NYT: Running a Hedge Fund is Harder than it Looks on TV

I wondered what had happened to Ron Insana - one of the few voices of reason on bubble TV (CNBC)

• Do you remember a time, only a short while ago, when virtually anybody could start a hedge fund? It seemed so easy: billions of dollars were being thrown around like confetti, even at first-time managers. You could make money with your eyes closed. Or so it seemed.
• Ronald G. Insana was one of the people who chased that dream. Yes, that Mr. Insana — the man who spent more than a decade as one of CNBC’s most prominent anchormen, interviewing some of the biggest titans in business and trying to make sense of the daily gyrations of the market.
• In March 2006, Mr. Insana left the network to try his hand at becoming one of those titans, setting up a fund to help investors get into hedge funds, a so-called fund of funds. Two weeks ago, Mr. Insana announced that he was throwing in the towel.
• One of the big raps against hedge fund managers is that their fee structure is so rigged that managers can get rich even if they never make a penny for investors. Eric Mindich, the former Goldman Sachs whiz kid, left the firm in 2004 to start Eton Park Capital Management and immediately raised more than $3 billion. His firm charged a 2 percent management fee and 20 percent of the profits with a three-year lock-up — handing him a $60 million paycheck before he even opened the door.
• But most hedge fund managers aren’t like Eric Mindich. They don’t start off with $3 billion and they don’t put out their shingle with a guarantee of riches. Instead, they’re like, well, Ron Insana.
• In his role as manager of Insana Capital Partners, he would act as a kind of hedge fund middleman, directing money to various hedge funds. His clients would be invested in SAC Capital, managed by Steven A. Cohen; Icahn Partners, managed by Carl C. Icahn; or the Renaissance Technologies Corporation, run by James H. Simons, perhaps the most successful hedge fund manager on the planet. These funds are typically closed to the public.
• In exchange for getting his investors behind the velvet rope, he charged a 1.5 percent management fee and took 20 percent of all profits. That may not sound like a bad deal — but consider that those fees come on top of the fees charged by the hedge funds themselves. In the case of Mr. Simons, in particular, the fees are astronomical: a 5 percent management fee and more than 40 percent of the profits. (as an aside Mr. Simons fund is the biggest quant fund on the planet and probably causing a lot of our unease - he employs more HAL 9000s than you can shake a stick at) :)
• Over the course of more than a year, Mr. Insana raised about $116 million. It was a respectable number, to be sure, but it wasn’t $3 billion. And here is where Mr. Insana ran into trouble. As an investor, Mr. Insana didn’t exactly have the wind at his back. During the 14 months his fund of funds was up and running, the Standard & Poor’s 500-stock index fell more than 15 percent. While some hedge funds managed to eke out gains, many did not. Ultimately, Mr. Insana’s fund lost 5 percent.
• In the mutual fund business, beating the S.& P. would be more than enough to survive, and even prosper. Mr. Insana would have been a hero. But the hedge fund business is far more cut-throat. For a small fund like Mr. Insana’s, it is imperative to make money regardless of whether the S.& P. is up or down — and because he didn’t, the 20 percent portion of his fee structure was worth nothing.
• That left his management fee, which amounted to $1.74 million. (That’s 1.5 percent of $116 million.) On paper, that may seem like a lot of money. But it’s not. Like many first-time fund managers, Mr. Insana was forced to give up about half of the general partnership to his first investor — in this case, Deutsche Bank — in exchange for backing him. After paying Deutsche Bank, Insana Capital Partners was left with only about $870,000.
• That would have been enough if it was just Mr. Insana, a secretary and a dog. But Mr. Insana was hoping to attract more than $1 billion from investors. And most big institutions won’t even consider investing in a fund that doesn’t have a proper infrastructure: a compliance officer, an accountant, analysts and so on. Mr. Insana had seven employees, and was paying for office space in the former CNBC studios in Fort Lee, N.J., and Bloomberg terminals — at more than $1,500 a pop a month — while traveling the globe in search of investors. Under the circumstances, $870,000 just wasn’t going to last very long.
• Finally, most hedge funds have something called a high water mark. It requires hedge fund managers to make investors whole before they can start collecting their 20 percent of the profits — regardless of how long that takes.
• In the end, the rock was simply too heavy for Mr. Insana to keep pushing uphill. On Aug. 8, he sent a letter to investors explaining why he was closing shop.
• He said he planned to take a job with his pal Mr. Cohen at SAC. (not a bad place to end up)
• In truth, there are thousands of Mr. Insanas desperately trying to raise money from nondescript little offices across the country. Some of them raised $10 million, some raised $100 million or more. And, as money has gotten tighter, and the bloom has come off the hedge fund rose, some have raised none at all.
• Such was the case of Dow Kim, the co-president of global markets and investment banking at Merrill Lynch, who left the firm in May of last year to strike out on his own. With expectations of raising several billion dollars, he hired more than 30 people. Last week, he shuttered the business before he had even begun.
• Although the big boys get most of the ink, Mr. Insana’s is a far more common story — and far more representative of what is happening in the land of hedge funds today.

And once again, this shows why my theory that as the marginal cusomer in the markets (not holding the most assets but doing the most trading) hedge funds are driving a shorter and shorter time frame in this new era of stock market. When you are paid on 90 day periods, and libel to lose clients/assets if you don't succeed quick - I believe this leads to the frantic change in directions, especially in times like this, as people are desperately looking to find any angle to make some profits. What will be interesting to me is after this wave of newly formed hedge funds of the past few years burn off into the ether whether we return to a more normal market - or if this is a permanent state of affairs as there are always new hedge funds starting to replace those failures. Many times run by the same people who failed. [Jul 12: Some More Hedge Funds Biting the Dust] [Mar 28: Founder of Long Term Capital Failing Again]

[Apr 8: Hedge Fund Manager - Good Work if you can Get It]

Weekend Fun: Google SMS (Part IV of the "Googling")

I found this clip on the front page of YouTube - randomly clicked on it and was amused. There appears to be a series of these - sort of Alfred Hitchcock-esque. I assume the title has to do with the "Haunting" movie from the 60s. This was the one I enjoyed most of the 4.

54 Stocks Returning 9% this Week

This week's list of top performers looked familiar to what was working previous to the past 2 months - global growth & commodity based names. We had a hunch it would be their time as we wrote a few times last week/weekend. As has been the pattern of late, the most beaten stocks eventually take the baton (unlike the U.S. men's and women's 4x100 relay teams) from the previous group of winners. It continues to point out a pattern where most rallies are being sold, and a rotation into beaten down stocks is where the short term money is being made. A very different pattern than is traditionally a short to medium term winning strategy. But the open question remains how long is their run, and is it "over" already as many run into technical resistance?

Criteria

1. Market capitalization $1.50B+ (I've dropped this down from $1.75B as I continue to look for some smaller fare that is outperforming)
   
2. Average trading volume 100K+
3. Stock price $10+
4. Return this week 9%+

Green names we own, blue names we have owned in the past or discussed in the blog. Again this week's list could also be named the most beaten down stocks of the past 2 months - a bunch of stocks that returned 10-15% in coal, fertilizer, natural gas that might as well be nameless since they are all traded as one monolith.

Symbol	Company Name	% Price Change 1 Week
ALO	Alpharma Inc	40.6
STP	Suntech Power Holdings	25.1
FMCN	Focus Media Holding Ltd	21.7
TC	Thompson Creek Metals Co Inc	21.6
CQP	Cheniere Energy Partners L P	21.0
DKS	Dick's Sporting Goods Inc	18.2
BZP	BPZ Resources Inc	17.8
PAY	VeriFone Holdings Inc	17.4
ACI	Arch Coal Inc	16.1
AEM	Agnico-Eagle Mines Ltd	15.5
HK	Petrohawk Energy Corp	15.1
ARD	Arena Resources Inc	14.4
YGE	Yingli Green Energy Holding Co Ltd	14.2
SQM	Sociedad Quimica y Minera de Chile	13.9
SU	SUNCOR ENERGY INC	13.8
TRA	Terra Industries Inc	13.6
GG	GOLDCORP INC	13.6
ENER	Energy Conversion Devices Inc	13.3
CNX	CONSOL Energy Inc	13.2
BTU	Peabody Energy Corp	13.0
IMO	IMPERIAL OIL LTD	13.0
ICO	International Coal Group Inc	12.5
UB	UnionBanCal Corp	12.3
CF	CF Industries Holdings Inc	12.0
TKTM	Ticketmaster	11.9
DPTR	Delta Petroleum Corp	11.9
SSRI	SILVER STANDARD RESOURCES INC	11.8
SLW	Silver Wheaton Corp	11.7
LTD	Limited Brands Inc	11.6
TCK	Teck Cominco Ltd	11.6
HES	Hess Corp	11.5
IPI	Intrepid Potash Inc	11.4
WLL	Whiting Petroleum Corp	11.4
SMS	Sims Group ADR	11.3
KGC	KINROSS GOLD CORP	11.2
NOV	National Oilwell Varco Inc	11.0
CRK	Comstock Resources Inc	10.9
MEE	Massey Energy Co	10.9
NXY	NEXEN INC	10.8
TX	Ternium SA	10.6
FLR	Fluor Corp	10.4
CLR	Continental Resources Inc	10.2
CNQ	CANADIAN NATURAL RESOURCES	10.2
MOS	Mosaic Co	10.1
RTP	Rio Tinto ADR Each Reptg Four Ord Shs	10.0
BUCY	Bucyrus International Inc	9.7
CGV	CGG Veritas One ADR Reptg One Ord Shs	9.7
TIE	Titanium Metals Corp	9.5
ANR	Alpha Natural Resources Inc	9.4
MMR	McMoRan Exploration Co	9.2
ECA	ENCANA CORP	9.1
PZE	Petrobras Energia ADR	9.0
UNT	Unit Corp	9.0
AUY	Yamana Gold Inc	9.0

European Banks Becoming Addicted to Nanny State Central Bank(s)

Gosh, this is in parts sad and frightful - Bank Borrowing from ECB is Out of Control. (ECB = European Central Bank = Europe's Federal Reserve) I only point this out because the financial problems are both global in nature and we are doing the EXACT same thing here. When these "crutches" first come out we are told, oh it's just for a few weeks or months. Then they get extended until "things get better". But what's half a trillion among friends? [Dec 18: Libor Rates Plummet on Half a Trillion Infusion by ECB] These central banks truly have developed a nanny state - just imagine if your small business was faltering - no one comes to your rescue...

• The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch. Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.
• "There is a limit how long you can do this. There is a point where you take over the market," he told Het Finacieele Dagblad, the Dutch financial daily. "If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding," he said. (Please send that memo to Uncle Ben)
• While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and 'cajas' with heavy exposed to the country's property crash. Dutch banks have also been hungry clients at the ECB window. (Remember Spain has just about as bad, if not worse, housing situation than we do - they, unlike the Germans or French, drank the United States Kool Aid of "lightly regulated markets will take care of themselves" and "0% down for $350K homes! Works like a charm!")
• ...over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe. (my suggestion is take the American way and just make it a 'plain in sight' bail-out. Covert is sooooooo European) "Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source. (hello? Spain) :)
  
• This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. (oh you mean the ones who played by the rules and stuck to normal lending patterns? aha)
• The latest data from the Bank of Spain shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt. (Cripes) These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.
• The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. (bring us your weary, your junky, your unpriceable) This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock. While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.
• The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system. (that's ok - we've done it here too)
• Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. (may I refer you to article 32.1-b from the Kool Aid Thinking Journal)
• Not to miss out, Nationwide recently announced that it was setting up operations in Ireland, partly in order to be able to take advantage of ECB liquidity if necessary. Any bank can tap ECB funds if they have a registered branch in the eurozone, although collateral must be denominated in euros. (so what is happening now is UK banks are rushing to set up entities in Euro zone so they can also suck from the teat of the nanny state central banks! Nothing like unintended consequences of market interference!)
• Jean-Pierre Roth, head of the Swiss National Bank, complained this week that lenders were getting into the habit of shopping for funds from those authorities that offer the best terms. The practice is playing havoc monetary policy. "What we should avoid is some kind of arbitrage by banks, which say they are going to go to central bank X, instead of central bank Y, because conditions are more attractive," he said. (if I weren't laughing, I'd be crying)
  

Of course we are innocent here as shown below :)

[Jul 30: Federal Reserve Continues its Historic Actions]
[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]
[Mar 16: Fed Races to Rescue Bear Stearns]

Bloomberg: Cleveland Cliffs (CLF) Asks Shareholders to Block Harbinger

The saga continues - it appears clear that Cleveland Cliffs (CLF) management wants to acquire Alpha Natural Resources (ANR) for business purposes and it appears clear Harbinger does not want it to happen for their investment purposes. The cross roads between hedge funds and business continues to fascinate - I expect hedge funds to wield more and more power in the coming decade and this to become commonplace as larger hedge funds attract more and more assets. And money = power. This opens up a lot more questions about how corporations will be run in the future - and for whom and with what time frame will decisions be made. A hedge fund can force a decision and then be "gone" in 3 months, 3 quarters, or 3 years and leave the actual business to deal with the mess or lost opportunity later.

• Cleveland-Cliffs Inc., North America's largest iron-ore producer, asked shareholders to block Harbinger Capital Partners' plan to buy as much as one-third of the company after meeting with fund director Philip Falcone.
• Cleveland-Cliffs ``unanimously recommends'' shareholders vote against allowing the hedge fund to increase its stake from 16 percent, the company said today in a regulatory filing. The company will ask shareholders to vote on the proposal on Oct. 3 at a meeting in South Euclid, Ohio.
• Harbinger opposes Cleveland-Cliffs' plan to buy coal miner Alpha Natural Resources Inc., saying it isn't in shareholders' interests. Letting the fund boost its stake would give Harbinger ``disproportional influence and control over corporate policy and Cleveland-Cliffs' strategic plan,'' the iron-ore company said.
• Under Ohio law, Cleveland-Cliffs needs to secure support from two-thirds of its shareholders to complete the acquisition of Alpha Natural Resources, which would more than double its output of metallurgical coal. Failure to win approval would require the Cleveland-based miner to pay Alpha a breakup fee of $100 million.
• Cleveland-Cliffs Chief Executive Joseph Carrabba spoke with Clark on July 15 to inform him that the company was about to announce the proposed acquisition of Alpha, the miner said in the filing. Clark said he would be looking for more information about the transaction and gave ``no indication'' that Harbinger would oppose the transaction, Cleveland-Cliffs said.
• Falcone wants Cliffs to consider putting itself up for sale and says the company could be worth more than $130 a share, the Wall Street Journal reported July 27.

Fast money (hedge fund) vs slow money (building a business). Fascinating.

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

Bookkeeping: 'Rising Tide' Performance Year 2, Week 3

Year 2, Week 3 performance of the mutual fund

Comments: Same old, same old. Hostage to oil and financials; certainly one must not make heavy sector weightings in this type of market where sentiment changes on a daily basis at times. Best to have a few positions in most every sector because you wake up each morning, not knowing what the quant hedge funds will want to buy that day. Really no change from much of what we've seen. Unfortunately it makes it very difficult to outperform the indexes in this environment since the action is so random and you need to have a hand in every pot.

The U.S. economic situation continues to degrade but we're at the point we're taking solace in the fact the rest of the world is also joining us in the stew. Only in the markets is that "good". I'm not sure how that is "good" considering the only leg holding up this economy has been the export market, but you can't argue with a bunch of pundits who insist world weakness means you must buy US stocks. We continue to have a relentless wave of investors who try to find silver lining in every report, and "out-anticipate" the "anticipaters" who want to be buying 6 months ahead of a real recovery & are constantly jumping the gun. Again, the vast majority of today's hot shot traders in their late 20s, 30s, and early 40s have never been exposed to (a) a consumer led recession or (b) a recession that the Federal Reserve did not "alleviate" within 2 quarters (note: printing press). So despite historic dislocations and historic acts by government to stop the pain, they still are of the belief the only game plan they know is accurate. (apparently no one reads history anymore - the 60s and 70s might as well be the 1860s and 1870s to these folks) So hence the constant buying in the face of bad news because "in 6 months everything will be fine". We (the market) continues down that path over and over, and then every few months a very bad group of events happens (or facts show no recovery after all) and these people are sent back to their foxholes. From which they emerge a few weeks later to once again tell us "we were wrong last time, but this time I am sure everything will be fine in 6 months! My playbook says so!" Or they lean on the nanny state bailing us out (who can blame them- it is starting to become ingrained in our culture over the past 15 years) as yet another reason to excited about stocks. And so we'll continue to go - I believe for quite a long time.

What's old is new again - I remember fearing going heavily short into any weekend in both the winter and spring due to government interventions. And now we have to fear it again because the seals will be clapping at the state of our "free capitalism" system as the socializing of losses (among the sheep and away from the power players) will soon be upon us again. On the short side if we are not fearing surprise Fed cuts, we're fearing new Federal Reserve facilities. If we're not fearing new Federal Reserve facilities, we're fearing market overreaction to new Treasury housing bailout initiatives. If we're not fearing that, we're fearing individual company bailout news (Bear). If we're not fearing that, we're fearing announcements about how we are going to bail out Freddie and Fannie. So it gets old after a while and you can see our "talk" that we spin to other countries (let the free markets work) is just a big hoax. When push comes to shove, we've abandoned the party line of free markets, and frankly it makes gaming any sort of conclusion in the near term impossible. You cannot model this constant intervention - but you can just shake your head sadly. It is sort of funny because in China with a 60% drop in their market, there have been repeated calls for the government to step in and "help". Aside from 1 change in tax treatment I have found very little that the "central command" has done to appease the whiners - in a socialist/communist country. Here in the home of capitalism? A completely opposite response. It is all laughable ... if it were not so pathetic. Try to imagine where this market would be if we were not flooding the system with dollars and propping up entities, slashing rates, changing rules, etc. As they say the Chinese have become the best capitalists in the world - and we're working our way to becoming the best socialists... at least economically for the top parts of society. If times are tough for the lower and middle class - fend for yourself, this is a free market society! Didn't you get the memo?

Back to the markets - we've turned back down from the 50 day moving average on the S&P 500 that we seemed to poise to finally break through about a week and a half ago. Now we sit in a tight range and we continue to have a ceiling overhead as that average falls lower and lower (1300 now). The primary trend is still down but it's a stubborn market that continues to cling to old playbooks. It is not really easy to generate much return even on the short side if you cannot short specific names - so in a market without large moves that continue in 1 direction for sustained periods, and without consistent sector "favoritism" it is a big grind to generate returns. We continue to sit in a lot of cash (I consider our bond ETF to be cash of course), and try to jab in and out for gains here and there. Frankly we are only using about 60-65% of our portfolio either long or short since there is no rhyme or reason to this market and little trend. Outside of big rally days - when we will lag (such as Friday) - that should help preserve us.

Once we break some support levels and/or the euphoria from the government riding in on its white horse to bail out another part of our financial economy passes, I believe the easier path shall be on the short side so we'll move cash there. But I don't want to give away gains left and right on the short side during "Kool Aid" moments. Hence we got some bad days early this week for the market, and by Thursday we were cutting short exposure because the market changes its mind daily. We continue to drift along trendless in the market and I find very few solid charts that one can trust for more than a few weeks. We made our money this week in solar stocks, and our short exposure in the 1st half of the week. We gave back some gains Friday since we did not sell everything that was up Mon-Wed, and quickly move it into everything that was down the first half of the week :) Here is an example of the current environment and pretty much sums it up:

"The dollar got pounded yesterday and everybody rushed to buy commodities as a safe haven. Now the dollar is strengthening so everybody's dumping commodities again," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Despite a big rally Friday, the S&P 500 simply was paring losses for the week (i.e. we got nowhere fast but with a lot of volatility) and finished with a 0.5% loss; the Russell 1000 followed suit. Rising Tide Growth had a good week ex-Friday (ironically) and gained 1.6%. We made up some much needed ground on the indexes this week, and pared the early losses for our 2nd year.

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 at roughly $4 million pledged - thank you.

Year 2 Metrics

Price of Rising Tide Growth: $10.768
Year 2 Performance to date (vs Aug 1, 2008): -2.21%

Comparable S&P 500: 1292.2 (+2.53%)
Comparable Russell 1000: 706.6 (+2.35%)

Fund return vs S&P 500: -4.7%
Fund return vs Russell 1000: -4.6%

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: Closing Cabot Oil & Gas (COG)

Our 2nd to last natural gas stock, just another of the many names at the bottom of the portfolio in very small allocation, I am going to "capitulate" and sell Cabot Oil & Gas (COG) for now. It is looking increasingly more realistic now that these stocks need to build multi month bases (meaning sideways action at best) for a few months before any serious run can be mounted. From time to time we'll have the oversold bounces that if you time perfectly you can get the $40 to $46 bounce, cheer wildly ... but it must be sold. It is too hard to make money consistently that way. I have many charts that look like this.

We did walk away with this one with a gain if you can believe it. But only because we sold (layered out) along the way, and didn't buy back on the way down. It's a $400 gain but if you look at that ugly chart any gain is a miracle. So I'm selling the last bit here (0.4% of fund) and we have 1 less name to deal with. Since the hedge funds treat all these as "1 stock" there is, at this moment, no significant reason to own so many stocks in global growth since they all trade in tandem. We cut 7-8 late last month, so here goes another one to the wayside.

I keep thinking that when I sell these and "capitulate" it will mark the bottom and these stocks will go on a 2-3 month tear but apparently a lot more people out there need to capitulate and I'm one of the earlier ones. ;) Once we're all out - then the stock will rally without us. That's Market 101.

Now why did I not buy an airline this morning!? Cha Ching.

No position

Bookkeeping: Reversing Yesterday's Call

Well I was hopeful we could have some sort of actual run in the global growth names, but went with my heart instead of my mind. The heart will kill you in investing world :)

We added some incremental global growth exposure yesterday - not a ton mind you (I only did 6 names - we own far more and we only added half a percent to one and a half percent to each) and they are coming back to haunt us today. So I'm reversing just about everything I did yesterday in these names. As I said repeatedly .... to the market, these might as well be subprime lenders, since this market is technically driven and all that matters are oil prices and charts. They bounced off oversold levels and unless oil persists upward - those opportunities are being used to simply sell/short the names. The fundamentals mean nothing. So we'll respect that.

Much like banks or retailers or the like from the past few quarters, these are now only buyable when they get crunched - you have to hope you buy them near the nadir and then sell into strength. Disobeying that rule probably cost us 0.3%- 0.4% today alone. You keep wanting to believe that earnings power trump money flow but that's just not reality in this current era. And again, I keep repeating myself, but most breakouts are failing - in this current environment you sell the breakout and buy the breakdown - so very backwards to everything we learn from years upon years of the market - but this is a new market. That rule holds unless you are in a few select subsectors - and those sectors have nothing to do with global growth.

It's just too hard to make money with these right now when you have to wake up each morning and predict the movement of oil and jump on either the long or short side, and then close out your position by 3:59 PM to repeat the same thing the next morning. That doesn't work for investors. Only daytrading.

This market continues to be a grind which is strange to say with the market up strongly today. But much of what is up is what was being sold Monday, Tuesday, and Wednesday. So it is deceiving. Today the money is back into our healthcare, retail, homebuilder (and financial) stocks - just the type of stuff no one wanted earlier in the week. And so it continues. Trendless and without leadership.

Another Bottom Call on Financials - this Time Even Before the Event Happens

These used car salesmen on Wall Street just never let up - this time they are calling for a bottom in financials even before the watershed moment arrives. Usually they at least wait for the event to happen before calling for the bottom - remember just weeks ago we had the bottom in because Merrill Lynch sold it's junk for 22 cents on the dollar, clearly creating a market clearing price for said junk - meaning we now could "price" everything and we're good from here [Jul 29: The Bottom is in Financials - Version 23,472] So now I guess this is "The Bottom is Financials - Version 23,473" Somewhere in the 10,000 range was the Bear Stearns bottom. Somewhere in the 5000 range was the "smart money overseas is buying Citigroup, so should you" [Nov 27: Citibank (C) Sells Stake to Abu Dhabi] etc etc.

• The eventual fates of mortgage giants Fannie Mae and Freddie Mac—along with Wall Street titan Lehman Brothers—could prove to be a watershed in the financial crisis and help restore confidence in the stock market, analysts say.
• The immediate impact of a collapse of any of the firms would likely create panic selling on Wall Street, these analysts believe. Yet it also could help convince investors that the worst had finally passed for the battered banking and housing markets, helping to bring a recovery in stocks and the economy.
• "One of the things that this market has been missing is a real panic," says Mike Larson, market analyst at Weiss Research's Money and Markets investment newsletter. "If we were to see an actual failure, a nationalization, some kind of take-under deal ... if we were to see something like that and we were to get some panic in the short term, in the long term that would be helpful to clear out those sellers that are left." (yes there was no panic in January 08 or March 08 or June 08)
• The seemingly inevitable move by the federal government to rescue Fannie-Freddie initially would shake the market. But once the dust clears and Fannie and Freddie can get back to lending again, that would likely be a catalyst to send the market higher. Combine that with a possible takeover of Lehman Brothers, which also could hurt shareholders, there would be greater clarity on Wall Street.
• "I suspect that this offers a tremendous buying opportunity for the markets," Michael Browne, portfolio manager for Sofaer Global Research, said on CNBC. "It's the sort of crash, the sort of failure that you see that tends to market bottoms." (I suspect eventually the squirrel will find a nut but I suspect I read those exact same words about 150 times the past year and I suspect if anyone listened to them they would of lost anywhere from 30% to 70% of their capital)
  

The Kool Aid is overwhelming.

Again it is very easy to sit there and call bottoms for the last year - especially if you don't run money. I keep asking where is the INSIDER buying by the banks themselves if they are so confident of things? Where are the huge CEO purchases (they have sucked the system of money so wouldn't it be nice if they showed some confidence and bought shares of the entities they know best?)? So "we" are to believe in the bottoms that the pundits scream at us about - when the executives who see what is on their balance sheet refuse to buy? Right.

Myself? I'm sticking with Meredith Whitney [Aug 4: Meredith Whitney Continues to be Negative on Financials (and Housing)] however this behavior really showcases the dependency of "free market capitalists" on government bailouts - it really is quite sick to watch and moral hazard has once again run amuck. But I certainly could see a "happy time" for market participants when the nanny state steps in - since they like to do their work on weekends, I'd say we have to be very careful holding excess short exposure going into weekends at this point because the euphoric buying that could ensue when mommy and daddy come to fix the problems greed and malfeasence created. It is hard to model "interference" and "socialism" on a spreadsheet. And then when THAT "high" wears off, we'll return to face reality (Alt A mortgages, option ARM mortgages, prime mortgages, credit cards, consumer loans, student loans, commercial loans) sometime later down the road. Until the next "bottom is in" event happens (some regional bank failure I assume). And we'll keep repeating this. For many quarters to come. And you'll be told - over and over - by the same folks mind you who told you the bottom was in August 2007 when the Federal Reserve first came to the rescue - that it's safe to get into the water.

Let me leave you with one comment from exactly 1 year ago:

“It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

Who would say such a thing that turned out so vastly inaccurate? Who would say a thing that proved to be nothing but a joke - that was abandonded at the first signs the babies on Wall Street had turned their golden goose into an era of pain for all of us with their lack of regulation and utter greed. Why none other than Mr Ben Bernanke. That was almost 1 year ago to the day. How quickly the reality of "bail out nation" changed those thoughts.

• Since then, however, the Fed has cut interest rates seven times. It has helped to orchestrate the bailout of Bear Stearns, backed up by a $28.2 billion loan. And last month the Fed stood behind Fannie Mae and Freddie Mac, America’s two troubled mortgage giants.
• The chief conundrum posed by the coincidence of the credit crunch and the inflation crisis has been whether to cut interest rates to spur flagging growth or to raise them to keep a lid on rising prices. This is generally treated as a technical question. It is as much a philosophical one. Should greedy bankers and imprudent borrowers be bailed out for their excesses in order to safeguard short-term prosperity or should they be punished in order that they learn the error of their ways and behave more prudently in the future?

(As always much prefer to read these UK papers - because at least they say things that are politically incorrect unlike most of our media.

As for myself, it just makes me a bit physically ill to watch this all play out. But I guess the idea is to get it to a point that you become numb to it all. And we can look back in a few years and say "well it was all necessary - who could EVER imagine all these events happening at once - my gosh, what a once in 100 year event". And much like after the Enron/Worldcom era - we'll forget the lessons, and allow those with the deepest pockets and biggest political contributions relax the regulatory environment again - slowly but surely - and we'll repeat this "once in a lifetime event" with something new (although I cannot imagine how they will top this one) sometime in the 2015-2017 time frame. And repeat this all over again. With your money. Because the foxes do run the hen house in this country. And they get the money from the sheep; that's us! It's quite the farm. BAAAAAAH.

Bookkeeping: Adding to A-Power Energy Generation (APWR) Ahead of Earnings

Many of these small cap stocks, especially of the Chinese variety, have no institutional support whatsoever so they get batted around quite easily in this market. One of my long term favorites in A-Power Energy Generation Systems (APWR) which despite a bevy of good news is constantly sold off - I have my theories on what is going on with this stock which was highlighted quite profoundly as we showcased here - stocks do not usually fall nearly 25% in the first 5.5 hours of trading, only to rally 25% in the last hour - on no news. But since this is not a financial, the SEC could care less about this sort of "activity". So I expect this stock to continue to be the plaything of certain financial bodies until when/if enough people find this name and more long term oriented investors latch on.

Either way, last quarter the company increased revenue 85% and profits 79%; backlog nearly doubled and I believe they are sandbagging earnings estimates with a very large range of $1.04 to $1.34. Analysts are in at $1.14. Their contract flow is fantastic and excluding any major surprise this stock is an outright steal at 17x forward earnings for where they are placed. Further updates on the wind business should help drive investment sentinment - but again, until more long term investors "buy in" this stock will just be rolled around by those currently in power.

Technically, the stock is at the low end of its recent range of $20-$23; we'd want to be buyers (adders) on a technical breakout over the 50 day moving average - north of mid $23s to show this stock has any sustained move to it, but for now there is an earnings update coming Monday which could be a catalyst. However, we've seen many other small cap Chinese stocks report 70, 80, 90, 100% growth and sit ignored so there is no guarantee. But I do believe the wind power catalyst might differentiate APWR; if not now - then into 2009.

We're adding in the $20.00s and taking this up to a 2.7% stake. I should add a stock acting so poorly ahead of earnings usually bodes poorly - so we'll reevaluate Monday post earnings. The 200 day moving average is down at $18 and short of announcing bankruptcy Monday, if the stock is tossed down there I'll add more there next week. I believe this stock has potential for $40+ by end of 2009, as the wind business should deliver a new $2+ of EPS by 2010. But stock price today or next week? Who knows. The company has recently filed their annual report - a very unique opportunity.

As an aside, oil is down a buck or two today - so as with the old football analogy - student body left (sell commodities, jump into consumer discretionary and financials), as opposed to student body right (buy commodities, jump out of consumer discretionary and financials). This is nothing but a traders market. Tell me the price of oil every day, and I flip my portfolio 180 degrees every night. That's all we are in right now. Yesterday the consumer was in trouble, today the consumer is just fine - thank you. Because oil moved $1.50. Oh yeh, we might get rid of Lehman Brothers (LEH) saga as well... therefore all our problems go away ;) Oh yes our 'free market capitalists' are also cheering on the 'socialism' that is the coming Freddie Mac/Fannie Mae 'intervention'. Nothing like the government using people's tax dollars to make 'free market capitalists' joyous. I love irony. Buy stocks; the government has your back (with your own money of course)

[Jul 23: A-Power Energy Signs $300M Contract with Thailand]
[Jul 14: A-Power Energy Generation Systems Hot and Heavy with Press Releases - Up Another 7%]
[Jul 9: A-Power Energy Generation Up 15% on Announcement of Completion of Largest Wind Turbine Plant in China]
[Jun 27: New Position in A-Power Energy Generation Systems to Create Alternative Energy Mini Basket]

Long A-Power Energy in fund and personal account

USA Today: Airlines Emerge from Profit Killing Oil Slick

I'm willing to invest in anything if it can make money... but prefer to find evidence of a chance of profitability. So despite peeving customers off... nevermind them anyhow

• United's decision to end free meals on certain flights – including on some trans-Atlantic routes – appears to have struck a chord with frequent-fliers. United sent a memo to its workers Monday detailing the changes, which included the elimination of free meals for coach-class customers flying between United's Washington Dulles hub and Europe. Also eliminated: complimentary meal service in domestic business class.
  
• "With so much bad news breaking lately, travelers have become pretty inured to the next fee, the next service cut, the next frequent flier devaluation, the next flight cancellation," Winship says. "In that context, any response at all is noteworthy. And the reaction so far to United's suspension of meal service on some international flights has been vociferously negative."
• "This is not necessarily new, just the latest in a long line of claw-backs of services and amenities that were once complimentary."
• "I am furious and outraged with United's change," says Emil Amato, of Los Angeles. Amato says he's ready to change to a new primary carrier, adding that he's already contacted other airlines to see if they'll match the 100K status that he currently holds in United's Mileage Plus frequent-flier program.
• Premier Executive- Mileage Plus member Michael Berman of Monroe, Wash., is another who says the move doesn't make sense. "It boggles my mind to think that they are not going to be serving meals in coach on trans-Atlantic flights," he says. "As far as the removal of meals in domestic business class, United seems to be intent on alienating its loyal, most profitable customers with this nickel-and-diming. I'm fed up enough to be very seriously considering switching my loyalty to Alaska."

.... is there some price where airlines can make a profit? (after all, with the hub and spoke system there are a lot of people 'hostage' to specific carriers no matter what they do) Or, does eventual profitability even matter anymore if/when quant hedge funds decide it is time to "buy buy buy"? Inquiring minds want to know.

• In early July, U.S. airline stocks were so battered you could buy one share each of five big airlines for less than the cost of checking a single bag. With oil prices then approaching $150 a barrel and air travel demand sinking, Wall Street's view was that most of the USA's airlines were destined for bankruptcy reorganization — some for liquidation — when their cash ran out within 18 months. One or two, the thinking went, would be toast by spring.
• ....conventional wisdom about airlines' survivability is changing rapidly, thanks in large measure to a $30-plus drop in the price of a barrel of oil. Don't get too excited yet — airlines' financial health is notoriously volatile. But a combination of factors could help most, maybe even all, of the USA's big airlines dodge the bankruptcy filings and liquidations so widely predicted only a few weeks ago.
• Over the last five months airlines have laid in deep capacity cuts, boosted fare prices by unprecedented amounts, and begun generating lots of new revenue by charging fees for services that used to be included with the ticket price.
• They've also refinanced debt, sold assets, and issued new stock to build up extra cash in hopes of surviving long enough for one or more of their competitors to fail — an event that presumably would greatly improve the surviving carriers' health overnight. Airlines, however, may not have to wait for one of their number to fail in order to get healthy financially.
• And though most carriers still can't turn a profit at existing jet fuel prices, they're getting close to the break-even point. Another $10 to $15 drop in the price per barrel, which some oil experts now say is possible, will have most of them back in the black. Analysts at both Morgan Stanley and JPMorgan Chase even are suggesting that the haggard industry could be profitable in 2009.
• JPMorgan analysts Jamie Baker and Mark Streeter told investors in an Aug. 12 report that the "industry today is a significantly different one than that which gave us pause last March." The carriers' recent capacity cuts, decisions to ground old, fuel-inefficient planes and to boost revenue via higher fares, and the imposition of new and larger fees are likely to be long-lasting changes, Baker and Streeter wrote.
• Millions of travelers remain steadfastly loyal to their airlines, King says, don't seem to be fazed much by rapidly rising fares, and will continue flying almost no matter what. That means airlines will continue to have large, predictable streams of revenue that will be highly valued by lenders and creditors, even when revenue doesn't cover operating costs. (doesn't make sense to me, but hey lenders have shown a lot of foresight the past half decade... what's that? Oh. Nevermind) Those lenders and creditors would rather keep airlines flying and generating cash than repossess collateralized assets such as airplanes that would be idled for months, or even permanently, by a repossession. (the parallels to the housing market are striking - but this would explain why lenders are constantly changing the terms of their convenants with the homebuilders when I assumed at least 2 major names would be bankrupt by now)
• Lower fuel prices and the carriers' recent dramatic operational and financial maneuverings have helped ease the crisis, but it has not entirely passed. Delta and US Airways are moving close to what Neidl calls the bankruptcy/liquidation danger zone based on their cash and short-term investments at the end of June as a percentage of their revenue over the previous 12 months. The danger zone, he says, is a ratio of 10% or less. Delta's cash-to-revenue ratio on June 30 was 16.1%, while U.S. Airways' was 17.4%. Both are addressing that issue.
• United, though, remains the closest to Neidl's danger zone, with a 14.1% ratio of cash to revenue. That ratio will rise a few points after United picked up $600 million in cash in July by renegotiating its affinity credit card deal with Chase Bank. Neidl's also concerned that United's projected cash burn for the coming winter will be larger than at most other airlines.

Not that fundamentals matter but.... a very useful breakdown of airlines one by one can be found here.

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STRONGEST
28. 5%: Southwest

LIKELY SURVIVORS
21.6%: AMR
27.4%: Alaska
23.2%: Continental
16.1%: Delta
24.5%: Northwest

STRUGGLING
19.5%: AirTran
29.1%: JetBlue
14.1%: UAL
17.4%: US Airways

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However, in the gambling (Wall Street) culture one would actually say if you are going to buy an airline why bother with a Southwest (LUV) (whose stock has held up reasonably well) when you can make the most profit (if you time it correctly) by buying the worst off (as long as the whole sector ramps together)?? These stocks actually performed far better than Ultrashort Oil & Gas (DUG) as an "anti-oil" play when crude fell from $140s to $110s. So as a hedge if nothing else they might be compelling. At some price. Note: Northwest (NWA) and Delta (DAL) are in merger agreement. As an example of why buying "worst" is better than "best"

• Shares of UAL (UAUA), United's parent, have risen nearly 350% in five weeks, while shares of Continental (CAL) and AMR (AMR), American's parent, have gone up about 150%.

You remember UAL (UAUA) right? I called it out (sarcastically) as the best stock on the planet Tuesday [Aug 19: Best Stock on the Planet: UAL] as it jumped to the mid $15s. With oil only up $10 since then, it's since lost nearly a third of its value - in 2 days. But hey, it's holding its 50 day moving average ;) But again, buying this stuff is waking up each morning, rolling the dice on oil futures and if its red you win, black you lose.

Checking in With Jim Rogers Part II

Here is the follow up to the Jim Rogers Part I piece - touches heavily on China.

First a continuation of Part I which we split into 2 since it was so lengthy

(Q): Throughout your career you’ve had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

Rogers: That’s the way to invest, as far as I’m concerned.

(Q): So conceivably, history would show that the highest returns go to those who invest when there’s blood in the streets, even if it’s their own.

Rogers: Right.

(Q): Is there a point in time or something you’re looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Rogers: Well, yeah, but it’s a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts. Not all of them, but most of them last week.

So, if you’re talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.

But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.

These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

(Q): Treason? Wow, I didn’t know that.

Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other people’s currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.

You know, even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would’ve been great.

You give me the largest oil field in the world and I’ll show you a good time, too. That’s what happened.

(Q): What if Thatcher had never come to power?

Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And that’s why she came to power…because it was such a disaster. I’m sure she would’ve made things better, but short of all that oil, the situation would’ve continued to decline.

So it may not be in our lifetimes that we’ll see the bottom, just given the U.K.’s history, for instance.

(Q): That’s going to be terrifying for individual investors to think about.

Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don’t just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.

Even Zimbabwe, you know, took 10 or 15 years to really get going into it’s collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it’s a major disaster.

That’s one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it’s going to take them forever to do so.

(Q): Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

(Q): They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

(Q): We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom.

But we’ve got a long way to go, yet.

Now onto part II which deals heavily with China

Despite its many problems, China remains such a strong long-term profit play that giving up on that country now would be like selling all your U.S. stocks at the start of the 1900s - before America created massive wealth by evolving into a world superpower, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

“I have never sold any of my Chinese companies,” Rogers said. “You know, selling China in 2008 is like selling America in 1908. Sure, let’s say the market goes down another 40% - so what! You look back over 100 years, you look back from the beauty of 1928, or even 1938 [in the depths of the Great Depression], and there is somebody who bought shares in 1908. He was still a lot better off having not sold in 1908.”

Keith Fitz-Gerald (Q): There’s a lot of talk that the Chinese will use the Olympics to launch a new wave of nationalism and to move ahead. Are the Olympic Games as relevant as some people think?

Jim Rogers: They’ve already got tremendous nationalism. But the international reactions about Tibet and the Olympic torchbearers re-awakened it.

And the politicians, of course, need it because they’ve got their own problems with inflation and overheating and [pollution and] the rest of it. So, like politicians throughout history, they fan it - do their best to say: Hell, it’s not our problem. It’s the evil farmers. It’s the French. See that store over there: It’s their fault. It’s the Americans.”

So that is happening, anyway.

As far as the Olympics themselves, they’re irrelevant America had the Olympics in ‘96 and it had no effect on the American economy - before or after. Some people in Atlanta were affected before and after. And some people who were involved with the Olympics were affected before and after.

America at that time had 270 million people. China’s got five times as many people, and it’s a much bigger country geographically.

Sydney, Australia had the 2000 Olympics. It had virtually no effect on the Sydney, or on the Australian economy - even though Australia had 18 million people. It’s tiny … nothing. Yes, it had an effect on some people.

Greece, in 2004, had the Olympics. You haven’t heard stories of a major collapse or a major revival of Greece in 2005, because the fact is that the Games didn’t have much of an effect - not a noticeable effect, anyway. It had spot effects only, so I ignore the Olympics as far as the Chinese economy - and its stock market - is concerned.

(Q): Are you still bullish on China?

Rogers: Oh, yeah. I never sold anything in China. In fact, I bought more. I bought Chinese Airlines (PINK: CHAWF) last week. I flew one coming here. Maybe I made a mistake [with the investment], because it was emptier than I thought it would be.

(Q): Any thoughts why?

Rogers: One thing, you know, is that China’s made it extremely difficult to get a visa right now. In the past, it’s been hard to get a seat because Chinese airlines were so full. On this flight there were empty seats.

That brought home to me that they are cutting back enormously on visas right now. Discouraging travel, trying to clean the air, trying to protect against somebody blowing up the Forbidden City, et cetera. So the fact that planes are empty right now may be smarter than I thought.

Maybe I did get the bottom on the airlines, because if they are going to reissue the visas again, after all this, after September [after the Olympic Games have concluded], then the planes are going to fill up pretty quickly again. I would have picked the stock up at a bottom.

(Q): Yes.

Rogers: Anyway I’m still around China. I have never sold any of my Chinese companies. You know, selling China in 2008 is like selling America in 1908. Sure, let’s say the market goes down another 40% - so what! You look back over 100 years, you look back from the beauty of 1928, or even 1938 [in the depths of the Great Depression], and there is somebody who bought shares in 1908. He was still a lot better off having not sold in 1908.

'Rising Tide Growth' Performance vs Peers July Update

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

Apr 23: 'Rising Tide Growth' v Mid Cap Growth Mutual Fund Peers
May 9: 'Rising Tide Growth' Performance vs Peers April Update
Jun 23: 'Rising Tide Growth' Performance vs Peers May Update
Jul 26: 'Rising Tide Growth' Performance vs Peers June Update

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

We now finally have a true apples to apples comparison as our first year completed as of July 31st. Our general big picture goals once live is to try to finish in the top 10% of our category most years - that would place us at the very top over 3 year, 5 year, 10 year time frames. Of course that goal won't be reached every year, but have to aim high. There are about 1870 funds in this category so any finish near the top 200 or so would place you in the top 10%. Finishing in the top 25 in any 1 year would be an extraordinary year in my eyes.

July was a horrid month for us as we lost just over 8% - however my hunch would be that it would be horrid for most of the other funds in the "top tier" for the past year since the stocks rallying in July (and the first part of August) were the "junk sectors" - the beaten down stuff that no one wanted except deep value fund managers who have been decimated the past year. I, we, all of us tend to focus on the short term performance so sometimes it is good to take a step back and analyze the longer term (and in reality 1 year is not that long of a time either)

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

As of the previous month we had been the #1 fund (out of 1860) in our category by a whopping 3%. But our return was 21.1% (19.4% after fees). We dropped a long way in July so I was curious how we would stack up when the final results came in. As of July 31, Rising Tide Growth NAV was $11.09, creating a 10.9% return (we started at NAV $10.00). As always my results are kept by third party, which I link to in the left margin of the blog.

RTG Return: +10.9% (9.2% after fees)
Top 25 peer range (1 year as of July): +7.2% (1st place) to +0.0% (25th place)
Average of all peers: -7.8%

Here are the top 25 performers in the category for July 31, 2008.

I love looking at this to keep things in perspective because the harshest critic of myself is... myself. We are going to have bad months and bad quarters along the way. But our lead (over the #1 fund) only fell 1% from a 3% lead to a 2% lead, and we still finished as the #1 fund in our category after a 8% loss in July. As I envisioned, the funds we were competing with for the top spot over the past year, had similar types of stocks and were decimated in July, even worse then we were. Again we at least carry cash and some short hedges, whereas 99% of mutual funds have 0-2% cash and no short exposure. I walked away from July in complete dismay but "relatively speaking" we still outperformed the pack, and on a yearly basis we did fantastic. To put in perspective how bad a year this was, in our category if you made 0% you finished as the 25th best performing mutual fund in mid cap growth (remember, out of 1860 peers). Keep in mind the S&P 500 was down 14% during a similar time frame [Bookkeeping: 'Rising Tide' Performance Year 1] so even a 0% return outperformed the market by 14 points.

In summary - we'd be the best fund in America in our category by 3.7%. We'd be beating the 25th best fund in our category by +10.9%. We'd be beating the average of our peer group by +18.7%.

Looking around the landscape - as I scroll through all the non sector funds - the #1 fund in mid cap value returned -1.7%. Only 7 funds in mid cap blend had a positive return, none over 5%. So no matter the style in mid cap there was no one close. In the small cap categories of value, growth, or blend only 2 funds were ahead of us. In the large cap areas of value, growth, or blend only 7 funds beat us. So in the entire non sector specific category we would of been the 10th best performing fund. (I believe there are roughly 6000-6500 non sector specific equity funds) And the top performer in all of mid cap funds. I'll take that for a rookie year. But the results demonstrate just how tough a year it has been for the mutual fund industry and investors overall (Hedge funds had the worst 1st half of the year in 20 years)

As always, our long term goals are to be near the top of this list in the 3 year, 5 year, and 10 year categories. Since I did this to see how we compared to peers on 1 year basis, it won't change much month for month, but now that we have 1 year under our belt as an apples to apples comparison I'll check back every quarter since the "standings" won't change much month to month.

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

Bookkeeping: Buying some Global Growth Names

It appears our call for an imminent recovery in commodities late last week was prescient [Time for Commodities?] Looks like HAL 9000 and his quant hedge funds have now deemed the global growth story back on as oil is up - therefore lemmings of all varieties now move in and we can buy safely. I think. But we had a lot of charts break through resistance yesterday and today looks like a confirmation day. That said it can all reverse on us tomorrow if oil drops a few bucks because that will mean the global growth story is once again dead and "demand destruction" will be squealed all over financial TV. But today is "demand construction day".

The reality is hedge funds were destroyed in the long commodities/short financials trade for 6 weeks and the purge seems over. So some sort of reality can once again return to these stories. That's my story anyhow, and I'm sticking to it.

I am making incremental purchases into many of the usual suspects (these are not super large buys and I refuse to make anything a 5-6% position in this market where things can reverse on you in 24 hours) - but again these names are now like banks from 3 months ago, the computers treat them no differently. An oversold group, that had broken charts about a week ago but finally refusing to go down - so the algorithms say "buy". They will buy as long as their microchips say it's time to buy - and then they'll liquidate and hurt people who use common sense or fundamentals and things like P/E ratios. So I don't know how long this move lasts - it might be over in an hour for all I know. But this is a jab "in and out" type of market so we'll throw a jab in, try to make some money, and then pull back on first sign of weakness.

I've added exposure across: Potash (POT), Mosaic (MOS), CF Industries (CF), Walter Industries (WLT), Flowserve (FLS), Fluor (FLR)

The latter 2 are not "commodities" but might as well be in this computer age of "everything within 6 degrees of oil *IS* oil". They had 2 of the best earnings reports out of my entire watch list and yet were hammered.

I don't like the overall market since it looks destined for lower price points so I'd like to see how these stocks react in the next few days before adding more. But so far so good - like I said last week this is the market of buying beaten down product. This was the most beaten down group... meanwhile the sexy sectors of the past 2 months - financials, airlines, healthcare, consumer discretionary are being sold off.

It's almost like there is not enough money out there to support multiple sectors at once. As I said, sustained breakouts are failing all over the place nowadays. No move seems to last more than 45 days. I'd like to see a cathartic selloff which punishes all groups at one time to feel confidant about any sort of intermediate bottom. But for now we play the rotation games, following in the computers (virtual) footsteps. At least these type of stocks we actually like the fundamentals...

I have a very easy principal from this point; regardless of fundamentals or sector if stocks begin to break back below support levels they get pruned back fast and hard. Regardless of PE multiples, growth rates or any of that other jazz that used to be pertinent. Since we've made that change about a week and a half ago, it's been working for us.

Long all names mentioned in fund; long Mosaic, CF Industries, Walter Industries in personal account

American Eagle Coins Sold Out; One Trader Held 11% of all Oil Contracts?

Fascinating. Gold usually ramps ahead of Armageddon ;) Or massive paper printing i.e. the type when your 2 major mortgage institutions are about to be bailed out...

• A buying spree in the popular American Eagle bullion coins appears to have depleted inventory of major North American coin dealers, contributing to supply fears and sharply higher gold prices on Thursday.
• Coin dealers in the United States and Canada said buying of gold coins and other bullion products has soared since last week as gold prices tumbled to near a nine-month bottom.
• Blanchard and Co., one of the largest U.S. retail dealers of rare coins and precious metals, said the American Eagle and American Buffalo one-ounce gold coins -- novel items among collectors and investors -- are currently sold out. "Nobody has the Eagles or the Buffalos right now. We bought 2,000 ounces late last week, and those were the last 2,000 ounces that we can find in the marketplace," said David Beahm, vice president of New Orleans-based Blancard. "If we don't have them, nobody has them," Beahm said.
• According to a Thursday report by the Wall Street Journal, the U.S. Mint told dealers it was temporarily suspending all sales of the American Eagle coins due to depleted inventory and unprecedented demand.
• Meanwhile, Canada-based dealer Kitco also said demand for gold bullion coins has increased significantly in recent days. Kitco's Senior Analyst Jon Nadler said American Eagles are still in stock even though delays in supply and shipping of all bullion products could be possible due to high demand.

I'm not a gold bug, but this is the type of stuff that has the conspiricy theorists up in arms ;) WSJ story here.

• "Due to the unprecedented demand...our inventories have been depleted," the Mint -- part of the U.S. Treasury Department -- told its dealers Friday. "We are therefore temporarily suspending all sales of these coins."
• The move shocked sellers and collectors of the coins, which are the most widely traded in the U.S. Suppliers became angry as they turned away customers. Theories about the decision's underlying cause ran rampant -- from investors in gold futures to Russia's invasion of Georgia.
• "This whole thing started about the time the Ruskies made their move," a collector noted in an Internet chat room called goldismoney.info. "It may very well be that the USGovt is preparing for the real financial meltdown by hoarding all remaining gold flows." (one of probably 85,000 theories currently being bandied around by the gold bugs) :)
• "The situation is strange and doesn't fit the 'normal' supply & demand economic model," the firm wrote to customers.
• The Gold Anti-Trust Action Committee, an advocacy group, said the Mint's move proved financial institutions are colluding to set prices. "The suspension is overwhelming evidence...that the commodities exchanges are being used...as part of a massive scheme of manipulation of the precious metals, currency and bond markets," the group wrote on its Web site.

As for oil, up $6, what happened to "demand destruction" pundits? Notice how they are silenced. It's not "demand destruction" it's all speculation and big money flowing in and out. Lookee here: One Trader Held 11% of all NYMEX Contracts.

• A single energy conglomerate held 11 percent of all contracts on the New York Mercantile Exchange at one point last month, according to a published report Thursday, suggesting that speculators may have played a larger part in volatile oil markets than once thought. (ya think? "supply and demand" doesn't really cause natural gas usually to fall 40%+ in 30 days, or crude down 20% after being up 100% in 7 months)
• The Commodity Futures Trading Commission made an unusual request last month for data from Vitol Group, a private Swiss energy company that regulators thought was helping industrial firms get the oil they needed, according to The Washington Post. (secrecy rules supreme in Switzerland financial accounts) :)
• The commission discovered, however, that the Vitol would be better described as a speculator, trading oil contracts to turn profits rather than assisting companies that actually needed oil delivered for their operations.
• By June 6, Vitol had amassed contracts equal to 57.7 million barrels of oil, about three times the amount the United States consumes daily. On that day, the price for a barrel of oil spiked $11 to settle at $138.54, per barrel, valuing Vitol's oil holding at nearly $8 billion. (wow)
• Commission documents do not show how much Vitol had put down to acquire that many contracts. Nymex allows traders to acquire contracts by putting up margins, which can amount to a fraction of the actual worth. So-called "swap dealers" operate in oil markets by investing on behalf of hedge funds and wealthy individuals who have no plans to take delivery, or buy an actual contract for oil.

Since commodities can be controlled by a fraction of their underlying cost it is not like they had to actually have $8 billion. I believe it is something like 10% for commodities (but don't quote me) so if that figure is near accurate $800M can control $8 billion. Did I mention we live in an age of leverage (that is quickly being destroyed the past year?)

Again, we are just gnats on the big behinds of these real movers and shakers - hence trying to "explain" or "correspond" daily moves to anything specific is best left to TV pundits. When the big money is doing things behind the scenes we see it in the price - simple as that. Trying to assign a "reason" is just a fool's game - we never really know who is doing what as so many trillions are sloshing through the global financial system at lightning quick pace.

Now... about that gold story... hmm....

Checking in With Jim Rogers Part I

Warning: Long entangled interview ahead....

Money Morning has a 2 part Interview with Jim Rogers who is always someone we want to listen to. Why? He is correct a lot of times. For those who don't know this is one of the best hedge fund managers of the previous generation - he seems to have basically hung it up since 1980 other than investing for himself.

• Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.
• And he made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that’s fueled a year-long bull market in the agriculture, energy and mining sectors.

He has moved his family to Singapore and has a nanny for his daughter that only speaks Mandarin Chinese so she can prepare for the coming era. When last we heard from him he was bullish on commodities, bearish on banks, the dollar, and the actions of the Federal Reserve [Apr 8: More Jim Rogers] [Feb 13: Jim Rogers on Commodities] So one would think after all these trades reversed on him in July and most of August he must be panicking. Not so much; although he did COVER his financial shorts last week because of the "interventions" by government it appears. Rogers always says he is the worst trader there is - he picks trends, he is early and he sits in them for years. Many times along the way there will be countertrends that move in opposite direction of the prevailing trend.

So let's check in on the first part of his interview. We'll post the 2nd part tomorrow. Some of the things he is saying, if you heard it a year ago you'd laugh it off (see Roubini). Now while many still seem to be "outlier" events no one can dare "dismiss" them. Anything seems possible in our new era. What worries me is quite a few smart people seem to share similar views that are quite traumatic in nature.

• The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.
• Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said. The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”
• “The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

The rest will be in Q&A format - it is worth copying in full

Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers: There was a train wreck, yes. Two or three – more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I don’t know how long the rally will last and then we’ll be off to the races again. Whether the rally lasts six days or six weeks, I don’t know. I wish I did know that sort of thing, but I never do.

(Q):What would Chairman Bernanke have to do to “get it right?”

Rogers: Resign. (not the first time Rogers has said this) :)

(Q): Is there anything else that you think he could do that would be correct other than let these things fail?

Rogers: Well, at this stage, it doesn’t seem like he can do it. He could raise interest rates – which he should do, anyway. Somebody should. The market’s going to do it whether he does it or not, eventually.

The problem is that he’s got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that’s what he could do. That would help. It would cause a shock to the system, but if we don’t have the shock now, the shock’s going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then it’s Fannie Mae (FNM), you know, and now Freddie Mac (FRE).

The next shock’s going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They’ve been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the “dot-com bubble” shock, so I guess Bernanke could try to start reversing some of this stuff.

But he has to not just reverse it – he’d have to increase interest rates a lot to make up for it and that’s not going to solve the problem either, because the basic problems are that America’s got a horrible tax system, it’s got litigation right, left, and center, it’s got horrible education system, you know, and it’s got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.

But this is academic – he’s not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That’ll be the best solution. Is he going to do that? No, of course not. He still thinks he knows what he’s doing.

(Q): Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn’t know anything’s wrong – that anything’s happening. Is that still the case?

Rogers:Yes.

(Q): What would you tell the “Average Joe” in no-nonsense terms?

Rogers: I would say that for the last 200 years, America’s elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America’s national debt.

Suddenly we’re on the hook for another $5 trillion. There have been attempts to explain this to the public, about what’s happening with the debt, and with the fact that America’s situation is deteriorating in the world.

I don’t know why it doesn’t sink in. People have other things on their minds, or don’t want to be bothered. Too complicated, or whatever.

I’m sure when the [British Empire] declined there were many people who rang the bell and said: “Guys, we’re making too many mistakes here in the U.K.” And nobody listened until it was too late.

When Spain was in decline, when Rome was in decline, I’m sure there were people who noticed that things were going wrong.

(Q): Many experts don’t agree with – at the very least don’t understand – the Fed’s current strategies. How can our leaders think they’re making the right choices? What do you think?

Rogers: Bernanke is a very-narrow-gauged guy. He’s spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America. There’s no problem in housing finance. I mean this was like in 2006 or 2005.

(Q): Right.

Rogers: He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.

(Q): That’s problematic.

Rogers: It’s mind-boggling. Here’s a man who doesn’t understand the market, who doesn’t understand economics – basic economics. His intellectual career’s been spent on the narrow-gauge study of printing money. That’s all he knows.

Yes, he’s got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he’s good at, we know. We’ve learned that he’s ready, willing and able to step in and bail out everybody.

There’s this worry [whenever you have a major financial institution that looks ready to fail] that, “Oh my God, we’re going to go down, and if we go down, the whole system goes down.”

This is nothing new. Whole systems have been taken down before. We’ve had it happen plenty of times.

(Q): History is littered with failed financial institutions.

Rogers: I know. It’s not as though this is the first time it’s ever happened. But since [Chairman Bernanke’s] whole career is about printing money and studying the Depression, he says: “Okay, got to print some more money. Got to save the day.” And, of course, that’s when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

(Q): And now we’ve got a dangerous precedent.

Rogers: That’s exactly right. And when the next guy calls him up, he’s going to bail him out, too.

(Q): What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Rogers: Well, Volcker has said it’s certainly beyond the scope of central banking, as he understands central banking.

(Q): That’s pretty darn clear.

Rogers: Volcker’s been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker. We’ve had couple in our history: Volcker and William McChesney Martin were two.

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party’s out of control.

(Q): This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?

Rogers: Yes. We had two central banks that disappeared for whatever reason. This one’s going to disappear, too, I say.

Cheers :)

Buckle (BKE) - Great Results; Bad Stock Reaction

I cannot stress how important it is to analyze not only the news, but the reaction to the news. That always holds, but even more now when "favored" sectors change by the week. Last week you could not give away commodity stocks - but this whole week they've been rallying. Last week retail stocks were rallying on horrid numbers and guidance, to the tune of 10-12% up a day. This week they are being sold off on good news. 3 days ago airline stocks were the hottest sector in the market as crude was $111. Now at $118 these are the worst stocks in the world. All this market has become is a rotational story by the quant hedge funds in my opinion. You wake up every morning and throw the dice on the price of oil and have to completely turn your portfolio in that direction. It is a sad state of affairs.

Anyhow our game plan now is to buy stocks we like not on breakouts (for the most part) but on break downs - because the quant hedge funds will eventually turn their attention to the broken down sectors and have your 2-5 weeks rally, and then move on like locusts to the next field to raid. So we move onto "consumer discretionary" - among the best sectors for the past 5 weeks and now back to the junkyard per HAL 9000. On Tuesday I cut Buckle (BKE) exposure ahead of earnings just for risk aversion purposes ahead of earnings. Today the company reported fantastic earnings, the stock popped to $51s and then has sold off the rest of the morning, down to $46s. HAL 9000 is now in sell the retailers on any news mode. Again - it is not the news but the reaction to the news. When gas was falling from $4.19 to $3.79 the consumer was "back" - time to buy airlines, consumer discretionary, Las Vegas casinos, autos, housing! With gas now heading back to $3.95 you have to sell all those groups! Amazing how 15 cents here or 30 cents there causes trillions of market capitalization changes in the stock market. I sound facetious but I think it really is that simple at this point. If you can tell me each evening what tomorrow's price of oil will be, I can move my entire portfolio exactly where it needs to be and we will be "correctly positioned" for 24 hours about 80% of the time. That's the market in its current form; unfortunately my magic 8 Ball does not do oil.

Let's look at Buckle's results

• Apparel and footwear retailer Buckle Inc (BKE) posted a 89 percent rise in second-quarter profit, topping market estimates, boosted by solid sales at its stores and a one-time gain.
• Kearney, Nebraska-based Buckle, which currently operates 382 retail stores in 39 states, reported net income of $22.3 million, or 72 cents a share, up from $11.8 million, or 38 cents a share, a year earlier.
  
• Net sales at the retailer, which sells clothes and accessories for young adults, rose 37 percent to $169.8 million.
• Analysts on average had expected earnings of 59 cents a share, before special items, on revenue of $165.6 million, according to Reuters Estimates.
• The latest second quarter included a gain of 6 cents a share related to insurance proceeds received for one of the company's corporate aircrafts destroyed in a tornado.
• Unlike its rivals, who have been feeling the pinch of the weak U.S. economy, Buckle, which offers a compelling mix of third-party brands like Guess, Silver Jeans, Hurley and Fossil, has seen steady growth in its same-store sales.

Ironically Guess (GES) and Fossil (FOSL) have actually been (relatively speaking) major outperformers in the retail space.

So excluding the 1x benefit of insurance proceeds the company grew top line at 37% and bottom at 74%. For this sector that is extraordinary. So we found an excellent name in a sector that HAL 9000 will surely run into at some point in the next 4-6 weeks as oil falls so we want to buy on pullbacks, not breakouts, in this type of market - if we can get mid $44s we have an excellent entry near the 200 day moving average which we can "stop" out of if it falls to the $43s.

Current analyst estimate is $3.19 but excluding the insurance payment they reported a 66 cent quarter, so we'll say $3.25 for the year and at $46 we're looking at a forward PE of 14. Which is less than Home Depot (HD) and it's 1% projected growth rate ;) We continue to like this name fundamentally but will respect the charts to survive in this market. We'll compare this to Aeropostale (ARO) which reports after the bell and should also provide a very nice report.

Long Buckle in fund; no personal position

Bookkeeping: Starting to Layer Out of some Solar

If we were in a bull market, I'd let these solar names run farther since they can rally for a few good weeks in fantastic fashion but it's been about a week and a half and this market is infamous for stealing gains away from you in the dead of the night. In my "layer in and out" approach I am going to begin taking profits in my "big 3": ReneSola (SOL), LDK Solar (LDK), and Energy Conversion Devices (ENER) - the latter I am beginning to worry about because I am hearing it's name almost on every website and financial TV show I watch in the past 48 hours.

Energy Conversion Devices and Solarfun Power (SOLF) report next week and that pretty much ends the major names in the sector. If this rally continues into those reports I plan to cut back much more severely as in my mind, it would set up a sell the news reaction. We've had a great run in a very short amount of time and I'll let other people assume the risk from there. Especially in this sort of market. However there is no "technical" reason to sell - the charts of these 3 are excellent

1. ReneSola (SOL) - reducing from 3.7% to 2.7% stake with sales in $19.40s
2. LDK Solar (LDK) - reducing from 2.5% to 1.9% stake with sales in $47.40s
3. Energy Conversion Devices (ENER) - reducing from 2.2% to 1.4% stake in $78.30s
   

To offset this I am going to add to position in Trina Solar (TSL) on what appears to finally be a breakout over the 50 day moving average - again the cheapest name in the sector by a country mile. But if it reverses back below that level we'll cut it back sharply. I am upping this from 0.6% to 2.4% exposure.

Despite fantastic fundamentals and very cheap valuations in the Chinese names, these are sentiment plays and sentiment can turn on a dime in this market. And when these stocks reverse and go down it is vicious. So we won't be pigs and we'll enjoy locking in some great short term gains.

Long all name mentioned except Solarfun Power in fund and personal account

Washington Post: In Farm Country's Boom, Hint of Bubble

I've said while there is a recession going on in this country on Main Street, it's a regional recession. I expect readers from certain parts of the country like Iowa, Nebraska, parts of Texas, Wyoming, Saskatchewan (the 52nd state) to wonder what all the fuss is about. [Mar 12: Grain Boom May Spark Rural Revival] We have a big country and different micro economies; obviously those dependent on natural resources have sort of been mini Brazil's. The Washington Post has an interesting article on some items we've touched on in the past...

• The trucks rumble down the main drag of this farm town all day long, the ones heading east brimming with grains of No. 2 Yellow Corn, the ones going west filled with Sweet Bran, a cattle feed that looks like breakfast cereal and smells like warm beer. That eighteen-wheeled evidence of prosperity shows why the Plains states are a bright spot in the otherwise gloomy national economic picture. Here, the housing market is holding up just fine, the banks are making plenty of loans, and employers keep adding jobs.
• The numbers are gloomiest for Sun Belt states with eviscerated housing markets, and there, interest rate cuts and stimulus checks are helping ease the pain. But in the area stretching from the oilfields of Texas north to the Dakotas, where the economy is holding up fairly well, those government actions may prove unnecessary -- and even contribute to new bubbles.
• The price of farmland in Nebraska has doubled in the past three years, primarily reflecting the boom in commodity prices. The increase also reflects the impact of rate cuts by the Federal Reserve that enabled buyers to bid up land with borrowed money. (sounds familiar! As I keep saying we with our 'nearly free money' policies we go to each time a crisis emerge, we are setting ourselves up for the next bubble) :)
• Corn has risen to nearly $6 a bushel, from around $2 in 2005; earlier this summer it was as high as $7.50. For an average-sized Nebraska farm with an average yield, that means an extra $900,000 in revenue (though that has been offset significantly by higher costs for fertilizer and fuel).
• "People on the East Coast and West Coast are seeing their food bill rise, well, a lot of that increase is ending up here," said Ernie P. Goss, an economist at Creighton University in Omaha.
• The jobless rate in Nebraska was 3.4 percent in July, barely up from 3.1 percent a year before. The national rate rose to 5.7 percent from 4.7 percent in that span.
• The availability of loans to farmers is the strongest it has been in five years, according to a survey by the Federal Reserve Bank of Kansas City, even as banks nationwide are becoming reluctant to lend money. The reason: There wasn't much overbuilding of housing here, so most regional banks are not saddled with the same bad mortgage and construction loans as their counterparts on the coasts.
• That prosperity also shows itself on Lyle Schjodt's farm a few miles outside Blair, where he farms 1,000 acres of corn and soybeans, 150 head of cattle, and 1,200 hogs. He still has the first tractor he ever bought, back in 1968, in a shed. "I've been farming for 39 years, and I haven't seen a better year than this one," he said.
• Schjodt is upgrading his equipment; he just ordered a $120,000 Case IH planter, a massive red device that deposits seed corn every seven inches in 30-inch-wide rows. He bought a new $50,000 Ford F-350 back in the spring, too.
• The government stimulus bill passed in February included provisions that will let him depreciate the value of those big-ticket purchases immediately. "They're some pretty attractive write-offs," Schjodt said. "It will get my tax bill down a lot in what's looking to be a real good year for income. I just wanted to take advantage of that."
• Not long ago, you could show up and buy a new tractor off the lot; now there is a 10-month backlog.
• Nationally, truck sales are battered by skyrocketing fuel costs. But auto sales are up 8 percent in the Omaha area so far this year, according to sales tax receipts.
• Wal-Mart has scaled back on its expansion plans nationally, but it is in negotiations to build a new store in Blair, which is about 35 miles northwest of Omaha. Several other retailers are opening nearby.
• The good times are not uniform across the region; ranchers have been pummeled by high prices for feed and fuel, and there has been flooding in Iowa.

[Jun 5: NYTimes: Farmland is Gold, So Billions Invested in Farming]

Nouriel Robini: "Told You So"

For those who don't follow the dismal sciences, Nouriel Roubini is an economist who quite frankly nailed this whole mess. He is someone I've followed the past few years, and as I've stated in the past he sort of has a spooky demeanor and sullen look, with an accent that makes it all sound that much more worse when you hear his predictions versus read them. We have a link in the left margin of the blog to his website and while I don't have as much time nowadays to keep up with it, I still try to read as much as I can of him. When last we left Roubini pre Bear Stearns bailout [Mar 13: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses] the punditry across America was STILL in denial about the problems and the popular figure of the day (I believe this was during the 3rd kitchen sink quarter - we're up to 5 now) was $300 Billion in losses. Well fast forward less than half a year and we're over $500 Billion on the way to a trillion. And if not for central banks interventions we'd literally have a financial system blown back to the Stone Age. Because after all, when you lightly regulate a system of self serving, greedy humans they will "self police" themself wonderfully! :)

The New York Times has a big write up on Roubini below - I've included the photo for added spook. What I find ironic about economists is despite being called the dismal science they really are no different than normal humans - they drink Kool Aid in huge quantities and generally fall into the "way too optimistic camp". The most optimistic get permanent rotational guest appearances on CNBC. So when a "truth teller" comes along, he/she/I is seen as a doomsdayer ;) I was also sort of smirking at the "economist on economist" sparring within this article - heck, Roubini could be wrong on every prediction from here on out on this crisis and he'll be 99% more accurate than those who lounged in the Kool Aid pool in 2005/2006. But since he does not rely on "mathematical models" in a religious manner he could be looked down upon. Those same models that even last fall, winter, and to this day have people denying there is anything wrong with the economy. Laughable. So read on to hear about Dr. DOOM!

• On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. (ok I can end the story there and Roubini get's a Hall of Fame membership)
• The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market.
• When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer. (scoreboard?)
• But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities.
• “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
• Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. (Kool Aid 0 - Roubini 3)
• Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. (where have we heard that before? Oh... last week) Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” (oh I need to borrow some of that phrasing - so good Roubini - so good) stuck to his script of “nightmare” events (Kool Aid 0 - Roubini 4)
• “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
  

This is a long story in the Times - and if you are into this type of thing, a great read. But to spare those of you who only want to know how to survive this market or what brand of Kool Aid is best to drink I'll skip along to his current views

• Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things.
• What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous.
• But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Future?

• Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, (our grand kids) along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

Solution?

• Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”

Long term Future?

• The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

This is an important point on how he even forecast the U.S. was in trouble

• The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

Does that sound familiar? Of course it could never happen here - we're the United States of Subprime - we are impervious!

• After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.”

Last point, economists are heavy drinkers of Kool Aid

• Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance.

But since we're denying there is even a recession because the numbers (government created) say there is none - we are just a big bunch of whiners. So get out there, and spend to support the US economy! (wait, isn't that what got us here in the first place?)

Suntech Power (STP) Ignites Solar Sector

I continue to be somewhat boggled by the individual stock reaction to what I see as very similar reports in the solar sector, but we'll never know what sort of short positions need to be covered in one stock versus another or what exactly is going on behind the scenes. Either way, former fund holding Suntech Power (STP) aka "the granddaddy of Chinese solar" said enough to make people happy and is up 15% today - thankfully the whole group is following so our 9% exposure to the group is treating us well today as we have multiple companies running in the +8-10% range. While growth is solid at Suntech (STP) it has the premium valuation in the group among Chinese peers (as it almost always has) and there are a lot of other companies growing faster at cheaper multiples. *IF* the company had been more consistent over the past year in regards to earnings you could make a case it's worth paying up for "consistent growth", but Suntech has missed quarters just as often as it's peers - but it is an analyst favorite with a management that the Street cannot stop falling over, so that counts for something in the Wall Street game. Full report here.

• Chinese solar cell maker Suntech Power Holdings Co Ltd (NYSE:STP - News) reported sharply higher quarterly earnings on Wednesday and lifted its 2008 revenue target on burgeoning global demand for solar energy.
• Revenue jumped 51 percent to $480.2 million, well above the $443.53 million in revenue analysts had been expecting, thanks in part to a strong euro.
• Second-quarter net income was $65.2 million, or 38 cents per American Depositary Share, compared with $41.3 million, or 25 cents per ADS, a year earlier. Excluding items, the company earned 41 cents a share. Wall Street analysts, on average, had been expecting earnings of 32 cents per ADS, according to Reuters Estimates.
• Gross margin excluding items was 24.7 percent, up from 22.5 percent in the first quarter.
• The company also said that demand from Italy, Germany and other markets would offset a sharp fall-off in demand from Spain next year as that nation pares back generous government subsidies for solar power. About 40 percent of Suntech's second-quarter sales came from Spain, and concerns about a pullback in demand from that market have weighed on the company's stock in recent months.
• "We have far more demand in the pipeline than we intend to supply," Suntech Chairman and Chief Executive Zhengrong Shi said on a conference call with analysts. (if you say the correct words on conference call you get a premium; if you have the same business but don't use the correct wording I suppose you don't get the same respect)
• In another positive sign for investors, Suntech forecast a 20 percent decline in polysilicon costs in 2009, but said contracted selling prices on its products for next year so far were better than expected.
• Citing robust demand, Suntech raised its 2008 revenue forecast to a range of $2.05 billion to $2.15 billion from a range of $1.9 billion to $2.1 billion. The solar company also increased its target for shipment of photovoltaic cells by 20 megawatts to 550 MW.
• Suntech has signed 200 megawatts (MW) of fixed price contracts for 2009 so far, and the biggest price decline from 2008 levels is about 5 percent, the company said. That's lower than the company's expectation that prices will fall between 8 percent and 10 percent next year, Chief Strategy Officer Steven Chan said in an interview.
• The company's photovoltaic cell production capacity was 660 megawatts at the end of the quarter, and Suntech said it was on track to reach a gigawatt of capacity by the end of the year.

So now Suntech Power (STP) after being in the doghouse for a while can for the next 90 days be in the "penthouse" of solar stocks - and we'll move the chairs around in mid November once more depending on who does best for that quarter. Certain other companies we happen to own in the space had much faster growth, raised guidance farther, trade at far lower multiples, and have better operating metrics. Further analysts were antsy about certain solar stocks we own having only 60% of 2009 production sold out and caused hand wringing post earnings; Suntech has about 30% of 2009 production sold out (that's half by my college level math) but analysts will clap like seals and they get the 15% bounce - ah, stock markets.... it is simply funny how something is a concern for 1 company but totally brushed off for identical peer. :) Don't get me wrong - this was a good report and bodes well for the entire (undervalued sector) and I've owned Suntech on and off both in personal account and here for years - in fact this was the first solar stock I ever bought. I am just shaking my head at some of the discrepancies among companies and the way analysts find certain things to pick on certain companies but not others. When this is a very homogeneous set of concerns.

Long other solar stocks in fund and personal account

Groundhog Day?

Funny how the more things change, the more they stay the same. I thought about writing a piece about the state of things but then I remembered, I wrote the exact same piece I wanted to post today 5 weeks ago

[Jul 10: Whose Bottom Will this Be? Lehman Brothers (LEH) or Fannie/Freddie?]

Once again I reiterate what I've been saying over and over - I'd be short Freddie Mac (FRE) (and up 40% in 2 days) if I could be. I'm on the opposite side of this trade from Bill Miller who I truly wonder will be forced to resign after this move [Aug 13: Bill Miller Continues to Boggle Me - Increasing Stake in Freddie Mac] I'm not sure how he is sleeping at night after adding 30M shares of this disaster on top of the 50M shares he already owned. Frightful.

There are some incredible profit opportunities on the short side - frustrating not to be able to use them to add to the portfolio. 40% gains don't come too easily on the long side. I'm not sure if by the time we are up and running for real, that we'll ever have such "easy" opportunities as are being presented right now. A lot of regional banks are going to be kaput too in under 6 months. But this one (FRE) is like a softball - I don't think it will ever get back over $5 again. (below $5 a stock is not shortable) I do expect some crazy gyrations as it turns into one of these nonsense stocks that can pop up and down 20% a day, but the roadmap of eventual landing spot is clear. As for Lehman, if it breaks that July 15th low the hedge fund computers will pile in on the short side even further purely on a technical basis. Hanging by a thread. That one could go either way - as I wrote last month I think the Federal Reserve now wants to show it will actually allow someone to fail and since it cannot be Freddie or Fannie it might be Lehman as the sacrificial lamb OR some foreign company might swoop in and buy Lehman for $5 or something like that.

The fact our market is even near to being "flat" when we are on the trail to losing a GSE (or as I believe both) is beyond amusing. People are obviously numb and in denial of just how bad things are. Err.. I'm sorry "it's all priced in." If you said this would be the outcome a year ago people would call you crazy. Now it's becoming "priced in" - hah. What a mess we've allowed.

So again, whose bottom will this be? Lehman or Fannie/Freddie?

Long Freddie Mac puts in personal account

Bookkeeping: Closing Canadian Solar (CSIQ)

We're treating the basket of Chinese solar stocks we own as "one position", and for whatever reason these names seem to trade off the previous quarter's earnings for the next few months. So favoritism flips from 1 name to the other for a 90 day period - and then when the next earnings report season comes out, a new subgroup gets the momentum money flocking into it, based on whomever did best that quarter. It makes little sense but it is what it is.

With that said we have multiple names and I'd rather focus the next few months on the names which had the least warts and now are the "favorites". Valuation means nothing in this sector as we've owned the cheapest name in the group for a year now and it has done nothing but lose us money. We took Yingli Green Energy (YGE) out in the mid $16s after a ho hum reaction to its earnings [Aug 6: Closing Yingli Green Energy] and it is now struggling around $15 after dropping to the mid $14s. We cut back Canadian Solar (CSIQ) ahead of earnings anticipating a potential adverse reaction to currency risk [Aug 12: Some Adjustments to Solar Patch]. This came to be true - CSIQ was near $31 when we sold and has now fallen to $28, after dipping to $27s. I thought the earnings reports were fine, but as I said above - this sector is strange in that favorites change from 1 quarter to another and once you are out of favor it can last a while. Right now the charts for these 2 are simply not as attractive as other names in the group so if I increase exposure I'd rather add to one of our names that currently has the investors favorite. CSIQ north of $33 and YGE north of $17 would be appealing from a technical perspective.

We only had 25 shares left of Canadian Solar (CSIQ) so simply as a bookkeeping procedure I'm closing this position out, and when/if these names show a better technical condition we'll consider adding them back. Until then, we have others to do the same job and give us the same exposure to the sector with charts in uptrend. And trust me when we come back again in November 08, these 2 names might be the "favorites" and all the money will switch to them. I don't pretend to understand it, but this is just the pattern - and I've been on the wrong side of that pattern citing "but I own the cheapest one, why does no one notice!" far too many times.

No position

Bookkeeping: Beginning Amylin Pharmaceuticals (AMLN)

I'm following the "buy the busted stocks" instead of breakouts methodology, but breaking a rule on buying individual biotech stocks with today's purchase of Amylin Pharmaceuticals (AMLN). This is one of the few biotechs I know pretty well, and have followd for quite a while - mostly due to its diabetes drug Byetta. Which is the cause of the recent ruckus - on Monday the FDA warned that Byetta might be linked to 6 severe cases of pancreatitis.

• U.S. health regulators warned of more cases of dangerous pancreas inflammation in patients taking Amylin Pharmaceuticals Inc's (AMLN) diabetes drug, Byetta, pounding company shares on fears of lower sales and doubts about a new version of the medicine.
• The Food and Drug Administration said on Monday it received six reports of hemorrhagic or necrotizing pancreatitis requiring hospitalization, including two deaths. The four others were recovering at the time of the reports.
• It was not immediately clear if the FDA would order new so- called "black box" warnings, the strongest type available, and representatives for the agency did not immediately return calls seeking comment.
• The new reports follow an earlier warning last October, when the FDA cited 30 reports of pancreatitis in Byetta patients. At the time, it said the drug was suspected in some of the cases, and Amylin agreed to add information about the risk to its drug label and to alert doctors about the problem.
• Analysts said on Monday the additional cases could pressure doctors into discontinuing use of the drug, which has already seen prescription growth slacken in recent months, in part because of difficulty adhering to twice-daily injections.
• Pancreatitis is an inflammation of the pancreas, which helps aid in digestion by releasing vital hormones. The condition usually subsides within a week, according to the National Institutes of Health.

The stock dropped by nearly 20% - and this is exactly why I usually do not gamble in individual biotech names: "FDA risk". But, since this came after the fact I am going to take a flier here. The stock was beaten down a bit more yesterday and is down a few more % this morning to the $27s range; there is no "great" reason to buy here but we are in day 3 of a purge which I believe is a bit of an overreaction from reading what people with a lot more knowledge than I have believe. The stock did fill a gap created July 31st in the mid $28s with this fall, and there is a lot of support in the $24s/$25s so if the stock does fall to that level we'll add there. But once again if you bought the "technical breakout" which this stock did once it closed over $33 you were demolished in under a week - it's a tough market.

The company is unprofitable and does have a 2nd drug, Symlin which is doing well, but Byetta is 90% of sales. It has to be administered twice a day which is a big pain but the future here is for a different version of Byetta; an "extended use" type which only needs to be taken 1x a week. The approval process for this version will extend well into next year - probably spring to summer. In late July Amylin was added to Goldman's conviction list at prices similar to where we are now

• Goldman Sachs replaced Gilead Sciences Inc (GILD) with Amylin Pharmaceuticals Inc (AMLN) on its conviction buy list, citing higher upside in Amylin's stock.
• The investment bank said Amylin also stood to benefit from diabetes drug Byetta, which is co-marketed with Eli Lilly and Co (LLY)

And in an ironic stroke - in this past weekend's edition of Barron's, Amylin was among a group of 5 biotech stocks listed as a potential takeover candidate.

• But one thing is certain: Mergers, buyouts and takeovers involving biotech outfits will become more common as Big Pharma increasingly tries to fatten its product pipeline by acquiring proven, as well as promising, bioengineered drugs.
• Another company that could spark an acquirer's interest is Amylin Pharmaceuticals (AMLN). It's working on a Type 2 diabetes drug that could be injected once a week instead of daily. Amylin has several development partners, including Eli Lilly, on the drug. It already markets two diabetes drugs, Symlin and Byetta. But some analysts say the product under development could boast major advantages. "A once-weekly drug that lowers glucose substantially, induces weight loss, isn't associated with hypoglycemia, and lacks a cardiovascular safety signal has multibillion-dollar potential," says Markowitz.

The market is nothing if not ironic; so let's look at some opinions of the most recent situation.

Motley Fool's Brian Orelli

• It amazes me how much investors can overreact to known side effects of a drug. This seems a bit excessive: a 13% drop (turned into 20%) after news that the number of pancreatitis cases from patients taking Amylin's diabetes drug Byetta increased to 36 from the 30 reported last October.
• It's not that pancreatitis isn't a serious issue -- the newly diagnosed patients had a more severe form of pancreatitis, and two of the six patients died -- it's that diabetics are already at increased risk of pancreatitis. At worst, patients with other risk factors for developing pancreatitis -- gallstones, severe hypertriglyceridemia, and alcohol use -- will stop using Byetta.
• The biggest worry may be about how the new cases of pancreatitis will affect Amylin's once-weekly version of Byetta that it's developing in conjunction with Alkermes (Nasdaq: ALKS).

David Kliff of Diabetic Investor (published by Forbes)

• The FDA issued a warning Aug. 18 for diabetes drug Byetta, because according to the FDA, there were six reported cases of severe pancreatitis, two of which resulted in death. The FDA did not mention in its warning that the agency considered this event to be "a rare and uncommon event"--which it did specify when it answered questions from Diabetic Investor.
• As expected, the mainstream media has done exactly what Diabetic Investor expected: Implied that Byetta usage causes pancreatitis. Looking over the various press reports, there is no mention that there are nearly one million patients taking Byetta or that patients with diabetes are at an increased risk of pancreatitis no matter what therapy they are following.
• The FDA felt it was necessary to issue a warning when six patients from a population of one million Byetta users developed pancreatitis. Byetta users are at lower risk than the general population in developing pancreatitis (six per 1 million vs. one per 3,400).
• Just what does the FDA expect patients and physicians to do now? Put patients on Januvia? Ask any respectable endocrinologist or diabetologist who's not on Merck's Merck (nyse: MRK - news - people ) payroll and he or she will tell you that Januvia's performance is average at best--there's a reason that the drug has gained the nickname "Junknuvia."
• Try as they might, Merck reps don't have a leg to stand on when comparing Januvia to Byetta; Byetta has superior glucose control, a superior cardiovascular profile and a proven ability to help patients lose weight.
• Why not just put patients on insulin? As effective as insulin therapy can be, primary-care physicians are not equipped to deal with the patient education required. Ask any primary-care provider why he doesn't prescribe more insulin therapy and the answer may just surprise you. No, it's not fear of injections, its fear of hypoglycemia, a serious and possibly life threatening event. Unlike oral medications or Byetta, which can be delivered with little or no monitoring, proper dosing of insulin requires a patient to be educated. This is something that primary-care doctors are not paid to do, nor do they have the time or infrastructure for it.
  

So there is definitely a risk here - if some major disclosure of a bevy of new pancreatitis cases comes out in the next few months then the big potential of the once a week Byetta could be called into question. But for a jump from 30 to 36 cases a drop of 25% in stock value seems a bit excessive - and as we stated last week, biotech has been one of the groups money has been rotating to [Aug 15: Where is Institutional Money Flocking? Biotech - 3 ETFs to Review], so this is a nice discount to get into 1 of the names.

We started with a 1.5% stake in the $27.70s and if we see a fall to the $24s/$25s we'll add to our position down there.

Long Amylin Pharmaceuticals in fund and personal account

Bookkeeping: Beginning BJ's Wholesale Club (BJ) Position

One of our long running themes has been the "Pooring of America" as costs of life overcome wage increases in the country for the lower and middle classes - it has been happening slowly but surely over the past decade - median wages have not kept up with inflation even if you use the government's faulty understated inflation figures. [Do The Bottom 80% of Americans Stand a Chance] Using reality the unwashed masses are falling even further behind, and without lines of credit available in great quantity as they once were (including house ATM) this problem will now be exposed (and has been the past year) as the tide washes out.

To that end, I've been pointing to to the Walmarts (WMT) and McDonalds (MCD) over the past year as good investments - but we have not bit ourselves. Today we have an opportunity in BJ's Wholesale Club to get a poor man's Costco (COST). The stock is down 7% on what I consider a good earnings report. Full report here.

• BJ's Wholesale Club Inc (NYSE:BJ - News) said on Wednesday quarterly profit rose as shoppers headed to its stores in search of low prices on food and fuel, and the No. 3 U.S. warehouse club operator raised its full-year profit forecast.
• Profit for the second quarter ended August 2 was $36.5 million, or 61 cents per share, up from $36.3 million, or 55 cents per share, a year earlier. Excluding a benefit of 3 cents per share for state income tax audit settlements, BJ's earned 58 cents per share in the latest quarter. Analysts, on average, had been expecting it to earn 57 cents per share, according to Reuters Estimates.
• BJ's quarterly net sales, which exclude membership fee revenue, rose 17.9 percent to $2.65 billion from $2.25 billion. Sales at clubs open at least a year, a key retail gauge known as same-store sales, jumped 15.5 percent, including an 8.1 percent contribution from sales of gasoline.
• The company said traffic increased by 5 percent for the quarter, excluding the sales of gasoline, its strongest growth since 2004. (people flooding into discount warehouses sounds like a "recovering economy to me!)
  

Raised Guidance (again)

• BJ's raised its full-year profit forecast, the second upgrade in a matter of months. The company now expects earnings for the year of $2.10 to $2.20 per share, up from its May guidance of $2.04 to $2.14 per share. The May forecast was 6 cents per share above the company's previous expectations offered in March.

Share Repurchases

• The company also announced that its board has authorized an additional $200 million for share repurchases. During the second quarter, BJ's purchased about 1.4 million shares of its own common stock at an average cost of $37.45 each, or approximately $54 million total.
• During the half-year ended Aug. 2, BJ's purchased about 2.4 million shares of its own common stock at an average cost of $35.30 each, or about $83 million. Including the $200 million authorization announced Wednesday, the company has about $291 million available for share repurchase.

The company has about about 60M shares outstanding so 2.4 million is not insignificant. (4%)

From a portfolio management point of view this helps build up our "consumer" side of the ledger - we are not hopeful for the US consumer but every so often (the past 5 weeks for example) consumer stocks rampage off of oversold levels and we are on the outside looking in. So this helps us get some exposure on that side and still fits into our wheelhouse of catering to the area of retail we think more and more Americans have been and will continue to migrate to (downscale) [Dec 26: Target Shoppers Turning into Walmart Shoppers]

Remember, we have noticed the trend the past few months that trend breakouts are not working (buying stocks as they break out) since by the time the breakout happens the move is 80%+ over and we're just scraping for crumbs as returns when the stock reverses after failed breakout. So we are adjusting and now looking for fundamental stories we like... ok... fundamental stories we can live with... and have pulled back. This is a classic case. When breakouts work for 2-3 months we'll switch back to our preferred method.

Technically the stock pulled back to near its 200 day moving average ($36.50s) so we're buying here. We are starting with a 2.5% stake in the upper $37s. After a gap down like this, there is some damage to the chart so I don't expect any imminent rebound, and $43 is going to provide a world of resistance but that's a good 15% higher and if we can get that in 6 months it would be a good return. If the stock breaks below $36.00 level we'll take the smaller loss and cut back simply for technical reasons.

The stock is quite rich at just under 18x forward estimates for barely double digit growth but this is the type of stock the money flow is going to, and valuations mean nothing nowadays. Important distinction about this bipolar market - not 4 days ago we had retailer flying up 10-15% on what I considered bad earnings reports/guidance; today we have a few retailers with what I see as solid reports and they are being beaten. This market has no memory from 1 week to the other, and what works one week fails the next. The "rotation" of money from week to week, or day to day, or month to month is relentless and nothing works for long periods of time. A very difficult market for anyone who does not have very short time frames.

EDIT @ 12:30 PM: Comments in this story on why the stock is down - I find these worries ironic when EVERYONE on CNBC assures me that as oil goes down all our inflation problems go away in the "coming 6 months". The spin meisters in our land of punditry are relentless. Remember, inflation is a tax on all things, producers and consumers - someone has to eat it. Except in our Goldilocks Kool Aid scenario proposed by pundits where inflation has peaked and you should buy consumer stocks across the board as gas dropping 40 cents means all is right in the world. Yet today its a concern again? ;)

• On a conference call with analysts, BJ's executives forecast second-half merchandise margin rate may slow from the first half as it predicted continued pressure from food and other inflationary cost increases. Echoing a repeated theme throughout the industry, the company said sales of less profitable food and other consumable products were strong while sales of discretionary merchandise from furniture and best seller books to jewelry and television slowed. That also raised concern about discretionary spending for the upcoming holiday season, analysts said.
• "Inflationary price increases is not new to us," BJ's President Laura Sen said on the call. "The size and velocity and number is really what's unusual about this year and for what we can see in the foreseeable future, we see more price increases coming in the second half." (The Kool Aid drinkers argue against this, saying inflation peaked this month - hence buy those Las Vegas casinos, airlines, home stocks, and auto stocks as the consumer is unleashed back onto the economy)
• "Investors are concerned about inflationary pressures and BJ's ability to pass that on to consumers in order to maintain its profitability," said Joe Feldman, an analyst at Telsey Advisory Group. On a conference call with analysts, BJ's management fielded many questions from analysts asking about cost and competitive pressures and the company's ability to pass them on.

[Jul 23: Costco Warning & McDonald's Continues to Be Dinner of Choice for Pooring Americans]

Long BJ's Wholesale Club in fund and personal account

Reuters: SEC to Propose Short Sale Rules in Weeks

This is my favorite quote from the story: He said it is not intended to have any impact on the direction of stock prices.

Sure, of course not ;) Just like the greatest short squeeze of all time did not intend to have an impact on the stock prices of financials a month ago ;)

• The top U.S. securities regulator plans to propose a new short selling rule in the next few weeks which would be broader than an emergency order covering just 19 financial stocks which ended last week.
• U.S. Securities and Exchange Commission Chairman Christopher Cox said on Tuesday the proposal "will focus on market-wide solutions." He said it is not intended to have any impact on the direction of stock prices.
• Cox also said the agency is still considering proposing that investors be required to publicly disclose substantial short positions in stocks. Substantial long positions in stocks already have to be disclosed. (yes, please do - that way when 20 major hedge funds have more shorted stock than is currently available - we'll know its naked shorting - thank you very much - you can bet the political contributions will be coming in hot and heavy from the major hedge funds in the next few weeks to try to fight this one off)
• Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making a profit when the price drops. It is a legitimate form of trading but often blamed when a company's shares fall. (this is fine)
• The SEC's emergency rule was aimed at cracking down on illegal naked short selling, when an investor sells stock that has not yet been borrowed. (this is not fine)
• Cox said on Tuesday that failures to deliver stock "were reduced substantially" for the stocks covered by the emergency rule. "It was a very effective order from that standpoint," Cox said.
• He said the SEC's emergency rule was never intended to prop up the stock prices of the 19 companies. "We expected and intended to have no impact whatsoever on the direction of prices," Cox said. "That's not the purpose of regulations." (I'd love to see this quote spoken when under lie detector)

Why don't we protect all these stocks immediately? Regulation SHO Threshold List. That would be a start. Let's make it an even playing field and give some of these small cap stocks a chance.

And with the dominance of computers in this era could you please put in the uptick rule? That way at least the algorithm would need to create at least 1 fake buy order in between each relentless sell order? I have never heard one explanation on why that rule mysteriously disappeared last year. Thank you Mr. Cox.

Coming Soon: A Post-American World

I was watching the CBS Early Show Sunday when one of our favorites, Fareed Zakaria, popped across the screen - hence I was forced to pay attention. I cannot bring the video over and in fact I don't see any video on the CBS website but I'll bring over some of the text. We highlighted Zakaria back in May [May 4: Weekend Reading] and if you are into the "big picture" there is a video and a series of links on his book - basically it argues not so much on the demise of America as much as the "rise of the rest". While, in current trajectory and with total lack of leadership and urgency I am a lot more worried about America than he is, I can see an ultimate end game where the rise of the rest actually helps buoy America instead of the vice versa condition we've had for the past 50+ years.

When we worry about the U.S. it's not so much the "End of Days" scenario but simply a parallel to Roman Empire, or British Empire - they are still around; but the prominence and wide swath of power/control diminished. I envision the same here - and no it won't happen in 1 year, or 2 years but it's BEEN happening slowly but surely - I call it erosion. Bluedog's blog reports we have troops in 147 countries and 10 territories. Why? There were not even that many countries in the Olympics. We're doing this with what money? The US spends more on military then the next 45 countries combined. Etc. Staggering stuff that we never "hear" about. But "someone(s)" are making a ton of money off this.

Just from my readings and TV viewings I simply see a complete lack of belief that not only is any erosion happening but even that it COULD happen to the "greatest nation on Earth". Luckily the people inside said nation have a lot of positives to offer, but at this point it is almost like we have to fight government and in fact a lot of big business and their interests to get in the right direction. National vision or leadership is kaput. These systematic bubbles that are "redistributing income" are wiping out normal average people via purported "100 year events" now on a 7-8 year cycle are just 1 example of many. In the end it's just a great transfer of wealth and moving the country more similar to a 3rd world country where wealth is increasingly congregated in fewer and fewer hands; that used to be ok when a rising tide lifted all boats but the past decade (and it has nothing to do with any 1 political party) has sharply reversed that trend. And I don't see it changing with any scenarios I can build out for the next 5-15 years. Not with our entitlement costs skyrocketing and great swathes of people in their 40s, 50s now buried under multiple bubbles - aka wealth destruction - during their prime earning years. As for the country as a whole, as Buffet says - we are like a big farming land owner - who needs to sell off X amount of acres every year to help us pay for the rest. But one day we run out of land.

• Consider the Olympic Games a giant exclamation point … a fanfare announcing a message from the Chinese. They're putting the world on notice, that they are players playing to win, and not just Olympic gold. They want you to know that China is a power to be reckoned with, and proud of it, that it's bearing down on the United States … fast.
• "The implications are that China will be the commercial leader of the world," Albert Keidel, an expert on China's economy, told Teichner. "It will also deserve and demand leadership in global institutions." Keidel is the author of a startling new study for the Carnegie Endowment for International Peace, "China's Economic Rise: Fact And Fiction."
• "We can model the economy and show that by 2035, it (China) will be as big, if not bigger than the United States' economy will be at that time, and by the middle of the century it will be twice the size of the U.S. economy at that time," Keidel said. "That's staggering," Teichner said. "That's conservative," Keidel said.
• So where will that leave the United States? Are we slipping? Are we reaching some inevitable tipping point that will change the world as we know it? Is the golden age of America coming to an end?
• Fareed Zakaria, editor of Newsweek International, said, "What's happening right now is, the world is moving beyond America. The future is, in many ways, being shaped in distant places by foreign people."
• "That's a big shift from a world in which America was at the center economically, financially, culturally, militarily, politically, to a world in which there are more centers and many forces, from India to China to Brazil to South Africa that have to be taken into account," Zakaria said.
• "This is not happening because America is failing or declining," Zakaria said. "It's happening because the rest are rising, and it's happening because the natives have gotten good at capitalism."
• Alan Wolff, an international trade lawyer and former U.S. trade negotiator who specializes in china, said we're not used to foreign competition. Coming out of World War II, we had a lot of breathing space; the rest of the world's economies were devastated, "but they're catching up," Wolff said.
• "Worldwide, 179 countries are growing faster than we are. As our manufacturing jobs have moved offshore, the United States has counted on innovation to keep its edge, but how much longer will that be possible?"
• Take the iPhone. The idea, the genius, was American. But the phones themselves are made in China, where the government is determined that the next generation of geniuses will be Chinese.
• "Actually, that's a stated national policy," Wolff said. "They have a medium- and long-term science and technology policy, 2006-2020, and in that policy one of the statements, one of the parts is to establish global brands, with indigenous technology, with Chinese technology behind those brands."
• Michael Jemal is president and CEO of Haier America, told Teicher that innovation and having its own patents is the "life blood" for Haier. "Haier applies for two patents every single day, every day of the year. In fact, it's more than that." Never heard of Haier America? Just wait. Right now, Chinese-owned Haier is trying to buy GE's appliance division When it entered the U.S. market nine years ago, the company sold three products. Now it sells 3,000. You name it, Haier makes it, everything from little dorm refrigerators to air conditioners, washing machines to flat screen TVs.
• "Haier is the number one brand in China," Jemal said. "In asia, we're in the top ten. The objective here in the U.S. is also to build a market share, to be in the top three in the U.S."
• The 600-plus foreign companies operating in South Carolina account for 1 out of 5 manufacturing jobs. They employ nearly two hundred thousand workers.
• Wolff said the president and Congress must face the new reality of global competition. "We need to change our tax policies, change our immigration policy. We made the U.S. a magnet, an attractive place for the best and the brightest in the world, and we frustrate that by saying, 'You get a Ph.D. here and that doesn't matter. Right now, we're throwing you out.' That's very self-destructive behavior."
• "We save too little, we consume too much, we borrow too much from the rest of the world, we use energy in a profligate and wasteful fashion," said Zakaria. He says the U.S. must change its ways, and soon, if we want to hang on to the wealth and influence we have.
• "I think that our window for policy change is very short," he said. "I think if we don't, in the next few years, four, five years, make the necessary adjustments, what you'll see is something that looks a little like the trajectory of the British empire in the 20th century. It's not that Britain collapsed, it's that it just slowly faded away in significance, in power and wealth."
• But Zakaria worries that one day historians will write about how the United States globalized the world, but forgot to globalize itself.

These "big picture" themes are a lot of what shape my long term investing themes - granted none of it matters in this current era, but one day it will matter again. And if China has "slow growth" (of 7%) next year or coal stocks are garbage because crude oil is down 20%, the US centric investor can do what he does. But we live in what I believe to be an inward looking society that really is missing a lot of what is going on in the world. So we'll continue to report on it, because not only are "they" not going away, but "they" are growing in strength and independence as time goes on... why we are busy fighting over national gas tax holidays. "They" are very hungry - sort of like the Greatest Generation here in the U.S. While many of "us" work very hard to keep up (with the Joneses), at the national level and in aggregate I believe we've grown complacent. There really is a global competition going on and we don't seem to realize that. When I think that is too harsh an indictment I just review these sort of items - [Feb 23: Two Million Minutes - a Global Examination] which follows the High School life (and preparation for the global world) of students in America vs India vs China. It is eye opening and worrying. I guess we'll find out how it all turns out by 2050 ;)

Bookkeeping: Cutting Mastercard (MA) as it hits 20 Day Moving Average

Well we caught another HUGE run, this time with Mastercard (MA) - made well over $6 on this one from front to finish. (being facetious) At this rate we might beat a 6 month CD. I was hoping Mastercard could break out past the 20 day moving average (mid $240s) and make an attempt to the 50 day ($260s and falling), but hope is for those guys who use fundamentals. Usually we wait for a stock to attempt to hit the 50 day moving average before watching for a rejection but I'm not even going to wait that long and assume the "move" is over as it's getting batted back even at the 20 day. Could be wrong. Could be right. But cash we will go into... selling this down from 2.5% of portfolio to 0.5%. I keep finding very few opportunities to make money on the long side - thankfully Fuel Systems Solutions (FSYS) never lets up.

I have a pretty big buy list right now but in this market, the best way to make anymore than 1.5% on a position (ex airlines of course) if to wait for the hammering and just guess where the catching knife falls and then hope you are close. The odds are poor with that methodology, because being a few days early means you can be down 15%+, but true sustained breakouts are rare at this time. For example - remember that nice post earnings breakout of Ctrip.com (CTRP) - almost gone.

Remember that nice post earnings breakout of Intuitive Surgical (ISRG) - almost gone.


Etc. Countless charts like these. No one is "investing"; everyone is "trading". Yes a few names are actually sustaining breakouts but guessing in advance which few will do that, versus the 90%+ that are giving back all their gains within a few weeks is best left to Nostradamus. Why is FSYS sustaining its run? I have no idea - the chart (at the time) looked no different than ISRG or CTRP. Just random action - 1 out of 20 stocks will be allowed to sustain a big move; the other 19 you have to sell when you get the pop. Because the market will take all your gains away if you don't. So we'll obey until odds turn more into our favor.

Long all named mentioned in fund except Intuitive Surgical; long Fuel Systems Solutions in personal account

Time for Commodities?

I wrote both last Friday in our performance update

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. 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.

And Sunday night in our weekly summary

I also have lack of conviction in any 1 sector so we're spreading our stakes over many sectors. That said, we've had a 2 month dismantling of the commodity sector and since they are no different then banks, retailers or homebuilders at this point; those groups had significant rebounds during the past year even when their fundamentals were deteriorating - so even if one believes the fundamentals are deteriorating at some point the market punishes the "crowded" trade - which at this point is sell off commodities. Maybe it won't be this week but my hunch is we are near to a bounce in the group. The question is how long will it last - but with broken charts everywhere we'll be selling into any bounce and if we are "wrong" and this is just step 1 of a much larger move up, we'll buy back positions as they show strength.

.... that in this market where you buy the beaten down and sell the strength, this 2 month hammering in commodities looked to be showing signs last week of relenting, and I felt a bounce could be in the offing. So far this week that been a good call as we are seeing some good action. But the open question is sustainability. Do you sell the bounce or buy the bounce? I don't know. My initial plan is to sell the bounce and if things continue upward to rebuy - since these moves can have some legs once HAL 9000 decides he loves commodities again. But do we expect a fundamentally driven move upward over a sustained period? Not anymore. Not in this market. Every stock, regardless of sector is the "same" - buy when oversold, sell into overbought - no moves last for more than 2 months.

I am using 2 charts as my proxies - in my 2 favorite commodity groups - Mosaic (MOS) in fertilizer and Walter Industries (WLT) in coal. Both are neither the worst or best chart in their group, and both have broken down below their 50 day moving average but then began to trade sideways. Now both are making runs at their 50 day moving average from below, and I'd like to see both close ABOVE and then make a confirmation day (a following day with a higher close/high) and then we can get sort of happy about this sector. But I would not expect any 3 month rallies.



Further if the market begins to break down action (not saying it will) will these stocks move in inverse relationship? Or will we finally reach that point where everything is sold at once instead of a sector by sector woodshedding action. All open questions - but those are my thoughts going forward. But once again, we seem to be in a place where the hardest hit gets the rotational money - the name of the stocks/sector mean little in this era - they are all the same to computers. These are not a fundamental investor's thoughts; these are a trader's thoughts. Because long term investors who use fundamentals as a basis for buying are being bludgeoned in this era.

So I'll be interested to see if we have the complete opposite trade - consumer discretionary/financial = bad, commodity = good. You know, caveman trading logic: "This stock good.. grunt. Beaten down. grunt. Me like. Me Buy. grunt. Retailer is last week trade. grunt. I sell. Technology? Not in caveman days."

Look for Jim Cramer to come on TV if this move lasts for a few more days saying "I want you in commodities - the move downward was overdone" ;) I'm still doubting the move will be sustained but I am sort of hoping for it to see if this prediction will come true.

Long Walter Industries, Mosaic in fund; long Mosaic in personal account

Bookkeeping: Cutting Back Buckle (BKE) Ahead of Earnings

I don't have quite the same conviction with retailer Buckle (BKE) as I have with some of these other names I've held through earnings, so with the company reporting Thursday and the stock now testing its 50 day moving average I am following the game plan and cutting back. Perhaps more ominous "might" be the formation of a series of lower highs over the past month - we don't like that. I've cut this back in the $48.40s from a 1.4% stake to a 0.4% stake, pending more information Thursday.

While I hate the consumer trade, there are basically 3 "youth oriented" clothing stores hitting their same store sales during the past year - Buckle, Aeropostale (ARO), and Urban Outfitters (URBN). The former 2 report Thursday and it was a toss up deciding which one of those 2 to buy so I get some 'consumer exposure' (one of the only things working in the market the past 2 months)

So we'll see how the results are Thursday - both companies have been reporting 20% same store sales figures, but it simply makes little sense to risk much capital ahead of earnings when even great reports (in the wrong) sector are punished. Is retail the wrong sector? I don't know. That changes by the day in this new era of market. Last week it was the right sector. By Thursday it could be the most hated sector. It depends on what site of the motherboard the hedge fund computers wake up on I suppose.

We'll assess these 2 names again Thursday and either continue on with Buckle or maybe make a switch. One of my 3000 strong analysts (readers) reported to me via email that the Houston store (Buckle) was nearly empty when he visited, which seems to be in direct contrast to their same store sales so we'll see in 48 hours. ;) Until then and without the ability to short some of these consumer discretionary names breaking down, I'm playing this market like a 89 year old granny: conservative.

Now... where are my teeth?

Long Buckle in fund; no personal position

Bookkeeping: Cutting Back Cummins Engine (CMI) on Technical Breach

Cummins Engine (CMI) is breaking down below the 50 day moving average so we're cutting back from a 2.0% stake to 0.3%. The stock price is low $66.20s. We're just sticking to this same game plan and cutting stocks HARD the day they breach support, even if it means we are going to sell some stocks unfairly and/or they reverse and bounce on us. Much like selling off fertilizer or coal stocks when their fundamentals are only improving this sort of trade makes zero sense to me from a company business standpoint. But until fundamentals are again respected in US stock markets, we'll stick to charts. We usually take a very incremental approach, building positions slowly or exiting slowly but not in this market.

Cummins is now trading at forward PE of 13 for 20% type of growth, and wonderful exposure to overseas markets - where they have been many years before the competition. But those are fundamentals and it's beyond the point. I see so many "cheap" stocks beaten senseless while people run into money losing operations such as airlines - it's gone from bemusing to a bit of a joke. But it is what it is, and I don't fight armies of quant hedge fund computers. (we tried for a few months; it does not work)

Shoot first, ask questions later continues. We'll preserve capital for the day sense returns.

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

Long Cummins Engine in fund; personal position

Bookkeeping: New Position in iShares Short Treasury Bond (SHV)

Long time readers will know I've been holding cash in a 10-25% range for pretty much the entire life of the fund. In Marketocracy.com I don't get this cash swept into a money market and hence for nearly 13 months have been earning 0% on this money. I was talking to an investing friend yesterday and bemoaning this fact, and he mentioned some ETFs which are as close to a money market as you can get - i.e. i want stability of principal and try to get a few percent points of return.

His suggestion was iShares 1-3 Year Treasury Bond (SHY) which looks, from volume, to be a very popular instrument. Average duration is 1.74 years and a 30 day yield around 2.5%.

I am going even more conservative than that since I effectively want as close to a money market as possible and am using iShares Short Treasury (SHV) which is less popular (by volume) but has average duration of 0.34 years and a 30 day yield around 1.8%.

So not much of a difference in yield and 1/4th of a year is as close as you are going to get to "cash" I suppose. And 1.8% yield is better than 0% I've been getting. The main problem is commission costs - as I liquidate this to buy other positions I'll incur commissions each time I trade "out" of a piece of SHV, but as long as it is not often enough to eat the 1.8% yield away I suppose I'll still come out ahead.

So while I'll create this as a separate position it is effectively "cash" in terms of replacing a money market account that I'd normally have in a brokerage. I only wish I had done this over a year ago since it would of helped goose returns a bit. In this environment even 1% helps.

Since I don't want to incur commissions each time I leave "cash", I'll actually keep a bucket of cash to the side and then put 75-80% of my free cash into this instrument so we create some interest on the money. For example, we currently have about $200K in cash, so I put $160K into the ETF. This way if I decide to buy something for $40K or less, I won't be paying the commission to "sell" the ETF.

Obviously I won't have to deal with that in a normal brokerage where free cash is swept into a money market.

Long iShares Short Treasury Bond in fund; no personal position

3 Casino Stocks - I Guess Gas Went up 2 Cents the Past Few Days?

Gas is down 40 cents, the US consumer is back! Pile in! Pile in!

Not so much.... as I keep saying each time these consumer discretionary stocks [Stuff I've Been Negative on Since Last Fall] jump on Kool Aid recovery talk - they just create yet another opportunity to short - the danger is timing. 3 casino stocks rolling right back over. Again we cannot short individual stocks in the current situation but this is simply the easiest way to make money the past year - let the "junk" to their oversold rallies and then get short. We're losing a lot of return by not being able to do this.

I don't see gas prices jumping up the past few sessions, so I wonder why this is when the theory was how great everything would be as gas prices fell? Ah yes - reality. Just 8 days ago these stocks were ramping up 12-14% [Aug 11: The "Turn" Appears to be Here]

Some amazing action out of the retailers - see Coach (COH) - and which we considered last week continues to fly. Lots of tried and true shorts over the past year such as Polo Ralph Lauren (RL)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 up 10%, Wynn Resorts (WYNN) 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.

A month earlier? [Jul 11: Gaming Stocks Absolutely Destroyed Yesterday]

Did I mention avoid anything to do with the U.S. consumer? Yesterday...

1. Wynn Resorts (WYNN) down 10%
2. Las Vegas Sands (LVS) down 11%
3. (grand prize to) MGM Mirage (MGM) down 21%

Have I mentioned this is not a buy and hold market. Nothing but traders moving stocks up and down to create some return for their funds. This is all the market has become. Did anything change fundamentally from 3 months ago? 2 months ago? 1 month ago? I know - I know - gasoline is down 40 cents so everything is fine in the United States of Subprime! But it didn't pop back up today - did everything revert away from "fine" the past 3 trading sessions? I only type this so for all of you who sit there and wonder "why is my stock doing this or that" and try to attach logic or fundamental reasons to it - to urge you to stop doing that. Save yourself the grief. Your stocks are in the hands of others and it's like balls of yarns for big cats - very big cats - with a lot of money and leverage. Fundamentals are not changing - just shorting, short covering, naked shorting, leveraged long positions, etc etc etc.

Fundamentals? So old school. Check back in about 6-8 weeks when these stocks go back on another 40% run upward. And then fall back down in 11-13 weeks. Rinse. Wash. Repeat. Since this is the only way to make money anymore and buying companies on their actual business is useless, I expect myself to be the proud owner of one of these gaming stocks in a few weeks so that I too, can yell about the upcoming economic recovery (even though the moves have nothing to do with fundamentals) and cheer these on as their fundamentals degrade. MGM is so bad you cannot even see the 200 day moving average on the chart anymore.

No positions but yearning to be long a casino stock in about 3 weeks - or maybe an airline or automaker

Best Stock on the Planet: UAL (UAUA) [United Airlines]

Every morning I see this stock up in premarket - its a wonder. Prospects are incredible going forward. They are projected to go from a $10 loss this year to a hopeful $5 loss next year. This will take their PE ratio from infinity to... infinity. But that's ok - the quant hedge fund computers love this stock. Best chart on the planet; talk about the "anti-oil" stock.

ReneSola (SOL) - The Sun Shines On

Quite a staggering good result from ReneSola (SOL) this morning; the stock has had a huge run since we began adding a week ago so some pullback might happen but it won't be for fundamental reasons. The revenue growth they had sequentially (quarter over quarter) is more than most companies do year over year - 40%! Research and Development spending jumped $3M from the previous quarter - that was much higher than I expected; if it had held steady from last quarter their net income would of went up from $23.3M to $26.3M and their EPS would of came out even more impressive. The only issue I have with SOL is their high share count for such a young company which makes it hard to grow earnings PER share - but the operating metrics are improving across the board and the year over year growth is off the charts. They "only" lost $800K in currency so unlike other companies in this space it was not a huge effect (especially spread over so many shares) - which was one reason we sought this name out for this quarter.

Despite tremendous growth in the near term it's all about "beating the numbers" game - analysts were in at $0.32 EPS and $141M in revenue. The company blasted those figures.

Note - they have an accounting treatment which I am not going to get into but it's spelled out in the earnings report. I'm just using the first set of numbers they reported.

• Net revenues for the second quarter of 2008 were US$173.0 million, an increase of 40.7% sequentially and 289.0% year-over-year. The increase in second quarter revenues was primarily attributable to an increase in output from the expanded production capacity and increasing wafer ASPs.
• Gross profit for the second quarter of 2008 was US$42.8 million, a 57.1% increase sequentially and 330.0% year-over-year. The gross margin for the second quarter 2008 was 24.7% compared to 22.1% in the first quarter of 2008. (that is a huge difference in just 1 quarter - 2.6%) The increase in gross margin was primarily attributable to a further reduction in the silicon consumption rate to 6.24 grams per watt from 6.30 grams per watt in the first quarter of 2008, the continuing reduction in non-raw material related production costs, and increases in wafer ASPs due to a high demand for our wafer products.
• Operating profit for the second quarter of 2008 was US$34.5 million, an increase of 48.9% sequentially and 328.4% year-over-year. The operating margin was 20.0% in the second quarter compared to 18.9% in the first quarter of 2008. (we love seeing those percentages increase, even with a huge increase in R&D spendings) The increase in operating expenses was primarily attributable to a substantial increase in R&D expenditure relating to our investment in developing alternative silicon feedstock materials.
• Net profit during the second quarter of 2008 increased 31.9% sequentially and 294.6% year-over-year to US$23.3 million. (EPS diluted came in at $0.38)
  

Polysilicon Project Update

• On May 14, 2008 ReneSola announced that it had increased the planned annual polysilicon manufacturing capacity to 3,000 tonnes at the wholly-owned facility in Meishan, Sichuan Province, China. Construction of this facility is on track, with completion expected in early 2009. The facility is expected to be operational in the first half of 2009.

Feedstock Procurement (big issue in solar world)

• As a part of ReneSola's diverse feedstock procurement strategy, the Company recently signed a number of polysilicon procurement contracts with international and domestic suppliers with terms ranging from one to five years. With two long term polysilicon procurement contracts signed in 2007, a total of 2,500 tonnes of polysilicon will be delivered during 2008 and 2009, with the majority to be delivered in 2009.

Production Capacity

• As a part of ReneSola's ingot manufacturing capacity expansion to 645 MW by the end of 2008, the construction of a facility to house 160 MW of multicrystalline furnaces is now complete and ready for delivery of the furnaces which will occur during the third and fourth quarters of 2008.
• Construction has begun on a new multicrystalline wafer facility that will hold an additional 355 MW of multicrystalline furnaces as a part of ReneSola's 2009 wafer manufacturing capacity expansion plan. The facility is expected to be complete in January 2009. The furnaces are contracted to be delivered in batches, and the last shipment is expected to be delivered in early third quarter of 2009.

Third Quarter, 2008 and 2009 Outlook

• Production output in the third quarter of 2008 is expected to be in the range of 90 MW to 95 MW, compared to 82.5 MW in the second quarter of 2008 and 36.0 MW in the third quarter of 2007. Gross margin for the second half of 2008 is expected to remain stable at the level under the Equity Accounting Method for the Company's investment in the Joint Venture.

• Based on strengthened wafer ASPs and increased production output we are once again increasing our annual production output and revenue estimates for 2008 and expect output to be in the range of 340 MW to 350 MW from the previously guided 330 MW to 340 MW, and expect estimated annual net revenues to be in the range of US$640 million to US$670 million from the previously guided US$570 million to US$590 million. (that's a substantial jump from their side - analysts are in $612M)
  

• We maintain our wafer production capacity target to be 1 GW by the end of 2009 and our 2009 annual production output is expected to be in the range of 650 MW to 750 MW, including output from tolling arrangements in the range of 100 MW to 150 MW.

So at this point the $1.29 2008 analyst estimate is obviously in jeapordy - they've now done $0.28 and $0.38 = $0.66 in the first half of the year. If they had zero growth from here and just replicated this quarter's performance that's another 76 cents. Due to an increase in share count from dilution which I believe on first glance is not showing on this earnings report I don't have an exact model on where they should be going for the year - also the question of R&D spending is an open one - does it continue at this new higher rate or does it fall back to a more normalized level - or somewhere in between. But it seems in a very back of envelope way that with the new guidance, $1.45-$1.50 seems likely for the year. Growth rates of 200%+ cannot continue but even if ReneSola "slows down" to 75% growth rates in the coming 2 years, perhaps they can get a better forward PE ratio than the current 12.

But that's just me, and fundamentals don't matter to this market.

Favoritism by investors seems to switch from company to company each quarter - and unfortunately they do all tend to trade in one band - despite the individual pros and cons - but for this current round it seems the 2 Chinese wafer makers have the best combination of momentum, lack of headwinds, and investor sentiment. Not to mention, despite huge runs in th past week, they still are dirt cheap - trading below Home Depot (HD) valuations.

[Aug 12: Some Adjustments to Solar Patch & New Position in ReneSola (SOL)]

Long ReneSola in fund and personal account

NYT: Export Boom Helps Farms, but not American Factories

Ah, the weak dollar has led to the great American manufacturing export economy - well not so much

• Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal. (let's cheer that US Multinationals have not found a way to outsource these products - at least we have something left that others in the world want to buy)
• This helps explain why manufacturing jobs are continuing to disappear by the tens of thousands and factories are closing even during a miniboom in exports. While the surge in commodities is a welcome relief, it is an unreliable prop for an industrial power.
• “The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly,” said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute. His point was that while Boeing’s aircraft or Caterpillar’s tractors are distinctive and sought after, corn grown in Iowa is virtually interchangeable with corn grown in Argentina or any other bread-basket country. “Over a long period,” Mr. Bivens said, “commodities contribute right around zero to export growth.” (easy now, let us have some bright spots in the morbid economy)
• An analysis of trade data by the federal Bureau of Economic Analysis illustrates just how lopsided the gains have been between manufactured goods and unprocessed commodities. All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported.
• Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent.
• But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. (oh really... imagine that) Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.
• “We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas,” said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. “But on the margin, we will shift a little bit of manufacturing back to the United States.” That has happened recently, in response mainly to soaring transportation costs and the weaker dollar.
• Many American manufacturers argue that as factories spread across the globe, exporting is no longer an effective means of competing against sophisticated and ever more numerous local manufacturers. In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.
• Currency fluctuations rarely alter these long-term commitments, and profits stay abroad. “Most of the money we make overseas, we keep there,” Mr. Pistell said, “and then plow it back into growing the business overseas.”

Conclusion: We continue to move to a flatter world - as consumption flattens in the US but grows overseas more production will follow (i.e. jobs). We are told the weak dollar is a great boom for the U.S. manufacturing base. The numbers tell a starkly different story, as we've pulverized the manufacturing base so there are not many even left to take advantage of this shift. But it is good for U.S. commodities - the multinationals have yet to figure out how to move coal mines or Iowa farmland to distant countries to take advantage of cheap labor. So we at least have that going for us as we continue to move to the 95.2% service economy.

Reader Investment Pledges mid August Update

Time for our monthly update on pledges. Another very good month where readers committed $654K towards our goal; again well ahead of my "projections" for $200-$225K a month. Especially solid in lieu of the fund hitting a slump the past 8 weeks, and a dismal market overall the past year. Total dollars committed is now $3.96 million. As mentioned in the past, my goal was to get to $7M in assets by the end of the first year of actual existence (preferably sooner so I don't have to lose money) and hopefully launch with $4M at least; so assuming all 200 or so investors are still onboard (which is not my assumption) we are now at that level. We've also gotten some good publicity from the Barron's article, and some smaller media requests so things are progressing very well for what I think will be a unique product.

If you are interested in investing/pledging as always send me an email (link on the website, upper right margin) or attach a comment to this post or one of the previous monthly updates. The original post on the purpose of the blog can be found here [Jan 7: Readers 'Pledges' Towards Mutual Fund Launch] Any time day or night, you can see how I am doing by verified independent 3rd party metric here: 'Rising Tide Growth' performance

Frequently Asked Questions can be found here.

With the pledges coming in well ahead of plan, we can now give a more firm update on launch date - at this time we are now shooting for "around" New Year's day - SEC approvals will determine the actual date. I know many people pledged (some a long time ago) without a firm date in mind and simply said "let me know when you are ready to go" with a very open ended commitment, so hopefully that gives you a better idea. We'll be working on the prospectus and N1-A (massive paperwork) with lawyers in the coming 3-4 weeks and then have everything off to the SEC by some point in September. From there you simply wait for comments/requests from SEC and eventually get your approval, generally 90-115 days from sending in the paperwork. What we'll do is have our new website up and have applications and prospectuses up by pdf file as soon as possible when the time comes, and be "open" at concurrent time frame of approval. And then it's for real.

A few more updates on the actual website - there is an open question of what exactly I can or can not do. The SEC has very strict regulations and you do not want to run afoul or essentially the fines levied would put one out of business. So as stated in the past, I plan to be as transparent as possible while staying within the rules. From feedback from countless readers that is a huge selling point for people and one of the main reasons for interest - we generally attract a hands on (not passive) investing group and instead of flying blind they like to know what is going on with their money. So it's a lot of extra work on this end to convey the thought processes, but it will differentiate us from the pack. And hopefully over the long run, performance will be the other differentiator. With that said, and this is subject to approvals as lawyers are still working through it, but our general plan now is a weekly update of all holdings posted after the close Friday of each week. The #1 rule in this sort of venture is no forward looking statements. Period. Hence some things I do today i.e. "I'd like to buy if/when it hits $XX" won't be allowed. Everything has to be historical. The #2 rule is I can't talk about a position until holdings have been updated. So if I make a transaction, it will be reported after the fact and after the week is over so I don't make a mistake in communication that puts me out of business. Meaning, trades won't be posted "within a day" like they are now, but more like our end of week summary where I review the top transactions of the week, ONCE the holdings are updated. So those are the 2 main differences I see from the current format, but it's still developing... even with those caveats I cannot imagine anyone else having a more transparent platform. As for economic commentary, mocking misleading government reports, pointing you to interesting stories from other blogs - all that will stay in real time. So hopefully that gives you a better idea of what the vision is for the future. The more detail the lawyers give - I'll pass along as we move forward.

Blog readership continues to grow but the market (and most likely the performance chasing nature of investors) has slowed us down recently - now we're averaging about 3200-3400 visits a weekday, and email readership consistent in the mid 600s range from last month. Obviously I sound a lot smarter when I'm beating the indexes by 20%+ than when I'm lagging so that is to be expected. But just like Ken Heebner or T Boone Pickens didn't suddenly turn stupid, I believe my brain is still intact - it's just a quite different market than any of us have seen. So adjustments are critical until we return to normal, whatever the new normal might be. There might be entire quarters I lag the market, or heck a year or two but hopefully the long term metrics are top notch and our first year, relative to the market was still excellent even if we hit a major slump at the end. ['Rising Tide' Performance Year 1] The market will return to quasi normal at some point in the future - we just picked a very interesting time to start up; it's certainly been an epic test to actually make a profit in this time frame. And frankly when I have bad spells, you will see why - as opposed to just watching a NAV fall on a daily basis without any idea what is going on behind the scenes. With that said I believe my thesis (plural?) have been on and economic calls made last year better than 99% of "famous" pundits paraded on TV on a daily basis [Jul 14: Reviewing December 2007's Roadmap & Views] but the market has eventually punished all sectors, and all stocks at one point or another - so making money on a consistent basis, even with the correct economic views has been a tough slog. But at least we've been in the positive column, unlike most peers.

I'm updating things on a state by state basis each month, as I outlined in [Investment Pledges by State] As we wrote, to make it cost effective to register in any state we need about $40-$45K coming in from that state. The good news is if you are not in a registered state, once the amount is breached, its a matter of 24 hours, and a fund can be open for business in any state. So if someone shows up in 6 months from a state that is not registered, they can be added almost instantly. I don't have the state by state data with me when I type this post so I'll update it at a later date - below is last month's "standings" if you will. I know a few of the 8 states that were "close" now are moved up to the top group but I don't recall which off the top of my head.

We now have 15 states (up from 12 last month) where the threshold is met and we'll be registered if we started today: WA, CA, MI, AR, NJ, TX, GA, IL, NY, MA, OH, FL, VA, NV, and AZ

Another 8 states we are well on the way and hopefully get a bit more before end of the year to get them registered ($20K+ pledged): CT, NE, KS, TN, MD, IA, NC, PA

Just getting started in these states with first pledges: MN, WI, LA, OR, NH, AL, KY

1 state TBD: SC

In addition to investors from Canada, Costa Rica, Germany, New Zealand, Singapore, and Uruguay we've now added Slovenia.

To future investors, as always, if you change your mind and want to rescind an investment pledge and/or change (up or down) the amount, please let me know since I simply want know where I stand in this process.

As always, thanks for the trust in investing.

Totals
January 7, 2008 = $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008 (click here for full post): $1.2M raised
May 15, 2008 (click here for full post): $1.6M raised
June 17, 2008 (click here for full post): $2.5M raised
mid July, 2008 (click here for full post): $3.3M raised
mid August, 2008 $3.9M raised

(there is a big gap here I cannot seem to erase - so scroll down for the list - sorry for the formatting)

Amount	Who	Where
$75,000	Self	MI
$2,500	Michael D	Oceanside, CA
$7,500	Oth	Parts Unknown
$10,000	Dean D	San Jose, CA
$2,500	Oza P	MA
$20,000	Oren L	Chicago
$10,000	Rob T	NYC
$5,000	Ryan	Seattle, WA
$7,500	Ted	Sunnyvale, CA
$2,500	Brian P	Cerritos, CA
$50,000	David B	Middlesex, NJ
$50,000	Ian M	San Antonio, TX
$40,000	"LiquidWindows"	Deep in heart of TX
$5,000	Jonson	LA, CA
$5,000	Jimidean	Birmingham, AL
$5,000	Brooks R	Baton Rouge, LA
$50,000	Zlatanscores	New Jersey
$3,000	Ben S	Portland, OR
$20,000	Sheng S	Omaha, NE
$10,000	msuberri	NJ
$5,000	David W	Houston, TX
$10,000	Ryan T	NJ
$3,000	NandaK	Nashua, NH
$50,000	WaltF	Louisberg, KS
$2,500	Joe	Scranton, PA (email)
$2,500	Todd	Nashville, TN (email)
$250,000	David R	South Carolina (email)
$100,000	A.F.	Los Altos, CA (email)
$50,000	Satya	Temple City, CA (email)
$15,000	Bobby L	San Jose, CA
$200,000	Ganesh S	Bellevue, WA
$2,500	Michael A	Charleston, SC (email)
$2,500	TJP	Sterling, IL (email)
$75,000	Bob B	VanBuren, AR (email)
$10,000	Pat L	Tuscon, AZ (email)
$37,500	Art H	Auburn, CA (email)
$5,000	Dan D	Augusta, GA (email)
$5,000	Jeffrey H	Greensboro, NC (email)
$37,500	Tom L	San Fran, CA (email)
$10,000	Wesley W	San Jose, CA (email)
$25,000	Tom S (daKat)	Minneapolis, MN
$5,000	Dan W	Mentor, OH (email)
$10,000	Jim G	Marana, AZ (email)
$5,000	Andrey G	Baltimore, MD
$20,000	Doug M	San Fran, CA (email)
$75,000	"Skooker"	moving (email)
$3,750	Brian C	Milwaukee, WI (email)
$2,500	Jason F	Big Apple, NY
$3,000	Chung W	San Jose, CA (email)
$3,000	Mac	Bellevue, WA
$10,000	BMW	Bay Area, CA (email)
$10,000	"steelelana"	NY
$10,000	"Jpassana"	TX
$5,000	Brian J	Racine, WI (email)
$5,000	Ceferino J	Parts Unknown (email)
$10,000	Link M	Knoxville, TN
$5,000	Pankaj	Forest Park, OH
$20,000	Alex A	Big Apple, NY
$100,000	D.K.	Los Altos Hills, CA (email)
$20,000	Roger B	Arlington TX
$20,000	Rohit S	Chicago, IL
$5,000	Praveen K	Atchison, KS
$25,000	Robert D	Niantic, CT (email - IRA)
$100,000	Scott R	Longbranch, WA (email)
$20,000	Roy S	Knoxville, TN (email)
$50,000	Douglas D	Atlanta, GA (email)
$20,000	Mahender B	Crofton, MD (email)
$15,000	Joon K	NYC (email)
$15,000	Linda A	Houston, TX (email)
$5,000	Bob M	Atlanta, GA
$3,000	Kiran A	Atlanta, GA (email)
$5,000	Alven	LA, CA (email)
$75,000	Vijay K	New Jersey (email)
$3,000	Tyler	CA (email)
$20,000	Jeff M	Cedar Rapids, IA (email)
$50,000	Will W	CA (email)
$10,000	Burt B	Venica, CA (email)
$4,000	Kathy A	Deland, FL (email)
$10,000	Nate W	Novi, MI
$5,000	Tom R	Canada (email)
$20,000	Anurag V	Germany (email)
$200,000	S.D.	Costa Rica (email)
$5,000	Behrouz F	Ottawa, Canada (email)
$20,000	Hong H	Hamilton, Canada
$15,000	Jeff F	Calgary, Canada (email)
$2,500	Hamish E	Queenstown, New Zealand
$25,000	George L	North Carolina (email)
$4,500	Satyakee S	Houston, TX
$2,500	"j/marketfolly"	TX (email)
$30,000	Rich P	Concord, CA (email)
$50,000	Rich T	S. Yarmouth, MA (email)
$5,000	Xiang X	Salem, MA
$25,000	Shane V	Houston, TX
$100,000	Dave K	Downey, CA (email)
$10,000	Bill H	Boston, MA (email)
$20,000	Kurt C	LA, CA (email)
$20,000	Charles L	San Mateo, CA (email)
$5,000	Troyhouse	Chicago, IL
$10,000	Darin P	Corvallis, OR
$10,000	Adam M	Columbus, OH (email)
$15,000	Justin K	Columbus, OH
$5,000	Adam S	CA (email)
$5,000	Mike M	Atlanta, GA
$25,000	Darius K (Asterix)	VA
$20,000	Arun	Sunnyvale, CA
$20,000	Tao Z	New York, NY
$48,000	Ghassan G	CA (email)
$25,000	Greg B	CA (email)
$100,000	Frank G	NJ (email)
$5,000	Bill G	PA (email)
$5,000	Jayson E	WI (email)
$20,000	V.K.	Amber, PA (email)
$3,000	Steven H	CA (email)
$10,000	Mark M	PA
$6,000	Gavin W	Canada (email)
$20,000	Alan N	Scottsdale, AZ (email)
$30,000	Bruce C	Lake Stevens, WA (email)
$2,500	Junyuan	Singapore (email)
$10,000	Trieu	Texas
$30,000	Nestor T	Uruguay (email)
$20,000	Dave B	Palo Alto (email)
$10,000	Adrian B	Canada (email)
$3,750	Rajesh S	Florida (email)
$2,500	Shelley G	LA, CA (email)
$2,500	Sachin S	Chicago, IL (email)
$3,000	Bob H	FL (email)
$15,000	Stanley T	Canada (email)
$10,000	Ron S	Florida (email)
$3,000	Scott H	Westlake, OH (email)
$10,000	Bruce L	Kentucky (email)
$15,000	BD	San Diego, CA
$10,000	Zhong L	McLean, VA (email)
$100,000	Andrew H	Reno, NV (email)
$40,000	Glenn E	Tampa, FL (email)
$5,000	Dennis B	Chicago, IL (email)
$10,000	Patrick G	Buffalo, NY (email)
$5,000	Peter M	Hubbardston, MA
$10,000	Karen K	VA (email)
$5,000	Jake M	Madison, WI
$5,000	Martin T	New York (email)
$5,000	Bob B	Merrimack, NH (email)
$10,000	Matthew L	South Carolina (email)
$10,000	Ed S	Arizona (email)
$60,000	Jason N	NY, NY (email)
$25,000	Richard D	Fairfield, CT
$2,500	Wei Z	Fairfax, VA (email)
$25,000	KB	Texas
$5,000	Carter W	Seattle, WA
$4,000	YJ	Brentwood, CA
$5,000	Bill H	Boston, MA (email)
$20,000	Tomaz K	Slovenia
$25,000	CS	Texas
$10,000	Olivier	Florida (email)
$100,000	Jake L	NJ (email)
$2,000	Marshall	St Charles, MO (email)
$5,000	Greg R	Florida (email)
$10,000	Rohit	CA
$2,500	Bruce W	Nortborough, MA
$10,000	Robert V	Doylestown, PA (email)
$25,000	Eugene/Wei L	NY (email)
$2,500	Gary F	Chicago, IL (email)
$6,000	Gramlich W	Laguna Beach, CA (email)
$25,000	Ron W	Carlsbad, CA (email)
$2,500	James S	San Fran, CA (email)
$50,000	Armour B	Phoenix, AZ (email)
$2,500	Mike H	Bothell, WA
$25,000	Dave C	Clearwater, FL (email)
$12,500	Song H	Singapore (email)
$10,000	Jatinder M	Elkins Park, PA (email)
$10,000	Victor C	Melbourne, FL (email)
$20,000	Jerry H	CA (email)
$20,000	Andy S	Mt Dora, FL (email)
$2,500	Dale Z	New Jersey (email)
$20,000	Ralph B	Bay City, MI (email)
$10,000	Kirk T	Fort Worth, TX (email)
$2,500	John C	Philadelphia, PA
$7,000	Lisa	Leesburg, VA (email)
$2,500	B M	Charlotte, NC (email)
$10,000	Jim F	New York (email)
$10,000	Ben	Indiana (email)
$2,500	Albert W	New Jersey (email)
$5,000	Steven M	West Virginia (email)
$10,000	Robert T	Houston, TX (email)
$3,958,500	Total

24/7 on Ken Heebner's 6/30 Holdings

Below is a blog entry on Ken Heebner's (he of CGM Funds) holdings as of 6/30/08. Funds are required to post their holdings with the SEC quarterly but are allowed quite a great delay. Due to Heebner's track record, it is worth noting what he is doing even if one agrees or disagrees with him. He had a great 2007 in his Focus fund specifically, but has had some market trailing years as well (he avoids technology so he missed the internet bubble years and the tremendous gains - and subsequent losses there).... but he goes specific (narrow), he goes hard (big weightings), he makes changes quickly when necessary, and he gets it right more often than not. So one must absolutely respect the 20+ year track record even if he has a bad quarter or year. Also he is one of the few funds out there that has any short exposure. (keep in mind he actually has multiple funds but the great performance of "Focus" has gotten all the attention and money have flooded in) So aside from that, we have similar styles - so it's always interesting to read up on what he is doing.

Knowing how heavy he has been in commodities, I've watched his fund performance the past 8 weeks especially - he was letting up blood left and right and is down 20% in the past 3 months, and in fact 17% in the past 4 weeks. So it's tough everywhere, even for the best. But there was a day last week when commodities surged upward, and that evening his NAV barely budged. This tells me he has already made changes to the 6/30/08 holdings so while I'm presenting the information below - I believe it's already "old". So we know where he came "from", but it will be interesting to find out in 3 months where he went "to" - unless he flips his entire portfolio once more by then ;)

Ironically, his fund topped out within 4 weeks of his cover story on Fortune magazine [May 28: Ken Heebner - America's Hottest Investor] - who knew the "magazine cover" indicator even worked on humans, and not just sectors or trends? Not to self: never, ever agree to appear on a magazine cover ;)

• While many funds and money managers are under watch, Ken Heebner and the investments in his CGM FOCUS FUND (CGMFX) are perhaps more closely watched than any other in today's current market. Some may love Warren Buffett and his no non-sense approach, but Ken Heebner actually has a better track record since inception and he is known for blowing out of sectors when he feels he should or can. In fact, you could almost think of the FOCUS FUND as being run more and more like a hedge fund with very loose guidelines on which stocks he can or can't pick from.
  
• The fund also noted about 14% of the total assest that were sold short, so he does make bets against sectors as well. As of June 30, Heebner was still extremely focused on the commodity and global growth stories.
• We went through to look for his positions in the Focus Fund that are worth more than $500 Million. Keep in mind that several other positions were just shy of the mark, so the overall values and holdings are better compared down further on at the full list. Here were his top holdings in the CGM FOCUS FUND: CONSOL Energy Inc. (NYSE: CNX), Peabody Energy Corp. (NYSE: BTU), Freeport-McMoRan (NYSE: FCX), Petroleo Brasileiro S.A. (NYSE: PBR), Hess Corporation (NYSE: HES), Schlumberger Limited (NYSE: SLB), Weatherford International (NYSE: WFT), and United States Steel Corp. (NYSE: X).
• On June 30, 2008 the fund's share price went out at $61.46. It was listed as of the August 14 close at $47.12. That is a drop of 23.3%. Conversely, the Vanguard 500 Index Fund that tracks the S&P 500 Index actually rose 1.3%
• We would caution that just because the markets in commodities and global growth have given back many gains in recent weeks, that is not an assurance that Ken Heebner is still active in all of these names. The losses are sharp in some of the names and Heebner is known for hitting the ejection seat without prejudice if he feels something has topped or if something has changed. It would lead one to believe that Heebner has stuck with the commodity stocks and global growth stocks or that his short sales aren't working.

I found this blurb interesting as Heebner has been much more bullish on the US economy than I have

• In the quarterly filing with the SEC, CGM's team noted "We believe the worst of the current financial ordeal is behind us though it is still too early to expect a broad recovery in the economy. Fortunately, we believe there are bright spots in the economy, areas of strength to provide select investment opportunities in an otherwise difficult market."

All his holdings are listed here - interesting to see him jump into one of our favorites - Cummins Engine (CMI) in a big way and while he was a coal investor before, he really upped the ante of late. But again that was in the last quarter so that could of changed significantly, and when someone tries to sell a $500M position it's going to cause major havoc in the stock prices.

He also added to his excellent short of Washington Mutual (WM) and added a short of Wachovia (WB) - hey I thought the financial crisis was in the 8th inning? Also dropped a lot of agriculture exposure. He also shorted General Motors (GM). Ironically shorting financials and auto makers have hurt him the past month as these are among the hottest sectors. Oh market - so cruel. But I think as the Kool Aid of 50 cent lower gasoline saving the US economy wears off he will be proven correct. But it is all about timing in this market. A few weeks early and you get sand blasted to the next zip code.

Bookkeeping: Cutting Flowserve (FLS) Exposure into Resistance

Nothing new to add here, I am cutting Flowserve (FLS) as it bumps against the 50 day moving average; it is actually holding up quite well the past few days so perhaps its trying to signal it is ready to escape the clutches of the "global growth is dead" trade. But I shoot first and ask questions later for now. Same thinking as the Jacobs Engineering Group (JEC) sale last week - great company, good sector, chart that appears to be breaking down but we have a nice lift into resistance. I will assume all such lifts fail until proven otherwise.

Selling in the low $128s to take this to a 0.3% stake. I *really* like this name but don't want to fight the tide.

Our conservative hedged bent works wonders on days like this when the market is down significantly - we are flat for the day despite a few badly beaten stocks. The problem is finding things to go "up" when the market is bouncing in this current environment - still working on that angle.

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

The Heat is On: Fannie Mae (FNM) and Freddie Mac (FRE)

Lost in this month long Kool Aid rally off the July 15 lows is the danger that is Freddie Mac (FRE) and Fannie Mae (FNM). Just a month ago we had one of those emergency Sunday evening announcements that now comes every quarter as we reward risk taking institutions with our tax dollars [Jul 13: And Here We Go]. When things go well, they keep the gains and CEOs laugh to the bank. When things go bad, we cannot let any major institution fail - hi Bear Stearns (BSC). This is one time when the inability to short is really going to cost us - while one could argue Bear was a surprise in how quickly it happened this one has looked increasingly obvious for 4-5 months - I think a 100% gain is very probable in Freddie Mac as I oppose Bill Miller on this trade and say it goes to $0. [Aug 13: Bill Miller Continues to Boggle Me - Increasing Stake in Freddie Mac] What has been hilarious is how the politicians have been layering these 2 staggering drunks with more drinks as the financial situation worsened at both. But then again their timeline is "fix the fire today and we'll worry about the next fire in a few months".

We've been on this case for a long while and I originally thought this day would come maybe mid 2009 but in this age when all time is compressed, it looks like the pressure valves are spouting and it's becoming increasingly clear that "socialism 101" will be happening in America (again) and I'd venture sooner rather than later. It seems like ages ago but just last month [Jul 10: Whose Bottom Will this Be? Lehman Brothers (LEH) or Fannie/Freddie?]

Here are some warnings we touched on

1. [Nov 20: Freddie and Fannie Trading Like Chinese Small Caps]
   
2. [Feb 27: OFHEO Increases Allowance for Fannie Mae] Instead of limiting risk, to "save" the mortgage market the regulators told these companies they will allow them to take even more risky loans
   
3. [Mar 10: Barron's Cover Story - is Fannie Mae the Next Government Bailout?] Even Barron's saw the writing on the wall - politicians of course, could not
   
4. [Mar 19: Fannie, Freddie Layered with MORE Risk] We bemoaned the "solutions" the politicians were coming up with for the housing problem - all of which added even more systematic risks on the back of these 2 institutions
   
5. [Apr 15: Could the US Lose It's Triple A Rating] We discussed the United States of Subprime losing its Triple A rating if it had to bail out these 2 institutions - think our dollar is a joke now? Just wait.
   
6. [May 7: Some Things I'm Reading] 2 articles from Wall Street Journal and NY Times warning about this

Now I wonder when the U.S. government comes in and prints money out of thin air to create preferred shares to prop up 2 mega agencies if that will be seen as "good for the dollar". It should be a disaster for the dollar, but you can't stop a good quant hedge fund when he/she/it is in there adament about a trade. Barron's is out this weekend with another story about how the writing is on the wall - The End Game Nears for Fannie and Freddie

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie's equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn't much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

Greenspan chimed in last week and on this point I do agree with him (not the housing part, but the GSE part)

• Alan Greenspan usually surrounds his opinions with caveats and convoluted clauses. But ask his view of the government's response to problems confronting mortgage giants Fannie Mae and Freddie Mac, and he offers one word: "Bad."
• The former Federal Reserve chairman also said he expects that U.S. house prices, a key factor in the outlook for the economy and financial markets, will begin to stabilize in the first half of next year.... he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."
• At the Fed, Mr. Greenspan warned for years that the two mortgage giants' business model threatened the nation's financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt "inevitable," he said. "There's no credible argument for bailing out Bear Stearns and not the GSEs."
• His quarrel is with the approach the Bush administration sold to Congress. "They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said. (this is how they hopefully end up - this way none is "too big to fail" in the future - let them all run as independent competitive bodies and if 1 of the 10 fails the entire global financial system is not set on it's knees - of course anyone following along the past decade could tell you that but as always we are REACTIVE not PROACTVE - only when the emergency happens do "solutions" start popping up)
• Instead, Congress granted Treasury Secretary Henry Paulson temporary authority to use an unlimited amount of taxpayer money to lend to or invest in the companies
• But a similar critique has been raised by several other prominent observers. "If they are too big to fail, make them smaller," former Nixon Treasury Secretary George Shultz said. Some say the Paulson approach, even if the government never spends a nickel, entrenches current management and offers shareholders the upside if the government's reassurance allows the companies to weather the current storm.

Both stocks are down >10% as of this morning. Sure enough when Kool Aid flows they will rally but they both seemed destined for the same spot. Your grandchildren's pockets. Freddie first, Fannie second - in my humble opinion.

No position

Bookkeeping: Cutting Perfect World (PWRD) and EZCORP (EZPW)

Disappointing reaction to in line Perfect World (PWRD) earnings today - obviously the momentum guys piled in ahead of earnings expecting X number and when they did not get it they pile right out. I'm in take no prisoner mode and it's now a broken chart - we have $21.50 as a potential double bottom point but now the stock trades below both 50 and 200 day moving average. One could attempt to buy at $22 and below and sell on a bounce to $25 I suppose, but right now it is no man's land and probably will be range bound until some time passes. I cut back at $23 and it's a 0.6% stake for now. Fundamentals remain excellent but they don't matter.

We mentioned EZCORP (EZPW) on this week's round up and I wrote

EZCORP (EZPW) walked away from a deal it had previously announced; which management said would reduce the quarter earnings and full year earnings by 1 cent. In return for that the stock fell from $18 to below$14, or nearly 25%. That's the market for you. This is a very fragmented sector so it is not like Value Financial is the only company they can acquire for accreditive earnings. We doubled our position, up to a 2.6% stake but we were early buying in the $15.60s. This is right above the 50 day moving average which I had been hoping would hold (the stock broke down the next day). Now the stock is right below the 50 day moving average so if it does not quickly move back up, we have yet another broken stock that the hedge funds can short away at for technical reasons. So we'll monitor this one and if it begins a downtrend we'll be cutting back sharply - we are in take no prisoners mode. Fundamentals mean nothing.

I'm sticking to that as the stock is down 4% this morning and similarly now exhibits a broken trend, so we're cutting back. Who knew how "devastating" losing 1 cent of EPS was. Sort of ridiculous but this is the current market. The chart now shows a stock intent on retesting its 200 day moving average of $13.50. We're cutting here at $14.50s and right back down to a 0.7% stake from 2.6%.

The market remains unforgiving and in this environment we are not going to stick around to see if there are bounces coming. We cut back, and ask questions later. Just like the computers. This entire 6 week move up in EZPW is now demolished in the matter of 2 sessions all on a 1 cent reduction in EPS guidance. Fantastic. Hopefully it settles down there in the $13s.

Long EZCORP and Perfect World in fund; no personal position (just sold PWRD)

ShengdaTech (SDTH) - Small Cap Opportunity

I'm increasingly looking at small cap opportunities in this trendless market, dominated by herd behavior - much of it computer generated. The hope is we find some companies that are outside the radar and hence not so reliant on hundreds of hedge funds moving in or out of stock en masse for us to profit. Now, the negative with under covered small caps is they can sit... and sit... and sit... for a long time without any movement. And then suddenly surge out of the blue on a catalyst - much like Fuel Systems Solutions (FSYS) has done [Aug 7: Fuel Systems Solutions - Monster Quarter but Impairment Charge will Confuse]. But this many times requires, months/quarters of no "benefit" (price appreciation) from holding the stock. And in a "what have you done for me" world with investors who always want appreciation, that's a tough road to hoe.

With that said ShengdaTech (SDTH) might be the right company at the right time with the right catalyst to wake up the market to yet another undervalued opportunity that is sitting in purgatory. First, let's look at the most important thing in this market - the chart.

As you can see the stock has had a rough year, dropping from $15 to as low as the $7s. In full disclosure I've been following this company for this entire period and was bullish on it in the $12-$13 range, thankfully we did not buy since we would of been bludgeoned but as time has passed the fundamental story has only improved, while the stock price has only broken down. Typical for this market. With that said we have built a nice 5 month base, mostly between $8 and $10. And that's pretty much all you need to know in today's day and age - the chart.

But since I am old school, I'll give you some background so you can see how people used to invest before computers took over the world. ShengdaTech (SDTH) has 2 business lines; moving into a related 3rd (more on the 3rd later) Per the company' website (note, very cool front page)

1. Nano Precipitated Calcium Carbonate (NPCC) - NPCC refers to ultra-fine precipitated calcium carbonate with an average particle diameter of less than 100 nanometers that is used as an additive in various products. Because of its special physical and chemical properties, NPCC has been widely applied in the paint, paper, plastic and rubber industries. We are targeting the fastest-growing area for NPCC, the tire and PVC building material market. It fills the spatial structure in rubber and enhances the property of rubber products. It can be used solely as a filler, which has a reinforcing effect, and it also can be applied with other fillers such as precipitated calcium carbonate, argil and titanium oxide for reinforcement, filling, improving the process and property of products and reducing rubber content. NPCC can be used to partially substitute some expensive materials such as titanium oxide and silicon dioxide. Currently, we are the only Chinese manufacturer of NPCC that is able to supply the tire market.
2. We are a leader in the coal-based chemical business in northern China, and manufacture ammonium bicarbonate, liquid ammonia, methanol and melamine. Ammonium bicarbonate and liquid ammonia are mainly used for nitrogenous fertilizers and raw materials of chemical products. Methanol is a chemical material and a clean alternative to fossil fuel. It is used in the chemical industry, pharmaceutical industry, light industry and textile industry. Melamine is the intermediate product of environmentally friendly resin.
   

Now on the basis of these 2 products lines, especially the NPCC this would an exciting enough of a company. But in the near term we have an important catalyst which could provide the only thing that seems to be moving these small cap Chinese stocks nowadays - a potential for a large earnings surprise. The company is acquiring a nitrogen fertilizer company.

• (June 20) Today announced that it plans to acquire Jinan Fertilizer Co., Ltd., a nitrogenous fertilizer company based in Jinan, the capital of Shandong Province. The Company intends to relocate its existing coal-based chemical operations to the facilities of the target acquisition, following receipt of a relocation notice for its factory in Tai'an City from the Tai'an City Government on June 16, 2008.
• The Tai'an City Government, as part of China's strengthening of environmental law enforcement reform, issued the relocation notice due to the close proximity of ShengdaTech's coal-based chemical facility to residential and business properties. According to terms of the relocation notice, ShengdaTech must cease operations at its Tai'an City coal-based chemical facility on November 1, 2008 but is permitted to continue operations until October 31, 2008 to ensure a stable transition of its chemical business and employees.
• The transaction will be contingent on the completion of an independent audit and due diligence, and negotiation of the final terms and a definitive agreement, and will be subject to approval by ShengdaTech's board of directors. The Company expects to complete the acquisition of Jinan Fertilizer Co., Ltd. on or before November 1, 2008.
• Jinan Fertilizer and its subsidiaries' were founded in 1958 as the first state-owned, mid-scale nitrogenous fertilizer enterprise in China. Jinan Fertilizer has seven subsidiaries and about 1,800 employees. Its products are sold under the "Quancheng" brand name and include concentrated nitric acid, synthetic ammonia, methanol, fertilizer and carbon dioxide. Jinan Fertilizer also produces compound fertilizer, liquid fertilizer and polywoven sacks. Jinan Fertilizer and its subsidiaries hold a 16% share of the domestic concentrated nitric acid fertilizer market and account for approximately 50% of China's concentrated nitric acid fertilizer exports, making it the second largest in the industry.
• Assuming the current market demand continues, the Company estimates that once Jinan Fertilizer achieves full operations in 2009 it could yield an annual sales of approximately three times the current sales of ShengdaTech's existing chemical business. The gross margin is estimated to be equal or higher than the current chemical business at targeted production levels.

I know what you are thinking - no one needs fertilizer as the world devolves into chaos and growth rates worldwide plummet (ex USA which of course will be immune - did I mention it's time to buy US stocks?) - it would be much more exciting if ShengdaTech was acquiring an US airline or US automaker or some other money losing venture. But regardless of the company, the importance is potential upside to EPS. We'll get into that later.

Now a bit of history - in May the company priced $100M in convertible notes. There was actually an over-allotment of $15M to boot. While this is a positive in terms of raising money, it's usually a death knell to a stock price for the medium term as institutions who buy the debt, short the common to offset their risk. And lo and behold ShengdaTech has their place front and center on the Regulation SHO Threshold Security List. What is that list you ask? Essentially it means "the naked shorting list" - yes naked shorting... something that we have rules on the books to disallow but goes on every day (I mean how else can hedge funds make free money?) Only when it affects our banks do we actually enforce our rules. Many many many small caps with no institutional support are all over this list - so this obviously puts tremendous pressure on the stock price.

In June, the company announced where much of this money was going to, a $56M plant for NPCC expansion.

• Today announced that on June 19, 2008 the Company, through Faith Bloom Limited, its wholly owned subsidiary, entered into an agreement with the local government to invest in the Zibo High-Tech Development Industrial Zone in Zibo, Shandong Province. The local government will provide the Company with sources of supply for limestone with reserves of at least 150 million metric tons, with mining rights to be transferred to the Company within 12 months. In addition, the Company will receive land use rights for the construction of a new NPCC facility and future build out.
• The initial investment in this new location will be approximately $56 million for the purchase of 58 acres of land, the construction of the plant with a capacity of 120,000 MT, and the equipment for the initial 60,000 MT of NPCC production. The first customer shipments are expected by July 2009.
• "We have selected the location for the facility based on its close proximity to a high-quality limestone mine, to our current and prospective customers, and to a shipping port that will serve our growing international customer base more efficiently. We expect to begin construction in August 2008. Our plan is to expand the Company's total annual production capacity of NPCC to 310,000 MT by the end of 2009."

Friday, came the company's latest earnings report - and once again it's impressive. I'll talk about the potential for EPS expansion after the highlights.

• Revenues for the second quarter of 2008 increased to $39.8 million, up 75.7% from $22.7 million in the same quarter of 2007. The strong revenue growth was due to higher selling prices and increased demand for both chemical and NPCC products. The reve