Whitney Tilson's T2 Partners Year End Letter

While we have very different 'trading' styles, I very much share the 40,000 foot point of view on how to manage a portfolio with Whitney Tilson.  Try to reduce downdrafts and protect against downside, and let the upside take care of itself.  Sometimes that strategy leaves you behind in the dust when the market goes on a steroid induced rampage as we saw the last 4 months of 2010, but this is a marathon and not a sprint.  The benefits of this strategy don't show up during the steroid era; that said, his long term record in the hedge fund is superlative.

Tilson runs a long short book and has bet against some of the most popular stocks in the market today ala Netflix (NFLX) and Lululemon (LULU).  While outperforming the first 8 months of the year, Tilson opines he did not believe enough in our new paradigm 'free markets' as practiced by Ben Bernanke, and championed by David Tepper - and hence missed the "can't lose" market the Bernanke Put offered in the last third of the year.  He provides his always frank analysis on the year 2010 in his year end investor letter below:


Whitney Tilson T2 Accredited Fund Annual Letter-2010
[Aug 10, 2010:  Whitney Tilson Becomes More Bearish on Economic Prospects of the U.S.]
[Nov 4, 2009: Whitney Tilson T2 Partners October 2009 Investor Letter; Housing Recovery Still Has Long Way to go]

Can the Unshortable Market be Shorted?

I have called this the unshortable market for many months as it acts very strange.  Again it is not so much the move up that is strange as the total inability for even short term pitstops in the months of Sept, Oct, Dec and thus far January.  November was an outlier event due to Ireland ...save for those headline events I am sure November would have acted similar to the other months.

Frankly as a contrarian when you hear people talking about unshortable markets you want to fade that...but doing so the past many months would have ripped your face off. So do we just give up until Jul 1 and QE2 ends? I doubt it will be that convenient.  During QE1 there were at least a few pullbacks...summer 09 comes to mind.  Further almost every strategist now thinks SP 1400 to 1425 is in the bag for year end 2011.  The problem is we are about 10% away from that target just days into the year.  Considering there are 11 more first days of the month this year (which are now almost always up) and 51 more Mondays (which lead to morning gap ups about 80% of the time nowadays) that does not leave much leeway for Monday afternoons through Friday for price appreciation.  Unless we are headed to a repeat of fed induced bubble mania circa 1999.

In the near term complacency is supreme.  But I could have said that 3 weeks ago or 13 weeks ago. The retail investor after a few years of fleeing the market is finally returning.  Equity inflows are positive the past few weeks.  (Don't ask how a market rallies 80% in 2 yrs without new inflows...its the new magic)  So that is a new event and again from a contrarian standpoint not a great one.  Generally the retail investor is last to the party and handed the bill.  But we do not live in normal times nor normal markets so we'll see how that goes.

I said early this week I would be interested in attempting a short strategy for the first time in a long time once the news was out of the way this week.  I like SP 1280 as a stop out point and I would probably be interested even more so if we get the traditional Monday morning gap up.  If the SP blasts through 1280 and makes a run for the roses next week...so be it, one has a defined level to trade against and stop out from.  But at minimum a hedge like VIX calls out a few months (April) seems sensible after a 4+ month run.  This is where I would be starting today in the low 17s.  One day people will believe the market can go down again and I would expect VIX to reflect that by popping into the low 20s.  So some April 20 or 22.5 calls make some sense to me.

Earnings begin next week and while the first few weeks are dominated by the multinationals who have the best of all worlds, many are priced 30-50% higher than they were last earnings season.  Thus the bar is much higher as we saw  yesterday with the reaction to december same store sales in the much worshiped retail space.

December Payrolls Mixed

Another head scratcher...please recall there are actually 2 surveys released today - one impacts the unemployment rate (household survey) while the other is the headline number.

The headline figure of +103K is not very good considering expectations but the household figure showed a decline of about half a million people who are unemployed hence the much followed unemployed rate dropped from 9.8% to 9.4%.  This was 9.6% 2 months ago.  Still looking into reason for the half million drop.

U6 fell back down to 16.7% but really no long term progress on that one.

Workweek flat.  Average hourly earnings up 0.1%.

Labor force participation continues to be terrible.  Fell another 0.2% to 64.3%.  This is now about 2.3% below the long term average which does not sound like much in percentage terms but means some 4 million dropped  out of the workforce the past few years and if we had a normal participation rate, the unemployment rate would be 2%ish higher...and getting worse as this figure was a substandard 64.5% last month.  We continue to wonder where all these people went.

November was not revised up that much...thought it would spike higher on a revision.  Up to 71K from 39K but it shows the folly in our knee jerk reactions  as speculators since whatever is said today will change in a handful of weeks anyway.

AP: Census Estimates Suggest 1 in 6 Americans Live in Poverty, 65+ Crowd Expanding Rapidly

One of the biggest mega trends happening in America is the bifurcation of society between the haves and the have nots.  Many of the jobs the 'underclass' once did are gone forever, while others spent freely when times were good, and when the tide turned have little buffer.  [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]   After all, saving for a rainy day is what boring people do.  Others really never got off the ground, as the K-12 education system has degraded dramatically the past few decades.  Frankly the underlying trend - as bad as it is on the surface - has been hidden by multiple bubbles, and most recently a level of government assistance never seen before. [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]  In terms of government spending, this brings up a host of issues as any changes to the social safety net are going to be send millions past GO and directly to impoverished.  (and yes there are people gaming the system, but not tens of millions).  There are myriad societal effects of the transformation of America from a relative egalitarian society in the 1960s to a 2 or 3 class system - but those are topics for other posts we have done.

The official U.S. government tally of who is living in poverty is a joke.  We last looked at it about 16 months ago [Sep 19, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated]  For example, if you make $23,000 for a family of 4 - you are not in poverty.  If you are single and make $14,000 you are not in poverty.  I'm not sure in what counties ex rural Mississippi you can accomplish that cost of living but apparently the government believes a middle class lifestyle is available at $25K for a family of 4 in all of America.    Or at least it would be inconvenient to admit otherwise. And yes once more let me put the caveat that being "poor" in America is different than being poor in Malawi, but in theory we should be comparing ourselves to other first world countries.

The AP has an interesting report of a new measure of poverty in the U.S., based on the census.  It has a different band of parameters and shows an increase over the government's incredibly generous definition of poverty.  As striking is the large increase in those in the over 65+ camp who fall into poverty.  Due to our consumption culture (encouraged by the government at every turn, since we've transformed our economy from good producing to services and consumption) many are entering the golden years with little to nothing.  Where once many had their mortgage paid off by the time they retired and hence could live on a much lower income as their largest expense was eliminated, now after a generation of serial refinancing and cash out to finance buying 'what we deserve', many still have the mortgage to worry about even at age 70+.   There are many other factors we've discussed often - i.e. the move from pensions to do it yourself savings in a country where saving is a sin and spending is worshiped, the disaster that is the 401k system, etc.  Unlike the mortgage crisis which is playing out in a relative short period of time (6-8 years), this grand economic experiment of running an economy on consumption & services (you do my nails, I'll cut your hair, you serve me a beer, I'll cut your lawn, you build a house, I'll default on it) is taking decades to play out.  But we're starting to see the first wave of results the past 5-10 years, and it's not pretty.

Bigger picture there are enormous stresses being formed at the bottom end of the society, and more and more are being caught in the net.  Anyone who truly believes there will be any serious spending cuts at the federal level does not realize the (increasing) dependency that has been created by the a multitude of poor decisions over the past few decades.  Indeed we fast approach the time when 1 in every 5 dollars of "income" are government transfers.   [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]   At this point, the genie is out of the bottle and with a dysfunctional government whose only solution is layer on more debt to kick the can down the road, our modern day plutonomy only grows in power. [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]  However, there appears nothing to be worried about since we've been well trained to parrot the fact that as long as the S&P 500 only goes up, everything in America is fine.  Nothing to see here, move along (buy stocks as you are moving of course).

Via AP

• The number of poor people in the U.S. is millions higher than previously known, with 1 in 6 Americans -- many of them 65 and older -- struggling in poverty due to rising medical care and other costs, according to preliminary census figures released Wednesday.
• At the same time, government aid programs such as tax credits and food stamps kept many people out of poverty, helping to ensure the poverty rate did not balloon even higher during the recession in 2009, President Barack Obama's first year in office.
• Under a new revised census formula, overall poverty in 2009 stood at 15.7 percent, or 47.8 million people. That's compared to the official 2009 rate of 14.3 percent, or 43.6 million, that was reported by the Census Bureau last September.
• Across all demographic groups, Americans 65 and older sustained the largest increases in poverty under the revised formula -- nearly doubling to 16.1 percent. As a whole, working-age adults 18-64 also saw increases in poverty, as well as whites and Hispanics. Children, blacks and unmarried couples were less likely to be considered poor under the new measure. 
• The new measure will not replace the official poverty rate but will be published alongside the traditional figure this fall as a "supplement" for federal agencies and state governments to determine anti-poverty policies. Economists have long criticized the official poverty measure as inadequate because it only includes pretax cash income and does not account for medical, transportation and work expenses.  (much like inflation, as long as you don't eat, use energy, pay for healthcare, or have kids in college - you are fine.   For poverty as long as you don't go to the doctor, need to drive to work, need daycare, or wear clothes at work - your income is sufficient)
• "Under the new measure, we can clearly see the effects of our government policies," said Kathleen Short, a Census Bureau research economist who calculated the revised poverty numbers. "When you're accounting for in-kind benefits and tax credits, you're bringing many people in extreme poverty off the very bottom."
• The official measure is based on a 1955 cost of an emergency food diet and does not factor in other living costs. (that is perverse)  Nor does it consider non-cash government aid when calculating income, which surged higher in 2009 during the recession. 
• The effect was seen most notably among older Americans. Under the official poverty rate, about 8.9 percent lived in poverty, mostly because they benefit from Social Security cash payments. But when taking into account out-of-pocket medical expenses and other factors, that number rises to 16.1 percent.
• Among the findings:
  --Without the earned income tax credit, the poverty rate under the revised formula would jump from 15.7 percent to 17.7 percent. 
• --The absence of food stamps separately would increase the poverty rate to 17.2 percent.
  --Taking into account millions of uninsured people in the U.S. had little effect in increasing poverty, mostly because those without insurance tend to forgo medical care rather than find ways to pay for it.

[Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide]
[Oct 22, 2010: Reuters - The Haves, the Have Nots, and the Dreamless Dead]
[Sep 3, 2010: FT.com - The Crisis in Middle America]
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]

Paul Volcker Gives Up, Resigning as Obama Advisor

I originally had high hopes when the news broke that Paul Volcker would work as an advisor for the Obama administration.  This was a no nonsense, tell it like it is guy who actually has the 'people's' interest in mind.  But hope goes to Washington D.C. only to die.  The man was marginalized dramatically by Larry Summers, and any impact he had on financial "regulation" was effectively loop holed to death by the banking lobbyists.  [Jun 26, 2009: Bloomberg - Paul Volcker Marginalized; Major Push Back on Curbing Excess. Our Life of Financial Oligarchy Does not Change] [Feb 23, 2010: Watered Down Volcker Rules, to be Watered Down Even Further] [Feb 2, 2010: Senator Shelby - We Don't Need no Stinkin' Volcker Rules]  I give him credit for hanging in there for 2 years - I would have thrown my hands up in disgust by day 2.

Lobbyist dollars by top 10 banks 1st half 2010 (representing perhaps 300K Americans): $16.3M
Lobbyist dollar by consumer protection groups (representing 300M+ Americans): $0.8M

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Charlie Gasparino, formerly of CNBC, wrote a nice summary of the situation in The Daily Beast: Volcker Rule is a Sad End to a Brilliant Career.

He's one of the greatest economists of our time and tamed inflation as Fed chief, but when Paul Volcker resigns as Obama's adviser, he'll be forever tied to a watered-down financial reform that won't prevent another collapse.

One of the saddest things about Paul Volcker’s probable resignation as one of President Obama’s top economic advisers is how he will be remembered. He won’t just be the Fed chairman who decades earlier performed a national service by defeating the economic evil known as inflation, but the bureaucrat who helped craft a convoluted financial “reform” law that has done little in the way of reforming activities that caused the 2008 financial collapse.


Volcker spent much of his first year in the administration with very little influence on economic policy. The White House and its economic brain trust of Treasury Secretary Tim Geithner, chief economist Larry Summers, and senior adviser Valerie Jarrett were still cozying up to bankers and campaign contributors like JPMorgan Chase’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein. They didn’t want to hear advice from the crazy old man who showed up occasionally at economic policy meetings and groused about putting an end to Wall Street risk-taking once and for all.

Volcker didn’t seem to care. He spent long hours devising his plan to take Wall Street out of the risk-taking business, meeting occasionally with bankers he knew and trusted from his days as Fed chairman and later as a chief economist for an independent investment firm. These people said he spent most of his time listening to how Wall Street changed over the past three decades leading to the financial collapse, how it became less of a business that was paid to give advice and more of a gambling den that rolled the dice with shareholders' money with little accountability from regulators.

Volcker, of course, had never really liked the big banks. He once quipped that the greatest innovation coming from the men of high finance was the ATM. He didn’t like the banks when he was Fed chairman, certainly not when he was out of government (just check some of his speeches), and certainly not now. And because of that, the bankers’ friends in high places, namely Geithner and Summers and ultimately the president himself, marginalized Volcker’s plan to make Wall Street a safer place.

[Apr 9, 2008: Paul Volcker Speaks]
[Mar 6, 2009: Where is Paul Volcker?]
 [Oct 15, 2009: All of Tim Geithner's (Wall Street) Men]  
[Jun 18, 2010: Gamling With Other People's Money]
[Sep 10, 2009: Goldman Sachs CEO - "Ok I Admit It, Some of our Financial Innovations are Socially Useless"]

Market has Essentially Pulled Back Once in 25 Sessions

What has been remarkable about this run - yet another "V" shaped move - is not the run up itself, but the lack of any pullback.  Aside from today the S&P 500 is up 20 of 25 sessions.  Of those 5 down sessions, 4 have been 0.16% or less.  The other session was -0.5%.  +/- 0.1% is a rounding error in the big picture, so effectively 24 out of 25 sessions have been flat or up.  That's ridiculous.

Jeff Saut - strategist at Raymond James - says a normal bull market run is 25 to 30 sessions.  This one is approaching 90 sessions.  He has never seen that in 40 years.

We saw similar "non stop up" runs with no pullback in September and October 2010.  Indeed, if not for the crisis in Ireland in November, we might be on the 5th month straight of no real pullbacks.  The action is completely out of character for a 'free market'.  Even NASDAQ 1999 had sharp pullbacks from time to time within its parabolic move.

As I wrote this past fall, the only time the stock market acted 'normally' since the call for Obama to "buy stocks" (March 09) in my view was between late April 2010 and early summer.  (excluding the 'fat finger' of May 6th) That was also the only time since March 2009 we have not been operating under QE1, QE 1.5 (reinvestment of MBS runoff) or QE2.  I don't think it is a coincidence.  While at this point even the bulls are crying out for a pullback so they can get more long exposure, I don't expect any form of normal to return to the market until the Fed stops handing $8 to $10 billion a day to primary dealers.  So yes PIMCO we do have a new normal.... ponzi style.

p.s. for all those crying the market is cheap or a great value, small caps now trade at 32x earnings.

General Motors (GM) Breakout

Picture worth a thousand words...

No position

World Food Prices Surpass 2008 Record; Prepare for the Riots?

As the 'financialization' of every commodity of earth continues at pace, and easy money pores out of almost every major central bank, we have now reached the point where food prices have surpassed the record levels of 2008.  [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] [Apr 28, 2008: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin] [Apr 3, 2008: Corn Hits $6, Start Stocking Up on Soda Pop]  What happened back then?  Just some minor issues such as rioting in many '2nd' and '3rd' world countries.  Looks like we need to prepare for another hot summer.  And domestically those food stamps are not going to go quite so far as they used to.  [Nov 10, 2009: Walmart Executive - "There are Families Not Eating at the End of the Month"]  

Oh well, just consider it collateral damage in The Bernank's plan to make us (and Goldman, JPMorgan, et al) all rich via asset inflation.   (I will stop by some local food banks to let them know they can make some mad money in the markets to offset the rising prices - as long as we all have Etrade accounts, we're good!)  Just remember to blame it all on China - that was a great excuse back in 08, even though we saw once leverage was taken out of the financial system prices of commodities suddenly crashed.  Or demand for food in China suddenly dropped 60% - pick your rationale.  This repeating epidemic has no relationship at all with financial speculation at all.  Nope.

On a related note - a tip of the hat to Congress for the recent ethanol funding expansion, pushed through in in the lame duck.  If there is one thing that makes sense when we have the potential for global food crisis, it is putting inefficient corn in our cars.  [Mar 27, 2008: WSJ - Farm Lobby Beats Back Assault on Subsidies]  The main saving grace at this time is rice, which is massively important in the East. [Mar 19, 2008:  Philippines Brace for Rice Shortage]  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]  Thus far prices remain well below 2008 levels - so we're safe for now.  Too bad there is not a rice ETF or else speculators using Ben's easy money supply and demand dynamics could push rice prices up much more quickly.


Via Bloomberg:

• World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.  
• An index of 55 food commodities tracked by the Food and Argiculture Organizartion gained for a sixth month to 214.7 points, above the previous all-time high of 213.5 in June 2008, the Rome-based UN agency said in a monthly report. The gauges for sugar and meat prices advanced to records.
• Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years in Chicago. Food prices may rise more unless the world grain crop increases “significantly” in 2011, the FAO said Nov. 17. 

• Last month’s year-on-year rise compares with the 43 percent jump in food costs in June 2008. Record fuel prices, weather- related crop problems, increasing demand from the growing Indian and Chinese middle classes, and the push to grow corn for ethanol fuel all contributed to the crisis that year.
• “In 2008 we had rapid increases in petroleum prices, fertilizer prices and other inputs,” Abbassian said. “So far, those increases have been rather constrained. It doesn’t really reduce the fear about what could be in store in the coming weeks or months.”
• In response to the 2008 crisis, countries from India and Egypt to Vietnam and Indonesia banned exports of rice, a staple for half the world. Skyrocketing food prices sparked protests and riots in almost three dozen poor nations including Haiti, Somalia, Burkina Faso and Cameroon.
• Rough rice last traded at $13.90 per 100 pounds in Chicago, compared with $20.21 at the end of June 2008. (this is the key one if you 'enjoy' riots)
• The surge in the FAO food index is principally on the back of rising costs for corn, sugar, vegetable oil and meat, which are less important than rice and wheat for food-insecure countries such as Ethiopia, Bangladesh and Haiti.
   

[Video] ABC News - Consumer Reports Showing People are Paying for Less

We spoke about this topic a few years ago, but lost in the multitude of obfuscation about inflation by the government, is the Vulcan mind trick our corporations are playing on us, in terms of packaging - especially in the grocery aisles.  Indeed, I noticed the first 59 oz plastic bottle of orange juice just yesterday.  After all, 59 oz is 7.8% less than 64 oz and what's 7.8% inflation amongst friends?  Especially if you can pull the wool over the many who don't pay attention.  I am sure our government statistics will overlook this minor issue - because as long as prices don't go up, who cares if you get 5, 10, 20% less product. And really is it important? After all government says food and energy are too volatile to really care about measuring - just move along, no inflation here.

ABC News did a quickie 2 minute story on this last night.  Make sure to turn your peanut butter jars upside down to check for hollowed out bottoms. ;)

ISM Non Manufacturing Pops to 57.1, Highest Reading Since Recession Began

The ISM Non Manufacturing reading came in very good today; unlike Monday's ISM Manufacturing which only represents about 10% of the economic activity and employment, this report is far more tangible to the current U.S. economy.  The headline figure came in at 57.1 (vs 55.00 in November) however just like Monday's ISM report, the employment component lagged severely.  The figure dropped to 50.5 from 52.7; in light of this morning's ADP report which showed a massive surge in employment in the service sector, we have some head scratching conflicting data. 

In other data points:

New orders were very good - jumping 5.3 points to 63.  One hopes the employment data is some sort of lagging indicator - i.e. headline figure jumps, new orders jumps... and eventually employers need to hire to take care of this situation, but "they" have been telling us employment is a 'lagging indicator' for nearly 2 years now.

Prices surged from 63.2 to 70.0 - mirroring what we saw in ISM Manufacturing.   Takeaway?  Inflation is jumping in every report except for those generated by the U.S. government.  How convenient. ;)  [Dec 16, 2010: Shadowstats.com - Consumer Inflation as Measured in 1980 Would be 8%+, as Measured in 1990, 4%]

This is the first time I can remember the headline figure on ISM Non-Manufacturing besting its peer in some 3 years...

PIMCO's Bill Gross' January 2011 Letter - Off with Our Heads

I'm starting to become afraid as Bill Gross is starting to sound a lot like Tradermark. ;) Some of the things in the January 2011 letter are almost verbatim from various entries on FMMF.   The thrust (literally) of January 2011's letter, is what I have labeled intergenerational arbitrage.  Taking from the those with little or no voice (tomorrow) to give to the today.  A selfish act, but one we have perfected.  We often speak of the lack of cost-benefit analysis in modern America; everything is benefit-benefit analysis.  "If we only spend/tax cut/stimulate/hand out/beg/borrow/steal $XXX, well we can make almost any economic figure surge".   Indeed, PIMCO itself noted we just bought some extra GDP with the massive package passed late in 2010.  [Dec 10, 2010: PIMCO Joins Goldman in Raising GDP Forecasts for 2011 as United States "Buys Itself" to Prosperity]  I am still giggling at the hard fought "compromise" between the GOP and Dems on that one - only in Cramerica do you call it compromise when you give both sides what they want.  Did I mention how hard fought it was?

The current excuse is we are just going to grow our way out of all our problems.  Sure, why not - it's only money.  I've proposed we cut all taxes to $0 and hand every American $10 million ... surely with the prosperity we create from those acts we will "grow" in a way no other country in the history of countries has.  Why do it half way? After all it's all about benefit-benefit analysis. :)

Anyhow as long as we see the benefits today, and any and all costs are pushed out til tomorrow (preferably to a generation we never have to look in the eye) it's all good.  Buy stocks - David Tepper style (we can't lose remember?).  And houses. And cars.  And shop your local mall - often.  American exceptionalism baby.

---------------------------

Here is a link to this month's letter, entitled "Off with Our Heads" - some highlights

• Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at a dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills.
• Unlike Euroland or the United Kingdom, which appear to have gone on an extreme fiscal diet, the American answer to a bulging waistline is always “mañana.” Debt commission recommendations are tossed in the trashcan, tea party election rhetoric eventually focuses on minuscule and merely symbolic earmarks, and both Democrats and Republicans congratulate each other on their ability to reach a bipartisan agreement for the good of the nation. Munch! Munch! Off with our heads!
• The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognise now what the ultimate cost of blueberries will mean for American citizens of tomorrow.

Four major factors come to mind:

1. American wages will lag behind CPI and commodity price gains.  Because policy stimulus is focused on maintaining current consumption as opposed to making the United States more competitive in the global marketplace, American workers’ real wages will almost necessarily lag historical norms. Chart 1 points out the graphical evidence of an erosion of labor’s share of the American economic pie, falling from 62% of GDP just recently to a current anemic 58%. Blame it on poor education, blame it on globalization, but an ongoing rebalancing of rich country/poor country wages inevitably will keep US wages compressed as deficit spending serves to reflate commodity and end product prices in future years but not paychecks. Americans will feel the pain but like the male mantis, probably not understand why they’ve lost their head.
2. Dollar depreciation will sap the purchasing power of US consumers, as well as the global valuation of dollar denominated assets. Unique amongst almost all other global citizens, Americans are ignorant of the merits (and the negatives) of currency depreciation. Unless they are smacked with the reality of an expensive hotel or a meal in a foreign port of call during summer vacation, we have few concerns when the dollar depreciates against a basket of foreign currencies. If our stock market goes up 10% annually in dollar-denominated terms, we assume we are 10% richer even if the dollar sinks at the same time. If the cost of imported goods and especially gasoline goes up more than our paychecks, we blame it on a political conspiracy. The fact is that annual budget deficits in the trillions of dollars add a like amount to the stock of outstanding dollars, resulting in currency depreciation, higher import inflation, and a degradation of dollar based assets in global financial markets. We become less, not more wealthy, losing our heads while we “hold on firmly and go on with (our) business”! 
3. One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible. Currently, the Fed is doing both, holding short term interest rates near zero, and engaging in Ponzi like Quantitative Easing II purchases of longer dated Treasuries in the open market. The combination offers bondholders about as an attractive situation as the one facing a male praying mantis: zero percent interest rates if you stay in cash, or probable principal losses if you take durational risk by buying 5 and 10 year maturities. Eventually, as reflationary policies take hold, long-term bondholders lose their heads (and a portion of their principal as well), as yields rise to reflect higher future inflation. Bondholders’ metaphorical warning: “don’t go near those longer term bonds you fool”.
4. Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable: witness Greece, Ireland, or a host of Latin American countries of generations past. According to Carmen Reinhart and Kenneth Rogoff’s excellent research in This Time Is Different, once a country’s debt approaches 90% of GDP (as the U.S. is now doing), its economic growth slows by up to 1% annually as the interest payments drain resources that should be going for productivity enhancements. Sovereign credit risk increases and yield spreads rise relative to global competitors. Future generations pay the price for their parents’ mindless thrusting.
5. 
   

[Dec 3, 2010: PIMCO's Bill Gross' December 2010 Letter - We're All Living in Allentown, PA]
[Oct 27, 2010: PIMCO's Bill Gross: Fed QE is "Truth be Told, Somewhat of a Ponzi Scheme"]

ADP December Payrolls Up a Whopping 297,000

Two back to back off the wall figures in ADP.  Usually the government's monthly report comes in about 70-80K higher than ADP but November's 92K in the ADP report was strangely much higher than the government report 2 days later, which came in below 40K. This time we have an off the charts figure of just under 300,000 in ADP.   Obviously we have a lot of seasonal hiring in December but one would think this is adjusted away somehow.  Almost all gains were in the service providing sector: +270K which would make sense in terms of a big jump in seasonal retail.  whatever the case the expectation for Friday's reports should go up but right now the relatiinship between ADP and government data seems more out of sync than normal.  January should likewise be interesting as we see how many of these gains potentially fade away as some seasonal workers are let go.  I thought the numbers this Friday would be positive to make up for a very strange November report, but no one is looking for 300Kish.

Mosaic (MOS) - Back in the Saddle

Fertilizer producer Mosaic (MOS) was my top dog position for much of latter 2007 into early 2008, often sitting at 6-7% of the portfolio.  While much of the rest of the market was falling apart after the October 2007 peak, there was a harbor of safety in the commodity space....until there wasn't.  After the blowup of commodities that started in mid 2008 - it, along with a host of companies across the commodities spectrum (and indeed the entire market) went into a death spiral.  In retrospect, once more the "front page" indicator worked like a charm in this space - no different than most investment crazes.  (be wary of the 'rare earth metal' cover story coming soon!)  [Apr 30, 2008: Finally (a Year Late) Fertilizer Hits the Front Page of the NYTimes; and an Interview with Mosaic CEO]  Much like auto companies/suppliers the fertilizer space has extremely high leverage with a supreme level of fixed costs.  So when business goes bad, it tends to go really bad - but when it is good, gross margins balloon, andmuch of the incremental revenue drops straight to the bottom line.

• Mosaic's gross margin for the second quarter of fiscal 2011 was $768.3 million, or 29 percent of net sales, compared with $307.0 million, or 18 percent of net sales, a year ago. 

Now appears to be one of those times... the stock is up some 100% in just over 6 months and reported another very nice quarter last evening.   I keep saying it, but this feels like deja vu with latter 2007, early 2008 across the commodity space.

Frankly, I am shocked there was never a bid for Mosaic somewhere along the line the past 2 years - perhaps the 64% stake by Cargill poses problems for an outside investor.  At $33B in market cap, there are now far fewer potential suitors.

Interestingly, Mosaic was able to pull this off with potash prices down year over year - but phosphates still are the dominant product line.  Potash prices are still far off the crazy times of a few years ago.  [Apr 23, 2008: Potash Hits $1000 on Spot Market]  [Apr 2, 2008: Potash Makers Already Talking $750; Up from $625] [Mar 27, 2008: Canpotex Potash Contracts Secured with India @ $625]

• Mosaic said today its average international selling price for potash in the second quarter fell to $331 a ton from $370 a year earlier.  Mosaic sold diammonium phosphate for $461 a metric ton in the fiscal quarter, up 61 percent from a year earlier.

Full earnings report here.

Via Reuters:

• Strong demand for fertilizer driven by high U.S. crop prices helped Mosaic Co's (MOS) quarterly profit and revenue beat Wall Street's expectations.  With prices for corn and soybeans near multiyear highs, farmers have strong incentive to plant as much as possible, a process requiring more phosphate and potash fertilizer.
• "I think people will focus on the high crop prices," Soleil Securities analyst Mark Gulley said. "It's hard to find a chink in the armor right now. The outlook is very solid."  It remains to be seen if U.S. farmers plant more corn than soybeans in 2011, Chief Executive Jim Prokopanko told Reuters, adding that the "fight for acres hasn't been fought yet."
• "Everything on the horizon that we see is in support of higher prices," he said. "We really feel good and confident about the business. Demand is booming, and our outlook looks good from any angle."
• Mosaic, which is majority owned by U.S. agribusiness giant Cargill, earned $1.03 billion, or $2.29 per share, in its fiscal second quarter, ended Nov. 30, compared with $107.8 million, or 24 cents per share, in the year-ago period.  Excluding gains from the 2010 sale of a stake in a Brazilian fertilizer producer, Mosaic earned $1.01 per share.   By that measure, analysts expected earnings of 91 cents per share, according to Thomson Reuters I/B/E/S.
• Sales of phosphate, the second-most important fertilizer for farmers, rose 49 percent to $1.97 billion during the quarter.  For the fiscal third quarter, Mosaic expects phosphate volumes of 2.4 million to 2.7 million tonnes. 
• Phosphate production has been curtailed in recent months due to the partial shut-down of a large Florida mine.  Returning the mine to 100 percent capacity is "one of our highest priorities," Prokopanko said. The company has an extension agreement in place with authorities to mine 200 acres through the end of March, he said.
• To reduce dependence on its phosphate business, Mosaic is in the middle of a $5 billion campaign to boost its potash capacity by more than 5 million tonnes over the next 10 years.  For the fiscal third quarter, Mosaic expects to ship 1.9 million to 2.1 million tonnes of potash.
• During the fiscal second quarter, sales of potash rose 69 percent. 
• Mosaic's overall revenue rose 56.4 percent to $2.67 billion. Analysts expected $2.44 billion.

[Jan 18, 2008: One Lonely Voice Agrees with Me on Food Inflation]
[Jan 14, 2008: Beating a Dead Horse - Fertilizer]
[Nov 19, 2007: Revisiting "Analysts Still Doubt Fertilizer Stocks"]
[Oct 23, 2007: Analysts Still Doubting Fertilizer Stocks]

No position

Qualcomm (QCOM) Near Deal to Buy Atheros Communications (ATHR) for $45/Share

Grrr.... so frustrating.  One of our mainstay holdings for the past 2 years - Atheros Communications (ATHR) looks like it will be bought out for Qualcomm for $3.5 Billion of $45/share.  Not only do we miss out on the buyout but one less candidate for the future portfolio. Indeed I said in early December to keep an eye on this one.  [Dec 1, 2010: Keep an Eye on Atheros Communications]

Bigger picture this is becoming an increasing problem for investors such as myself.  A lot of the small to mid cap secular growth stories - namely in tech - are being snapped up or never make it public since the mega cap giants buy them all up - hence their big growth gets embedded in a much slower giant.  Much like Xbox is stuck inside of Microsoft.  (in that case of course, Xbox originated within MSFT but it's the same idea of a high growth arm of a slow plodding giant) I think this might be the reason the remaining independent high growth names have such a premium - scarcity value. There are so few domestic opportunities for secular growth, that for those that remain stand alone, people are willing to pay any premium.  Atheros would not even be considered the cream of the crop in terms of growth like some of the other names that had ridiculous 2010 price appreciation, and probably have priced themselves out of being acquisition targets.


Per NYT:

• Qualcomm is near a deal to buy Atheros Communications, a semiconductor manufacturing company, for about $45 per share, or $3.5 billion, according to two people with direct knowledge of the talks.
• A deal could be announced as soon as Wednesday, said these people, who requested anonymity because they were not permitted to talk publicly about the deal. They added that the talks were in their final stages but could still fall apart.
• The deal would represent a roughly 22 percent premium to where Atheros’s stock traded midday on Tuesday. Atheros stock has jumped about 50 percent off its lows in September as the outlook for business and consumer spending has improved.
• A purchase of Atheros would be Qualcomm’s largest acquisition ever. Over the past year, Qualcomm, based in San Diego, has quietly sat on a pile of more than $10 billion in cash, while its rival Intel has gone on a buying spree. Last August alone, Intel spent nearly $10 billion acquiring McAfee, the antivirus software maker, as well as units of Texas Instruments and Infineon.
• Atheros, based in Santa Clara, Calif., makes chipsets for a range of wired and wireless devices, including desktops, laptops and tablets. On Monday, it announced two new wireless products that bring Wi-Fi and Bluetooth technology to notebooks and tablets while reducing reducing power consumption and increasing the longevity of batteries in such devices. 

[Oct 26, 2010: Atheros Communications with Solid Report, but Guidance Soft]

No position

Trading Community Beginning to Turn Against Gold?

Increasingly my belief is large money has the capacity to move markets, and the ability to influence others via options market activity is increasing.  So many people are looking for any edge, and as we saw in 2008 with the banks - once players began blasting these institutions with put buying everyone began asking "what do they know that we don't know" and that led to selling... or more put buying... and it tends to feed on itself.   We saw similar activity in the CDS market for sovereign debt more recently.  The same goes for the upside, especially with so many services now alerting market players to large institutional scale activity in the options market.  One could say in some ways this is using the market psychology to manipulate things if you are a big enough fish.

i.e. short XX in scale, then start blasting the option markets with out of the money put purchases, which scream out to everyone in a market where any dislocation is picked up by algorithms the world over, which then leads to people asking "what does this big boy know?", which leads to copycat behavior or "shoot now, ask questions later".... which leads to ....

You get the point.  A very large player can move markets simply due to their scale causing others to mimic or question their own position.  That original shorting of XX in scale is a winner due to all the following factors.   Not to mention the follow up puts.

Apparently the "trading floors" are buzzing with large scale put purchases of the gold ETF at the 115 strike price (apparently in March).  This same player could have been shorting GLD (the ETF itself) in size ahead of this now very obvious put buying.  So does this feed on itself?  Already the questions begin "what does this person know?"  And so the human psychology plays on itself as the CNBC Fast Money crew jumps on it - so both the retail investor and the institutional investor now know "someone smart" is doing something.  If the herd follows the Pied Piper, the original put buyer (who potentially also has a big short position of the ETF itself) will make mad money frankly only due to the scale of his put position causing herding behavior. 

As we can see from the chart GLD 115 would be a dramatic drop, down below the 200 day moving average.  But frankly it need not go anywhere near that for said purchaser of puts to make mad money.  Indeed with today's 3% drop today this institutional buyer has already made some excellent change.  Even a drop to the upper 120s from the 134s would derive very big profits.  And all it took was said "smart money" leaving his/her large 'footprint' all over the market.

p.s. for your technicians out there, one could make the case gold has just made a head and shoulders formation.  

Here is a video of the Fast Money crew talking it up....




No position

Speculators Moving into the Natural Gas Space?

With almost every commodity known to man (not named cocoa or natural gas) sent to the stratosphere in 2010, one needs to ask if the speculator class will finally start pumping up those few left behind.  Since supply and demand as a reason for prices to adjust is "so 2004", it need not matter if U.S. physical inventories of natural gas are bursting at the seams... we have a fiat money tsunami to push into the market (every market) and we can only run up silver 2-3% a day, so many months in a row.   Don't look now but guess what commodity got 2011 off to a hefty start?

If this continues (clearing $5...and than $5.20 will be important), just another line item to add to the list of price pressures on both consumer and producer in the year ahead - but as always, it won't matter until it matters.

No position

Both Goldman Sachs (GS) and Apple (AAPL) Show Breakout Potential

Yesterday's "we must rally for rallying sake" gap and run, pushed both Goldman Sachs (GS) and Apple (AAPL) above key resistance levels.  Apple is the dominant animal in the widely traded QQQQs, hence the rally in December without Apple's participation was very interesting.  While sentiment readings and the "giddy" factor on CNBC is off the charts, as a bull you definitely like to see these type of moves in what are considered bellweathers.   Apple especially now has a wonderful sideways base to work off of.

With that said, I still think at these levels of euphoria we are now becoming increasingly prone to a blow off type of correction - perhaps Friday's "surprising" employment figures will provide the incentive for the last surge higher before we finally have an inkling of correction.  I would begin building some hedges against long positions starting next Monday (afternoon of course since we almost ALWAYS gap up on Monday mornings) or Tuesday.  Next week will mark the 6th week of non stop rallying (have we even had more than one 0.5%+ down day?); generally a good time to expect some weakness to begin.

No position

Byron Wien's 10 Surprises for 2011

After a quite stellar surprise list for 2009, 2010 was a dud for Byron Wien. (see 2010 'surprises' here)  That said, just for fun let's showcase what is a widely publicized list amongst the Wall Street crowd.  (this is his 26th year doing this conjecture)  Looking over this year's surprises, I'd argue many of the items are near consensus, especially in the first part of the list.  For example, many on the Street are calling for GDP around 4%, and unemployment to fall to about 9%... yields to rise on U.S. debt.... the S&P to hit 1400-1450.... M&A to explode higher under an orgy of easy money...gold to keep rallying as central bankers spit on fiat money.... agricultural commodities to surge....oil to continue ever upward.... etc. 

-----------------------------------

Via Barron's:

Wien defines a “Surprise” as an event which the average investor would only assign a one out of three chance of taking place but which he believes is “probable,” having a better than 50% likelihood of happening.


The Surprises of 2011

1. The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.

2. The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Spreads with corporate fixed income securities narrow.

3. Encouraged by renewed economic momentum the Standard & Poor’s 500 rises close to its old high of 1500. A broad range of sectors participate, but telecommunications and utilities lag. With earnings improving, valuations seem low and individual investors return to equities for the first time since the financial crisis. Merger and acquisition activity becomes intense and the market reaches a blow-off euphoria. Stocks correct in the second half as interest rates rise.

4. Although inflation remains benign, the price of gold rises above $1600 as investors across the world place more of their assets in something they consider “real.” Sovereign wealth funds of countries with significant dollar reserves also become big buyers. Hedge funds keep thinking the price rise is becoming parabolic and sell their positions and some even short the metal but gold keeps climbing and they scramble back in.

5. Worried about inflation and excessive growth, the Chinese decide to use their currency as a policy tool. They manage the value of the renminbi aggressively to keep the growth of the economy below 10% and to prevent consumer prices from increasing above the 4%–5% range. The move is viewed as a precursor to the world-wide adoption of a basket including the renminbi as an alternative to the use of the dollar as the principal reserve currency.

6. Rising standards of living in the developing world seriously increase the demand for agricultural commodities. The price of corn rises to $8.00, wheat to $10.00 and soybeans to $16.00. Commodities become a component of more institutional portfolios.

7. The housing situation improves. Although the inventory of unsold homes remains high, the oversupply is drawn down substantially, contrasting with an increase in 2010. The Case-Shiller gradually heads higher and housing starts exceed 600,000.

8. Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. The higher price at the pump fails to discourage driving, increase sales of hybrid vehicles or cause Congress to initiate conservation measures.

9. Frustrated by the lack of progress against the Taliban and the corruption of the Karzai government, President Obama concludes that whenever American troops return home, Afghanistan will once again become a tribal state ruled by warlords. He accelerates the withdrawal of most military personnel to the end of 2011. Coupled with the pullout of forces in Iraq, this will leave the Middle East without a major Western presence in the face of rising fears of terrorism.

10. Under duress Angela Merkel leads the way in European financial reform. The weaker countries, having pledged to cut their budget deficits in half by 2014, are provided additional transitional aid by the European Union (with Germany’s backing) and the International Monetary Fund as long as they implement their austerity programs, increase some taxes and still show modest growth. The European financial crisis becomes less of a concern. The policies put in place prove psychologically satisfying to the financial markets but harmful in the longer term because they are palliative and do not represent solutions. “

Incredible Run in the Coal Space

You could throw a dart and make tons of money the past 4 months, but certain sectors have been more than incredible.  One such group are the coal stocks - they are making moves similar to the commodities bubble in 08 [May 21, 2008: Coal - Just Amazing].  This was one of my favorite groups in late 2007 through mid 2008 as I believed a secular shift was occurring as coal went from a domestic commodity to something much more similar to oil - global in nature.  The relative ease of transport is what has separated coal from natural gas - both of which the U.S. has in abundance but only the former is (relatively) easy to move around the globe to countries which are the new energy hogs. From 2007 [Sep 18, 2007: Another Look at Coal]

A key driver of this demand has been China's emergence as a net importer of coal in 2007. The country is firing up a new coal-burning plant each week, and this growing appetite has devoured coal from Australia, South Africa and other suppliers that would normally ship to European markets.

Some European consumers have therefore turned to U.S. suppliers to replace coal that is now too expensive to ship all the way from Asia.

Some sample returns below:

Massey Energy (MEE) +77% since early October (3 months)

Walter Industries (WLT) +79% since early September (4 months)

Patriot Coal (PCX) +86% since early October (3 months)

Alpha Natural Resources (ANR) +60% since late September (3 months)

James River Coal (JRCC) +56% since early November (2 months)

Even if you went with the most conservative option - the Market Vectors Coal ETF (KOL) +45% since early September (4 months)

[Dec 6, 2007: Coal Stocks Quietly in Bull Market]
[Jan 14, 2008: New Coal ETF (KOL) Introduced from Van Eck Global] 
[Feb 7, 2008: Coal Bandwagon Gaining Steam]
[May 1, 2008: Walter Industries - the Most Amazing Company]
[May 5, 2008: Alpha Natural Resources Booming Earnings - Just the Start]
[May 20, 2008: Market Vectors Coal (KOL) Red Hot]

No positions

[Video] CNBC - Goldman Sach's Jan Hatzius Gets Very Bullish on 'Stock Market Economy', Still Some Struggles in Real Economy - Changes Mind on Future QE Prospects

The one economist all of Wall Street (and I am sure many in the Federal Reserve) listens to, has changed his tune quite substantially the past 3-4 months.  Goldman's Jan Hatzius had a quite dour outlook just this past October  [Oct 6, 2010: Goldman Sachs - 2 Scenarios for U.S. Economy in Next 6-9 Months (a) Bad or (b) Very Bad] but 2 months later as the massive "don't call it yet another stimulus" plan looked headed for approval turned quite bullish [Dec 2, 2010: Goldman's Jan Hatzius Turns Quite Bullish]  Indeed the surprise of the payroll tax holiday and some of the other goodies stuffed into the Bush tax cut extensions led him to believe that GDP will be pumped up by an additional 0.5 to 1.0% in 2011. 

Interesting to note that the man who was saying the Fed would need to eventually do $2 TRILLION of additional Quantitative Easing (again not that many months ago) now has changed his tune on that end as well.  He believes the current $600B is more than likely all there will be.  That said, he does not see the ultra easy Federal Reserve moving to any form of tightening in 2011... or 2012.  This is quite remarkable as it will mean never before seen levels of liquidity for HALF a decade.  We saw the misallocations 1% rates for about 2 years (2003-2004) eventually created ... but as Chuck Prince says - dance until the music stops!  A year ago ago at this time, all the talk was when the Fed would tighten (many thought by mid to late year 2010).... now we are talking 2013.  The massive steroids to the economy continue....

With all that said, it will continue to not feel like any sort of recovery for large swathes of the populace... but for the "Stock Market Economy" Mr. Hatzius is waving the green flag.  Below we have a video with some of his thoughts courtesy of CNBC

8 minute video - email readers will need to come to site to view

ISM Manufacturing Pops to 57.0 from 56.6 Matching Expectactions

At this point I don't think the economic data matters much as animal spirits are extremely high with the belief the market simply can not go down as the Bernanke put makes the Greenspan put look like amateur hour.  After today's spike, the S&P 500 is only about 10-12% away from many strategists year end targets of 1400-1425.  With 51 more Mondays to go this year and 11 more "first day of the months", not sure how we're going to be able to contain ourselves to only a 10-12% gain from here. 

As an aside every working American just got a 2% raise today, as the payroll tax holiday kicks in - that is $2000 per median household ($50K income) and $4000 for a higher income household ($100K).  This is on top of the huge transfer payment increases we have seen the past 2-3 years, some are measuring those at roughly $2500 per household.  (across 110M households)  While these numbers don't seem huge consider the median household income is roughly $50K.  The government is increasing this by about $4500 in 2011 (transfer payments + payroll tax) or almost 10% per household ... of course offset by massive deficits.  However, that is a huge non organic increase in income for the average household.  Spending is done at the margins if you exclude the upper end consumer... and these are significant supports for the consumer spending economy we now depend on.

It is going to be fascinating to see if the politicos actually take the payroll tax holiday back in 2012 or if they will extend it another year going into an election - because we surely will hear cries of "tax increases" if the 1 year tax hiatus is allowed to expire a year from now.

Today's ISM Manufacturing figure came in line with expectations at 57.0 with prices paid up 3 points (72.5 from 69.5) and new orders up 4.3 points (60.9 from 56.6).   In the Bernank's world, this is a great report as he loves inflation.  Strangely, both the export and import components fell, as did inventories. While manufacturing is only about 11% of the economy, and 9% of employment this report is still more closely watched than Wednesday ISM Non Manufacturing.

More from Bloomberg

Cummins (CMI) Gained 140% in 2010

One of our favorite names - Cummins (CMI) had a monster 2010, up about 140%, tacking on some $10B+ of market capitalization.  This is one of the many "U.S." companies increasingly only in name with the majority of revenue coming from overseas.  Cummins represents the quandry facing investors in 2011... or at least "some point in 2011" when the current euphoria wears off.  Where to put your money for outsized gains?  Perhaps Cummins has another 25% type of year in it - or perhaps it is being priced for perfection and prone to a blow up in the year ahead as some earnings report disappoints the new crowd of speculators who have piled into the name.  Indeed, last quarter the company missed on both the top and bottom line but since we are in the David Tepper market where no one loses anymore as The Bernank says the market must go up - it did not matter.

Earnings are slated to jump from $5.00 for year end 2010 (soon to be reported) to $7.00 in year end 2011.   That's a forward PE of 16, using earnings a full year out from now - for what is an industrial cyclical - albeit one with some fantastic secular underpinnings.  Further with commodity inflation we have to begin to model the same problems we had in 2008 - when input prices (i.e. steel) began to surge, profit margins were punched in the gut across industry.  [May 14, 2008: Deere Earnings - Why I'm Avoiding Equipment Stocks]  [May 17, 2008: WSJ - Fast Rising Steel Prices Set Back Big Projects]  If speculators continue to push commodities up at current pace, we're going to start seeing some tremendous headwinds in late 2011 - a mirror of what happened in 08.  So while the market certainly can continue upward in the year ahead, it is going to be difficult for the exact same names that have been market leaders the past 2 years to continue to carry the baton - or at least to expect level of performance similar to what we've seen.

The CEO for Cummins made a quick appearance on CNBC Fast Money Friday.  See below.





Some highlights from the crew:

• The maker of diesel engines, fuel systems and emission controls based in Columbus, Indiana benefited from an expansion into overseas markets such as China and India, powering trucks carrying everything from grain to iron ore to people.  
• “Global economic strength, a replenishment cycle of old trucks and some production capacity taking out during the recession are driving the gains,” said Karen Finerman, President of hedge fund Metropolitan Capital Advisors and owner of Cummins shares. 
• ... governments around the world.... implementing emission standards that would require the purchase of efficient engines made by companies like Cummins.
• In the third quarter, sales in non-U.S. markets jumped by 56 percent and accounted for about 60 percent of total revenue. Providing engines to power medium-duty trucks and buses in Brazil were a particular highlight. The company, located about 1 hour south of Indianapolis, has customers in 190 countries.
• In October, the company raised its 2010 sales forecast to $13 billion, which would be an increase of 11 percent from 10.8 billion in annual revenue last year.
• Analyst sentiment has cooled slightly a bit on the name after the big gains this year. Nine analysts rate it a “buy” and nine call it a “hold” or “underperform.” The average 12-month price target of Wall Street is $107.67, which would represent an almost 7.7 percent return in 2011, not including the dividend. 

[Nov 19, 2010: Bloomberg - Oldest Truck Fleet Since 1979 May Mean 56% Jump in North American Output]
[Oct 26, 2010:  Cummins Misses on Top and Bottom Lines, but Foreign Sales up to 63% of Revenue]
[Jul 27, 2010: Cummins Demolishes Estimates]
[Sep 23, 2007: Stock to Watch: Cummings Hitting on all Cylinders] 
[Feb 11, 2009: WSJ - Cummins Engine Shifts Gears Amid Stall]

No position

First Day of the Month + Monday Morning Meltup Kick In for Start of 2011

Looks like 2011 is going to be little different than 2010 and 2009.  As noted last week the first day of the month is almost always up and usually in relatively sharp fashion...this has been a pattern for well over a decade.  As a special bonus this month the first day of the month happens to be a Monday.  As has happened repeatedly since the 09 lows Monday morning gap ups have become the rule.  News or no news.  For an 'efficient market' which supposedly discounts such things it is remarkable how patterns that are now obvious to everyone keep working.  Looks like another year where much of our gains will come premarket and on little news.

Most Read Posts of 2010

With about 7000 posts authored in roughly 3.5 years, it is always interesting to see what is the most popular amongst readers.  Below I've listed the most visited stories in year 2010, excluding the posts along the top of the page such as "About Me" and "Fund FAQ/Pledges".

1. [click here]  Kyle Bass of Hayman Capital - Japan Defaults or Devalues Debt in 3-4 Years; U.S. in 10-12
2. [click here]  Ordos - China's Empty City (this post is actually from 2009 but was still a hit in '10)
3. [click here]  Byron Wien's 10 Surprises for 2010
4. [click here]  Zero Down Mortgages Restarted by Biggest Subprime Lender in Town - Fannie Mae
5. [click here]  Sovereign Risk Chart - Where Would the U.S. Fit in, on Europe's Scale?
6. [click here]  Video - Who is Sylvain Raynes and How Did He Make it on CNBC? (my nomination for 2nd funniest video in history of FMMF after the infamous Jeff Macke clip)
7. [click here]  Charles Biderman of TrimTabs Claims U.S. Government Supporting Stock Market
8. [click here]  His is (Way) Bigger Than Yours... One Day Trader's Office Setup
9. [click here]  Oh My - We're Crashing (flash crash in real time!)
10. [click here]  Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending

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Other fun stats

After U.S., Canada, and U.K. the countries most visitors came from

1. India
2. Germany
3. Singapore
4. Australia
5. Croatia! (Since inception I seem to have a random fanbase there)
6. Hong Kong

Top cities globally

1. NYC
2. San Francisco
3. Chicago
4. L.A.
5. London
6. Houston
7. Seattle
8. Washington
9. Atlanta
10. Singapore (city-state)
11. San Jose
12. Dallas
13. Toronto
14. Minneapolis
15. Austin
16. Hong Kong
17. San Diego
18. Zagreb (I was hoping it would be Dubrovnik but beggars can't be choosers)

[Video] Joseph Stiglitz, Nouriel Roubini, VY Reddy, Raghuram Rajan Look Ahead to 2011

A nice series of videos with 4 powerhouse economists (this is where I insert the joke that if 4 economists are in the room, we should expect 7 opinions).  Americans will be very familiar with the progressive Stiglitz, and the now infamous Roubini.  Joining them is the former chief economist of the IMF Raghuram Rajan who had a very impressive interview on CNBC last October (which I never posted to the blog but you can see it here), and a man who at this point most Americans could only wish for as a central banker, VY Reddy.  Unlike the Greenspan's and Bernanke's of the world who claim the bubbles (which they create) are not something they can see.... and that they can only fix the bursting bubbles after the fact, Doctor Reddy was pushing against the easy money bubbles as they were creating, helping India avoid massive financial damage seen in the West.   He stood up to private bankers who were furious that a central banker would not be their drug dealer in chief, but in the long run he worked for the people - not the bankers.  What a concept. [Dec 28, 2008: NYT - How India Avoided the Crisis]

All together about 35 minutes of interviews