raise Stake in Cleveland Cliffs (CLF)

This is an interesting move considering Harbinger thinks this is the top in the commodity "bubble" - watch what they do, not what they say. Wouldn't one be selling off exposure to commodities if this was the top?

• Hedge fund Harbinger Capital Partners, the largest shareholder in iron-ore company Cleveland Cliffs Inc (CLF), said on Thursday it has sought approval from Cleveland Cliffs' shareholders to raise its ownership stake in the company.
• The hedge fund is opposing Cleveland Cliffs' proposed takeover of Alpha Natural Resources (ANR), as it contends that the Alpha deal is not in the best interest of shareholders.
• Harbinger said in a regulatory filing that it has asked Cliffs' for a shareholder vote that would allow the hedge fund to acquire at least one-fifth or more of Cliffs' outstanding shares.
• Harbinger currently controls about 15.57 percent of Cliffs' shares. It also indicated it would not seek to acquire more than a one-third stake in Cliffs.

To be a fly in Harbinger's offices... I am boggled by the actions versus the rhetoric. But a lot of things have been boggling me of late. ;)

[Jul 31: FT.com - Mittal (MT) Considering Bid for Alpha Natural Resources]
[Jul 25: More Drama at the Cleveland Cliffs Corral]
[Jul 16: Thoughts on Cleveland Cliffs (CLF), Alpha Natural Resources (ANR) Deal]

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

Bookkeeping: Adding to Mastercard (MA)

I want to highlight Mastercard (MA) to show you a chart that represented how stocks used to trade pre quant hedge fund dominance. Today, in most cases, bottoms seem to happen instantly, out of thin air, and in V shapes - so you have no chance to catch the "turn". After a stock gets beaten down for a few weeks, it culminates in a down 8% day, and then the next day it's up 11% and on its way to a run in the other direction. There is no "bottom formed", just a pin point bottom and complete 180 degree change of direction. There is no way to use charts to catch that but that is how trading has seemed to evolve over the past year and especially the past two quarters. Complete random, bipolar changes in direction without warning. If you are 5 days early you can lose 25-30% of your capital. Hence "old fashioned" rules are thrown out the window.

Now let's compare that to Mastercard (MA) which my jaw dropped when I saw something that actually looked familiar to me, a potential gently forming bottom being created - key word gentle - versus the harsh reversals that now dominate this market. We see a stock here that builds a base over the course of a few weeks or months before turning back upward. I thought these sort of charts had gone the way of the Dodo bird.

Do my eyes deceive?

Now this is still a quite broken chart since we are making a series of lower highs, and most likely this move will go kaput (if technical conditions prevail) somewhere in the $260-$270s. The 50 day moving average is $260 and falling by the day. But at least it is something I recognize.

On our earnings preview entry at the end of July we wrote

Mastercard (MA) - chart has been degrading here as well; I am praying for a "miss" or "guidance" that does not make people happy so I can load up at lower levels.

A few day laters after Visa (V) reported we wrote

I was hoping for some kind of miss from Mastercard so we could cheap up shares cheaper but it appears this won't be happening.

We got what was considered a "miss" in fact, and I began adding some in the $240 but was holding out for a test of the 200 day moving average as we wrote on July 31

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

So now we seem to have a successful test of that $220s level and the inklings of a bounce. We shall see - but this is a low risk position - if it breaks down below the 200 day moving average (mid $220s) we cut it back - no harm, no foul. But in this era of "compressed time where everything happens at 10x the speed of the old days" the 2 week base Mastercard is forming is akin to a 4 month base in the old days, so it's an easy chart to read.

We'll move up this position to 2.5% of the fund, and probably cut back as we enter that area of resistance north mentioned above. If it can break through there and get back to the upper $200s/$300 area than we have resumed a new trend up. But I'll assume we fail about $30 higher from here.

Unfortunately charts like this are few and far in between so easy entries are hard to find...

Long Mastercard in fund; no personal position

Where is Institutional Money Flocking? Biotech - 3 ETFs to Review

One area you can see I've been transitioning into is healthcare. I still don't buy the "technology is a safe haven" thesis but I have to respect that's where money flow is going. Healthcare I can feel a bit more comfortable with because it's a traditional safe haven in times of recession. Not that we are in one, or ever will be in - as the U.S. is the only country on the planet that will avoid recession even though all the problems being caused in the world are due to our excess. We are just that good. ;)

One subsector of healthcare that I always say I fear buying individual stocks is biotechnology - aside from Gilead Sciences (GLD) I can't recall ever owning an individual name in my life due to fear of FDA approval/denial ripping 40% of your capital in milliseconds. With that said, there are a few individual names I have been considering the past month only to watch them to levitate without me. So one approach are ETF's - 3 of which I am looking at and will review in this post - all of which hold the larger type of names I prefer - if you think big cap biotech is risky just imagine small cap biotech. Now before going forward, let me say 1 word of caution is chasing into these ETFs (and the stocks within them) at this point might be "late"; on the other hand we have seen once institutional money makes a decision to run into a sector, the herd mentality takes over and it can run far longer than one ever imagines. But once 'Fast Money' starts pumping a sector so heavily, I begin to get nervous about top ticking a move - however this is the type of sector we'd like to buy on a pullback.

EDIT 1:45 PM: Reader has notified me of another ETF IBB iShares Biotechnology (IBB)

Of the 3 ETFs - First Trust Biotechnology (FBT), SPDR Biotech (XBI), Biotech HOLDRs (BBH) - none really have a ton of individual volume - the latter two average under 300K shares traded daily and the first under 40K shares, so they are somewhat illiquid in fact.

I always like to look at holdings of the ETFs because the construction is so different and I don't like ETFs which are heavily weighted to the top 2-4 holdings. So of these 3 we see that situation with Biotech HOLDRs (BBH) - some might like it, some might not, I fall in the latter camp. Here are the top holdings as of May 31

1. Genentech (DNA) 38.7%
2. Gilead Sciences (GILD) 22.8%
3. Affymetrix (AFFX) 17.4%
4. Biogen (BIIB) 9.9%

Really there is no need to go further - these 4 names make up 88.8% of the holding. So if you are huge DNA/GILD fan you can essentially buy this ETF and then get a few other biotechs thrown in to offset some of the exposure but with 2 holdings making up 62% of the ETF it really does not strike me as "diversification". On the other hand these 2 stocks have been on a tear and despite a complete blowup in Biogen (BIIB) the ETF is performing well. Reason? DNA has been the subject of a takover bid, and a month ago had a big jump. It will actually be curious to see how the composition of this ETF changes once (if) DNA is acquired. But this doesn't suit our purposes.

Next, we'll look at First Trust Biotechnology's (FBT) top holdings as of June 30

1. Vertex Pharma (VRTX) 6.8%
2. Illumina (ILMN) 6.2%
3. OSI Pharma (OSIP) 6.2%
4. PDL BioPharma (PDLI) 5.8%
5. Amgen (AMGN) 5.7%
6. Cephalon (CEPH) 5.5%
7. Genentech (DNA) 5.5%
8. Genzyme (GENZ) 5.0%
9. Celgene (CELG) 5.0%
10. Gilead Sciences (GILD) 5.0%

We see a lot more diversification here and the top 10 holdings make up 56.5% of the entire ETF. Interestingly, Illumina (ILMN) - one of our holdings - is the #2 position even though it is not a drug company but a diagnostic / life sciences type of company. All the major players are represented here with Amgen, Gilead, Genetech, and Celgene. Frankly I know nothing about the top holding VRTX but the #3 holding OSIP is one of the names I've been thinking of adding to the fund over the past 3-4 months as the chart has been impressive- but while I've been "thinking" the stock has gained 50%+. So aside from the real lack of volume this name has a lot of positives going for it.

Last, we have SPDR Biotech (XBI) - here are the top holdings as of August 18

1. Imclone (IMCL) 5.8%
2. Amgen (AMGN) 4.9%
3. Genentech (DNA) 4.6%
   
4. Amylin Pharma (AMLN) 4.6%
5. Celgene (CELG) 4.5%
   
6. Genzyme (GENZ) 4.2%
   
7. Cephalon (CEPH) 3.8%
8. Gilead Sciences (GILD) 3.6%
9. Biogen (BIIB) 3.2%
10. Vertex Pharma (VRTX) 3.1%

Another very diverse group and even less concentration in the top 10, as they make up 42.2% of the ETF. Keep in mind these are fluid vehicles as the top 10 have changed weightings quite a bit from even June 30. I assume Imclone's jump to the top of the weighting has to do with its recent buyout offer. So this is also a solid candidate, and its volume is a bit more attractive to us for ease of exiting or entering the position, or scaling in/out.

For comparative purposes I've posted charts below of the relative performance of the 3 ETFs over 2 time frames: 3 months and 6 months

3 months (click to enlarge)

6 months (click to enlarge)

In the 3 month period, BBH has outperformed with a 25% gain since we had that huge move up in Genentech (DNA) so it's a bit deceiving. The other 2 came in at 16-19% range. In the 6 month period BBH and XBI both came in at around a 25% gain with FBT not far behind at 20%. Again, the action is relatively random as the portfolio weightings outside of BBH are dynamic and we've had takeover action in the group.

I am keeping both FBT and XBI on the radar but due to volume will probably go with XBI once (if) this sector gives us a decent pullback. This will give us some biotech exposure but without individual company risk, and expose us to an area that does not batter us with the daily "financials vs commodities" battleground that is getting weary at this point.

Long Illumina in fund; no personal position

NYT: Cost Cutting in New York, but a Boom in India

Now that oil is headed back to $60, the countries that import "stuff" i.e. India should do well - as their inflation disappears. Ok, maybe not so much....

• India's inflation soared to a 16- year high and may accelerate further after the government approved wage increases for civil servants.
• Wholesale prices rose 12.44 percent in the week to Aug. 2, after increasing 12.01 percent in the previous week, the commerce ministry said in New Delhi today. Economists were expecting a 12.2 percent gain. (wow these guys measure inflation on a weekly basis?)
• Prime Minister Manmohan Singh's cabinet today approved an average 21 percent salary increase for about 5 million government employees. That may give the central bank little choice other than to raise interest rates again after three increases since June, economists said. (do you see what I mean when I write the global wages are going to eventually be heading to some crossing point among countries as globalization trudges ahead the new few decades?)
• Soaring energy and commodity prices are fanning inflation across Asia. Pakistan's inflation accelerated to a 30-year high of 24.33 percent in July. Consumer prices in Indonesia jumped 11.9 percent last month, the biggest gain in almost two years. (hmm they must of not gotten the memo of how oil prices will soon be cut in half and hence nothing to worry about - that is the US market thesis as they shrug off all inflation reports, pointing to them as "backwards looking")
• Faster inflation is squeezing consumer spending and hurting factory output. India's industrial production grew 5.2 percent in the quarter ended June 30, almost half the 10.3 percent pace in the same period a year earlier.

We've predicted this spate of inflation and "mostly" got out of Asia a few months ago. However we did stick with India a bit too long. But again, if the thesis of global commodity prices staying down is "true" we should be seeing an uptick in the markets of Chindia because those 2 are the ones who need to import "stuff" and hence lower prices would help them. But China has been in the doldrums and India, despite a little minor rally here of late, has been a very bad performer the past quarter. Coal prices on global markets continue to hold firm, and fertilizer prices continue to remain firm. Interesting - to those who use fundamentals. Since it is all about oil - it doesn't matter to the computers.

Anyhow as we become a more flat world - multinational jobs will go where the labor costs are cheaper (although with the wage increases in India the past half decade they better be careful or capital will go find a new country to exploit... err take advantage of cheap labor), an interesting piece in the NYTimes

• India - On the top floor of a seven-story building in this dusty aspiring metropolis, Copal Partners churns out equity, fixed income and trading research for big name analysts and banks. It is a long way from the well-cooled corridors of Wall Street, and quarters are tight; business is up about 40 percent this year alone.
• “This is one bulge-bracket bank,” said Joel Perlman, president of Copal, pointing toward a team behind an opaque glass wall. “And this,” he said, motioning across a narrow corridor “is another.”
• The banks edit and add to what they get from Copal, a research provider, then repackage the information under their own names as research reports, pitch books and trading recommendations. (ah, so that's how it works)
• Wall Street’s losses are fast becoming India’s gain. After outsourcing much of their back-office work to India, banks are now exporting data-intensive jobs from higher up the food chain to cities that cost less than New York, London and Hong Kong, either at their own offices or to third parties.
• Bank executives call this shift “knowledge process outsourcing,” “off-shoring” or “high-value outsourcing.” It is affecting just about everyone, including Goldman Sachs, Morgan Stanley, JPMorgan, Credit Suisse and Citibank — to name a few. (I call it "Pooring of America" but let's just get focused on labels - we still have plenty of Walmart jobs, baristsa jobs, food service jobs, and tanning salon jobs left here! You can't take that from us!)
• The jobs most affected so far are those with grueling hours, traditionally done by fresh-faced business school graduates — research associates and junior bankers on deal-making teams — paid in the low to mid six figures. (key words - so far - just like we said 10 years ago - the only jobs leaving are back office work... now we are giving up low to mid 6 figure jobs as well - and replacing them with $35K jobs in the "service economy")
• New York City financial firms expect to hand out some $18 billion less in pay and benefits this year than 2007, the largest one-year drop ever. Over all, United States banks will cut 200,000 employees by 2009, the banking consultancy Celent said in April.
• The work these bankers were doing is not necessarily going away, though. Instead, jobs are popping up in places like India and Eastern Europe, often where healthier local markets exist.
• In 2003, JPMorgan and Morgan Stanley said they planned to move a few dozen research jobs to Mumbai, Lehman Brothers was working on a pilot program to create research presentations in India and both Merrill Lynch and Goldman Sachs said they had not moved any research to the country. Five years later, the trickle is a flood. Third-party firms say they are seeing a 20 to 40 percent upswing in business this year alone.
• Morgan Stanley has about 500 people employed in India doing research and statistical analysis. About 100 of Goldman Sachs’ 3,000 employees in Bangalore are working on investment research. JPMorgan has 200 analysts in Mumbai working for its investment banking operations around the world, doing industry analysis, and compiling data and charts for marketing materials. It has an additional 125 analysts in Mumbai supporting the bank’s global research division.
• Citigroup employs about 22,000 people in India, several hundred of whom work in investment research. Deutsche Bank has 6,000 employees in India, according to the bank’s Web site.
• The jobs off-shore are more likely to come from the investment bank and trading divisions of Wall Street firms, rather than the sales side, which produces analyst reports about companies and industries, said Andy Kessler, a former analyst who has written several books about Wall Street.
• “There’s a huge amount of grunt work that has been done by $250,000-a-year Wharton M.B.A.’s,” Mr. Kessler said. “Some of that stuff, it’s natural to outsource it.” (we don't need no stinkin $250K jobs here!)
• After research, the next wave may include more sophisticated jobs like the creation of derivative products, quantitative trading models and even sales jobs from the trading floors.
• Proponents of the change say Wall Street’s wary embrace of the activity may signal the beginning of a profound shift in the way investment banks are structured, with everyone but the top deal makers, client representatives and the bank management permanently relocated to cheaper locales like India, the Philippines and Eastern Europe.
• In the future, executives in India like to joke, the only function for highly paid bankers in New York or London will be to greet clients and shake hands when the deals close. (I don't think it's that funny or facetious myself - give it 20 years)
• Permanently moving banking jobs out of New York or London is a touchy subject on Wall Street. Many investment banks, including Morgan Stanley, Goldman Sachs, Merrill Lynch and Citigroup, would not make executives available to discuss the topic. Press officers for most banks asked not to be quoted or argued over semantics. For example, one spokesman said his bank’s fast-growing India support operations are not an outsourcing facility, but a “center of excellence”; another argued that large cost cuts at his bank’s New York and London headquarters were really “re-engineering” so the bank should not be included in such an article. ( I love it! It's all about semantics baby - Hello Mr. Jones - we are shipping your job to Mr. Shah at the Center of Excellence - please back up your stuff in the box provided. Good day sir!)

Again this is not to criticize or really admonish such moves. Just to point out the reality versus what you are "told" by political and business leaders. The reality is a very stark difference and it is done slowly but surely - erosion.