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.

Photovoltaic Solar Looks to be Arriving in Scale in the U.S.

We have quite the huge announcement from Sunpower (SWPR), Optisolar and PG&E (PCG) after hours - this is a long term game changer if the utilities themselves decide to go solar as opposed to individual and corporations. Sadly our Congress still sits on their hands on the renewable tax credits for alternative energies while the rest of the world moves onward. California is trying to move on, with or without, the rest of the U.S.

Solar is real and not a fad unlike what you are currently seeing on the popular financial TV shows. The questions will be who will be the ultimate winners and how many will there be? [Jan 3: The Long Term in Solar] Intel (INTC) is getting in [Jun 17: Intel Creates a Solar Company Spin Off] Applied Material (AMAT) is getting in - these are not small start ups guessing on a "maybe" industry. And Goldman Sachs (GS) is quietly snapping up the land throughout the southwest US desert. Meanwhile the "Fast Traders" and pundits point their nose upward and remind you of the solar fantasy in the 1970s and how this is just a repeat. Nice.

• Pacific Gas and Electric Company today announced it has entered into two utility-scale, photovoltaic (PV) solar power contracts for a total of 800 megawatts (MW) of renewable energy. This significant commitment to photovoltaic technology will deliver cumulatively 1.65 billion kilowatt-hours of renewable energy annually. This would be equivalent to the amount of energy needed to serve approximately 239,000 residential homes each year.
• PG&E entered into an agreement with Topaz Solar Farms LLC, a subsidiary of OptiSolar Inc., for 550 MW of thin-film PV solar power. The utility also signed a contract with High Plains Ranch II, LLC, a subsidiary of SunPower Corporation (Nasdaq: SPWR - News), for 250 MW of high-efficiency PV solar power.
• "These landmark agreements signal the arrival of utility-scale PV solar power that may be cost-competitive with solar thermal and wind energy," said Jack Keenan, chief operating officer and senior vice president for PG&E.
• The 550 MW Topaz Solar Farm project would utilize relatively low-cost, thin-film PV panels designed and manufactured by OptiSolar in Hayward and Sacramento. Located in San Luis Obispo County, California, the project would deliver approximately 1,100,000 megawatt-hours annually of renewable electricity. The project is expected to begin power delivery in 2011 and be fully operational by 2013.
• SunPower's planned 250 MW solar ranch, would be located in San Luis Obispo County's California Valley and will deliver an average of 550,000 megawatt-hours of clean electricity annually. The project is expected to begin power delivery in 2010 and be fully operational in 2012. The ranch would employ SunPower's proprietary crystalline PV solar cells, which generate up to 50 percent more power than conventional crystalline cells. The company would install its patented SunPower® Tracker solar tracking systems at the site, which tilt toward the sun as it moves across the sky, increasing energy capture by up to 30 percent over fixed systems, while reducing land-use requirements

GreenWombat article - California's Game Changing Solar Deal

• In a move that could alter the economics of the global solar industry, California utility PG&E on Thursday announced that it will buy 800 megawatts of elecricity produced from two massive photovoltaic power plants to be built in San Luis Obsipo County on the state’s central coast. The 550-megawatt thin-film plant from Bay Area startup OptiSolar and a 250-megawatt PV plant from Silicon Valley’s SunPower dwarf by orders of magnitude the five-to-15 megawatt photovoltaic power stations currently in operation around the world.
• Most of the industrial-scale solar plants designed to replace fossil-fuel power use solar thermal technology, meaning they deploy mirrors to heat liquids to produce steam that drives electricity-generating turbines. Photovoltaic power plants essentially take the solar panels found on suburban rooftops and put them on the ground in gigantic arrays.
• How gigantic? OptiSolar’s Topaz Solar Farm will cover 9 1/2 square miles of ranch land with thin-film panels like the ones in the photo above.
• “Obviously this is huge and a bold move,” says Reese Tisdale, a senior analyst who studies the economics of solar power for Emerging Energy Research in Cambridge, Mass. “It’s a pretty big jump in manufacturing capacity and a big opportunity for the PV industry, particularly for thin-film.”
• If the power plants are ultimately built - and that’s a big if, given the challenges to get such facilities online - and other utilities follow PG&E’s lead, demand for solar modules could skyrocket.
• “If we were trying to do it this year, it would be all of our production,” says Julie Blunden, SunPower’s vice president for public policy. “SunPower is ramping very quickly. By 2010 our production will be at least 650 megawatts.”
• The PG&E deal puts OptiSolar in the spotlight. Founded by veterans of the Canadian oil sands industry, the stealth Hayward, Calif., startup has kept its operations under cover, avoiding the media as it quietly set up a manufacturing plant in the East Bay and prepared to break ground on a million-square-foot factory in Sacramento. (can't wait for the IPO) ;)
• It has long been an open secret that building massive photovoltaic power plants was not economically viable. So what has changed too make constructing gargantuan PV power plants profitable?
• “Lots of things have changed,” says SunPower’s Blunden. “Power prices are going up and public policy is requiring utilities to have a portfolio of renewables.” And after building some 40 megawatts of power plants in Spain, SunPower has been able to improve its manufacturing processes and cut costs, according to Blunden. “We could see where the cost reductions were coming down and the benefits of scale,” she says. “We saw there was a way for us to be competitive with other renewables.”
• Goldstein says OptiSolar’s business model of owning the supply chain - from building its own machines to making solar cells to constructing, owning and operating power plants - will allow it to reduce costs. “By taking control of the value chain from start to finish, by being vertically integrated and cutting out the middleman,” he says, “we can be competitive not only with other renewable energy but with conventional energy.”
• Photovoltaic power plants do have certain advantages over their solar thermal cousins. They don’t need to be built in the desert, thus avoiding the land rush now underway in the Mojave. PV is a solid-state technology and with no moving parts - other than the sun tracking devices used in some plants - they make little noise and are relatively unobtrusive. Most importantly in drought-stricken California, they consume minimal water. And the modular nature of solar panels means that a power plant can start producing electricity in stages rather after the entire facility has been constructed.
• But contracts are no guarantee the even a watt will be generated. The Topaz and California Valley projects must overcome a number of obstacles, not the least of which is the U.S. Congress’ failure so far to extend a crucial 30 percent investment tax credit for solar projects that expires at the end of the year. SunPower’s Blunden acknowledges the PG&E project is contingent on the tax credit being renewed. (plenty of money for corporate farmers, ethanol, and big oil - lots of strife over any credits for wind and solar - welcome to your US leadership - bought and paid for)

NYTimes article here

• Two California companies said Thursday that they would each build solar power plants that were 10 times bigger than the largest now in service, creating the first true utility-scale use of a technology now mostly confined to rooftop supplements to conventional power supplies.
• At peak hours, together the plants will produce as much power as a large coal plant or a small nuclear reactor. But they will run far fewer hours of the year so output will be at least a third less than that of a coal plant of the same size.
• The largest current installation in the United States is at Nellis Air Force Base, in Nevada, with 14 megawatts, also built by SunPower. Spain has one completed plant at 23 megawatts. A German company, Juwi, has a 40-megawatt installation east of Leipzig. Florida Power and Light recently ordered a 25-megawatt plant.
• California requires that 20 percent of the kilowatt-hours sold by investor-owned utilities come from renewable sources by 2010, a goal that some companies are struggling to meet.
• SunPower’s panels are mounted at a 20-degree angle, facing south, and pivot over the course of the day, so they face the sun. OptiSolar’s panels are installed at a fixed angle. They are larger and less efficient, but much less costly, so that the cost per watt of energy is similar, company executives said.
• Neither approaches the economy of fossil-fuel burning plants, said Jennifer Zerwer, a spokeswoman for Pacific Gas and Electric. But they are competitive with wind power and with power from solar thermal plants. And prices will eventually fall, she said.

Or if you want the Cliff Notes Video - CBSMarketwatch has one here ;)

Huge. If Congress actually budges and allows us to get to a spot Japan and Germany were 7 years ago and Spain 3 years ago.

[Jul 29: Beggers Can't be Choosers - Some Minor Solar Deals]
[Jul 10: Well It's a Start - Sunpower to Build 2 Solar Power Plants]
[Jun 7: As Energy Costs Soar, US Looks to Solar]

Long Goldman Sachs in fund; no personal position

Bookkeeping: Cutting Jacobs Engineering Group (JEC)

Jacobs Engineering (JEC) is up to $78 range on an upgrade. I am cutting my position here as this is an out of favor group, and the stock has held up well. Frankly, when the fund is up and running I'd put a short on this type of chart to hedge and help us make some money. This is an easy trade - short here near $78, and put stop loss over $81ish. (in fact we'd go long north of $83 on "strength" and a new higher level than the previous high) I think it heads to $70 and if I'm correct we make an easy 10% to hedge against the portfolio in the "global growth side". But I can't do that (now). So we sell, and get this down from a 0.9% stake to a 0.2% - effectively a holding stake for us (i.e. selling out of a position without literally removing it from the portfolio)

Look at the trend line from May, a series of lower highs (I count 6!) - if I had any computer skills I'd draw a beautiful line on this chart connecting all the highs and showing you where you can short it on each spike up. Until that trend breaks, its a stock with no hope on the long side other than oversold rallies after it gets pummeled.

I like this name and group fundamentally, but this is not a place money is flowing to at this time. We sold out of McDermott (MDR) yesterday and it's being hammered to the tune of 8% down today, as case in point. We'll continue this same pattern of behavior we've been doing lately until these sectors begin to attract real buying interest - sell on any lifts up into resistance. At this point there is no difference between these and banks or airlines or retailers or housing stocks.

We're playing with 1 arm tied behind our back since we can't do the 2nd half of these trades and that is (after selling down) shorting them down from the resistance areas so we're losing a lot of profit opportunities from the dark side but that is the vehicle we have for now, so can't do much about it.

Long Jacobs Engineering Group in fund; no personal position

T Boone Pickens Has a Rough July

Ok I thought I had a rough July - I guess it is all relative - especially considering these guys can do a lot more effective hedging against long positions than we can do.

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

The New York Post said T. Boone Pickens “took a beating” investing in natural gas and oil in July.

The commodity portfolio of his BP Capital lost 35%.

Overall, the fund lost 10% last month, the tabloid said.

Pickens said a “steep decline” in natural gas and oil had an “adverse impact on our performance” in an investor letter.

The Post called the downturn “embarrassing” for wildcatter Pickens. The Texas oilman, 80, is campaigning to boost alternative energy output.

Pickens has sided with the “Peak Oil” premise and in April predicted the cost of oil would top $150 a barrel. But after hitting a record high of $147.27 in July, the cost of oil per barrel has plummeted $35 to $113.

Pickens was not the lone casualty of the commodity backlash. The average hedge fund lost 4.35% on the HFN Hedge Fund Aggregate Average in July.

Dallas hedge fund BP Capital has $7 billion under management.

***********************
Another "gray haired" guy who got trapped by the new era of fast money and has been playing by the "old rules" we all thought still apply... (note at this point anyone who has entered the market over 5 years ago I now consider a "gray haired" guy since we're playing by the wrong set of rules) I don't think one of the best investors/corporate raiders of the past 30+ years suddenly got stupid; the rules have simply changed (at least for now).

I think this showcases yet again how heavily the "long commodities/short financials" trade was weighted by the hordes of institutional money. When all these rats decided to jump ship at the same time, we all capsized (note - I use the word rats affectionately) The velocity of the moves nowadays are really the only difference - what used to takes months to unwind is now taking days or weeks at most. If you dare sit back and think about the situation over a couple of weeks, you are down 30%. Shoot first, ask questions later.

So now as they flee into healthcare and technology stocks - you can bet at some point in the future those ships will capsize when the time comes for them to leave en masse and move to the next sector to feast upon (en masse). And we'll sit here perplexed asking why these "safe" stocks are down 40% in 3 weeks when the fundamentals have not changed. Same Bat time, same Bat channel - only the names of the innocents destroyed will be different. Follow the bouncing ball across the deck, and try not to be the in the last few groups without a lifeboat. This market is all about momo chasing guys (and their friendly computers) levered up the nose. (remember, we're just gnats on their behind(s)) It's all good until the trend changes - then it can get dangerous fast. Welcome to your new world of (ahem) "investing".

[Jul 8: Readers Homework - Do Your Pickens]
[Apr 17: World's Best Oil Investors Thinks Oil Goes Higher, not Lower]

"Before He Trades" A Carrie Underwood Paradoy

Our readers rule! Another great video pointed out by a reader - thanks for the heads up. For anyone who is more of a trader and less of a mutual fund investor you will laugh out loud at this! Something to keep us amused while the market bounces around like a Mexican jumping bean.



If you don't know the original song it is parodying this big hit - for all our problems, we are definitely the most creative bunch of sheep on the planet ;) (and one hell of a good advertising tool)

Howard Davidowitz - the Only Realistic Retail Analyst in America?

Howard Davidowitz continues to be the man - another great audio clip from a retail analyst who speaks the truth/reality. It is completely hilarious how the interviewer tried to start the interview trying to offer Howard Kool Aid, and pointing out some non existant silver lining and Howard shoots her down in the first sentence. Classic stuff - a fun 5 minute listen.

We highlighted Mr. Davidowitz back in March when he was dead on (well, he agreed with us so of course he was dead on) [Mar 30: Howard Davidowitz on US Consumer] and he continues to be spot on (once again agreeing with us) I just love when people are this blunt...

He talks about helicopters, the farce that is inflation government reports, entitlement programs, etc. From a retail analyst? Fantastic.

"The worst is yet to come"
"The consumer is in survival mode"
"The living standards of most Americans are going to be down... permanently" - Davidowitze

On the bright side he is bullish on Walmart (WMT) just like we are for the same reasons "Pooring of America 101"

Interesting Stock Reaction to Ctrip.com (CTRP)

We're behind on earnings reports - there are quite a few this week and I've been unable to keep up with the volume, so we'll catch up over the next week.

Interesting reaction in the stock today for Ctrip.com (CTRP) as it is up nearly 20% - we hold very little so it's not really helping us. They beat analysts estimates by a wide margin but have provided very weak guidance (for them). Usually they lowball, but in the years I've been following the company I've never seen guidance of 15-20%. The market seems to be ok with it, perhaps since the stock has been beaten to such a pulp. The number of curveballs in this market is astounding - we've had far better results / guidance in other names and they've proceeded to sell off 30% within a week. Then a company with what I consider weak guidance gets a jump of almost 1/5th. Simply mind numbing action of late. The "other" Chinese company that we own which reported last night, which was also beaten down, and is far cheaper - had what I considered a far better report and is down a few %. I give up on trying to provide explanations - it is what it is.

• For the second quarter of 2008, Ctrip reported total revenues of RMB402 million (US$59 million), representing a 30% increase from the same period in 2007 and a 10% increase from the previous quarter. (analysts in at $54M)
• Hotel reservation revenues amounted to RMB196 million (US$29 million) for the second quarter of 2008, representing a 14% increase from the same period in 2007 and the previous quarter primarily due to increased volume in hotel bookings.
• Air-ticketing revenues for the second quarter of 2008 were RMB169 million (US$25 million), representing a 44% increase from the same period in 2007 and a 6% increase from the previous quarter, primarily due to increased air ticketing volume.
• Packaged-tour revenues for the second quarter of 2008 were RMB24 million (US$3 million), up 85% from the same period in 2007 primarily due to the increased leisure travel volume, and a decrease of 11% from the previous quarter due to seasonality.
• Income from operations for the second quarter of 2008 was RMB127 million (US$19 million), which represented a 34% increase from the same period in 2007 and a 15% increase from the previous quarter. Excluding share-based compensation charges (non-GAAP), income from operations was RMB159 million (US$23 million), representing a 34% increase from the same period in 2007 and a 10% increase from the pervious quarter.
• Operating margin was 34% in the second quarter of 2008, compared to 33% in the second quarter of 2007 and 32% in the previous quarter. Excluding share- based compensation charges (non-GAAP), operating margin was 42% in the second quarter of 2008 compared to 41% in the second quarter of 2007 and was relatively consistent with the previous quarter.
• Net income for the second quarter of 2008 was RMB119 million (US$17 million), representing a 35% increase from the same period in 2007, and a 21% increase from the previous quarter. Excluding share-based compensation charges (non-GAAP), net income was RMB151 million (US$22 million), representing a 35% increase from the same period in 2007, and a 14% increase from the previous quarter.
• Diluted earnings per ADS were RMB1.72 (US$0.25) for the second quarter of 2008. Excluding share-based compensation charges (non-GAAP), diluted earnings per ADS were RMB2.17 (US$0.32) for the second quarter of 2008. (again, the world we live in is non GAAP so $0.32 vs analysts $0.20)

Outlook

• For the third quarter of 2008, Ctrip expects the year-on-year net revenue growth rate to be in the range of 15-20%.

Very small share repurchase

• The board of directors has approved a share repurchase program, which is subject to shareholder approval during Ctrip's annual general meeting currently scheduled in September 2008. The board has authorized Ctrip to repurchase, using funds from Ctrip's available cash balance, up to US$15 million worth of its own ADSs.

Analysts currently have $1.02 EPS for the year, with this $0.12 beat you have a $1.14 but it is unclear how the next quarter will react with this lowered guidance. But say they can do $1.20, at $51 it's a forward P/E of 42x. I find that rich considering this new guidance which probably is a low ball, but far lower than I can recall this company ever giving. But the market likes it, and that's all that matters.

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

Long Ctrip.com in fund; no personal position

Starting to Read More of this Around the Internet - Logic Useless

A reader sent me a link to this site and I'm starting to read this more and more around the internet. Especially from people with gray beards (literally?) i.e. even the Doug Kass' of the world. Sometimes I feel like I am a complainer about the incessant whining I do about the lack of logic in this market - frankly the market has always had a lack of logic in the near term but you could take advantage of that (i.e. profit). Now, I am not so sure with the programmed trading if one can take advantage of it because if you are wrong by even a 5 day duration you lose 30% of your capital. There is no coming back from that - if you lose 30% you need to make 40% just to break even. That is not a set up for success over the long run.

Once more these are times like I've never seen before - I continue to wonder if this is a permanent change as the macro quant funds dominate more and more of the trading [Cramer - Quants and their Machines] , or if this is just a transitory period. I am hoping the latter as hedge funds had their worst 1st half performance in 20 years so as they stumble over each other trying to out trade one another, all they are doing is losing money for us all. But all you need to do in hedge funds is have 1 huge period of gains (levered up 20:1 or 30:1 preferably) and you have what I call "generational wealth" - the type that takes cares of your grandchildren's grandchildren. Remember a few hedge fund managers made over a billion dollars... in 1 year. [Apr 8: Hedge Fund Manager - Good Work if you can Get It] So why not take outsized risks, with huge leverage - if you are correct you can effectively take care of generations of your family. If you are wrong - you blow up. You close your fund, hang out for 6-12 months, then get the word out that you are starting a new fund and people start sending you money (because your "pedigree" is enough to convince them that the last blow up was a "Black Swan" event) and you play the game over again. It's the biggest craps table in the world. [Jul 12: Some More Hedge Funds Biting the Dust] [Mar 28: Founder of Long Term Capital Failing Again]

Here are some words from another "old timer" - maybe we are all just whiners; those of us who have been around markets for a while. Or maybe this is truly a very different market. My conclusion is if this is the new era - where nothing works off of logic for long periods of time - the retail money will give up. Many have already been (in their minds) fleeced from the early part of the decade when they chased into technology stocks (hand raised, I was one of those guys) and now again in the past year - many people I read anecdotally on message boards are incensed when a company like Flowserve (FLS) raises guidance by $1.25 and then loses $20 of stock value within days. That whole sector of money will simply hang it up. Remember, it's been a "Lost Decade" for investors - anyone buying "the market" has made nothing; and adjusted for inflation they have lost money. [Mar 26 - WSJ: Stocks Tarnished by Lost Decade] No easy answers here and I don't know if one can truly "adapt" to this market where everything is random and bipolar. For me, the advantage of the market over a gambling hall is "research" can give you better "odds" than going to Vegas - that's the selling point. But increasingly the odds are no different than Vegas. And we know in the end the house wins there.

Commodities -- like nickel and zinc -- have also fallen heavily as a result of thinking that a global economic slowdown and the continuing credit squeeze will hurt demand.

The reason that these price moves are so dramatic and occur within such a short period of time is that they're basically speculator driven. Hedge funds now speculate on anything and everything. And they do it from minute to minute, from day to day. Add "everything and anything" to the trading desks at Wall Street's investment bankers and you have a desperation willing to throw billions at "bets. -- many of which pay off spectacularly, if you can read the tea leaves and sharply limit your losses if the market moves against you and watch it hawklike. This is a game that most of us simply don't have the time, patience or stomach for. But we're the victims of it, as we see our long-term "logical' ideas get crushed.

I doubt that this situation will change. I suspect that with limited investment banking fees and rich clients soured on their brokerage houses (because of the auction rate securities freeze-up), the big Wall Street houses will spend more of their time gambling (also called trading). And markets will become even more volatile.

Look at the charts. No one can time when markets change direction. But you could. When it's going up, stay long. The minute you get a one or two percent pullback, sell and go short. Stay short until the market moves against you. Meantime, make sure you get on CNBC and argue "logically" that Gold or Silver or Oil is dead (or alive) for the following reasons. You can always find reasons. And you can always find lazy CNBC reporters who need someone with a shtick and a point of view on how to make their viewers their next bundle. CNBC is only interested in the next bundle. That's why viewers watch and hence, advertisers buy ads.

It's getting super hard to be a long term investor. In the old days, you could pick some "logical" positions, stay with them and eye your monthly brokerage statements with satisfaction. No more.

I don't have a simple solution this morning. My wife's "solution" looks increasingly enticing, "If we have it, let's spend it. That way we get something for our money."

Note: I've received emails from people in "regular" (i.e. we actually pick stocks) hedge funds who also are extremely frustrated by the quant hedge funds, and they are suffering along with the rest. So perhaps we are just all a bunch of whiners and need to recognize it is best just to hand our money over to HAL 9000 since he is going to dominate us in the end. I hope not.

A reader sent me this audio link, here is a hedge fund manager who is giving up and returning money to investors, because he says there is too much volatility to meet monthly results. Note - he is a human being, not a computer.

Foreclosure Filings Up 55% Year over Year

For the past few months we have not really talked "that" much about housing; certainly not as much as we did early in the blog life. Reason being back then the pundits were vehemently arguing the housing issue is smallish, there had never been a national drop in housing prices , blah blah blah. So we wanted to get the reality it out there. Now they've been silenced on all those issues and what we are left with is the constant looking for silver linings in very bad data and "trying to anticipate when the bottom begins". But every so often we'll post some data, such as this. And housing is so intertwined with the banking system/credit situation it must be something you continue to monitor. But since the news won't be changing for a long time, I don't really bother to post 90% of the statistics since it would get repetitive. Summary: It is bad. It will continue to be bad. When it "recovers" it will be a long period of scraping along the bottom. Think tech stocks from the early part of the decade and how they "recovered" - long, drawn out process and many never came back. Or think Japan 1990s.

Keep in mind as you read the below data that certain states have put a pseudo moratorium on foreclosures as a preventative measure, so the numbers would be even worse if not for that.

• The number of homeowners stung by the dramatic decline in the U.S. housing market jumped last month as foreclosure filings grew by more than 50 percent compared with the same month a year ago, according to data released Thursday.
• Nationwide, more than 272,000 homes received at least one foreclosure-related notice in July, up 55 percent from about 175,000 in the same month last year and up 8 percent from June, RealtyTrac Inc. said. That means one in every 464 U.S. households received a foreclosure filing last month.
• More than 77,000 properties were repossessed by lenders nationwide in July, the company said. (thats almost a 1 million annualized run rate)
• Nevada, California, Florida, Arizona, Ohio, Georgia and Michigan had the highest foreclosure rates. Foreclosure filings increased from a year earlier in all but eight states
• Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan. (Bingo)
• As foreclosures soar, banks and mortgage investors are also facing a pileup of foreclosed properties on their books and are cutting prices dramatically. (which will drive down prices for those in homes in the same areas - which will cause them to be underwater if they bought anytime in 2003-2007, and thus the daisy chain continues)
• RealtyTrac noted that it had more than 750,000 foreclosed homes in its database of properties for sale, equal to about 17 percent of the 4.5 million U.S. homes that were up for sale in June. (think about that - 1 in 5 homes in America for sale is a foreclosure - and even at those "bargain" prices we are not seeing any huge uptick in sales - one must ask why if the Kool Aid economy is doing so well)
• RealtyTrac noted that it had more than 750,000 foreclosed homes in its database of properties for sale, equal to about 17 percent of the 4.5 million U.S. homes that were up for sale in June. (buyers will include Goldman Sachs and Blackrock, trust me ;))
• Even with government help, nearly 2.8 million U.S. households will either face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, predicts Moody's Economy.com.
  

From a stock perspective, all the Kool Aid gang wants to see is no further deterioration so they can jump up and scream about the imminent turn. Things don't have to get better; they just don't have to get worse. Again - these are the same pundits who denied housing prices could ever fall nationwide - they were proven to be liars in January [Jan 24: They Said it Could Never Happen. Ever.]... and in fact it would not really hurt the economy even if that "outlier" Black Swan event happened. So keep that in mind when they scream joyous songs of glee every time a data point turns in their favor.

WuXi PharmaTech (WX) Earnings

WuXi PharmaTech (WX) earnings seem quite stellar on first glance - I am assuming the analysts expectations are non GAAP since we live in a non GAAP world (which is a whole issue onto itself) but I digress. $0.14 EPS was consensus, with a range of 8 analysts of $0.08 to $0.19 - I only point that out because this is a young company with a short track record and a bevy of analysts who are having trouble coming to a consensus.

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

EDIT 11:30 AM: Looks like I am not the only one confused - apparently for some reason news reports are using GAAP earnings not non GAAP and hence considered this a miss; why they are doing that is beyond me when everyone uses non GAAP in their estimates. Also analysts are confused - never a good thing

Oppenheimer & Co. analyst Charles Rhyee reaffirmed a "Perform" rating on the stock, calling the results confusing as the company included a series of adjustments and one-time tax credits. He placed the actual adjusted profit closer to 14 cents per ADS

"Lab services revenue and margins remain solid, but overall gross margin was impacted by weakening margins in the core WuXi manufacturing operations," he said, in a note to investors. "Long term, we believe WuXi should benefit from increasing outsourcing trends to China, but remain cautious over the near to medium term."

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

They appear to have done a $0.21 quarter... and the market yawns if last nights after hours action signifies anything. If this was an American contract research organization posting a beat of that significance (50% over consensus) I assume it would be up 15-20%. Oh well, the beat goes on. Or is it (our) beating goes on. We even have the right sector (health care) on this one, but apparently the wrong country.

• Net revenues for the second quarter 2008 were $70.8 million, representing a year-over-year increase of 134% from $30.2 million in the second quarter 2007.
• Net revenues from laboratory services increased 80% to $45.2 million in the second quarter 2008 from $25.1 million in the second quarter 2007. Net revenues from manufacturing services increased 400% to $25.6 million in the second quarter 2008 from $5.1 million in the second quarter 2007.
• Our overall non-GAAP gross margin was 40%, laboratory service non-GAAP gross margin was 50% and manufacturing non-GAAP gross margin was 24%. GAAP gross profit for the second quarter 2008 was $22.1 million and overall GAAP gross margin was 31%, laboratory service GAAP gross margin was 39% and manufacturing GAAP gross margin was 17%. (don't often see gross margin expressed as GAAP v non GAAP)
• Non-GAAP operating income was $17.0 million in the second quarter 2008, a 90% increase from $8.9 million in the second quarter 2007. Non-GAAP operating margin was 24% in the second quarter 2008, down from 30% in the second quarter 2007. GAAP operating income for the second quarter 2008 was $7.7 million. GAAP operating margin was 11% in the second quarter 2008, down from 25% in the second quarter 2007 primarily due to amortization of acquired intangible assets. (this is a negative divergence but they hired a lot of "seasoned executives" which probably causes some of the increase in expenses, and hence reduction in operating margin)
• Non-GAAP net income for the second quarter 2008 grew 81% to $15.5 million, compared to the non-GAAP net income of $8.6 million in the second quarter 2007. Non-GAAP net profit margin was 22% in the second quarter 2008.
  
• GAAP net income for the second quarter 2008 increased 19% to $8.5 million from $7.1 million for the second quarter 2007. GAAP net profit margin was 12% in the second quarter 2008.
  
• Non-GAAP diluted earnings per ADS were $0.21 compared to $0.13 in the second quarter 2007. GAAP diluted earnings per ADS were $0.12 in the second quarter 2008 compared to $0.11 in the second quarter 2007.

Guidance

• We maintain our 2008 annual consolidated net revenues guidance in the range from $280 million to $300 million

All the non GAAP vs GAAP figures are making for a messy earnings report but generally the "wink wink" methodology on Wall Street is to use non GAAP because huge amounts of executive compensation can thus not "count" against profits. Another in the many games we play.

Even with the reduction in operating income %, WX is showing a 24% which compared to the 12-15% range of American peers. Some of the margin pressure looks to be "growing pains" but in the long run, with a much lower labor cost (one reason we bought it) they should maintain superior to peer margins even with the quarterly ebbs and flows. Well, we've held it this long - I don't see any reason to sell it here - I guess it can trade in obscurity for an unknoweable amount of time going forward. We're just racking up profitable Chinese companies growing 100%+ who cannot find a bid...

[Jul 15: Warburg Pincus Takes 5%+ Stake in WuXi PharmaTech]
[May 28: WuXi PharmaTech with Another Solid Quarter]
[Mar 12: WuXi PharmaTech - Very Good Earnings]
[Nov 5: Two New Foreign Positions Added Today]

Long WuXi PharmaTech in fund; no personal position

Classic Human Psychology in Stock Picking

Classic investor behavior as shown on Tim Knight's blog Slope of Hope (kudos to reader for emailing this to me)

(click to enlarge)
Trust me I feel like this right now with those darn commodities although we still hold some good proportion - right now we are in either step 13 or 15 of the commodity "bounce" ;) The difference nowadays is the full spectrum of the above chart used to take months to play out - now it takes a few weeks at most, and many times a week or so in our A.D.D. trading/quant fund led market.

p.s. for those who follow Ken Heebner, it looks like he has abandoned the commodity trade in the past 10-15 days. Or cut back severely. His concentrated holdings should of been up somewhere in the 4-5% range today. Instead CGM Focus (CGMFX) was flat - today was a key "tell" to see what was suspected over the past few weeks was indeed true. After 6-7 weeks of pummeling it looks like he said 'no mas' sometime in the past 2 weeks. A change in direction - right or wrong, we won't know until we look back in a few months... interesting nonetheless.

We're just spreading our bets over multiple sectors at this point (we finally enjoyed a nice day - up nearly 2%), and ready to go much more heavily short if the market gets off the Kool Aid. Back at it tomorrow.

Bill Miller Continues to Boggle Me - Increasing Stake in Freddie Mac (FRE)

For those of you new to the markets, Bill Miller used to be the mutual fund star - beating the S&P 500 for 15 years in a row. He has fallen into tough times the past few years as we outlined in April [Apr 9: Bill Miller is #596! Ouch] As I wrote then

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

Probably his fund has had a few good weeks here on this "buy the junk" rally, but he was piling into those sectors during the winter before multiple legs down. And still (in my mind) a lot of trouble ahead.

While I agree with his recent comments [Aug 5: Bill Miller "Toughest Market I've Seen"] especially for those of us who are not computers and use fundamentals, moves like this boggle me. Talk about throwing gasoline on the fire.

• SHARES OF Freddie Mac (ticker: FRE) have been in freefall recently but Legg Mason has kicked off a buying spree at the mortgage lender, becoming its largest shareholder. On Monday Legg Mason (LM) disclosed it now owns 79,880,998 shares of Freddie Mac, or a 12.4% stake. At the end of the first quarter, Legg Mason owned 50,244,068 shares of the government-sponsored finance giant. (Adding 30M shares)

• Baltimore-based Legg Mason filed as a passive shareholder and listed July 31 as the date when it reached the ownership threshold triggering the filing. Previously Legg Mason had been Freddie Mac's second-largest shareholder, edged out by Capital Research Global Investors.

• Shares dropped to a 52-week intraday low $3.89 on July 11. Since then, the stock has made an incremental recovery, closing at $5.60 on Monday, down 30 cents.

• "Bill Miller is going to look like the smartest guy in the room or the dumbest," says Lon Juricic, president of StreetInsider.com, referring to Legg Mason Capital Management's chairman and chief executive. "He's outperformed for so many years, but the credit crunch has him scrambling. Obviously he must still see some value in [Freddie] because he keeps putting shareholder money in it."
• However, for Juricic, too many questions remain about Freddie Mac's future. "The question is will Freddie Mac be around in six months? When they go to raise capital, who's going to be there?" he says. "It's been trading like it's going to $0, and the Treasury hasn't detailed how they would structure any bailout, so there's concern that there's not going to be anything left over in the plan for common shareholders."

• Following the report, Friedman, Billings & Ramsey analyst Paul Miller cut his target price to $5 from $7 and maintained an underperform rating on the stock, estimating that Freddie Mac will need to raise $10 billion to $15 billion of capital.

• Miller’s Value Trust has lost a third of its value over the past year, Fortune’s Eugenia Levenson recently noted, weighed down by bad bets on Citi (C), Aetna (AET) and UnitedHealth (UNH) and hit by $2.4 billion in investor withdrawals.

So that's an interesting situation. A company with under a $5 Billion market cap (well under right now) needing to raise $10 billion... would need to tell its shareholders (if they use stock) we need to dilute you to the tune of 2:1. Meaning for every share you own we are going to issue 2. Is that cool with you? Somehow I think not.

While the equity markets continue its joy ride in the financials, the credit default swaps (a measure of risk) continue to devolve for the financials. Meaning the smart guys who sat in the back of the class with their calculators are increasingly worried while the rowdy jocks (and their computers) have ridden the equity up, up, and up the past month. I'll go with the guys in the back of the room.

Specific to Freddie we've spoken of the potential for these 2 Government Sponsored Entities to go bankrupt (effectively) at least for the common shares (debt will be protected by the printing press of the US government lest we lose all credibility in this world and bring the global financial system to its knees). Mr. Paulson now has his Congressional approved bazooka in which he can use your grandchildren's money to support the stocks (free markets and all).... but my thought is he will use your money to issue preferred stock which while in the interest of "fairness" destroy the common shareholder (read: going to $0). Now, last I checked 50M shares x $0 is no different than 80M shares x $0. But I'll check with those guys with the calculators to make sure my thesis is correct. While I admire Miller for continuing to run a concentrated portfolio this is an abject risk of shareholder money and smacks of desperation (my performance has stunk for years and I need a home run to get back).

I'm not the only one who believes this; none other than Bill Gross has said the same view.

• Bill Gross, who manages the world's biggest bond fund, said the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.
• ``By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it,'' Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. ``We'll be on our way toward a joint Treasury-agency combination.''
• Gross adds to a growing chorus of investors and analysts predicting U.S. Treasury Secretary Henry Paulson will need to use his newly won power to prop up Freddie and Fannie.
• Freddie Chief Executive Officer Richard Syron today told investors the company will wait for its stock to improve before starting its planned $5.5 billion capital raising. (you're going to be waiting a long time....)
• ``If they're unable to tap the markets to raise capital, we're talking a matter of quarters before the government has to step in,'' said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

This market is without memory and while we are busy partying over the dramatic drop in gasoline from $4.19 to $3.79 (woo hoo, the consumer is back!) not much at all has changed in the financial world, other than a government induced short squeeze of epic proportions [Jul 26: Government Ban on Naked Short Selling in 19 Financials Created the Greatest Short Squeeze of sll Time] and Merrill Lynch essentially paying someone (22 cents on the dollar but we'll finance 75% of the deal and if you lose money, we'll take most of the hit) to get rid of their CDOs [Jul 29: The Bottom is in Financials - Version 23,472]. The seals are clapping all this as good news, but the bond guys are mocking them. The bond guys have consistently been correct - each time the market ran off to a counter trend rally the bond market has stayed consistent and on even keel (read: negative) - both in fall 2007 (all time highs post Federal Reserve emergency cuts) and spring 2008 (post Bear Stearns) ... and now. So we know what followed those periods of disconnect between the bond guys and the equity guys. The equity guys were shown they were "wrong"... again. I continue to believe risk is high, and the Kool Aid consumption is even higher.

Now that the Kool Aid is thick in the air, and we seem to have a failed attempt on the S&P 500 to break back through the 50 day moving average - I've been adding back to Ultrashort Financial (SKF) in scale. Expect the attention sometime in the next 1-6 weeks to return to those financials, especially of the government sponsored type as the attention deficit disorder generation finds something new to fuss about once the oil crisis becomes boring for them to trade. A few more name banks should also be "IndyMac'ing" soon enough to capture the A.D.D. crowd's attention - hi Downey Financial (DSL)

Buy Freddie stock? When it acts like this even with all of King George's Horses and Men flailing to save it? You first. No.... I insist.

Long Ultrashort Financial in fund and personal account

Bookkeeping: Closing McDermott (MDR)

I wanted to sell McDermott (MDR) in the high $30s in after hours after that not so quality earnings report Monday night [Aug 11: Global Infrastructure Night: Fluor, McDermott Earnings] but we obviously do not have access to after hours in this vehicle. So instead we suffered through quite a loss as the stock spiraled down to $34s. Today we are getting a 7%ish rebound to high $38s so I am closing this 0.8% position.

We've held this since day 1 of the fund and we leave with a $6500 loss. Since this is a market not of individual stock but of sector, I won't feel bad if the stock rebounds because to the quant computers Fluor = KBR = Foster Wheeler = McDermott = Shaw Group = corn = oil = coal = fertilizer. It's all the same vehicle to them; individual stocks or individual sector dynamics mean nothing in this current era. So if oil goes down, all these will be sold and it doesn't matter what you own, Fluor showed us that yesterday after one of the best earnings reports I've seen this quarter - and down 12% as a result. McDermott - with a not so impressive quarter? Down 14% - woo hoo! So as you can see, there is no difference if you perform or don't perform - if you are in the wrong sector the algorithim returns conclusion: sell at all cost. And the trade is executed.

If oil goes up, then we still have some other names in this space to benefit. McDermott has now disappointed 3x in the 5 reporting periods I've held it so that's enough. Maybe "this" is the bottom since it just bounced off August 2007 lows (and is down by nearly half in a month since oil dropped by 20%), but quality of management and being able to trust them is half the battle, and right now I am tired of the constant disappointments. We have a solar stock we own that does the same thing and I'm near wits end with them; if they did not trade at 8 PE ratio for 100%+ growth they'd be "gone" as well.

Oh, by the way, the U.S. needs $1.5 TRILLION in infrastructure upgrades over the next 20 years but that's useless information - in the next 3 months the globe is slowing, so infrastructure stocks must be trashed since no one is an investor and everyone is a trader. Anything longer than 90 days does not matter because the money that moves markets is paid on 90 day increments, and we need to make our quarters to get paid! 20 years? That's for those old fogeys at mutual funds - haha "investing" - how quaint. Buy and hold? So old school.

• Southern Company Chairman and Chief Executive David Ratcliffe said Wednesday he expects as much as $1.5 trillion will need to be invested in new power plants, construction and other infrastructure over the next 20 years to meet the growing demand for energy.
• “We’ve got to invest in major capital and new infrastructure by some estimates over the next 20 years -- as much as a $1.5 trillion in new power plant, transmission and infrastructure,” he said, in an interview on CNBC. “It will be a challenging time to meet the growth of this economy.”

Long Foster Wheeler, Fluor in fund; no personal position until oil is over $250 because that's the only way global infrastructure works. Or until quant hedge funds say it's time to get in

Bookkeeping: Starting Mylan (MYL)

You can probably tell what direction we're heading by today's purchases. Mylan (MYL) is a very boring company in generic drugs. I could spend an hour talking about fundamentals but it means nothing; this is an asset allocation play - it's in healthcare and the stock broke a double top, and now pulled back to support, down 2% ish today so I'm starting a 1.25% stake in the $13.30s. Since this is a slow mover entries and exits are important.

(Please note the next few paragraphs involve fundamentals, none of which matter)

The generic drug story is easy to understand - the big pharma makers have drugs that come off patents and then a whole slew of generic companies fight over getting "first to market" copy cats and they sell it for a fraction of the cost. Competition is high, but we've seen some consolidation in the space with the big dog Teva Pharmaceutical (TEVA) buying Barr Pharmaceuticals (BARR) about a month ago.

• Teva Pharmaceutical Industries (TEVA), the world's largest generic drug company, said on Friday it would buy rival Barr Pharmaceuticals Inc (BRL) for $7.46 billion to expand its leadership in the U.S. market and fortify its presence in Europe. The price represents a 42 percent premium to Barr's closing price on Wednesday.

Mylan (MYL) has struggled (stock wise) with a large purchase of it's own; Merck KGaA's generics business. Mylan also has bought a majority stake in Indian firm Matrix. So the point being that the company is expanding globally, helping to offset stagnant US growth. But a ton of drugs are coming off patent in the next 3-5 years so there will be opportunity for all. But the more consolidation the better (less competition in the space).

Mylan had to take quite a hit to earnings and lowered guidance across the board after the acquisitions so 2008 EPS is pretty shoddy but analysts think they will rebound to about $1.00 next year - that gives you a sub 14 PE ratio (forward), for about 15% growth. TEVA is around a 15 PE ratio. Does it really matter? I find the value (relative to growth) rich but people don't want global growth companies growing at 40-70% for half the multiple of a generic drug maker so it is what it is. For those not named HAL 9000 here are the last earnings.

• Mylan previously had two reportable segments, the Mylan Segment and the Matrix Segment. With the acquisition of Merck Generics on October 2, 2007, Mylan now has three reportable segments: Generics Segment (or Generics), Specialty Segment (or Specialty) and the Matrix Segment (or Matrix). The former Mylan Segment is included within the Generics Segment.
• Total revenues for the quarter ended June 30, 2008 increased by $656.8 million to $1.20 billion from $546.3 million in the same prior year period. Approximately $669.3 million represents amounts contributed through the acquisition of Merck Generics.
• Total revenues from North America were $461.8 million for the three months ended June 30, 2008 compared to $455.0 million for the same prior year period, representing an increase of $6.8 million. Revenues of approximately $32.4 million were realized in North America in the current quarter as a result of the acquisition of Merck Generics. Excluding these amounts, total revenues decreased by $25.6 million from the same prior year period.
• Total revenues from EMEA and Asia Pacific, as well as revenues from the Specialty Segment, were all the result of the acquisition of Merck Generics. For EMEA, revenues for the quarter ended June 30, 2008 were $389.8 million, the majority of which are derived from the three largest markets; France, the United Kingdom and Germany. Total revenues from Asia Pacific were $141.4 million for the three months ended June 30, 2008, and were derived from Mylan's acquired operations in Australia, Japan and New Zealand.
• The Matrix Segment reported third-party revenues of $104.6 million for the three months ended June 30, 2008 compared to $91.3 million for the same prior year period, representing an increase of $13.3 million or 15%. This increase is the result of growth in the anti-retroviral franchise, with higher sales of both API and finished dosage form products, the latter of which Matrix began to produce and sell in late calendar year 2007.
• Gross profit for the three months ended June 30, 2008 was $414.2 million and gross margins were 34.4%. Gross margins were negatively impacted by certain purchase accounting items recorded during the quarter of approximately $112.1 million, which consisted primarily of amortization related to purchased intangible assets and the amortization of the inventory step-up associated with the acquisition of Merck Generics. Excluding such items, gross margins were 43.7%. Gross margins in the same prior year period, also adjusted to exclude certain purchase accounting items, would have been 57.7%. This decrease is due to the fact that, on average, the newly acquired Merck Generics entities, particularly in countries outside of the United States, contribute margins that are lower than those realized by Mylan's domestic subsidiaries.
  
• On a GAAP basis, primarily as a result of purchase accounting items, the Company reported a loss per diluted share of $0.03 for the three months ended June 30, 2008.

So let's review

1. Mostly stagnant revenue
2. Falling margins
3. Falling earnings per share

With this potent trio the stock is on fire. Why? It's in healthcare and that's all that matters in the market of "asset allocation means everything". I am being somewhat facetious and some of these issues are shorter term in nature - I won't add (edited for not nice words) type of stocks to the portfolio even if the market drives them up - I still want quality names - Mylan should rebound nicely in 2009 as the Merck line is better absorbed and it now has a much better global reach than 2 years ago.

But in summary, all the above is useless in the current market. Healthcare is where hot money is flowing and this should provide some buffer in what I think will be some rocky roads ahead. The chart below does not agree with my typical charting source, which shows the 50 day moving average at $13.30. So we had a double top broken, and now the stock has pulled back to a support level so using nothing but technicals, this is a buy. We continue to increase exposure to the hedge funds favorite area of the market. Until they abandon it and move to the next sexy flavor of the week/month/quarter. If they decide its time to move on and they've gotten sick of healthcare, and drop the stock below $12.75 we'll take a stop loss and move on.


Long Mylan in fund; no personal position

Bookkeeping: Cutting Mosaic (MOS) on 10% Bounce

I am very conflicted on these fertilizer names - they are ridiculously cheap on fundamentals but that has not stopped a relentless sell off. As I said a week and a half ago you now need to treat this group like financials, because the quant hedge funds do. [Cramer - Quants and their Machines] They get sold off relentlessly and then one day they turn on a dime - they get run up by the same quant hedge funds and then once the algorithms are done with their work, they move on to the next field like the locusts they are, leaving the stock for dead in its wake. That is a very a sad statement on the affairs of the market. I look at Mosaic (MOS) I see a stock that will be making $14 EPS in the year ending May 2009. That is a forward PE of 7.5 - for 100%+ growth.

But I have to sell it because HAL 9000 and friends will drive it to a 5 PE? Or 3? Can this really be all this market is about? If so, I say it's all pathetic. The growth in this name even if "global demand destruction" cuts its growth in half to 2/3rd is 30%. (I didn't know food was so "elastic" in demand, but that's the current theory) Or let's get crazy and say it turns from a 100% grower to a 15% grower, I'm still paying a PEG (PE to Growth) ratio of 0.5 at 15% growth. 1 is considered "fair value". Yet I should not pay "up" at 7.5 forward earnings for that? Most banks who have terrible prospects the next 3-4 years trade at higher multiples. The ones that still have earnings to speak of.

Again, I won't lie and say this makes any sense. It makes none. But I'm going to assume the stock breaks down after this bounce and falls lower as its trailing to the 200 day moving average ($105s). I hope I'm wrong as a matter of fact. For now I'm cutting this position back from 2.7% of fund to 1.5%. Every nerve ending in my body says this is "wrong" to do because it makes zero sense. But fundamentals mean nothing. Maybe we'll be lucky and we can get a forward PE ratio similar to say Wells Fargo (WFC) - hey 10x the growth for less multiple - and the stock can rally to $125 which is the 50 day moving average before being bludgeoned.

I don't know when sense returns to the market, but until it does we're sticking with the game plan, even if it could cause us to miss out on great fundamentals. Maybe this stock formed a double bottom with its mid March low of $90 and it booms from here. Since very little makes sense I'm just going the cautious route. Frankly I'm doing things that make little sense from a fundamental point of view - this is one of them.

Long Mosaic in fund and personal account

Bookkeeping: Beginning Stake in Sequenom (SQNM)

I've been tracking Sequenom (SQNM) for about a month now as the stock trades between $19-$23; following quite possibly one of the biggest runs I've seen post NASDAQ bubble days. In May this was a $7 stock.

This is a speculative play because there are no earnings and this is not a 2008 play, nor a 2009 play, most likely a 2010 or 2011 play. But this is one unique company and I wanted to start my position today; I have no idea what "fair value" is at this point but the potential in this company is enormous IF things go according to plan. Here is a company description

Sequenom Inc., a genetics and molecular diagnostic company, provides genetic analysis products that translate genomic science into solutions for biomedical research, molecular medicine, noninvasive prenatal testing, and livestock and agricultural applications.

In early June came a major breakthrough

• Sequenom, Inc. (NASDAQ:SQNM - News), a leading provider of genetic-analysis solutions, announced positive results from screening studies using the Company’s noninvasive circulating cell-free fetal (ccff) nucleic acid SEQureDx™ Technology, which enables the detection of fetal aneuploidy, including Down syndrome from maternal blood.
• The Company reported that in blinded studies performed at Sequenom involving approximately 200 clinical samples collected both prospectively and retrospectively, its proprietary test for Down syndrome correctly identified 100% of all Down syndrome samples (i.e. sensitivity or detection rate), without any false-positive outcomes (i.e. specificity). The studies conducted both prospectively and retrospectively, involved approximately 200 samples in both normal and high-risk patients. The blinded-prospective study involved 180 samples comprising 130 low-risk and 50 high-risk samples. The test correctly identified three Down syndrome samples without any false-positive outcomes. Of the 21 blinded samples analyzed retrospectively, the test correctly identified seven Down syndrome samples while also indicating no false-positive results.
• With currently available serum-testing options having detection rates between 70% to 90% and false-positive rates as high as 5%, SEQureDx Technology shows promise for significant performance advantages over the current paradigms for prenatal screening.
• “We are very pleased to be reporting substantial progress toward commercializing an important test to screen for Down syndrome that can be administered as early as late in the first trimester through a simple blood draw from the mother,” said Harry Stylli, Ph.D., Sequenom’s President and Chief Executive Officer. “Data from our blinded screening study for the detection of fetal aneuploidy indicate that the current version of our test has identified all Down syndrome samples without any false-positive outcomes. Also our coverage has improved to at least 93% of the U.S. population. Although these results require further validation in larger studies, such results using SEQureDxTM Technology can potentially transform current clinical practice for Down syndrome-risk assessment.”

So in a word, this "could" be huge. Essentially a much more accurate Down Syndrome's test - which can be administered in a non invasive way (blood test) versus current methods. The stock went from $7 to $13 within days of the announcement, took a little rest before going from $13 to $23. It just pulled back to $19 but I was hoping for a further pullback - instead its reversed on a dime and has jumped to $21 where I'm starting a minor stake (0.8% of portfolio). If it breaks to new highs we'll add more north of that level, or we'll add on pullbacks.

As for the Down's test; this is a relatively small sampling size and a larger test group is in process of which we'll get more data later this year and into 2009 (there is a huge 10K sampling to be done in 09). If all goes well, this could start generating serious revenue in 12-18 months. There is an analyst day on 9/23 which should also be a time to reveal more data.

That's not all. The company is also involved in 2 other tests - a fetus gender test and a Rhesus disease diagnostic test. The company recently reported earnings; but frankly it's all irrelevant right now to the future of these tests.

"Smart money" is piling in....

1. Ridgeback Capital Management now owns 10.2M shares with recent purchases right around this price. That's over 1/5th of all shares. They literally have been buying almost every day the past 2 weeks - based on their holdings they look to be a $500M hedge fund that specializes in biotech - with only about 20 positions.
   
2. RA Capital Biotech Fund now owns 5.2M shares as of mid July, along with what appears to be call options as well.

RA Capital Management, LLC is an investment advisor based in Boston specializing in the life-sciences and drug development sectors. Our team has been investing since 2002 and is comprised of professionals with training in biology, chemistry, and medicine and also has industry and business development experience at the executive and board levels. We invest in companies with promising technologies and products.

Further the CEO has been buying shares at recent prices. I consider insider buying to be a lot more important indicator than insider selling as the latter is the whole purpose of the greater transfer of wealth in America from the many to the few - so its status quo. Buying? Much more rare.

Again, fair value is unknoweable - this will trade on news and promise; outside our normal fare for the fund. But this is not an "FDA approval" type of "drug" story - I like these sort of diagnostic companies but by the time they are profitable they usually are worth a lot more than at this stage. Risks are 2 institutions now control 15.5M out of 47M shares - or this could be reward if they don't sell. Further risks are any negative testing results in the future. I would consider this a highly speculative position but one that could potentially be a very big winner if things progress.

Special regards to Zach for making my life easier, and providing some institutional research reports on this name once I identified it, so I can pretend to be halfway smart money as well.

Long Sequenom in fund and personal account

Bookkeeping: Creating a CRO Basket

I've been talking about these healthcare contract research organizations (CROs) for a long time, but aside from WuXi PharmaTech (WX) have not taken the plunge - to my chagrin. With the lack of market leadership ex-healthcare, this is one sector where I can at least believe in sustained growth over the long run unlike most of the groups being run up the past 5 weeks which are nothing more than a rotational trade, which will be abandoned once the hedge funds are done with it. So for our time line which is longer than that, we want to be focusing on items we can actually hold for the longer term, unlike say auto companies which are a current flavor of the day.

I'm adding 3 names to WuXi and considering this as "1 position" (4 stock basket) - since these stocks have had a huge run, I am not going in large to begin with and hoping for pullbacks - I'm cognizant of "chasing" here so don't want to overdo it to begin. I have a 8 names watch list (I forgot to add Charles River Labs (CLB) to the chart below; it is one of the larger players) and here is a simplistic chart of their stock prices, 08 estimates, 09 estimates, 08 forward PE ratio, 09 forward PE ratio and 1 year growth rate (09 vs 08)


So in green shade are the 3 names I am adding today. Please note we are starting small and hoping for pullbacks in all these names. These are not identical companies - they all specialize in different parts of the clinical trials, and have different strengths and weaknesses - but I'm a generalist (expert in nothing) so hence I take a basket approach. Some of these names I have followed for years - others are newer to me.

ICON (ICLR) - simply the best company operationally; I've owned this on and off over the past half decade. Irish firm. Highest valuation but they deserve it. $2.5B market cap.

"Can't Touch This" - every fall to the 50 day moving average is a buy on this chart

Kendle International (KNDL) - really surprised me last quarter with a heck of an earnings report - surprised the Street as well judging by the stock reaction. Bought on valuation since I can get similar growth rates for far lower prices. $700M market cap.

"Surprise Surprise" - I'd like to be a buyer on a pullback to the mini gap at $42 if plausible


Life Science Research (LSR) - this is my "reach"; a newer name for me and I am still doing work on this name as I am not as familiar with it as the rest, only on my radar for the past month but it's dirt cheap compared to peers. I was not "super" impressed with their last quarter but without access to research reports I am going off of future analyst expectations and they seem to have growth in line with the sector for 2009. This is the smallest in the group @ $500M market cap.

"We're Young, We're Tough and We're Cheap"


I also like Covance (CVD) and Parexel International (PXL) - the growth rate on the former is misleading - again I am not sure why exactly 2009 growth is so low over 2008 without access to institutional research, but it most likely is some anomoly associated with taxes or some one off type of situation. Their results have been very good of late, but I went with ICLR - and all things being relatively equal I always like the smaller company because they are easier to grow faster. (CVD $6B market cap versus ICLR $2.5B) Parexel just took off like a moonshot post earnings so I would like to buy it if it comes back to fill the gap.

"Another Powerhouse"
"Earnings Darling" - gap at $29 we'd love to buy


Pharmaceutical Product Development (PPDI) did not blow me away with the last earnings but a rising tide lifts all boats and it has upticked along with the group despite striking me as "eh".

"Eh - someone please notice us; we're in this sector too"


Some of our earlier posts in this group

1. [Aug 8: ICON Gets Some Love from Investors Business Daily]
2. [Jul 22: ICON - they Never Miss and Give us a Chance at Cheap Shares]
3. [Apr 14: Keep an Eye on... Parexel International]
4. [Mar 12: WuXi PharmaTech - Very Good Earnings]
5. [Feb 21: ICON with a Solid Report]

Kendle's latest earnings here

• Net service revenues for the three months ended June 30, 2008, were $127.0 million, an increase of 30 percent over net service revenues of $97.8 million for the same period a year ago. et service revenues from the June 2, 2008, acquisition of DecisionLine Clinical Research Corporation (DecisionLine Clinical Services) accounted for approximately 2 percent of the growth in net service revenues.
• Net income per diluted share for the second quarter 2008 was $0.52 per share, up 79 percent from net income per diluted share of $0.29 for the same period of the prior year.
• Income from operations for the three months ended June 30, 2008, was $16.1 million, or 12.7 percent of net service revenues, compared to income from operations of $10.9 million, or 11.1 percent of net service revenues, for the same period of the prior year.
• Net service revenues by geographic region for second quarter 2008 were 45 percent in North America, 44 percent in Europe, 8 percent in Latin America and 3 percent in the Asia/Pacific region.
• New business awards for second quarter 2008 were $204 million, which represents a 24 percent increase over the same quarter last year.
• The net book-to-bill ratio was 1.4 to 1 for the three months ended June 30, 2008.
• For the full year 2008, Kendle is now projecting net service revenues in the range of $490 to $500 million and earnings per share on a diluted basis of $2.00 to $2.15. Kendle previously had projected net service revenues in the range of $450 to $460 million and earnings per share on a diluted basis of $1.90 to $2.07.

Life Sciences Research's latest earnings here

• Revenues for the quarter ended June 30, 2008 were $64.3 million, 10.5% above the revenues for the same period in the prior year of $58.2 million. Excluding the effect of exchange rate movements, revenues increased 11.1%
• Operating income for the quarter ended June 30, 2008 was $10.0 million, or 15.6% of revenues, compared with $7.5 million, or 12.9% of revenues for the same period in the prior year.
• Net income per common share was $0.58 for the quarter ended June 30, 2008 compared with $0.43 for the quarter ended June 30, 2007. Net income per fully diluted share was $0.47 for the quarter ended June 30, 2008 compared with $0.36 for the quarter ended June 30, 2007.
• Net new orders totaled $70.2 million for the second quarter of 2008. This represented a book to bill ratio of 1.09 for the quarter.
• At June 30, 2008 backlog (booked on work) amounted to approximately $202 million.
• Most exciting now is the prospect of needing to consider facility expansion beyond our current footprint, which we believe will support our near term growth to the $320 million level, as we strive to match the longer term business growth expectations of our customers.”

I began all 3 positions today with 0.5-0.6% type of stakes so as a group of 3 they make up 1.7% of the portfolio. I am hoping for pullbacks to build this basket higher. WuXi PharmaTech (WX) reports after the bell today - I'll decide after I see that if we'll keep holding what has been a dog for us, or punt it in favor of an American firm.

Long WuXi PharmaTech, ICON, Life Sciences Research, Kendle in fund; no personal position

Thinking is Not Rewarded in this Market - Deere (DE) is Case in Point

I have to sort of snort at the results from Deere (DE) this morning and then look at the damage in our portfolio. We tried to be very selective in our "agriculture" exposure - when I closed out a competitor of Deere's back in January, I wrote in the piece [Jan 25: Closing Agco (AG)]

So despite the very good valuations in this group, I am going to stand aside for now and re-assess. I like the fertilizer names far more than the equipment names because equipment has issues such as higher input costs (steel, petrol products, etc) that affect margins negatively, whereas the fertilizer names are simply immune to just about everything.

So I was early on this call, and accurate. Before Deere reported in May I wrote [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]

On this week's earnings preview I wrote this in regards to Deere (DE):

Major ag equipment player Deere (DE) - I don't own the equipment stocks anymore; at some point the rising cost of steel, petrol products and the like will be hurting the bottom line unless they can pass all the costs along to farmers - over the next year if inflation does not abate this is the type of company who could see profit margins squeezed simply from the constant increase in input costs.

That was accurate then, and it continues to be accurate now as seen by today's results by Deere (DE) which has the stock down 10%.

• Deere & Co (NYSE:DE - News), the world's largest maker of farm machinery, reported a lower-than-expected profit in the latest quarter and said raw material costs would hurt profits in the fourth quarter, sending shares down 6 percent in pre-market trading.
• Like manufacturers everywhere, Deere and its rivals have been complaining about rising raw material prices, especially for steel. Analysts have said their ability to pass on prices to customers is key to the companies' long-term outlook.

This is an example of why this market has been so frustrating. Intellectually I believe I nailed this call by avoiding equipment and staying in fertilizer stocks, which frankly have shown no signs of slowing down, and have been able to raise prices far above the rate their input costs. While that mattered in January through June 2008 - the fertilizer stocks continued to romp while the equipment stocks faltered badly - it has not mattered one iota the past 2 months. So despite squirreling out a trend, and being correct on it, we've been punished just the same the past 60 days. In summary it has not mattered what homework you did, you just have to make a sector wide bet (regardless of fundamentals in the sub sectors of the sector) and either be "in" or "out" of the entire "group" - the market is not discerning between the individual niches of the sector. So fundamental homework is useless and everything continues to be about 'sector allocation'.

I am seeing many examples of this across our portfolio holdings and it is making for an exasperating experience of late for a person who relies on fundamentals.

No position

Option ARMs - Who Thought Up these Time Bombs?

The title of this entry is a rhetorical question. We know the Wall Street answer is: "some genius who made many of us many many many hundreds of millions... did I say millions... I meant billions - until the house of cards fell over - but we still got ours."

I always relay the story of certain articles that really woke me up to the housing bubble - 2 of them included

1. Some punk kid (ok ok he was somewhere in his early 20s and I was envious) who was a mortgage broker in Vegas, who was making 100s of thousands a year churning out mortgages, driving fast sports cars... WHILE flipping houses on the side (I believe from memory he owned 8-9 at time of the article) and
   
2. When I first read about option ARMs in a BusinessWeek article.

Now thanks to the power of Google I found the former story - May 30, 2005 - Riding the Boom. Honestly I just re-read it for the first time in 3 years and it's even better now than when I first read it - worth your time so you can spot the "next" bubble. Ah, the dream of milking the American system as told by Zareh Tahmassebian.

I read about the option ARM as the cover story October 2006 [Nightmare Mortgages] Another absolute read...

As to the latter article - what's an option ARM you ask? Well after Alan Greenspan lowered rates to HISTORICAL lows, the golden era of adjustable rate mortgages was birthed. Why adjustable? Because despite historical low fixed rates you could only buy so much house at each income level with fixed rates in the 5% ranges. So we needed to find something more to qualify more buyers and goose home prices.... adjustable rate mortgages were the hot thing. But when adjustables with 10% or 5% down disqualified too many people we moved to a new era - the 0% down adjustable rate mortgage. This was dangerous territory - keep in mind the adjustable rate was many times at a teaser rate far below the "future rate" once it adjusted upward. Now I'm a well read person so I knew about this part - but not until I happened upon the BusinessWeek article did I learn about a new invention - the option ARM. This was for the person they could not qualify at 0% down, with teaser rate. So the Frankenstein was created - a mortgage where you don't even pay enough to pay down interest - at the end of each month, you make your payment, and the difference between what you would pay on a normal mortgage and what you paid on this mortgage is added to the principal. Meaning you OWE more on the house each month. Ridiculous you say? Nope! Not if the home price goes up every month, preferably at an annualized rate at 20% a year as we know all homes do! It's GENIUS. (on Wall Street)

The super cool part is we package these loans, mix them up with a bunch of other mortgages, sell them to "super smart" hedge funds with "sophisticated risk" models - along with institutional buyers across the world - and call it a day. Everyone wins.

Until the fan hits the bleep and then bounces off the wall and hits the fan again. So *THIS* is why when EVERYONE last summer (except for a very small select group of people who were pointed to as outcasts and doomsdayers) said it's "only a subprime problem", I was writing this is NOT a subprime problem. Subprime is the tip of the iceberg - it's a symptom... in fact it would be the first to cleanse itself and we'd be rid of this class of homeowner who frankly in most cases should never of gotten a loan in the first place. They will default quickly.

The insidious groups are the Options ARMs, the Alt As, and the "prime" borrowers (best of breed) who had to stretch way above their head just to buy a home in many of the top 10 hottest markets since they were priced out property - due to all the others clamoring in with Uncle Alan's easy money. And so we'll have wave after wave of defaults - the primes are just now beginning - if you don't believe me, just read through JPMorgan (JPM) highly respected CEO's (Jamie Dimon) comments from last quarter. And this is why there is no "recovery" coming in a few months, or when gas hits $3.25. We have systematic risk; and many many banks will be in trouble before all is said and done. Subprime? Heck we're probably 80% of the way through with those guys - they were just the canary in the coal mine. Get ready for the next waves - we'll begin with the Option ARMs. And so we're here now. Read on. And where will the capital come from as these mortgages begin to default in waves? Oh I know - printing presses. Go buy the dollar - it's going to be a "safe haven" since we are not as bad off as Europe. Surely as a trade it will work - but as anything steeped in fundamental reality of true strength: not so much.

• Borrowers with $25.4 billion of option adjustable-rate mortgages owe almost as much as their homes are worth, and one in eight is at least 90 days late on payments, according to Countrywide Financial, the lender bought by Bank of America last month. Option ARMs let borrowers skip part of their payments and add the balance to principal.
• As of June 30, the typical borrower owed 95 percent of the value of his home, up from 76 percent when the loan was made, Countrywide said in a regulatory filing
• Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent.
  
• The average FICO credit score dropped to 680 from an original 715, but topped the 620 that some analysts deem a cutoff for "subprime." The data show how the nation's housing crisis has hurt borrowers with good credit (free markets WILL solve everything in the end, but really do we need to go through this mess and hurt so many people? Yes we do - because regulation has become an evil word under certain political party banners)
  
• Countrywide's $25.4 billion of option ARMs at its banking unit represent about 28 percent of total mortgage loans held for investment.
• Lenders industrywide have said many borrowers who owe more than their homes are worth are abandoning their properties because they don't expect to recoup their losses. (revenge of the sheep) [Feb 29: Faced with Mortgage Default, some US Homeowners Walk Out]
• "People still don't understand what a catastrophe this is," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics of Torrance, California. (buy bank stocks, gas is going down to $3.50 and they are 'safer' than companies growing earnings 50%+; the stock market is all knowing and can discount the future perfectly - see all time highs hit October 2007 as example of its predictive prowess)
• But sinking housing prices and relaxed underwriting standards left many people with negative equity in their homes, leading to a surge in foreclosures.
• Bank of America is not the only big lender with option ARM headaches. Wachovia (WB) said borrowers in its $122 billion "Pick-a-Pay" option ARM portfolio owed 85 percent of what their homes were worth on June 30, up from an original 71 percent. In California's Central Valley, the average was 109 percent.
• Countrywide said borrowers of 83 percent of its option ARMs got their loans with little or no documentation of their income.

So let's review. Banks need to be bought because this is the upteempth bottom. We need to trust these executives who have told us for each quarter (4 in a row) it won't get worse than this, and they don't need to raise capital. Meanwhile in 2 banks alone we see $150 BILLION (that's with a B) of option ARM mortgages where the balances on the principal have been RISING for the past 2-3 years, instead of receding like a "normal" mortgage would. And that's the situation is home prices stabilized where they are TODAY, and fell no further. And that's if job losses stopped where they are TODAY, and fell no further.

So against that backdrop let me give you the saving grace: gasoline prices will fall 40-60 cents, saving people $25 a week. They can throw that against their mortgages and that solves the whole problem. Or so say quant hedge fund computers per the price action the past 7-8 weeks.

Now that you understand, please go get yourself some bank stocks because "it can't get worse" and "it's all priced in" ... or any early cycle stock because we'll be out of this non-recession soon. Very soon. Since all that matters are gasoline prices - the magic elixer. Oh wait. Did I mention the Alt A loans [Mar 19: Alt A Mortgages Beginning to Break Down] and Prime Loans that are just now beginning to go bad? Oops.

I can't stress again what we've allowed to happen - essentially the NASDAQ tech bubble has been overlayed on top of the housing sector. So now it effects us all - and it's poison has infected countries worldwide. How this gets solved in 13 months is beyond me but that's the current Wall Street fantasy. The one we'll be sold each time the market rebounds off oversold levels, and banks rally 60-75% in 6 weeks. Once the Kool Aid wears off, they are just better shorts the higher they rebound. This will keep working - until one day the housing market truly settles as people make transactions at prices that make sense for both buyer and seller, and are based on a normal ratio to incomes. We're not close.

So please take the time to read about Zareh Tahmassebian, at 22, the proud owner of 8 houses on his own, and 7 more with a partner throughout Arizona and Vegas in 2005, and extrapolate over the many Zareh's out there and who exactly is going to be buying all these abanonded "investor" homes on top of the growing foreclosed home inventory... even if gasoline goes down to FREE. Unicorns. Mermaids. CNBC pundits dreams of "6 months everything will be fine". All Kool Aid.

[Jun 8: Newsweek - Why It's Worse than You Think]
[Apr 4: Late Payments on Consumer Loans Highest Level in 16 Years]

Fluor (FLR) to Hedge Fund Computers: The World Does Not End at $110 Oil. Or $80. Or $50.

Have to love the Fluor (FLR) - probably had this contract sitting in their back pocket considering they just announced earnings yesterday, without mention of said contract. The market completely destroys their stock on "more fears of the future" and they come out with a $4 billion contract. Nice. Now instead of being down 12% on stellar earnings, they are only down 6%. (we consider that an up day around here) Boo Yah.

• Fluor Corporation (NYSE: FLR - News) announced today that the company was awarded multiple contracts by BP America for its Whiting (Ind.) Refinery modernization project. Fluor is responsible for overall program and construction management, engineering, procurement, fabrication and construction. For this phase of the modernization project, Fluor will book $3.8 billion into backlog in the third quarter of 2008.
• Fluor recently completed front-end engineering and design and began detailed engineering and construction in July 2008 with a projected completion date of fourth quarter of 2011.
• When complete, the modernization project will increase the Whiting facility’s gasoline production by 1.7 million gallons per day and will equip the refinery to process increased amounts of secure Canadian crude oil.
• Fluor spokesman Keith Stephens says the upgrade will allow the Whiting, Ind., refinery to process higher sulfur grade petroleum that for the most part is from shale in the western United States and oil sands of western Canada. (this is not necessary with oil heading back to $12 a barrel)
  

This sort of great news should support the stock for ... at least 2 hours. Before the computers begin the relentless selloff on the "I don't believe contracts, they will all be cancelled and who needs refineries anyways" thesis. Anyhow, it's all just a bit surreal right now. No matter what is said by these companies, the computers sell it off and their microprocessors argue "none of it matters because as the world slows ex-USA the demand for everything will falter and it will be cancelled anyhow. We are forward looking machines and know better than humans."

And so it goes. Again - fundamentals are for old fogeys. Frankly, I don't know what to buy anymore - 90% of the stuff working is based on a complete hoax that $3.25 gas will fix the US economy (driving consumers back to auto dealerships, stores, Las Vegas, and flying all over the world with their new and improved dollar - which after faltering for nearly the entire Bush presidency is up a whopping few weeks and thus is marking a new era), while simultaneously ruining the economies of every other country in the world (i.e. no global growth). Back to the dart board (blind folded of course) it is!

Long Fluor in fund; I would be long Fluor in personal account at these prices except who needs refineries anyhow

Bloomberg: One Third of New Home Buyers in Past 5 Years now Underwater

This is something we've long predicted as we called the current period, the year of the 'walk away' - when people got into homes they should not be in, and like any rational person see no sense in continuing to pay for an asset that is depreciating in value - especially when the 'free market' decided we can now buy $300K assets with "no money down!" So they have nothing invested (many mortgages even threw the closing costs into the principal! as long as you had a pulse you're in!) So many walk away - after sitting in house "rent free" for a while of course. Leaving some ghost towns. [Aug 4: WSJ - After the Bubble, Ghost Towns Across America] Or in the older neighborhoods, pockets of blight. (always a good thing for property values, no?)

As foreclosures mount this figure will only grow since we are still not getting market clearing prices in many of the (once) most overheated markets - many of the transactions, blog readers who have been around for a while will recall, are foreclosure sales - hence the "uptick in sales which clearly marks the bottom - for the 23,125th time" everyone is getting breathless about. [Apr 26: Bankrate.com - Average Joe Still Can't Afford a Home]

So if, as I believe, home prices in much of the nation continue to fall for another 18 or so months (if not longer) and we put millions more underwater - many of which have outstanding home equity lines, how much recovery will we have from gas going from $4.10 to $3.25. Again, the "logic" of some of this trading is simply untenable.

• Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.
• Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes.
  
• For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.
• Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage.
• `It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.''
• In Stockton and Modesto (California), more than half the sales in the second quarter were of foreclosed homes, Zillow said. Almost 15 percent of sales nationwide were foreclosures, the company said.
• The median home price of $206,919 was the lowest since the fourth quarter of 2004, the company said. [Dec 6: What Should Median Housing Prices be Today?]

[Jul 10: Foreclosure Activity Map]
[Mar 25: WSJ - Wave of Foreclosures Drives Prices Lower, Lures Buyers]

Cramer on Infrastructure Stocks

I am once again aghast at the reaction to Fluor (FLR) earnings - either we are heading for the type of global recession no one can fathom or the hedge fund liquidations are continuing hot and heavy. And if its the former, trust me, buying anything in the US just because "we'll be the first to recover" is simply a fool's game. I continue to ask where the next leadership group will be if we are going to bludgeon these names with true earnings power and a global growth bent - sorry a market led up by retailers, financials, and airlines in an economy that is just now really beginning to face a recession is not an arguement I am buying for any period of time (other than an oversold bounce). I'll take responsibility for being "wrong" the past 7 weeks but we've seen similar rallies last fall and early spring on "hopes for a US recovery" before the bottom fell out. I contend we'll see another, and the higher this "junk" rallies the better for the eventual shorting opportunity.

As to the infrastructure stocks - as always it is not the news, but the reaction to the news that matters. This reaction is awful but in this day and age I can no longer tell if its selling by humans or simply algorithms selling, so hard to 'read' anything into the reactions. But this is simply a market like no other - I continue to see the type of awful reactions reserved for stocks that completely miss earnings, while the companies missing earnings are rewarded with 30-50% gains in a month. I know its all "buy the loser thinking since everything reverts to a mean" but the velocity and relentlessness of said moves is beyond compare of anything I've seen in 12+ years. Company after company, we are seeing entire years worth of gains disappear... and these are not the ones with exposure to subprime or systematic risk. Again, either they are telegraphing the type of global recession where we want to own nothing but gold or this is just massive liquidations in the hedge fund community.

I am copying this from Cramer simply because it pretty much summarizes my thoughts tick for tick. I wrote yesterday

As for Fluor (FLR) it is making a valient effort to hold the 200 day moving average ($77) but its peer group is being systematically dismembered since the world is heading for the abyss ... err the world ex the US of A which will thrive as it decouples from the rest of the world. The stock is trading near $80 in after hours but we have to keep a very tight leash on this because if the stock breaks down, it has potential to follow the death spiral of its peers. Despite the fundamentals

I'll point out below I continue to be perplexed by Foster Wheeler - it posts similar growth numbers to Fluor but trades at 14x instead of 24x earnings. Backlog is not growing quite as fast, but why it trades at such a discount is a great question.

Cramer writes

Foster Wheeler (FWLT - commentary - Cramer's Take), Fluor (FLR - commentary - Cramer's Take) and McDermott (MDR - commentary - Cramer's Take) are in free fall, and while I was disappointed in McDermott's earnings, I am miffed that FWLT and FLR, which had really great backlogs and earnings, can't get any support at all here.

Fluor, first of all, guided up very big, one of the biggest I have seen, so for this stock to be down 10% seems absurd. Foster Wheeler now trades at less than one time its backlog, a solid backlog put on mostly when oil was substantially lower, so there is almost no chance of cancellation.

Yet nobody cares because of the price of crude.

This is a market that loves and hates with such passion that you have to ask yourself if this is the moment when you have to start buying and putting away stocks that sell at valuations that make no sense unless oil is going to $60, which is how I feel with these two.

It is also how I feel about National Oilwell Varco (NOV - commentary - Cramer's Take), with an order book that, again, is the envy of the industry and, again, just needs natural gas above $7 and oil about $70 to make the numbers for at least the next three years.

Unfortunately, the pain of sticking with stocks like Fluor and Foster and National Oilwell is beyond the ken of most mortals.

These are not dot-coms. There is some worth here. But nobody cares. One day they will. The trick is to remain alive and in the game until they do, because we know, from the banks, that when they turn, and they will turn because their businesses are, long term so excellent and steady, you will not be able to get into them. You will, by nature, be too late.

Sometimes you have to lose some big money to make some bigger money. That's how I feel about these stocks at these levels.

But boy do I feel lonely.

Bookkeeping: Another Layer Out of Fuel Systems Solutions (FSYS)

Winners have been few and far between of late - one bright spot has been Fuel Systems Solutions (FSYS). Consistent with my layer in (and out) approach I am taking another layer out today on the nearly 8% move up to high $56s. I'm reducing FSYS to a 2.8% stake from 3.8%.

The stock is starting to get rich here, even on my "aggressive" (ex-items) $2 EPS target for 2008. [Aug 7: Fuel Systems Solutions - Monster Quarter but Impairment Charge will Confuse] Analysts have a $1 EPS target. But since fundamentals mean nothing to me anymore we'll let the sweet chart keep talking. If we get mid $60s we'll take another layer out. Otherwise we are buyers on material pullbacks.

[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

Zhongpin (HOGS) - Very Good Earnings but No One Cares

We continue to wallow in stocks growing 100% a year but trading at 10-15x forward earnings.... watching the junk of the market, in some cases growing 5-15% and in some cases shrinking, being run up 30-40-50%, while some of our holdings die on the vine is an exercise in frustration.

Zhongpin (HOGS) put out yet another astounding quarter but if a company executes in a forest and its doesn't have subprime, American consumer, or fuel cost exposure does anyone care? We've held this stock for quarters now and the stock price has barely budged. Maybe when it trades at forward P/E of 6 on 100%+ growth it can go up 5%. Or if it goes into the airline business.

• Revenues increased $73.8 million, or 116.0%, to a record $137.5 million from $63.7 million in the second quarter of 2007. The significant increase in revenue was due to increases in prices and sales of the Company's pork and pork products resulting primarily from increased sales to food services distributors and to restaurants and non-commercial customers. (keep in mind one facility in Sichuan province was closed for a month during the quarter due to earthquake)
  
• During the second quarter of 2008, the volume of pork products sold increased 47.7% from the second quarter of 2007. For the quarter, chilled pork sales increased 118.7% to $71.9 million from $32.9 million in the second quarter of 2007. Sales of chilled pork accounted for 52.3% of net sales during the quarter, up from 51.6% a year ago. Revenue from frozen pork was $49.0 million, up 120.5% from $22.2 million in the second quarter of 2007, accounting for 35.6% of net sales compared with 34.9% in the second quarter of last year. Prepared pork products increased 121.2% to $13.2 million from $6.0 million in the same period a year ago. Revenue from fruits and vegetables, which accounted for 2.5% of total revenues, was $3.4 million, up 30.9% from $2.6 million in the second quarter of 2007.
• Gross profit in the second quarter of 2008 was a record $17.1 million, up 109.2% from $8.2 million in the second quarter of 2007. Gross margin was 12.4% in the second quarter of 2008 compared to 12.8% in the second quarter of 2007. The slight decrease in gross profit margin during the 2008 period was primarily due to an increase in the cost of raw materials, which was offset, in part, by an increase in the market prices for pork products.
• Income from operations for the second quarter of 2008 was $9.3 million, compared to $5.0 million the second quarter of 2007. Operating margin for the quarter was 6.8% compared to 7.8% for the second quarter of 2007
• Net income for the second quarter of 2008 was $8.5 million, or $0.29 per fully diluted share, up from net income of $4.2 million or $0.20 per fully diluted share, in the second quarter of 2007. (share count increase is hiding incredible bottom line growth)

Outlook - Financial

• Zhongpin is confident in its ability to meet guidance for full year 2008 revenues in the range of $490 million and $520 million, gross margin between 12.6% and 13.0% and net income between $30 million and $33 million, or between $0.98 and $ $1.07 per share, assuming a fully diluted share count of 30.7 million shares outstanding. This guidance excludes the impact of any future acquisitions.

Outlook - Business

• Zhongpin has an aggressive capacity expansion plan to meet the growing demand for high quality pork products in China. Zhongpin's new facility in Luoyang City, Henan Province has begun production and this new facility is expected to ramp up to over 70% utilization rate by the fourth quarter of 2008. With the addition of the Luoyang City facility, Zhongpin now has a total annual capacity of 391,560 metric tons for chilled and frozen pork, excluding outsourcing from OEMs. The Company is currently building a chilled and frozen pork facility in eastern Henan Province in Shangqiu City, which is expected to begin operations in the fourth quarter of 2008 and will expand annual capacity for chilled and frozen pork by 80,000 metric tons.
• The Company's new prepared meat facility at Zhongpin's Industrial Park located in Changge City, Henan Province is on schedule to begin production in the third quarter of 2008. This facility will add 28,800 metric tons in annual capacity of prepared meat, a 114% increase over Zhongpin's current capacity of 25,200 metric tons, bringing total capacity of prepared meat to 54,000 metric tons. In addition, Zhongpin plans to expand and upgrade its production line for fruits and vegetables in Changge City, Henan Province. The new lines will expand Zhongpin's production capacity for fruits and vegetables by approximately 30,000 metric tons annually and will begin production in the fourth quarter of 2008.

Another case of triple digit growth at forward P/E of 11.

[May 12: Zhongpin Reports Earnings]
[Mar 25: Zhongpin Earnings]

Here is what you get in this market for quarter after quarter of 100% growth in this market... zilch

Long Zhongpin in fund; no personal position

China Medical (CMED) Announces Convertible Notes Offering

We simply cannot catch a break of late; everything we touch turns into (fool's) gold... China Medical announces a Convertible Notes Offering driving down the stock 8%

• China Medical Technologies, Inc. (the "Company") (Nasdaq: CMED - News) today announced that it intends to offer, subject to market and other conditions, $150.0 million aggregate principal amount of convertible senior notes due 2013 and American Depositary Shares, or ADSs, which are being purchased by affiliates of the underwriters of the notes offering pursuant to ADS issuance and repurchase agreements with the Company.
  
• The Company intends to grant to the underwriters of the notes offering an option to purchase up to an additional $22.5 million aggregate principal amount of notes to cover over-allotments.
• The Company intends to use the net proceeds of the notes offering, after deducting underwriting discounts and offering expenses, for general corporate purposes and for the acquisitions of businesses, products and technologies that the Company believes will complement its existing business.

EDIT @ 11:30 AM: The stock has dropped all the way down to its 20 day moving average (-10% for the day) so I bought more there, the position is now up to a 3.8% allocation of the fund.

Bookkeeping: Some Adjustments to Solar Patch & New Position in ReneSola (SOL)

With the new information from Yingli Green Energy (YGE) [Aug 6: Yingli Green Energy] and LDK Solar (LDK) [Aug 11: LDK Solar (LDK) Crunches Estimates] I am making an adjustment to the "Chinese solar" basket I've created

1. 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)
2. Based on the strength of LDK Solar (LDK), I upped the stake in the mid $39s to a 1.7% of portfolio. If my estimates for 2008 are accurate they could be doing a $3 EPS year, conservatively that should generate a $60 stock price by December 2008 (with a 20 PE ratio) or 50% upside from here, even after today's big move.
3. 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.

Last quarter results here

• Net revenues for the first quarter of 2008 were US$123.0 million, an increase of 28.0% sequentially and 242.4% year-over-year. The increase in first quarter revenues was primarily attributable to an increase in output from the expanded production capacity and increasing wafer ASPs.
• First quarter 2008 gross profit was US$27.2 million, a 38.8% increase sequentially and 234.1% year-over-year. The gross margin for the first quarter 2008 was 22.1% compared to 20.4% in the fourth quarter of 2007.
• The increase in gross margin was achieved despite an increase in average feedstock costs of 21.0% sequentially and was primarily attributable to a further reduction in silicon consumption rate to 6.3 grams per watt from 6.5 grams per watt in fourth quarter of 2007, a continuing reduction in non-raw material related production costs and an increase in wafer ASPs due to the high demand for our wafer products. (this is key in a high polysilicon cost environment)
• First quarter 2008 net profit increased 1.2% sequentially and 160.6% year- over-year to US$17.7 million. Earnings per ADS $0.30 basic and $0.28 diluted.
  
• The first quarter foreign exchange loss was US$0.06 million compared to foreign exchange loss of US$1.2 million in the fourth quarter of 2007.
• Production Output 66.5 MW, increase of 29.6% from 51.3 MW in Q4 2007, and ahead of 62 MW guidance

Second Quarter Outlook

• We anticipate production output to be in the range of 75 MW to 80 MW in the second quarter of 2008 compared to 66.5 MW in the first quarter of 2008 and 23 MW in the second quarter of 2007.
  
• Gross margin for the second quarter of 2008 is expected to remain stable.
  
• On April 17, 2008, we increased previously issued full year 2008 production output to 310 MW to 320 MW and revenue guidance to US$530 million to US$550 million for 2008. We are once again increasing our outlook for full year 2008 and expect production output to be in the range of 330 MW to 340 MW with annual net revenues of approximately US$570 million to US$590 million.

Much like LDK Solar they are planning on a polysilicon production facility to bring down their raw costs

• ReneSola announced on November 19, 2007 that it planned to develop a polysilicon manufacturing facility with an annualized capacity of 1,500 tons in Meishan, Sichuan province, China. With a substantial pipeline of wafer sales secured under various long term contracts and strong customer interest in signing further long-term contracts, ReneSola has decided to increase the previously announced 1,500 tons of annual polysilicon manufacturing to 3,000 tons on the same site in Meishan to secure more in-house polysilicon supplies.
  
• Land leveling has been completed and construction has commenced with completion expected in early 2009. The facility is expected to be operational in the first half of 2009. As part of the project, ReneSola has signed purchasing contracts and made down-payments for major capital equipment from world-class international equipment suppliers.

Production Capacity Ramp

1. With our current facilities reaching full capacity and strong customer demand for additional wafer sales contracts, ReneSola is pleased to announce a further expansion in its wafer manufacturing capacity to 1,000 MW by the end of 2009. (that is a staggering increase from current levels if they hit this level, a tripling of production in 16 months from today)

On the negative side ReneSola already has a huge share count (more than LDK Solar) despite a much younger life, and already has done one dilutive share offering - there is potential for yet another which always hurts earnings PER share. But, the earnings potential is still explosive, and if they lowballed any of their numbers they could beat estimates significantly in the coming quarters. The ability to reduce silicon consumption to 6.3 grams is also key. Any further reduction would be excellent. At the current guidance of $1.29 EPS for 2008, if one could generate a 20 PE ratio that equals $25.80 or essentially 100% gain from here. Is a 20 PE ratio outrageous for companies growing 100%+ a year? I think not - especially when the market is rushing to put that sort of multiple on retailers growing 12% a year just because gas prices are dropping from $4.10 to $3.70. Where the sense is in this market - is beyond me.

There are many many many moving parts in solar so it is hard to estimate anything out 6 months to a year. Prices fall, prices rise, polysilcion supplies are always a worry, government subsidies are always a worry, this or that always causes hand wringing. But if both LDK Solar and ReneSola can do what they are guiding for - you should see 2 companies who are wringing out a lot of cost (by bringing a lot of polysilicon production in house) causing gross margins to expand significantly WHILE ramping revenues. So far the market could care less as these stocks have been bludgeoned but one day earnings potential has to recognized by this market. When that day comes is anyone's guess.

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

LDK Solar (LDK) Crunches Estimates

As I said in our earnings preview for the week

LDK Solar (LDK) - complete crap shoot with any of these solar names around earnings. The sector is out of favor is the overriding theme. In the 2 years or so I've been in these stocks this is the longest I can remember absolutely no rally in the group.

You just never know with these guys - they can be up 25% or down 25% within minutes of their earnings report. In LDK Solar's case it's "up" (20%). The chart did not signal much before hand...
We don't own a major stake since we've taken a basket approach to the sector so we won't benefit much but it's nice to see news to the positive and hidden within the outstanding numbers are some other good news items. I continue to find valuations in this sector, for those of you who believe in P/E ratio to growth, as simply absurd but that has not stopped the stocks from a continued selloff and general abandonment.

LDK Solar earned 82 cents versus the Street's estimate of 42 cents. So the $1.70 2008 estimate immediately jumps to $2.12 and obviously one can argue next quarters 41 cent estimate looks silly as does the 50 centish 4th quarter. There is a good chance for $2.75 in earnings in 2008 for LDK Solar - even taking into account the $40 price tag in after hours that is under 15x forward earnings if the $2.75 is good. If you go with analysts ($1.70 + $0.40 beat) = $2.10 the forward PE ratio = 19. For triple digit growth. Instead people are flooding into retailers and restaurants (and autos and airlines and financials) for similar PE ratios... for 1/10th the growth. Because thats what the quant hedge funds say is "the truth".

• LDK Solar Co Ltd (LDK) on Monday posted quarterly earnings that blew past Wall Street estimates as a manufacturing capacity expansion allowed the company to sell more solar wafers, sending its shares up 19 percent in extended trade.
• LDK's second-quarter revenue was $441.7 million, well above the company's May forecast of $278 million to $288 million. (I'd say)
  
• Second-quarter net income rose to $149.5 million, or $1.29 per American Depositary Share, from $49.8 million, or 45 cents per ADS, a year ago. Excluding the change in fair value of prepaid forward contracts, the company earned 82 cents a share, according to Reuters Estimates. Wall Street analysts had been expecting earnings of about 40 cents a share. (actually .42 per Yahoo?)
• Gross profit margin for the second quarter of fiscal 2008 was 25.4% compared with 27.7% in the first quarter of fiscal 2008 and 35.2% in the second quarter of fiscal 2007. (don't like this trend down but it should be transitory before a major expansion in 2009/2010)
  
• In recent months, however, investors have shunned solar stocks due to fears that an expected pullback in Spain's generous solar subsidies could hamper demand. (as we know the whole world revolves around 1 country) ThinkPanmure analyst Peter Peng said much of the second-quarter demand for LDK's solar wafers likely came from Spanish solar system installers who are scrambling to finish projects before a cap on subsidies goes into effect. (and here we go with the Bad News Bears)
• "There is a pull for the Spanish integrators to get projects in by September, but even beyond that most of these solar companies are seeing very, very strong demand for 2009," Peng said. "There is a possibility that Germany, Italy and potentially France and other smaller markets could offset the loss of market size in Spain." (nice words from an analysts - I'm floored)
• Average selling prices on the company's products were up 10 percent from the previous quarter, as it was able to pass along the high cost of their main ingredient polysilicon. (as Paris would say "that's hot" - and surprising)
• LDK also began selling wafers made from upgraded metallurgical silicon during the quarter, ahead of schedule. Upgraded metallurgical silicon is less pure, but also less costly, than standard electrical grade silicon. (very positive)

Outlook Change - the variance is laughable in magnitude

• LDK raised its full-year revenue outlook to between $1.65 billion and $1.75 billion. It had previously expected revenue of $1.08 billion to $1.18 billion for 2008.
• For the full year, LDK said wafer shipments are expected to be between 750 megawatts and 770 MW, up from a previous forecast of 560 MW to 580 MW for the year.
• The company's 2008 gross margin forecast was unchanged at between 23 percent and 28 percent.

Plant Update

• LDK said construction of its polysilicon plants remained on schedule.
• LDK said it was on track to produce between 100 tonnes and 350 tonnes of silicon in 2008, and next year plans to produce between 5,000 and 7,000 tonnes.

Polysilicon Costs

• LDK Chief Financial Officer Jack Lai said on a conference call with analysts that the company's silicon costs should improve in the fourth quarter. (that's very positive since it weights on these stocks like a piano)
  

Look, if restaurant stocks and clothing stores deserve forward P/Es of 16-19, I don't care if oil goes to $60 - much of the rest of the world moves to alternative energy because they don't want to be in the same pickle the U.S. has now twice put itself through (1970s, late 2000s). This company is (with no growth from this quarter) going to put up a $2.75 year - so let's call it $3. By simply putting a "clothing store" P/E ratio on it you are talking mid 50s. But companies growing triple digits generally get higher P/E ratios than companies selling sandwiches, at least in the market I grew up in. But maybe not in this era. If you dared give a company which can grow 30-50% year over year for the next 3-5 years a PE ratio in the mid 20s, you'd dare to dream of $75. I know, it sounds crazy - I come from the old school where earnings actually drove stock prices. Maybe one day humans will win out over computers again.

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. But this whole sector tends to trade together so perhaps its just a moot point - throw a dart. That's what the market does.

[Jul 2: Restarting LDK Solar]
[May 12: LDK Solar - Good Earnings but Worrying Margins]

Long LDK Solar in fund; no personal position

Global Infrastructure Night: Fluor (FLR), McDermott (MDR) Earnings

Two of our infrastructure stocks reported tonight with mixed results - Fluor (FLR) continues to hit home runs, and is up 5% in after hours, while McDermott (MDR) did not report what the market liked and is down 5%. We have a slightly larger exposure to Fluor so net net, we'll break about even if the knee jerk reactions in tonight's after hours are any indication.

At $42 McDermott trades at 14x 2008 earning estimates, or about HALF of what Buffalo Wild Wings (BWLD) trades at (just trying to point out the wide discrepancies among totally disparate sectors). Fluor, along with Jacobs Engineering Group (JEC) always carries a high premium to the peer group and is at 24x 2008 earnings estimates. McDermott is now trading at levels seen a year ago; if the $40 level does not hold, technicals say we are heading to $35; if that does not hold we go back to early 2007 prices of $25... despite far higher earnings. If the $40 level DOES hold, then one could make a claim for a double bottom

As for Fluor (FLR) it is making a valient effort to hold the 200 day moving average ($77) but its peer group is being systematically dismembered since the world is heading for the abyss ... err the world ex the US of A which will thrive as it decouples from the rest of the world. The stock is trading near $80 in after hours but we have to keep a very tight leash on this because if the stock breaks down, it has potential to follow the death spiral of its peers. Despite the fundamentals I'll point out below (p.s. we don't use the f word around here anymore - I am only posting earnings reports for historical reference so we can look back at laugh at the era when they mattered)

1) McDermott earnings - revenue was a bit light, and earnings were in line. Power & Gas division continues to be the area of strength as it has been in the past. [Apr 29: McDermott Issues Warning] Backlog was flattish which is something we keep an eye on.

• McDermott International, Inc. (NYSE:MDR - News) (“McDermott” or the “Company”) today reported net income of $177.5 million, or $0.77 per diluted share, for the 2008 second quarter, compared to net income of $149.4 million, or $0.66 per diluted share, for the corresponding period in 2007.
• McDermott’s revenues in the second quarter of 2008 were $1,792.6 million, an increase of 26.4 percent compared to $1,418.1 million in the corresponding period in 2007. The year-over-year improvement in Company revenues was primarily the result of a 50 percent increase from the Offshore Oil & Gas Construction segment.

2) Fluor earnings - beat on top line and bottom line and raised guidance (AGAIN) Fluor continues to earn its premium. Oil & Gas and Power segments are the lion's share of the growth - Government and Industrial were flattish, while Services grew nicely but is a small dollar amount.

• Revenue rose by 37 percent to $5.8 billion, up from $4.2 billion in the second quarter of 2007, driven primarily by significant growth in the Oil & Gas and Power segments.
• Net earnings rose 119 percent to $209 million, or $1.13 per diluted share, compared with $96 million or $0.53 per diluted share for the same period last year.
  
• Operating profit for the quarter more than doubled to $392 million, compared with $187 million in the second quarter of 2007. All business segments contributed to this positive result by posting solid growth in profit over last year.
• Second quarter results included a pre-tax gain of $79 million, or $0.26 per diluted share, from the sale of its joint venture interest in the Greater Gabbard Offshore Wind Farm project.
• Operating margins rose to 6.8 percent, reflecting improvement in all segments. Excluding the Greater Gabbard sale, operating margins were 5.4 percent, up from 4.4 percent a year ago.
• New project awards for the second quarter were a record $6.4 billion, compared to $5.8 billion in new awards a year ago. The quarter included a $1.8 billion award for the Greater Gabbard Offshore Wind Farm power project in the United Kingdom, which will provide carbon neutral, renewable electricity for more than 415,000 homes [May 16: Fluor as a Wind Play? $1.8 Billion Says Yes]
• Consolidated backlog rose to another new company record of $33.0 billion, up 28 percent from a year ago and up $1.5 billion over the prior quarter. (the market says all/much/most of this will go away once oil goes back to where it was... last August)

Outlook

• “We are encouraged by the strength of our financial results to date, and see substantial opportunity for the balance of the year,” said Chief Financial Officer Mike Steuert. “As a result, we are increasing our full year guidance for Earnings Per Share to a range of $3.65 to $3.80 per share for 2008.” This compares with previous guidance of $3.30 to $3.45 per share after adjusting for a two-for-one stock split that was effective on July 16, 2008.

[Jul 9: Fluor vs Perini - a Rising Tide does not lift all Boats]

Looking forward the question is to keep McDermott or not - while growth is nothing special, the valuation is quite low. I don't have a Value Line Survey in front of me but I could estimate it's somewhere near the lower end of its range. Considering I like the business prospects of Foster Wheeler (FWLT) slightly more than McDermott and it now trades at the same forward multiple (on faster growth) I'll probably exit McDermott. Both FWLT and MDR have similar destroyed charts. [Aug 6: Foster Wheeler - Solid Numbers]

I continue to be perplexed by Foster Wheeler - it posts similar growth numbers to Fluor but trades at 14x instead of 24x earnings. Backlog is not growing quite as fast, but why it trades at such a discount is a great question.

Long all stocks mentioned in fund; no personal position

Singapore Exports to Decline as Asia Braces for Deeper Slowdown

I don't have a problem in the sell off in commodities on the global slowdown thesis - heck we were proponents of this thesis when everyone was slapping the "decoupling" scenario in our face. In fact we closed some of our Asian ETFs this spring just for that reason [May 23: Smaller Asian Countries Begin to Buckle Under Oil - I'm Closing iShares Singapore (EWS)] Even then as I was buying the very unpopular Ultrashort Oil & Gas (DUG) - which is now very popular of course, I wrote...

While I'm a near term energy/commodities bear [Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas (DUG)] my comments are more longer term in basis. Essentially we are going to go through years of "World of Shortages" in which commodities trail upward on a long wide slope, punctuated by some dramatic selloffs and bubble like runs up. (of which we have just seen one). But at some point as we've been pointing out, it stops making sense to build things due to commodity costs - either steel [Fast Rising Steel Prices Set Back Big Projects] or energy. Only "not truly free markets" are in fact holding us up - Asian and Middle Easterners willing to pay almost any price to keep their growth going. This cannot continue forever or at any price. This is a major distortion and few countries can keep this up or their budgets will be blown up (we don't mind that in the United States of Subprime; we just will print more money to "fix things" when we have massive deficits) - however not every country is so irresponsible so we now are beginning to see the first signs of economics trumping the distortions in the smaller Asian economies. Now if China/India follow suit a lot of things will be changing in this world.

So I get the global slowdown thesis - I just don't get the "buy US retail, auto, consumer discretionary" thesis as the counter balance to the global slowdown. I realize huge amounts of investment money need to go "somewhere" and by default much of it is heading in these directions but from a standpoint of "sense" - there is very little in this trade. Unless we are already discounting out 2+ years to the "recovery".

Bloomberg reports about the slowdown thesis - where are all the decoupling experts who CNBC trotted out all fall and winter? No where to be found....

• Singapore said its exports will fall this year for the first time since 2001, as the city-state joined its neighbors in signaling a deepening economic slowdown. The island's trade promotion agency today lowered its forecast for exports this year, saying they will drop between 2 percent and 4 percent, from an earlier estimate of a 2 percent- to-4 percent growth.
• Gross domestic product increased 2.1 percent from a year earlier in the second quarter, after expanding 6.9 percent in the previous three months, the trade ministry said today.
• The U.S. housing recession that has roiled financial markets is hurting export demand and threatening expansion in a region the Asian Development Bank says will account for more than a fifth of global growth this year.
• ``U.S. consumption is declining sharply and the outlook for export demand will remain weak until 2009,'' said Takayuki Urade, head of Asia economics at Nomura Holdings Inc. in Singapore. (so U.S. consumption is declining sharply but to make any money in this stock market I need to buy US discretionary stocks - got it - only in the stock market does this make sense)
• Australia's central bank today said it expects a ``significant moderation'' in domestic demand that will cut economic growth by half and drive up unemployment.
  
• Japan last week said the world's second-biggest economy is ``weakening'' for the first time since 2001. The country's exports fell for the first time in more than four years in June as growth in shipments to Asia and China eased, signaling the U.S. slowdown is spreading to the emerging markets that helped sustain expansion. (did I miss the Japanese economic "strength"?)
• ``Weaker growth in the major economies, coupled with the need to contain inflationary pressures, will dampen growth in the fast-growing Asian economies,'' Singapore's trade ministry said today. It ``expects the electronics industry to remain soft in the second half of 2008, reflecting weak demand for semiconductors.'' (but I'm supposed to buy technology as the anti-oil trade - even as demand slackens worldwide. Got it.)
• South Korea on Aug. 7 said growth in Asia's fourth-largest economy is easing as consumer spending slows and higher fuel costs stoke inflation. An expansion of 4.8 percent last quarter was the weakest annual pace since the start of 2007. (but as oil goes down, all our problems go away - it's working in the US, why not S. Korea? Aha, the U.S. is the land of magic)
• The Reserve Bank of India last month lowered its economic growth estimate for the year ending March 2009 to 8 percent from a range of 8 percent to 8.5 percent as inflation at a 13-year high erodes spending by consumers and companies. (but Indian stocks were booming last week as oil falls?)

Conclusion: Logic. Check it at the door when it comes to investing in this manic stock market.

Long Ultrashort Oil & Gas in fund; no personal position

Bookkeeping: Starting Buffalo Wild Wings (BWLD) Position

Panera Bread (PNRA) and Buffalo Wild Wings (BWLD) are both favorite places to eat, are reasonable cost places to eat for those who don't want just "fast food" and now have excellent charts. Both look like good purchases for the fund, and I've owned both these over the years in personal account, but I went with the latter - it's a bit more expensive but a higher growth rate and less saturated across the U.S. - but that is really irrelevant - it's all about charts anyhow.

We started Buffalo Wild Wings with a 2.5% stake in the low $38s. Much like the airlines, or any retailer at this point we face the danger of "chasing" a stock after a huge move - but this price action seems relentless - I thought the same thing a few days ago and only watch these stocks move up and up. Right now the name of the stock is immaterial - be it a casino, clothing store, or restaurant - it's all "one big trade" - the anti-oil trade.

For those few of you who still delve into the black magic arts... otherwise known as fundamental analysis.... here is why, unlike the junk that is flying up 25% a week, I can at least (somewhat) sleep at night with BWLD in the portfolio. Keep in mind chicken prices should appreciate considerably in the year ahead but the market could care less right now. You do have to respect the fact they can continue to see strong same store sales growth in a down economy.

• Restaurant operator Buffalo Wild Wings Inc (BWLD) posted a 46 percent rise in quarterly profit, beating market estimates, and said it was confident of achieving its targets for 2008, sending its shares up 13 percent.
• Several initiatives like stores remodeling and marketing the company has taken appeared to be working and boosting sales, Morgan Keegan & Co Inc analyst Destin Tompkins said by phone.
• The operator of Buffalo Wild Wings Grill and Bar restaurants earned $5.6 million, or 31 cents per share, for the second quarter ended June 29. It reported a profit of $3.8 million, or 22 cents per share, last year.
• Total revenue rose 29 percent to $97.9 million, said the company
• Same-store sales increased 8.3 percent at company-owned restaurants and 4.5 percent at franchised restaurants. Buffalo Wild currently operates 521 restaurants in 37 states.
• Average weekly sales for company-owned restaurants rose 10.7 percent to $40,572 for the second quarter, while franchised restaurants averaged $46,390, up 5.4 percent from the year-ago period.
  
• "(Chicken) wing prices remained relatively low during the quarter and at least to date, have not increased. So, they continued to be favorable for the company," Tompkins said.
• For 2008, the Minneapolis-based company said it was confident of achieving its targets of net earnings growth of 25 percent, revenue growth of 20 percent, and unit growth of 15 percent.

Jul 30 Barron's Article
Jul 30 WSJ Article

Valuation is very rich at 27x forward earnings but since people don't want fertilizer at 7x forward earnings we need to pay up for the hottest stocks in the market ;) Aye carumba. We continue to make quite serious changes to the fund - until people wake up and figure out lower oil prices are signaling serious weakness in global economies - this is the "trend" to ride. The 1 year high is $42 so I'd expect the stock to stall out there.

Long Buffalo Wild Wings in fund; no personal position

The "Turn" Appears to be Here

Very positive action today after surpassing S&P 1290 [S&P 1290 is our Moby Dick]. Still 2 hours to go but any close over 1305 or so would make us happy campers from the long side. (need to stress - we need to close above that level; not simply trade over it during the day) I've continued to reduce exposure (unhedge us) from the short side; now we just need to actually find stocks on the long side that go up, instead of down.

EDIT 3:40 - Did we just see the biggest head fake of the past... week? Hmm.. now trading below 1300, and gave back 10 S&P points in 2 hours. This market won't give anything up easily - going to be an interesting few days to see if we can continue the trend


With this sort of action we can potentially see a move all the way back up to the 200 day moving average (1370 and falling) although not at the pace we've experienced the past few sessions. Or maybe we will, everything happens in lightning speed nowadays. When we get there will revisit the dark side of the market as this rally is yet another hoax in my opinion. Our troubles do not go away just because crude oil is lower.

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

It is truly amazing how the entire world has changed by a 40 cent drop in gasoline prices - headed to 65 cents. One has to ask why are we not taking serious steps to stop us from being hostage to oil prices when we can see how our entire economy, and system of capitalism dies at $4 but revvs at $3.50.

At some point in the future we'll wake up from this dream state, look across the bed to the stock laying next to us and think "what were we thinking?" - but for now the party is on. Laggards are leaders.

Note to self on June 20th your sarcastic self wrote

Can we only be half a week away from the first breathless talk by Maria or Erin about how serious Ben is about slaying the inflation beast? Laughable - but we'll play along. If/when crude every does take a break (say $120?) then we can also hear about how gas $3.75 instead of gas $4.15 is going to mean the consumer will be piling into the malls. Crude $100? Gas $3.25? Time to buy airlines! SUV makers! Hurry!

Note to self: listen to yourself next time

EZCORP Down 8% on Termination of Value Financial Deal

Have I mentioned this is a tough market :) When it rains...

EZCORP (EZPW) is down 8% as Value Financial Services terminated a deal that would of been accredative to EZPW. In the near term it would of added 1 cent to EPS, and this termination will cost nearly a million to EZPW.

• EZCORP, Inc. (Nasdaq: EZPW - News) announced today that its efforts to acquire Value Financial Services, Inc. have ended. As announced on June 5, 2008, EZCORP entered into an acquisition agreement with Value Financial Services, Inc. This past weekend, Value Financial Services, Inc. notified EZCORP that they elected to terminate the agreement.
• Commenting on the termination of the acquisition, President and Chief Executive Officer, Joe Rotunda, stated, "We are disappointed that Value Financial Services has elected not to move forward with the transaction, which I believe would have been beneficial to shareholders of both companies. Despite our disappointment, I continue to be energized about our growth prospects in each of our business segments.
  
• With the termination of this acquisition, we expect to take a charge of approximately $900,000 for transaction related expenses in our September quarter. As a result of this charge and the lack of an anticipated $0.01 per share benefit from the acquisition, we are lowering our earnings guidance for the quarter and fiscal year ending September 30, 2008 to $0.34 and $1.18 per share."

The stock is down to the $15.60s and thus far is holding its 50 day moving average just above $15.50. If we can hold this range I'd like to add - one could construe this as a slight negative to the long term because more stores = more growth, but this reduction in quarterly and full year guidance by a whopping 1 cent is not worth losing $50 million of market cap. But fundamentals mean little and a previously impeccable chart could have some holes blow into it with today's action.

EDIT: Essentially doubled position in the $15.60s, will stop out of this position below $15.00. Up to 2.6% stake

Long EZCORP in fund and personal account

Sandridge Energy (SD) - Speechless

Sandridge Energy (SD) is (was??) one of the top holdings of many of the smartest hedge funds around when J over at Market Folly last looked (3/31 holdings). This is a natural gas play with some great lineage (think Chesapeake Energy (CHK)). I wrote this "way back" on Jun 1 - how quickly things change in this new era.

The other name for you natural gas junkies, and Chesapeake Energy (CHK) fans [May 1: Today's Interesting Reads -> Meet Mr. Gas] is Sandridge Energy (SD), which I've heard of from a couple of places now. First one of our readers, "Madhatter" has a blog where he breaks down some large hedge funds holdings and this name came up when he was analyzing Lone Pine Capital's (Steven Mandel's) holdings, so that perked my attention since I'm on the lookout for interesting natural gas plays. Then the Motley Fool reports the CEO was the cofounder of CHK, so in this type of business you want management who has this level of experience. [May 12: A Chip off the Old Chesapeake] CHK's CEO is infamous for buying stock, he does it in good times or bad which shareholders just have to love - and it looks like Sandridge's CEO Ward is of the same cloth.

I can only guess said hedge funds are puking this position out - I have nothing intelligent to add to this picture.

I will be VERY interested to see these hedge funds updated holdings - both their 6/30/08 holdings and 9/30/08 holdings. My guess is they held the position on 6/30 but began puking it out the past month. We are definitely seeing the signs of capitulation - again, at some point there is "value" in these stocks being systematically destroyed but you simply do not want to get in the way right now - people buying Friday after the nearly 20% loss, thinking they caught a great price, simply are being blown up today. It is dangerous to one's capital right now to even think of buying a commodity stock - just the mere act of thinking about it is costing people 2-3% return ;)

No position

F5 Networks (FFIV) Up 25% in a Week

In my search for technology exposure to add to the portfolio last week, I almost added back F5 Networks (FFIV), a former fund holding [Sep 26: Closing F5 Networks] The chart was fantastic

Then I did something stupid. I thought. And I used fundamentals. Big mistake.

(1) I thought on the macro level, will their business really change now that oil is down? Will businesses suddenly report a surge in network spending? Nah. If anything this economy is slowing and businesses will cut back as that happens.

(2) I quickly reviewed the last earnings report - nothing special.

• Network equipment maker F5 Networks Inc (FFIV) reported a 12 percent decline in quarterly profit as it was hurt by higher expenses.
• For the third quarter, its net income was $19.1 million, or 23 cents a share, compared with $21.8 million, or 26 cents a share, a year ago.
• Total revenue rose 25 percent to $165.6 million, but was offset by an almost 34 percent jump in operating expenses.

(3) I quickly reviewed the valuation, $0.86 EPS for 2008 = forward PE of nearly 40x. Very rich for 20% growth. (PEG ratio of 2!)

So I made the worst mistake possible last Friday - I used my brain. Instead I should just think like a computer and make it simple "Chart good = buy"

Today it is up another 5%. Hedge funds want technology - at any cost. Declining earnings, rich valuations, shoddy growth, economy in US degrading - that is for humans to worry about.

Lesson learned. Next time - don't ask questions. Don't think. Thinking costs you money. Look at pretty picture. Buy when pretty picture looks good. End of story.

No position

Bookkeeping: Capitulating on Coal

Commodities obviously continue to be "liquidated" by HAL 9000 and friends, so I need to take some actions to shore up the hemorrhaging. I've cut back the fertilizer quite a bit, and it remains my favorite theme so I don't want to cut much more. Note - I'm not buying because these stocks are in free fall and if PE of 10 why not PE of 5. Who knows where the selling ends.

I am going to instead cut some coal which is inane considering the price for coal (the actual commodity) stands like a fortress as compared to oil but since they are both black and hence HAL 9000 cannot discern between the two - they get sold off. I am hoping my capitulation marks the bottom. I am cutting back 2 names to the bone.

First, Massey Energy (MEE) - the stock has broken the 50 day moving average ($70) and seems like it has a date with destiny at the 200 day moving average ($50). It is in no man's land now in the $57s. So I'm going to take my ball and go home and take it down to a 0.3% stake.

Second, Walter Industries (WLT) - all things considered this stock is holding up. Why? Probably the homebuilding exposure - no, I'm serious. [May 1: Walter Industries - the Most Fascinating Company] Or perhaps there is some back office buyout deal in the works - we'll never know. But the question is, is it going to simply follow the path of Massey Energy or is this relative strength signaling something? Either way I am not going to stick around at this moment to find out - the stock broke its 50 day moving average in the low $90s and the 200 day moving average is ... in a galaxy far far away. I've taken it down to a 0.4% exposure.

One day, these stocks will act like broken homebuilders, retailers, financials, airlines, auto stocks - and make a huge bounce off an oversold level. And people will pile in and yell at us that this bounce signals the return of the global economic boom. We'll know its nothing more than HAL 9000 and his thousands of brothers across NYC/CT buying. But for now, it appears there is no end to the liquidation so we don't want to stand in front of the freight train any longer; we've already handed back a ton of unrealized gains.

I'm willing to sacrifice for the team - perhaps my selling marks the bottom. I am even reading coal bears (read: human beings) say enough is enough and they are covering but this is a new era. Valuation means nothing. Only hedge fund computers piling in and out matter. And they seem intent on getting out - at any cost. Humans are so 1990s.

Long Massey Energy, Walter Industries in fund; no personal position

Bookkeeping: Adding to Apple (AAPL). Amazon.com (AMZN), Adobe (ADBE) Breaking Out

We've been talking about buying strong charts and anything starting with the letter "A" in technology is now moving - even Agilent Technologies (A)?

We mentioned last week we'd increase exposure in Apple on a move above $170 or its 50 day moving average. While I feel like I am going to somehow get burnt on this trade, I am sticking to my "system" and adding Apple (AAPL) here north of $171. We've taken it up to 3.3% of the portfolio. I'd like to see it clear low $180s which is old resistance to get real constructive - again I am still a bit uneasy here - we will need the market to remain bullish for this trade to work. If it drops back below $164 we'll cut back and take some small loss. Or... that "double bottom" in the mid $150s might, in retrospect, been a screaming buy signal. We'll only know in when we look back in a month or two.

Another "breakout" chart is Amazon.com (AMZN) - in the old days when oil went up every day it was a clear play on the US consumer will be too poor to drive to the mall and hence will order like mad from home. Now with oil headed back to $20 or below, I don't know what the play is other than quant hedge funds want technology. It's booming today and broke through a clear resistance area of $85 where it topped out multiple times.

EDIT: Here is the Amazon.com driver

• Citigroup said on Monday that Amazon.com Inc's (AMZN) Kindle electronic book reader appears to be selling much better than expected and could double a previous estimate for units sold this year, sending shares in the online retailer up 9 percent.
• With few cool new gadgets expected on the market, the Kindle could be one of the top electronics gifts of the upcoming holiday season, along with Apple Inc's (AAPL) newest iPhone, Citigroup said.
• "Turns out the Kindle is becoming the iPod of the book world," Citigroup analyst Mark Mahaney wrote in a note to clients. He kept a "buy" rating on the share.
• Mahaney estimates Amazon will sell up to 380,000 Kindles in 2008, up from a previous forecast of 190,000, noting that adoption rate would be similar to the first year of sales for Apple's media-playing iPod. He sees Amazon selling up to 150,000 Kindles in the fourth quarter alone.
• Mahaney also expects Kindle and related revenue of more than $1 billion by 2010, compared with a previous view of $400 million to $750 million.

A little Adobe (ADBE) breakout anyone?


Long Apple in fund; no personal position

2008 Olympics 4x100M Freestyle - the "Amazing Race"

"Amazing" is a term used far too often, but this was among the most amazing sporting events I've seen. The French were trash talking pre-swim, and were heavily favored. In the first leg of the race multiple world records in the 100M distance were set as Michael Phelps did 47.5; an Australian in the same leg bested that at 47.2. The U.S. took the early lead but the French came back and had a sizeable lead in the last leg - the announcers had given up and were talking how so many teams had broken the world record and the U.S. did well with the silver.

Then watch the last leg: 46 seconds. The order of magnitude of that time versus anyone else is unfathomable. The end is classic; unfortunately most of the east coast missed it as it was post midnight. Amazing stuff!

Click on "U.S. Men win 4x100 free relay"

Exclusive Summer Olympics news & widgets at NBC Olympics.com!

Fund Holdings Earnings Preview for the Week

This continues to be one of the most surreal earnings seasons I can ever remember - stocks with lousy results bid up on the thought that "when oil comes down everything will improve for everything not related to oil" and many stocks with fantastic results smashed down because "those results are backwards looking and as the globe devolves into anarchy who needs commodities?" Yet a world in anarchy of course needs malls, autos, and lots of plane tickets ;)

We are now through the vast majority of the S&P 500 companies - now we generally deal with (mostly) smaller fare and a lot more foreign companies. I will wonder how next earnings season will fare as the dollar strengthens because as we've been pointing out the past few quarters much of the US multinationals "strength" has been export growth and "currency gains". For all those banging the drumbeat of a stronger dollar, one must ask what happens when companies begin to miss because those currency gains disappear into the ether. And the bigger question - while I realize the thesis (which we pointed out last winter) for the eventual dollar rebound is be "everyone else stinks, but we stunk first and hence will rebound first, and relatively speaking our stink is improving" - how does a country whose government sponsored entities (who everyone seems to forget about) hang by a lifeline - and quite possibly will need a massive capital infusion in the coming months - be considered a strong currency? I won't even touch on entitlements because that is SO far past the timeline of trigger happy hedge funds, nor crumbling infrastructure, nor the next round of stimulus etc etc - all that is going to require a lot of printing of dinero. Anyhow - we can't be bothered with details like that.

On to earnings...

Monday
Global infrastructure company Fluor (FLR) - quite possibly one of the best positioned companies in the coming 5 years - with their hands in wind, solar, petrochemical - you name it. But with oil headed down all these projects apparently will get cancelled - although all its peers have reported completely the opposite. But the market, in its all powerful "looking ahead 6 months" is telegraphing a wave of cancellations as the world devolved into the already mentioned Mad Max environment. Fluor just continues to sign contracts worth a billion here, or a billion there - and the stock keeps getting pummeled. The stock broke down below its 200 day moving average last week and hence is thus in the File 13 pile.

LDK Solar (LDK) - complete crap shoot with any of these solar names around earnings. The sector is out of favor is the overriding theme. In the 2 years or so I've b