Fund My Mutual Fund

What the Heck is Going on During Mondays Lately? Always Up

2009-11-20T14:53:00.002-05:00

I've noticed Mondays have been very strong lately; the past few weeks government officials worldwide reiterated stimulus, money printing, and more stimulus - first in the G20 (2 weekends ago) and then in Asia (last weekend). But then I thought back and it seemed like every Monday we seem to walk in to things that hammer the US dollar, and the market soars. So I thought I'd look a bit closer.

Whatever (or whomever) is doing this, seems to love marking the markets up on Monday. Just by chance? Or am I data mining? If the pattern holds you should be buying hand over fist for "Monday Mark Up"... or at least covering any index short exposure. Considering we are sitting just over the 20 day moving average and we'll be drunk in some announcement over the weekend that will cause the US dollar to sink.... odds are for another one lovely Monday?

I've cut back my index short upon noticing this trend plus the near term support level ....

NYT: With FHA Help, Easy Loans in Expensive Areas; Barney Frank Pushes for Permanent Higher Limits - Approaching $1 Million

2009-11-20T13:45:00.007-05:00

Let me take you back to a time... a simpler, gentler era known as 2006. Money was easy, banks were giddy with their chance to throw dollars in every direction.

Let me take you forward 3 years. Replace the words 2006 with 2009, and banks with US taxpayer. We not only have forgotten the lessons of 20, 50, 80 years ago. We've forgotten the lessons of 1 year ago. But not to worry, I'm sure it will work out better this time around. I just want you to remember these people when you are asked to pony up taxdollars to fund FHA (although it won't be a bailout since they can borrow money directly from the US Treasury Dept without asking Congress) - the folks who will say they were duped, they thought it was the bottom, they never expected prices to drop again, that it was the government's fault they were offered this type of loan. This is whom your taxpayer money will be handed to when we need to "save them" to "support the housing market" in the next decade.

And remember these stories as you sit in awe at the "housing rebound" statistics we are hearing about aka green shoots.

Via NY Times:

In January, Mike Rowland was so broke that he had to raid his retirement savings to move here (San Fransciso) from Boston. A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

We've had a lot of candidates for quote of the year lately, here is another fun one:

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

Oh yeah baby! Money is free and comes from the trees! Boo yah! I am so stoked I did not have to bother with 1 economics class in high school, so I can live in the Matrix ....with no qualms! I was told to just show up at the office at the required time and a nearly million dollar loan was mine!

....second partner, Michael Bedar, 31. “Then we read about the F.H.A. I had never heard of it before, and couldn’t quite believe it. But it was the answer to our problems.”

Government largesse is indeed the solution to all our problems Mr. Bedar.

Thanks to rock-bottom interest rates, none of them will pay much more than a thousand dollars a month. “Everyone should have the chance to do this,” Mr. Kurland said.

I agree, it is a God given right as written in the Constitution for the Fed to spend trillions of dollar to manipulate interest rates down, and then hundreds of billions should be offered by federal government for taxpayer handouts. We all deserve this... it's right there in one of those articles. (you might have to squint to find it) Everyone should have the chance!

In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default.
In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own. Now the government is guaranteeing an average of six mortgages a week here. Real estate agents say the insurance is such a good deal that there will soon be many more.
F.H.A. insurance was created for minority and low-income families who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets. They must pay a substantial insurance premium of 1.75 percent of the loan. But in return, their down payment can be as low as 3.5 percent.
For decades, most F.H.A. loans were in low-cost states like Texas and Michigan. Under the agency’s loan limits, houses along the coasts were usually too expensive to qualify. In 2007, fewer than 4,400 F.H.A. loans were made in California, according to the research firm MDA DataQuick, and none were in San Francisco.
The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the F.H.A. insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200. (temporary my foot)
At Guarantee Mortgage Corporation, which has 150 mortgage brokers in the Bay Area, Seattle and Portland, Ore., F.H.A. loans have grown to about 15 percent of its business, from less than 3 percent a few years ago. “It sure has helped us put a lot of deals together,” said Guarantee’s chief sales officer, Bob Siefert. He predicts that a quarter of Guarantee’s deals will soon be guaranteed by the F.H.A. (wait, I thought it was temporary? now you are planning to funnel 25% of your mortgages through the agency that caters to "at risk, low income" borrowers?) Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.

And as with every government handout, the drug addict becomes more in need of said drugs. Taking away those drugs becomes ever much more difficult.

Policy changes like the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo. With government finances already under great strain, the policy expansions are creating new risks for American taxpayers. (that's ok, I'll just pass it off for my grandchildren to pay, no skin off my nose! Someone please send me a government official to high 5!)
The Internal Revenue Service is giving tax rebates to first-time buyers, and soon to move-up buyers, in a program beset by accusations of fraud. [Oct 22, 2009: First Time Homebuyer Fraud Called Disturbing] And the government agency that issues mortgage insurance, the Federal Housing Administration, is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. On Thursday, the Mortgage Bankers Association said more than one in six F.H.A. borrowers was behind on payments. (green shoots!)

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?” (no, it was not. But let's not worry about details like that)
He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.
Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees.

Hey as long as the stock market surges on "better than expected" housing data it's all bridge under the water to me. I win in my stocks, my future grandchildren pay the bill, people who put almost nothing down on a million dollar home get to show off to friend, then will live there without making a payment for 2 years in 2012-2013 as we keep foreclosures off the market (more green shoots). I believe this is called a win, win win.

2006? or 2009? The dream never ends with easy money - the quotes all sound so familiar. Mr. Bedar, Mr. Rowland and the third partner in their property, Jordan Kurland, are all in the technology field, but their dreams of wealth do not feature stock options.

“We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

It can only be months before "Flip That House" makes it back to HGTV's normal programming. Can we rename it "Flip that Taxpayer Sponsored House"? Thanks.

Oh yes... remember how this FHA limit extension was going to be a "temporary fix"? hahaha - sucker.

A few weeks ago, Congress extended the higher lending limits for another year.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750.
His bill would make the new limits permanent.

We are the chosen people... don't you forget it.

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

I'll just add this one to the list:

Warning: [May 6, 2009: FHA - The Next Housing Bust]
Warning: [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]
Warning: [May 13, 2009: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
Warning: [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
Warning: [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]
Warning: [Aug 14, 2009: Ginnie Mae CEO Resigns After 1 Year on the Job]
Warning [Sep 18, 2009: Washington Post - FHA's Cash Reserves Will Drop Below Requirement]
Warning [Oct 14, 2009: NYT - FHA Problems Raising Concerns of Policy Makers]
Warning [Nov 18, 2009: Toll Brothers CEO: "Yesterday's Subprime is Today's FHA"]

Bookkeeping: Cutting Back Perfect World (PWRD) on Break of Support

2009-11-20T11:08:00.000-05:00

Speaking of a narrowing of the market, about 4 weeks ago many of our positions began breaking below key moving averages ... we mechanically began culling them and moving into cash. Then within a week the large caps broke down (just for a week mind you) and the S&P 500 broke the 50 day moving average - right before Halloween. We also had 6 intraday reversals in a 2 week period. 3, 5, 7 years ago this would of led to a larger move down. Instead we did a 180 degree turn at the beginning of November and went straight up in now taken for granted, rocket ship style. Head shaking to say the least.

So let's see if we repeat this again. However, next week is a holiday week and usually the denizen of the daytraders - some of the biggest moves in nonsense stocks typically happen Thanksgiving week as the market is very thin. But I am beginning to see some charts again break down as they did about a month ago, so once more we're going to mechanically cut back. I see quite a few names "close" to puncturing a moving average...

First off will be Perfect World (PWRD) which on an intraday basis has sliced through its 50 day moving average - we're going to cut back the position in a large way going from a 1.4% exposure to 0.2% as the stock breaks $43.

Long Perfect World in fund; no personal position

"Houston, We Have a (Russell 2000) Problem"

2009-11-20T10:40:00.003-05:00

Since that surge on Monday this market is really scuffling and providing very little opportunities from either the long or short side unless you are an extremely short term oriented daytrader sort. We're essentially in a holding pattern circling the airport... it is just unclear if this is the correct airport.

I want to show quite an interesting divergence, one we have been talking about for 6 weeks.... and that is the lagging nature of the small caps versus the large caps. While the DJIA, S&P 500, and NASDAQ get all the publicity, the Russell indexes are quite important and something I look at a lot.

There are 2 major indexes, the Russell 1000 (RUI) and Russell 2000 (RUT), both components of the Russell 3000 (RUA). The Russell 3000 covers 98% of the market capitalization in the stock market so it's effectively the market (there is an even broader measure out there called the Wilshire 5000, with the bottom 2000 stocks being very small). The Russell 3000 can be broken cleanly in 2 pieces, the largest 1000(ish) go into the Russell 1000 and the smaller 2000(ish) go into the Russell 2000. I measure the fund performance against the Russell 1000 because it is broader than the S&P 500, with the bottom half of the Russell index representing the type of stocks we spend a lot of time in ($3B, $4B, $5B type of market capitalizations).

Either way, when we compare and contrast the charts we can see one the issues that has been flagged in this market for the past 6 weeks; a major divergence between larger cap stocks (Russell 1000) and smaller cap stocks (Russell 2000).

Russell 1000

Russell 2000

The Russell 1000 looks almost identical to the charts of the NASDAQ and S&P 500. Making newer highs, pulling back to support and just charging along - looks fine. The Russell 2000 on the other hand has a troublesome chart. For those who follow technical analysis you see a very obvious "double top" over the past 3 months, at 625. Not to mention after breaking through the 50 day moving average in the past week, it has now broken right back below it. These are 2 quite bearish situations.

The implications here is this market is being led by large caps, and the rally is getting more and more narrow. A market led by large caps is not bad nor good; I am ambivalent about that. But a narrowing rally is not good. That said, we noticed this about a month ago and thus far it has not mattered. Volume is quite poor in the markets as well, and has been for months - again a warning sign that has not mattered. Personally with the volume situation, this seems like a market dominated by professionals as the retail investor is mostly crowded out, liquidating old investments to survive in this economy, or sticking to bond funds. With 50-60% of trading just between 1 computer and the next in milliseconds, it appears those algorithms are a lot more interested in liquid large caps than small caps. Can this divergence keep going? Sure - why not. But in the old market this action in the Russell 2000 would be a big red warning sign. In this new paradigm market? Who knows anymore.

Tim Geithner Under Fire (Videos)

2009-11-19T16:30:00.008-05:00

Rough day at the office for Tim Geithner

2 very interesting videos - whatever side of the aisle you are on, it sure is interesting to watch. Please note, I did NOT write these titles for the videos - they are from the youtube user.

I have never seen Geithner so agitated... I almost felt sorry for him. Almost. Then I remembered who was the head of the New York Fed the past few years. Frankly it sounds like the stuff you hear on the playground in 4th grade ... but I must admit, highly entertaining.

Video 1 - Congressman asking Tim to resign (6 minutes, you can skip right to minute 2 where the fun begins)

Republicans “gave this president an economy falling off the cliff,” Geithner told Representative Kevin Brady of Texas as the two men interrupted each other during a hearing today. “I can’t take responsibility for the legacy of crises you bequeathed the country.”
The “worst financial crisis in generations” happened after “almost a decade, certainly eight years, of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy,” Geithner said.

Video 2 - an interesting "he said, she said, he blames, she blames" (6 minutes)

Another Republican on the panel, Representative Michael Burgess of Texas, told Geithner that he disagreed with Brady. “I don’t think you should be fired,” Burgess told Geithner. “I thought you should have never been hired.”

PIMCO's Bill Gross December 2009 Letter : Risk of Bubbles Rises with Low Rates

2009-11-19T14:15:00.007-05:00

One of the most powerful men in the United States, Bill Gross, has put out his monthly letter and its a doozy. [Feb 21, 2009: Fortune - Is PIMCO's Bill Gross too Powerful?] Nothing new to FMMF readers, but when the most respected of investment managers start waving the bubble flag, it's less easier to ignore then when the "mavericks" of the blogosphere do so. That said, Gross essentially says the Fed is boxed in - at least using conventional Keynesian economic theory.

To reiterate the stance I've held for about 1.5 years now, I believe the economy is so structurally impaired we won't see rates increased throughout all of 2010. Remember, Ben would much rather have new bubble than to be accussed of "repeating the mistakes of the 1930s".

Quick hit from Bloomberg: PIMCO's Gross Says Risk of Bubbles Rise on Low Rates

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Federal Reserve keeping interest rates at record lows.
“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.” (i.e. in other words, destroy savers and push them into risky assets)
“Raise interest rates with 15 million jobless and 25 million part-time working Americans?” wrote Gross, co-founder and co-chief investment officer of Pimco. “All because gold is above $1,100? You must be joking or smoking -- something.” (bingo - they are boxed into a corner; gold is meaningless to Joe 6pack... the real worry will be if Ben prints enough to push oil over $100; then it begins to get interesting)
The “heavy lifting” will likely be done first by other central banks such as those in Australia and Norway that have already begun to increase interest rates, Gross wrote.

Some interesting views on China:

“China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland,” he added. China has kept its currency at about 6.83 per dollar since July 2008 to help sustain exports amid a global economic slump.
“With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside -- higher Treasury yields, and lower stock prices -- which the Fed must surely be leery of before making any upward move, of its own,” Gross wrote.

Thankfully, Ben's rose colored blinders shall remain on.

Fed Chairman Ben S. Bernanke said after a Nov. 16 speech in New York that it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

The full letter is here; worth your time to peruse over a fine glass of ~~Kool Aid~~ wine.

Main takeaway: Ben Bernanke continues the war on evil American savers, much like his predecessor did, therefore he wants you to buy stocks ... now get to it!:

With the global financial system apparently stabilized, returns “on” your money are back in vogue, and conservative investors who perhaps appropriately donned a Will Rogers mask nary a fortmonth ago are suddenly waking up to the opportunity cost of 0% cash versus appreciated assets at renewed double-digit annual rates. That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars, shown in Chart 1 – yield close to nothing

[Jun 10, 2008: PIMCO's Bill Gross on the Inflation Fantasy]

Bookkeeping: Beginning Starter Stake in Ctrip.com (CTRP)

2009-11-19T13:53:00.003-05:00

Aside from E-House Holdings (EJ) which completely fell flat on its face, one of the best earnings reports of the past few weeks was Ctrip.com (CTRP). Unlike EJ, the stock gapped up after earnings and tacked on a bushel of points. Today the stock has come back and filled it's "gap" in the $66s, where I am going to create a starter stake of a 0.5% allocation. I would prefer to be a buyer around $60 (where I'll place a limit buy near) with a stop loss below that point. But it's an ok place to begin a position with hopes of lower prices in the future.

We have not owned this name in a while... this is normally where I'd talk about valuation, growth metrics, fundamentals but it all has become moot. Stare at the dollar chart, and act accordingly.

As an aside I am laughing out loud at my main watch list... about 60 stocks. All but 1 stock is in the red ... while the dollar is up 0.25%. This inverse dollar trade is so sickening.

Ctrip.com International, Ltd. is a leading travel service provider of hotel accommodations, airline tickets and packaged tours in China. Ctrip aggregates information on hotels and flights and enables customers to make informed and cost-effective hotel and flight bookings. Ctrip also sells packaged tours that include transportation and accommodations, as well as guided tours in some instances. Ctrip targets primarily business and leisure travelers in China who do not travel in groups. These travelers form a traditionally under-served yet fast-growing segment of the travel industry in China.

[May 14, 2009: Ctrip.com - Steady as Always]
[Aug 14, 2008: Interesting Stock Reaction to Ctrip.com's Report]
[May 15, 2008: Ctrip.com Down on Earnings - I'm Buying]
[Feb 28, 2008: Ctrip.com Continues to Impress]
[Jan 5, 2008: Zachstocks on Ctrip.com]

Long Ctrip.com in fund; no personal position

More Homes in the US in Delinquency or Foreclosure, than for Sale

2009-11-19T11:45:00.006-05:00

Despite countless monies spent by government to manipulate the housing market upward, [Mar 5, 2009: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners] we have reached a new threshold in our "recovery".... for the first time the number of homes in delinquent status + foreclosures is GREATER than the number of homes for sale.

That's astounding.

As we wrote often in 2007 and 2008 this would be a 2 step housing bust. The first bust was a once in a lifetime (we hope) "stupid mortgage" disaster that began in subprime and moved up the food chain to Alt A loans [March 19, 2008: Alt A Mortgages Beginning to Break Down] , interest only loans, and the most evil of them all.... option ARM loans. [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?] These are the loans that the government is spending money left and right to mitigate... people who bought way too much house and were "tricked" into these loans now deserve tax money to get them into a sensible loan. Many of those folk are currently in trial programs, but we've seen in the past more that half of the modifications just kick the can down the road [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] and eventually the mortgage goes into foreclosure. It just delays the inevitable and has wasted a ton of money by taxpayers on a solution that does not even work half the time.

The second step of this bust is what a traditional housing drop looks like... when people lose jobs in a recession, they can't make payments and the house goes into foreclosure. That has usually been a regional situation in the US rather than a national situation but this recession recovery is so vast and broad it is hitting people everywhere. And this is the prime loan area that is now taking big hits. All prime loans mean (to me) are people with good FICO scores. Good FICO scores mean nothing when you lose your employment... you can have the will, but not the way to make a mortgage payment.

I cannot stress enough how a mortgage bust is supposed to be a lagging indicator in an economic downturn - it traditionally happens mid to late cycle in a recession - due to job loss. But thanks to the "financial innovation" and "daytrading home culture" (no one is blameless) this is the first recession that was LED by a housing bust. Now that's innovative!

One more kicker - I have long said this will be a 2 part bust, the first of its kind. I might be wrong there - because we are in the eye of the storm on many option ARM and interest only mortgages. Maybe we will get to not only experience the first 2 part national housing bust, but a 3 parter. [Nov 4, 2009: Whitney Tilson T2 Partners October 2009 Investor Letter; Housing Recovery Still Has Long Way to go]

The details:

Mortgage Delinquencies Jump to Record High

US mortgage delinquency rates and the percentage of loans that entered the foreclosure process jumped in the third quarter, with both reaching record highs, the Mortgage Bankers Association said on Thursday.
The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from 9.24 percent in the second quarter and up 265 basis points from 6.99 percent one year ago, the MBA said in its National Delinquency Survey.
The delinquency rate broke the record set last quarter. The records are based on MBA data dating back to 1972.
The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure.

So we have 9.64% of all homes in some sort of delinquency.

The percentage of loans in the foreclosure process at the end of the third quarter was 4.47 percent, an increase of 17 basis points from 4.30 percent the second quarter of 2009 and 150 basis points from 2.97 percent one year ago.

And then we can add another 4.47% for foreclosures. Hence a combined 14.11% of mortgages in various stages of distress despite the actions that have moved many borrowers out of these categories via workouts. Without those actions the "free market" would of created an even larger swathe of loans in either situation.

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

Now the truly remarkable stat:

The number of loans 90 days or more past due + foreclosures is over 4 million.
The number of new or existing homes for sales is 3.9 million.

It all comes back to jobs in the end... without jobs there is no solution.

Oops, I'm sorry - there is still the ultimate solution. [Jul 15, 2009: Reuters - Obama Mulls Rental Option for Homeowners, along with Paying Mortgages for Unemployed] We've already seen the "rental option" unleashed 2 weeks ago... only 1 last "solution" left to go.

Bookkeeping: Selling Index Longs as S&P Breaks 1100

2009-11-19T09:40:00.005-05:00

I am just being mechanical and conservative here and selling out the index longs (TNA & SPY calls) bought Monday on the breakout over S&P 1100 as we fall back below it. Could be a head fake - we never know until after the fact, but we can always re-enter on a bounce back over S&P 1103-1104 or so. For now capital preservation as we view a market that is long overdue to give back some gains.

Losses will be earned on both positions.

See yesterday's post for thoughts on where we could potentially fall to if this move continues.

EDIT 9:40 AM - threw on a bit of a short TNA position just to hedge the portfolio a bit.

A good (short) video below that explains the nexus of the current bull, bear debate - continue the very obvious and crowded trade up, or not?

Short TNA in fund; no personal position

John Paulson Set to Launch Gold (GLD) Hedge Fund

2009-11-19T09:20:00.012-05:00

I keep looking for something that marks at least an intermediate term top in gold, i.e. a "magazine cover" indicator aka when everyone is on the same side of the trade and even your barber starts talking up gold stocks. This doesn't mean the thesis is not correct in the long run, but let's keep an eye out.

The latest bit of "piling on" in the gold trade is infamous hedge fund manager John Paulson - who already holds enormous amounts of gold in his main fund (over 8% of the entire SPRD Gold Shares (GLD) ETF!) - opening a gold specific hedge fund, partially just to find a place to protect his wealth from the ravages of central bankers. He will be putting $250M of his own money into the fund.

At this point if John Paulson was his own country he'd be somewhere in the 16-20th range in terms of largest gold holdings... I guess he wants to make a run for top 10 status - remarkable. [Oct 13, 2009: Largest Gold Reserves by Country]

Hedge fund manager John Paulson, who raked in $20 billion in 2007 by betting against financials and all things subprime, is looking to grow his gold stash with a new fund, tapping into investor concern about a weak U.S. dollar and inflation.
According to the WSJ, the famed money manager will launch in January 1st a fund dedicated to buying up shares of gold miners and other bullion-related investments. The new fund will invest in gold-related shares and gold derivatives and will aim to outperform gold prices.
Mr. Paulson, who spoke about the fund at a meeting with his investors in New York, argued that the bull run was only beginning for the precious metal. He said he was starting it in part to give himself more personal exposure to gold.
Paulson is already a major holder of gold. For the past year or so he has been building gold positions in the firm’s current funds. His investments include shares of Johannesburg-based gold producer AngloGold Ashanti Ltd (AU). The billionaire manager also has a large stake in Gold Fields (GFI), Kinross Gold (KGC), Market Vectors Gold Miners ETF (GDX) and SPDR Gold EFT (GLD) in which he has over 31 million shares or 8.6%.
Mr. Paulson currently has more than 10% of his $30 billion or so under management in gold-related investments, according to his investors. He is estimated to be worth about $6 billion, and plans to invest as much as $250 million of his own money in the new fund.

[Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]
[May 16, 2009: John Paulson Continues to Pile Into Gold]
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]

Long some gold instruments in fund; no personal position

Infectious Greed: Detroit v Rest of US in Unemployed Per Job Posting

2009-11-19T08:50:00.003-05:00

Hat tip to Paul Kedrosky for this eye opening chart. The source data can be found here but as they say a picture is worth a thousand words; clearly there is a localized depression in the metro Detroit area.

[click to enlarge]

As you view in shock and awe, I'd also like to point out the city in the far LEFT of the chart - i.e. where all the jobs are. It's a sick indictment of what is going on in the country.

(please note, the data seems to be from a search engine for job searches - so we can question the absolute accuracy, but the key is magnitude of difference)

To newer readers please understand I have Michigan economic bias [Jun 25, 2008: I have Michigan Economic Bias] and of course one is affected by what one sees/hears locally on a day to day, year to year basis. That said, seeing what was happening locally..... ahead of the rest of the country, helped me have conviction in my predictions on what would happen to the country as a whole back in 2007. [Dec 4, 2007: Predictions for the Coming 6 Months] While I try not to extrapolate "Detroit" to the rest of the country, my main hope is we are not the canary in the coal mine for a country dependent on finance, government, "shopping", "home flipping", and health care for its prosperity.

Obviously a reader from Texas has a whole different world view than someone who has *this* situation within a 30 minute drive. [May 15: One City Block in Detroit] And someone in Washington D.C. is simply asking "what recession?"

Toll Brothers (TOL) CEO: “Yesterday’s Subprime is Today’s FHA,”

2009-11-18T15:35:00.005-05:00

*deep sigh* Just another day in Rome...

I truly wish those of us who have been warning about this impending mess could get tax exclusions from our wages to be raided for the bailouts that are to come. I do want to make a caveat since I've made the FHA implosion my personal Roubini / Schiff call. Each time a government official denies FHA will need a bailout, I scoff on the blog and say "just you wait". Well I found some grave news dear readers about a week ago in some of my readings. The government officials are correct.

Please sit down for this....

When the FHA needs funds from the taxpayer there will be no request to Congress. Because as law is currently written FHA can go directly to Treasury and get the money. Congressional approval is not required - therefore technically, there will be no bailout. Just a movement of shells between one hand and the other.

So all we wait now is the fake surprise and indignity from our politicians, whose policies have taken us here, when this day comes. They will say "how could no one see this coming!?" "how could we keep repeating the same mistakes over and over?" "Why was no one reading Fund My Mutual Fund blog!?" (ok they won't say that last one) .

We'll throw today's comments from Bob Toll onto our warning list... and yes, I've made the list and checked it twice.

Warning: [May 6, 2009: FHA - The Next Housing Bust]
Warning: [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]
Warning: [May 13, 2009: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
Warning: [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
Warning: [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]
Warning: [Aug 14, 2009: Ginnie Mae CEO Resigns After 1 Year on the Job]
Warning [Sep 18, 2009: Washington Post - FHA's Cash Reserves Will Drop Below Requirement]
Warning [Oct 14, 2009: NYT - FHA Problems Raising Concerns of Policy Makers]

If you are not familiar with Mr. Toll of Toll Brothers (TOL), he is widely considered the best CEO in the public housing market. Much of this seems to be based on his ability to top tick the housing market by exiting much of his stock exposure near the top of the bubble, being granted many more options to replace those during the downturn, and of late furiously selling off his company stock as he did right before the last bust. Now why would we do that as we embark on a "housing recovery"? Right Mr. Cramer?

Again none of this will be new to regular FMMF readers - since summer 2008 we have said we are just going to repeat the exact same housing situation, except this time we will skip the banks entirely and the bust will go directly onto the government's balance sheet. It is far more efficient to have the government bailout itself than deal with middlemen like banks.

But remember, as long as the stock market goes up, as the best discounting mechanism in the world... all is right in the world. Don't you forget that.

Via Bloomberg:

The Federal Housing Authority, which insures home purchases with as little as 3.5 percent down payments, may create another crisis in the lending industry, Toll Brothers Inc. Chief Executive Officer Robert Toll said.
“Yesterday’s subprime is today’s FHA,” Toll said today at a New York conference for builders sponsored by UBS AG. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” Toll Brothers is largest U.S. luxury homes builder..,

That last quote about "bail us out" is a bit rich coming from a home builder CEO and all the largesse they have received from the taxpayer these past 2 years.

The FHA’s insurance reserve ratio fell to 0.53 percent, the lowest level in history, and more steps are needed to shore up the agency that guarantees one of every five single family loans, Housing and Urban Development Secretary Shaun Donovan said Nov. 12. The FHA is required by Congress to maintain a loan reserve ratio of at least 2 percent to protect the insurance fund from default.
The FHA said 456,000 of its loans, or 8.2 percent, were in default as of September. That was up from 5.6 percent in September 2008.

Via WSJ blog

“And now if you’re doing business at $120,000 and you’re given an $8,000 credit, and you’re only making the guy put down 3.5%, not only does he get the house but he gets some cash to walk away from the settlement table with,” Mr. Toll said.

Which is exactly the point we've been making REPEATEDLY as we pound the table at how evil the $8000 tax credit is, as designed. No skin in the game is the #1 reason people walk away from homes; not being underwater. You now make home ownership easier than renting with this tax "credit" which the states have turned into a "down payment / closing cost" replacement. The FHA claims NO that's not true but you can read the details of various state "work arounds"...this was supposed to be a CREDIT in the first place but desperation took over and it turned into a HANDOUT up front. Therefore no need to have money to actually "buy"...

“That’s essentially a no skin-in-the-game person,” says John Burns, president of John Burns Real Estate Consulting.

From this chair, it just feels like waking up each day to be punched in the gut by the stupidest entity on Earth. They only know how to do one thing, and keep repeating it. And tell us it is necessary. I will check the Constitution tonight for "every American is entitled to owning a home and all taxpayers must be sacrificed to make it so"... must be in an article I missed.

Some days you just want to crawl back into the Matrix.

Sincerely,
Disgusted but Numbed

Bookkeeping: Stopped Out of E-House Holdings (EJ) ... Again

2009-11-18T14:51:00.000-05:00

I am having a frustrating time with E-House Holdings (EJ); after we bought back a large exposure yesterday morning following a stellar earnings report; the stock has done nothing but sell off. I am confused by the reaction but the stock has been weak for much of the past month. Obviously a big player wants out or something else is going on. I don't know, but I'll respect the price action. We've been stopped out about 90% of our stake, almost all of which was yesterday morning's purchase around $20.80. Our stop out level was in the $19.60s, garnering a very quick 5.8% loss.

The chart now looks better suited for shorting rather than being long but we just tried that last week, with poor results as well. Until EJ gets away from this 50 day moving average I don't want a piece of it either way - we'll keep a very small long position while trying to figure out why one of the best earning reports of the season was completely laughed off.

Long E-House Holdings in fund; no personal position

S&P 1100 Current Pivot Point

2009-11-18T13:18:00.004-05:00

All ~~eyes~~ microchips seem pointed at S&P 1100. As we wrote Monday during the morning surge:

I hate to use the word "resistance" anymore since all resistance has been futile so maybe we'll use "resting point" from now on. I'll start looking at the next "resting point" for the S&P 500, first glance says 1110 and then above that 1140.

Again since "resistance" nowadays is akin to Swiss Cheese, we won't be using that word. But the "resting point" of S&P 1110 has thus far proven correct; this is where we've stalled intraday yesterday and today. If you have not nodded off watching this market the past day and a half you will notice we are stuck between 1100 and 1110... 10 S&P points. Just to scare some cocky bulls you'd think we'd see a scoop down below 1100 to trigger a lot of stop losses (including mine), as that is how the old stock market used to work. The current version rarely even offer these small hiccups.

So go forward it's a pretty simple plan - if somehow we could actually fall, short term oriented ~~computers~~ traders (are there any other kind nowadays?) will be exiting on a break of S&P 1100, and there would be a decent chance at falling down to the 20 day moving average, in the S&P 1080s. Where thankful buyers ("I caught the dip! Yeeeeah!") will be waiting with open arms. There is also a tiny little gap just over S&p 1070 which could come into play if this scenario plays out.

Or, on a break north of S&P 1110 level ... the "new higher highs" buyers shall join us. I would normally say a move over S&P 1110 WITH volume is required, but volume has become a useless indicator for 6 months as most volume is simply HAL9000 trading shares to other copies of his program, while the rest of us are a sideshow.

So we wait, common sense says some pullback would be in order after a non stop assault upward the entire month. Unlike gold, oil is not making new highs, and today we have a session where stocks are down while the dollar is down (rare as a dodo bird lately). These are normally divergences to note, but divergences have also meant nothing in this new paradigm market.

Oh yes... the most important chart on the planet... "bulls" (who apparently are rooting against America via a lower dollar) want to see $74.50 and below, "bears" want to see a recovery in the dollar. How backwards it has all become...

[please note - stockcharts.com does not update the $USD chart intraday so this is as of the close yesterday; real time the index is around $75.10]

Best Performing Stocks of the Decade: 1900% to 7900% Gains

2009-11-18T12:15:00.003-05:00

I emailed the the originator of this list, Eddy Elfenbein of Crossing Wall Street, to see what his parameters for "Top Stocks of the Decade" were and there was but one:

The universe was any stock traded on a US exchange that had a price of at least 50 cents on 12/31/99.

Despite a lost decade in the stock market for the casual investor [Feb 5, 2009: Mutual Funds Have Tough Decade] [Mar 26, 2008 - WSJ: Stocks Tarnished by Lost Decade] [Oct 7, 2008: Bloomberg - 2000s Stock Market Worse than 1930s], there were some massive individual winners. We've owned a handful of these names from time to time the past few years: QSII, XTO, AFAM, FCN, GROW but certainly only garnered a fraction of these decade long gains.

About 3 years ago when I saw a similar list, the #1 stock was Chico's FAS (CHS) - a woman's clothing store. That moment pretty much marked the top in the stock, but ironically if you had bought in November 2008 ..... well you have a chance for a 2nd round trip at "best stock in the decade ending 2018" . Of course there was the small matter of the stock giving back all the decade's gains in 2006-2008.

[click to enlarge]

Let's see if momentum crowd favorite, Green Mountain Roasters (GMCR) faces a similar fate in the coming decade. Hansen Natural (HANS) was GMCR before it was cool to be GMCR.

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

Enjoy... and if you happen to know of a stock (or two) that will be on the list November 15th, 2019 my email is always open to you. ;)

Top Stocks of the Decade

GMCR..............Green Mountain Coffee Roasters.............7,895.4%
HANS...............Hansen Natural........................................6,504.1%
BYI...................Bally Technologies...................................6,394.2%
SWN................Southwestern Energy...............................5,108.4%
CLH..................Clean Harbors..........................................4,456.0%
DECK...............Deckers Outdoor......................................3,669.5%
AMED...............Amedisys.................................................3,669.2%
TNH.................Terra Nitrogen...........................................3,611.5%
BOOM..............Dynamic Materials....................................3,519.4%
QSII.................Quality Systems........................................3,497.2%
JOSB................Jos. A. Bank Clothiers...............................3,419.5%
CETV................Central European Media Enterprises........3,263.4%
XTO..................XTO Energy...............................................3,191.2%
SIRO ................Sirona Dental Systems..............................3,142.0%
AFAM................Almost Family...........................................3,071.6%
MCF..................Contango Oil & Gas...................................3,034.0%
JST....................Jinpan International...................................2,974.2%
TRA....................Terra Industries........................................2,339.7%
MDVN.................Medivation...............................................2,321.6%
RRC....................Range Resources....................................2,231.9%
ISRL....................Isramco....................................................2,093.5%
CGA....................China Green Agriculture...........................2,064.3%
CEDC..................Central European Distribution...................2,049.2%
FCN.....................FTI Consulting...........................................2,044.3%
GROW.................U.S. Global Investors.................................1,887.3%

Performance Through November 15, 2009

No positions currently

Minyanville.: Our Economy is on Steroids

2009-11-18T11:00:00.008-05:00

Below is a guest post, reprinted with permission of author Vitaliy Katsenelson who writes often at Minyanville.com. I don't have as much time to read the site as I used to, but he is definitely one of the more thought provoking writers at the site.

If you are new to FMMF, I wanted to bring over Vitaliy's piece because it summarizes what you can find in hundreds of previous pieces we've written; summarized in one location. Vitaliy is more generous than I, calling this the economy on steroids... injected by our doctors. I've likened them more to drug dealers, and America akin to driving at 140 mph on a freeway while on crack cocaine.

But one point I want to stress that many commentators miss out but Vitaliy nails is each iteration of drugs builds up tolerance... to have the same effect in the future you need stronger and stronger drugs. I've used in previous posts the example of the car companies 0% financing post 9/11. That worked wonders the first time around at jump starting sales, but then you trained the consumer to expect it, and he/she now demands it - especially with the domestic car makers. So the handouts have to get bigger, and more outrageous to get the same effect over time.

We've taken that and now extrapolated it across the entire US economy... you can see it in today's housing starts number. The addicted US home builder (and buyers) rushed in to take advantage of the first time homebuyer HANDOUT. Then they sat on their hands in October while debate of its extension was happening. We saw in the past 2 weeks new mortgages (despite almost record low rates!) dropped to a 9 year low as Americans had their hands out waiting for more handouts before they would commit to buying. Today we see the home builders did the same - pulling back construction until they were assured more debt would be layered onto our grandchildren via handouts. Without government handouts they know the buyer won't return en masse, and hence they have no need to build homes. Now with new handout firmly in place until middle 2010, the housing market can continue to "function". And then next spring we'll be told more handouts are needed to keep the housing market "momentum" going. (please note - I just used the word HANDOUTS repeatedly for a reason)

This is also why the next (i.e. current) rounds of home buyer credits... and the next cash for clunker programs will lose effectiveness versus the original versions. You've drawn in the majority of potential car buyers and new home owners on the first tranche of handouts. To keep the same level of interest you have to make the incentives even bigger.... because the drug addicts need stronger drugs as their bodies have built up tolerance to existing levels. We are a country that no longer can function without the drugs of easy money coursing through our veins. [Jun 3, 2009: A Country that Cannot Function Without Easy Money] We've squeezed all the blood from the stone, saving rates have been demolished through an adoration of a consumption culture, and our central bank policies have created a bubble burst cycle that used to be seen twice a century, but now twice in 10 years - destroying nest eggs and savers in its path. So it's come to this - bribing American people to consume with money we, as a government, do not have.

But Vitaliy does a great job summarizing our thoughts in one comprehensive piece; this is like a summation of 50 FMMF posts into one. This is the type of post to pass along to co-workers, friends, family members who are walking around, not realizing what our leadership is doing. Don't mistake my stock buying or "partying with the stock Joneses" as a change in thought process... in fact the more I see, the more I am distraught about what will happen to this country down the road. We've only repeated the same mistakes; but bigger - much bigger. The stresses have simply been moved onto the backs of the US taxpayer - that is borne in the currency. I spoke about this in depth in the audio interview with Andrew Horowitz this weekend. We giggle in joy as speculators each time the US dollars falls because it drives stocks up, but a true currency panic in the US will make 2008 would like a picnic. Thus far, America has gotten away with murder due to its status as the world's reserve currency, almost any other country on Earth doing what we have done would have caused the IMF to swoop in ... dictating to do the exact opposite. It's a surreal world. The biggest game of chicken ever seen - but it's no game.

One should be terrified to think what the country will face at 6.5% mortgage rates (once considered "normal"), and long term rates on amassed national debt increasing by 100%; both very viable situations within 3-5 years. We will pay a dear price... in time. Enjoy it while the Kool Aid is flowing.

Link to original article
Link to Vitaliy's web home: ContrarianEdge

Along with the article, there is a presentation in pdf format that can be accessed here.

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

Our Economy is on Steroids

Birds are singing, the sun is shining, and life is beautiful again. On the surface, the vital signs of our economy are improving with every economic report. In some areas, like unemployment, the rate of decline is decelerating. In others, like GDP, decline is turning into growth.

The stock market is behaving as if the history of the last 20 years is about to repeat itself. Recession will turn into a robust expansion. Stock prices are discounting an expectation of robust earnings recovery to a level only slightly below the pre-financial crisis level, and risk-taking is in vogue again as the performance of junky stocks trumps quality.

The global economy reminds me of a marathon runner who runs too hard and hurts himself. But now he has another race to run. So he’s injected with some serious, industrial-quality steroids, and away he goes.

As the steroids kick in, his pace accelerates, as if the injury never happened. He’s up and running, so he must be okay -- at least this is the impression we get, judging from his speed and his progress. What we don’t see is what's behind this athlete’s terrific performance -- the steroids.

Of course, we can keep our fingers crossed and hope that the runner has recovered from his injury and what we see is what we get -- the athlete is at the top of his game -- but there are problems with this thinking.

Serious steroid intake comes at a cost: It exaggerates true performance. Steroids can be addictive; once we get used to their effects it's hard to give them up. The longer we take them the less effective they are. Finally, there's a good reason why steroids are banned in sports: They damage the athlete’s body.

Our economy suffered severe injuries last year, and to keep it going massive amounts of steroids were and are being injected -- they’re what economists call stimulus (or government intervention).

Let’s take a closer look at the extent of the steroidization (to coin a new word) of our economy, and its side effects.

I’ll focus on the US economy, but similar arguments to varying degrees are true for many countries around the world. In the US, things appear to be stabilizing and improving on the surface, but beware, there's a giant IV hooked up to the veins of the economy, through which billions of dollars are constantly being pumped in. The stimulus is everywhere:

To help the auto industry, taxpayers were subsidizing the price of autos through the Cash for Clunkers program and thus were creating artificial demand.
The housing market, the epicenter of this crisis, is propped up from different directions. On one side there's a buyer tax credit (it used to be just the first-time buyer, now it's any buyer).

From a different direction, interest rates are kept low by the Fed’s quantitative easing, fancy econ-speak for the Federal Reserve buying long-term bonds and thus keeping long-term rates artificially low.

Finally we have the (now) defunct government-controlled Fannie Mae (FNM) and Freddie Mac (FRE), which are the mortgage market of our economy because they account for the bulk of mortgages originated today.

Because banks are the conduits through which the government pumps stimulus into the economy, the aforementioned government involvement in the housing market helps them generate enormous fees.

In addition, profitability is boosted (at the expense of savers) by the near zero short-term interest rates, again thanks to the friendly Fed, which allows banks to earn a healthy interest-rate spread.
Last, and certainly not least, the giant, multi-hundred-billion-dollar infrastructure projects are coming on line as you read this. Yes, steroided we are.

Now let’s look at the side effects:

Our economy’s true, un-steroided, unstimulated performance is a lot lower than the one we observe. Though the government can spend money at a high rate for longer than one would rationally expect, stimulus is a finite endeavor that comes with a heavy price tag. In most cases, the stimuli have been financed with higher future taxes and rising government debt, thus higher future interest rates.
Steroids and stimulus share addictive properties, and the longer we take them the less effective they become; but once we’re used to them, it’s hard to give them up. The $8,000 tax credit started as a temporary measure. However, the politicians found it difficult to let go, and the program was extended and supersized by providing the tax credit to anyone with the patriotic ambition to buy a house.
Japan was on the stimulus bandwagon for more than a decade and, with the exception of its government debt-to-GDP ratio tripling, Japan has nothing to show for it. Its economy is mired in the same rut it was in when its stimulus marathon started. It had a hard time giving up stimulus because the short-term consequences were too painful. Also, Japan is proof that a low (zero) interest-rate policy loses its stimulating ability over time and turns into a death trap for the economy as leverage ratios are geared to low interest rates. Now, even a small increase in interest rates (say, from 1% to 2%) would be devastating for Japan’s economy.

In many cases the simulative measures just accelerate future sales to an earlier date, at the taxpayers' expense. After Cash for Clunkers ran its course, demand for autos fell into the abyss. The same will be the fate of industries exposed to infrastructure projects.
Finally, stimuli result in long-term damage. Politicians and central bankers have good intentions; they hope that the stimulus will tide us over in the bad times and buy some time for the economy to heal itself. It’s a logical argument. For instance, as much as we hate banks to be making a lot of money today, it allows them to patch up holes in their balance sheets from past and future losses.

However, for the most part, stimuli just kick the can down the road and result in higher debt and higher taxes. But the harm doesn’t stop there: Stimuli cause bubbles. The fix for the 2002 recession involved interest rates staying at extremely low levels for a long time, which resulted in the housing/liquidity bubbles we’re paying for today. The present stimuli will leave us with even more serious damage somewhere down the line.

The stock market’s recent rally followed a typical, by-the-book, coming out of recession trajectory -- it was cyclical. The stocks most sensitive to the economy appreciating the most.

(Mark's note - next portion is stock specific, so if only interested in economics and the mess we are creating you can stop here and jump to the bolded area below)

Let me demonstrate what is priced into cyclical stocks by looking at Caterpillar (CAT), your typical American blue chip industrial, cyclical stock -- one that in theory should prosper during global economic recovery.

Third-quarter sales were down 44% from last year. China was its brightest spot as sales there dropped (only) 26%. The stock is around $60, more than double its low in March and not far from $85, its all-time high, reached in 2008 when global growth was its oyster.

The company expects to earn around $2 this year (excluding recurring nonrecurring charges) and expects sales to grow in teens next year from this year’s base. But even if Caterpillar were to earn $3 next year, investors aren't paying for next year’s earnings, as they’d be paying 20 times next year’s earnings.

This cyclical stock isn't worth that; investors are paying for what happens beyond 2010.

To understand what happens past 2010, let’s see what's driving Caterpillar’s next year’s earnings growth. Here's a quote directly from a Caterpillar press release: “[Global] governments introduced more than $3.5 trillion in multi-year stimulus programs with most of the expected impact in the last half of 2009 and into 2010.”

If I owned CAT, the question I’d want to know the answer to is, what’s next after 2010?

Stimulus creates an appearance of stability and growth, but a lot of it is teetering on a very weak foundation of government intervention. Investors must distinguish between what's real and what's not. In this environment, investment success will not only depend on what stocks you own but also on the ones you don’t -- stock selection is important.

The hopes that we’ll transition soon from government steroiding back to an economy running on its own are overoptimistic; there is just too much stimulus in the economy for that to happen. The detox process from the massive consumption of steroids won't be a smooth and painless experience.

This transition will be slow and rocky, as today’s stimulus wears off and we hit the wall in this economic marathon.

It's also important, at this stage, to note the four most dangerous words on Wall Street: This time it’s different.

However, this time, this recession, isn't the same, either. We aren't suffering through your garden-variety corporate recession, it’s a consumer one. Consumers, two-thirds of the economy and its past growth engine, are now the economy’s weakest link: Consumer debt-to-GDP is pushing 120%, double what it was in the 1980s. The financial system, though stabilizing, is hanging on the whims of one economic statistic: employment.

Over the last couple of weeks we've started seeing the first signs of a second (or third, I’m losing count) wave of layoffs. For instance, Johnson & Johnson (JNJ), Electronic Arts (ERTS), and Pfizer (PFE) all announced they’ll lay off a large percentage of their workforce. Higher unemployment will trigger larger loan defaults, and then we may even have another round of bank problems.

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007). To receive Vitaliy’s future articles my email, click here.

Freeport McMoran Copper & Gold (FCX) Potential Breakout Candidate; Cleveland Natural Resources (CLF) and Various Coal Plays (MEE, WLT) also Hot

2009-11-18T08:55:00.003-05:00

I see a lot of extended charts out there as we move into what seems like day 82 of consecutive upside, along with some bond fide breakouts. While we should only be so lucky to catch another Potash (POT), one chart that caught my eye last night was Freeport McMoran Copper & Gold (FCX). Much like Potash had key resistance at $106, FCX has some at $84.$85... which it sneaked a peak over in the closing moments of the day yesterday. All it will take is some hammering of the US peso and off to the races she *might go*.

Her Peruvian brother in arms, Southern Peru Copper (PCU) is in a similar set up; here the magic number is "low $36s".

Some names from our past, that we have not touched in 15+ months are also in serious breaks - I offer to you Cleveland Cliffs (CLF) [iron ore], Walter Industries (WLT) [coal] and Massey Energy [coal]. Mmm... technically Cleveland Natural Resources is the new name on CLF. These are "double top breakouts" galore.

CLF: $40 was the number here... a quick 10% gained post breakout

WLT: $68 was the number here; not a clean breakout (actually fell back below $68 very quickly on the 1 day we have sold off in the entire month of November, last Thursday)

MEE: Muy bonita! $35 was your key, a quick 15% since that breakout.

So what one hopes when you buy this sort of breakout i.e. Potash yesterday , or potentially a Freeport or Southern Peru Copper if either jump over resistance soon... is that in a week or so those charts will look like the 3 charts above.

As Jim Cramer says there is always a bull market in every asset on Earth other than the US dollar somewhere.

Egregious melt up anyone? +7% on the S&P already in 1/2 of a month.... that annualizes to 170% return. When does the bull trap ever rear its head again?

Long Potash in fund and personal account

Marc Faber: As Long as Ben Bernanke is Fed Chief, Gold (GLD) Will Be a Good Investment

2009-11-18T08:15:00.000-05:00

Much like Hugh Hendry, I can watch to Marc Faber videos all day even if I did not agree with a thing either fellow said. They just have an entertaining spectacle about them. Hence we must devote 1 post a month to Mr. Faber. I am not sure what to make of today's video - the contrarian deep inside my soul is searching for a Gisele Bundchen moment that would mark at least a counter trend rally in the dollar - ala "I refuse to be paid in dollars" circa late 2007. Gisele almost nailed the dollar bottom to the month [Jul 20, 2008: World Currencies in the Recession] As I wrote in July 08

Many don't remember now but right around when the recession "officially" began (we did not admit to it until nearly a year later) in December 2007 the dollar was the scourge of the Earth. Reports of supermodel Gisele Bundchen (speaking of nice graphics) not accepting dollars (Nov 07) but only wanting to be paid in euros marked the near term bottom in the dollar.

Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar. Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.

Despite her inability to time currency movements, please note the excellent choice of husband ~ the handsome, bright man on the right, is not only a star NFL quarterback, future political star, a hero to men across Boston, but most importantly ....a Michigan man. (please bear with me, it's Ohio State week and I only have past glory to grasp at this point)

But I digress!

While I want to find things that say "this marks at least a short term bottom in the dollar", in the long run - the utter disrepect our leadership has for fiscal responsibility can make the case that Marc is correct about gold. As always... we'll see.

Roughly a 8 minute video below (email readers will need to visit the site to watch) - I swear I thought Marc was predicting gold was heading to $800 just a month ago, but maybe I am mixing up my pundits. Faber believes there is no way we revisit stock market lows of early 2009 because of the markets ever fall again, the "money printer" will print even faster to create even more "prosperity" for us all.

Here, Marc goes even further and gives a flamboyant "Gold will never go below $1000 again" - 10 minute video below (email readers will need to visit the site to watch)

hat tip to Expected Returns for the latter video.

[Oct 8, 2009: Marc Faber on CNBC India]
[Sep 3, 2009: Marc Faber August 2009] <--- could be my favorite financial video of all time
[Aug 13, 2009: They Broke Nouriel Roubini, but not Marc Faber]
[Jun 19, 2009: Marc Faber - 10 to 20% Inflation Coming to US]
[May 15, 2009: Faber - This was a Central Bank Printing Press Rally]
[Mar 19, 2009: Both Marc Faber and Jim Rogers Predicting Civil War or Unrest]

Gold (GLD)

Still All Good for the Bulls - Quiet Consolidation

2009-11-17T15:18:00.003-05:00

Barring a nasty reversal in the last 45 minutes, today is a big win for the bulls. Support of S&P 1100 has been held; a major move up is being consolidated with almost no pullback at all. Stocks are simply churning before making the next move (up!) - that's how it appears at this point. One would think they would of dipped us below 1100 for a moment at least to collect all those stop loss orders, but bears cannot even manage that.

Dip buyers remain absolutely confident Ben Bernanke's printing presses will present them with only wins, and no losses. They will continue the now religious fervor of buy any dip. One day this will change. Today is another moment where *that* day seems to be in a galaxy far, far away. Now we just eagerly hope for more dollar destruction tomorrow....lower living standards, higher stock prices - the new American dream.

USA Today: China Pushes Solar, Wind Development

2009-11-17T14:45:00.011-05:00

Just something to keep your eye on as your politicians promise you that the US will be the world leader in green tech jobs. In fact they will have to layer countless more debt on your children and grandchildren for temporary "green jobs" jobs, to make this mirage come true - for a while. Most likely this promise will come next spring as the next massive stimulus is pumped to the masses to create "green jobs" retrofitting buildings and such. Meanwhile, ask where the production is and what work we will be left with after we borrow money from China to create temporary jobs. [Nov 2, 2009: Lack of Green Energy Manufacturing Capability in US Means 84% of Stimulus Goes to Foreign Firms]

Remember, Japan and Germany are a decade ahead of us as we decided daytrading homes was the real way to prosperity as a nation... and China is subsidizing every form of green energy.

Just today I saw two separate Chinese firms (both of which we've owned in the past) pledging to build plants in the US as "political" cover... Suntech Power (STP) in solar and A-Power Energy (APWR) in wind.

Gov. Jan Brewer on Monday announced plans for a Chinese-owned solar panel maker to build its U.S. headquarters and a manufacturing plant in the Phoenix area, propelling one of the nation's sunniest states toward a bigger global presence in the renewable energy industry. Suntech Power Holdings Co. said it expects to start building photovoltaic panels at the facility by the third quarter of 2010. The company, which has more than 9,000 employees, expects to eventually employ 250 or more people at the plant.

By doing so, they can clap their hands that they are creating jobs (hundreds!) in the US - collect money from the federal government (which in reality is their own government's money, just passing through the US government after we borrow it) while 99% of the production is back in the home country. But hey we get some assembly jobs here, and some great photo opportunities for some governors.

With the capacity to make 30 megawatts of solar panels per year, the Arizona facility would represent about 3 percent of Suntech's total production, Bachman said.

If you are not familiar with the solar industry in China - there are literally over 100 firms there. Suntech is their largest fish, but again its 3% of ONE company's production; i.e. equivalent to 1/10th of one of Suntech's countless smaller competitors. But again, a wonderful photo opportunity... to be frank it is a genius move by the Chinese; sort of a Trojan Horse strategy. And they will get tax handouts to boot; brilliant. Key word below "appear".

"They want to appear to be manufacturing here domestically so when the solar market takes off in the U.S., they have room to stand on and say, 'We are producing jobs here and we want to be able to sell our panels here as well,'" Bachman said.

As for US solar companies? Last I checked our best firm (we only have a handful), First Solar (FSLR) was moving as much production as possible to Malaysia.

Now in the wind space, A-Power, which was the source of the controversial story I highlighted above in early November, has decided it would make for good press to build a plant in the US too. It is nice that Chinese companies are offering some scraps to the Americans...

China's A-Power Energy Generation Systems (APWR) has signed a cooperation agreement with equity firm U.S. Renewable Energy Group (US-REG) to build a plant in the United States to supply wind energy turbines to renewable energy projects in North and South America.
The joint announcement in Washington late on Monday came three weeks after A-Power said it planned a $1.5 billion wind farm project in West Texas along with U.S. companies.
It will employ about 1,000 workers and create additional jobs during construction, the companies said.

Convenient timing; I'm sure "central command" back in Beijing did not like the backlash to the New York Times story and A-Power got some "assistance" from their government in making this decision. ;) So all in all 1250 jobs and I'm sure grand promises of many more to come (ahem). If you divide those 1250 jobs times all the tax handouts from US federal government I am sure it will be akin to the cost per job "created or saved" from the current stimulus - perhaps $1-$2M a head?

I actually thought about 2 years ago the one thing the US could grow dramatically in the manufacturing base is the production of wind turbines (for domestic usage) since they are so heavy, transporting them across oceans would be cost prohibitive, but ... I guess that thesis was wrong.

Meanwhile a lack of any sort of long term industrial policy continues to make the US look the fool... but it would be "socialist" to plan out 10 years in America. That's best left to Germans. Or those "backwards" French who long ago had the majority of their energy usage based on nuclear. Dogma baby.

Anyhow back to the Chinese... via USA Today:

China leads the world in making solar cells, the key component in solar panels, many of which are exported to the U.S. But China is setting itself up to do more than just manufacture components for renewable energy, such as wind and solar. It's also spending heavily to build its own domestic market as it attempts to battle its greenhouse gas emissions, electrify its nation of 1.3 billion people and curb its massive pollution problem.
The buildup of a huge market in China for renewable energy is luring global manufacturers and research teams to China, energy executives say. (hmmm, I thought that was supposed to be happening here instead)
That's causing concern in some corners that China – not the U.S. – will emerge as the hub of the new industries, leaving the U.S. as dependent on foreign nations for solar panels, wind turbines and other green-energy equipment and technology as it is on the Mideast for oil. (why not? dependence on others has been working like a charm the past quarter century. Anyhow my politicians promise me that this will not, and can not happen. I believe "drill baby drill!" is the way forward to new industries, right?)
"The Chinese government has recognized that these industries are the 21st century's industries of importance, and it wants to be the Silicon Valley of renewables," says Alan Salzman, CEO of U.S.-based VantagePoint Venture Partners, which specializes in clean energy and clean tech investments. (all government is evil, says right here in my dogma book - this obviously will fail as all things in China have the past 15 years... err) He says the U.S. hasn't been as clear or as determined as China, a stance echoed by Energy Secretary Steven Chu in testimony before a Senate committee last month.
China doesn't look like a poster child for green energy. More than 70% of its energy comes from coal, which produces more carbon than other fuels. Pollution is rampant. But industries and economies have been transformed before, and new leaders have emerged, says venture capitalist Salzman.
While China spends about $9 billion a month on clean energy development, the U.S. "has fallen behind," Chu said. (however, Chu happily noted the U.S. leads the world in financial oligopoly support as well as "financial innovation" - ok I made that up) He noted that the world's largest turbine-making company is headquartered in Denmark, that 99% of batteries for America's hybrid cars are made in Japan and that the U.S. has lost most of its solar cell manufacturing industry.
China's government has set ambitious targets for renewable energy, which is scheduled to account for 15% of its fuel by 2020. The U.S. has no national target. (and that pretty much sums it up - to have a target would have half the country screaming socialism - remember, in our current climate John F Kennedy is a socialist for daring to ask the country to put a person on a moon in a decade. It's just turned plain silly at this point.)
By 2013, China is expected to become the world's biggest producer of wind energy, the council estimates. Recently, it eclipsed everyone in wind-turbine-making capacity, up from "nothing" five years ago, says Steve Sawyer, the trade group's secretary general.
China is muscling up on solar, too. Within five years, it's expected to be the No. 1 solar market.
One big reason China can move so fast? Once its central government decides on a policy, it can execute quickly through the nation's handful of state-owned utilities, Chan says. In the U.S., there are thousands of electric utilities and a barrage of regulatory and environmental hurdles to starting new projects.
"China is pushing harder on solar now than anywhere in the world," says Mark Pinto, chief technology officer for the U.S.-based Applied Materials. "In China, nothing is too fast. They've got the land, the need and fast decision-making."

Again, ask yourself where all these jobs will be coming from in the next decade... where is the R&D going? This is what people do not get - we are in a global competition. The blurb below is exactly what should strike the gut to those who believe in fanciful tales from our politicians. Our green jobs will be to "install" foreign manufactured green products, with some cursory foreign plants employing a tiny portion of Americans as eye candy. I suppose our oligarchs can help in the financing because that's about the last piece we are going to have left.

Applied Materials is the biggest maker of equipment to make solar panels. Last month, it opened the world's largest solar research facility – in China.
"If the manufacturers are in China, that's where we need to go," Pinto says

Feel free to extrapolate from there. Again, the dogma tells us in 10-15 years a plethora of new US jobs will be created as the Chinese buy American "stuff". Solar panels? Wind turbines? Well there has to be something they will need from us. Keep the dream alive I suppose... I'll just keep talking to the wall while being called nasty names like "European". Better yet, I'll cloak myself in the soothing words of our political class. Words fix everything... much better than any sort of long term planning or vision, any form of national framework to nurture business - especially the small / medium kind who do not have the lobbyists behind them. Rather than long term planning, let us expect year after year of shotgun solutions (more stimuli!) printing more and more money (or borrowing) as "solutions". Looking forward to it myself.

Pinto and others say China sits on the cusp of an opportunity it may not have had before. China's companies have historically been successful because of their low-cost manufacturing of existing technology rather than from innovation of new technologies. "This time, China has gotten in on the ground floor," Applied Materials' Pinto says.

No positions

Potash (POT) Could be on the Verge of a Breakout

2009-11-17T12:29:00.004-05:00

Fertilizer stocks were some of our huge scores in 2007 and first half 2008; specifically Mosaic (MOS) but Potash (POT) was another huge winner. While Mosaic remains comatose, Potash might finally be ready to join the commodities party. I have been observing a double top area in the $106 range; a breakout over that level could lead to a much larger move. As I type this Potash has just broken over $106....

Might be adding this name later in the day, pending its action (and the market's) in the hours to come.

EDIT 12:40 PM - Long 2% allocation of Potash on a break over $107.

Long Potash in fund and personal account

George Soros Reveals Stake in Ford (F), Adds to Walmart (WMT), Cuts Position in Petrobras (PBR)

2009-11-17T11:15:00.004-05:00

It's that time of quarter - when the whales of investing have to reveal what they are doing on the long side to the SEC (they can still keep secret their shorts). There are a lot of websites that will be looking at these disclosures in the next 48 hours so we'll just focus on a few. When I did some "Googling" on George Soros last night I was taken aback how controversial a figure this guy is; there are more stories about his politics than investing. I could care less about his politics, he is a smart guy who uhhh... admittedly plays the gray side of the rule book at times, but Goldman Sachs (GS) is worshiped for the same behavior.

The big news with George Soros this quarter is his revelation of a stake in Ford (F). I've been very torn on this name because it has the benefit of being the only US car maker who did not go through bankruptcy, and actually has a competent CEO (who came from Boeing). So that already sets them apart from what the other 2 domestics have had the past decade. The company seems to be getting good will from the American people due to the fact they did not resort to handouts from the taxpayer. On the other hand, General Motors and Chrysler were able to wrangle some very competitive concessions from the UAW (union) due to their bankruptcy while Ford is now facing a major issue on that front. Due to their relative success, the union does not want to give the same deal to Ford.

So what we have here is the same issue that has been happening in the airline industry... and a reason why no one can stay profitable for long, and we see bankruptcies year after year. One of the players in the industry goes bankrupt, gets major concessions, is able to walk away from much of their debt and then re-enters the competitive landscape meaner and leaner. They can charge lower prices, which in turns causes pressure to all the other airlines. Hence that tends to push other airlines into bankruptcy and the whole cycle keeps repeating. As I assess Ford, I wonder... if their cost structure is now higher than GM or Chrysler... and they did not get their debt (partly) wiped away, are they really in a better position in the long run? If you use the airline example the answer is no. Hence this is a tough one, but George Soros appears to be a believer.

On a side note, hat tip to Ken Heebner of CGM Funds who also has been an early believer in the Ford story. The stock is now at a 2 year high. (double top?)

A quick look at some of Soros' major moves as of Sep 30, 2009:

Billionaire investor George Soros' hedge fund reported holdings of $6.2 billion during the third quarter, an increase of $2 billion, after taking a stake in automaker Ford and boosting his holdings in communications services stocks.
According to a regulatory filing on Monday Soros Fund Management took a 7.3 million stake in Ford Motor Co (F) during the third quarter that is valued at $53 million. (Amazingly Ford still has a $30B market cap despite trading in the $8 range) The fund bought at an average of $7.21, gaining $11 million through today, and ranking Soros the automaker’s 38th largest investor, with 0.2 percent of common shares outstanding, according to Bloomberg data.
He also raised his stake in retailer Wal Mart (WMT) Stores to 1.1 million shares valued at $54.8 million. The fund had cut back on its position in the retail giant in the previous, quarter to 89,710 shares.
Soros cut his stake in Petroleo Brasileiro SA (PBR), or Petrobras, to 7.4 million shares from 9.8 million shares.

Soros was also active in the telecom space, mini oligarchs:

Soros also raised his holdings of AT&T (T) to 4.2 million shares at the end of the third quarter, from 791,000, while he raised his stake in Verizon (VZ) to 4.6 million shares, from 594,853 in the second quarter.

And more exposure in two of our "dominant 4" financials, true blue oligarchs:

Additionally, the fund boosted its financial sector holdings, betting on two of the largest commercial banking giants - Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM).
Soros purchased 224,100 shares of Bank of America and 67,800 shares of JPMorgan. The fund now owns 271,900 shares of Bank of America, valued at $4.60 million, and 73,700 shares of JPMorgan, valued at $3.2 million, as of Sept. 30.

Soros Top 10 Holdings by value are:

Petrobras (PBR) $340M
Hess (HES) $277M
Potash (POT) $266M
SPDR Gold Trust (GLD) $242M
Another Petrobras position $231M
Plains Exploration & Production (PXP) $169M
Verizon (VZ) $138M
AT&T (T) $114M
Interoil (IOC) $11M
DirectTV (DTV) $110M

Soros obviously is a believer in the commodity trade.

[Oct 26, 2009: George Soros Interview with Financial times - October 2009]
[Jul 9, 2009: WSJ - Latest Picks from John Paulson and George Soros]
[Apr 7, 2009: George Soros on Yahoo Tech Ticker]
[Mar 31, 2009: UK Times: George Soros Sees Global Meltdown]
[Feb 23, 2009: George Soros - This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union]
[Feb 18, 2009: George Soros Increases Stakes in Potash & Petrobas]
[Jan 28, 2009: Roubini & Soros on Bad Bank]
[Apr 9, 2008: Soros Believes Global Subprime Costs to Reach $1 Trillion]
[Jan 22, 2008: Soros Says World Faces Worst Financial Crisis Since World War II]

No positions in names mentioned other than a non related gold stake

Bookkeeping: Rebuilding E-House Holdings (EJ) Position on Earnings Blowout

2009-11-17T09:40:00.003-05:00

The market often makes little sense to me; if a company like Caterpillar (CAT) reported an earning report like we just saw from E-House Holdings (EJ), CNBC anchors would be in tears of joy and the stock would be up 20%. Instead EJ is up 2%, despite beating by 15 cents... AND increasing guidance. My first thought this morning when I saw the numbers was "going to have to chase another one" - guess not.

We had a very small long position as the stock had broken support the past few weeks but we are using today's muted reaction as an entry point to expand our position by just under a 2% allocation. Even better we have a nice entry point near $20.80 which is not too far above a nice support area so if the market begins to punish E-House Holdings again, we can exit with minor damage. We'll place a stop loss somewhere in the mid to upper $19s. As the month of October shows - this is a volatile stock. (range of $17 to $24)

I will update this entry with more details on the earnings as I have time.

Per Briefing.com:
8:08AM E-House China reports 3Q09 net income of $0.46/ADS, ex-item, vs. $0.31 First Call consensus; revenue increased 119% y/y to $86.2 mln vs. $78.9 mln consensus (EJ) 20.42 : Co issues upside guidance for Q4, sees revs of $103-$106 mln vs. $85.9 mln consensus. Co states, "Our strong third quarter results clearly demonstrate the success of our strategy and our ability to create value for our shareholders. For the whole year of 2009, we expect to achieve more than 10 million square meters of new properties sold, which will set an industry record and further solidify our industry leadership position."

EDIT 10 AM: Full report here. Some details below

Revenue

Third quarter total revenues were $86.2 million, an increase of 119% from $39.3 million for the same quarter of 2008.
Third quarter revenues from primary real estate agency services were $59.4 million, an increase of 195% from $20.1 million for the same quarter of 2008. This increase was mainly due to a 235% increase in total gross floor area and a 314% increase in total transaction value of new properties sold, partially offset by a lower average commission rate of 1.4% in the third quarter of 2009, compared to 1.9% for the same period in 2008.
Third quarter revenues from secondary real estate brokerage services were $6.1 million, an increase of 246% from $1.8 million for the same quarter of 2008. The increase was mainly due to higher total secondary real estate transaction volume under improved market conditions, despite a decrease in the total number of secondary real estate brokerage stores E-House operated to 112 as of September 30, 2009, from 136 stores as of September 30, 2008.
CRIC, a subsidiary of E-House, provides real estate information, consulting, advertising and online services. Third quarter revenues from CRIC were $20.5 million, an increase of 19% from $17.2 million for the same quarter of 2008. The growth was attributable to an increase in data integration and subscription services as CRIC further expanded coverage and marketing of the CRIC database in 2009.

Costs

Third quarter cost of revenues was $18.7 million, an increase of 130% from $8.1 million for the same quarter of 2008.
The increase was mainly due to higher salaries and commissions paid to the Company's sales staff as a result of higher transaction volume and value of new properties sold, and a higher agency fee paid for signing new primary real estate projects. The expansion of real estate advertising services also contributed to the increase in cost of revenues in the third quarter due to additional cost of purchasing advertising spaces for resale.

Income from Operations

Third quarter income from operations was $40.4 million, an increase of 310% from $9.9 million for the same quarter of 2008.
Income from operations excluding share-based compensation expenses (non-GAAP) for the third quarter of 2009 was $42.7 million, an increase of 291% from $10.9 million for the same quarter of 2008.

Net Income

Third quarter net income attributable to E-House shareholders was $34.9 million, an increase of 220% from $10.9 million for the same quarter of 2008.
Third quarter net income attributable to E-House shareholders excluding share- based compensation expenses (non-GAAP) was $37.2 million, an increase of 211% from $12.0 million for the same quarter of 2008.
The increase was mainly due to an increase of income from operations and an increase of other income, primarily representing cash subsidies received by the Company's subsidiaries from local governments as incentives for investing in certain local districts, partially offset by a higher effective tax rate.
The effective tax rate was unusually low in the third quarter of 2008 as a result of a clarification of the gradual tax rate implementation under the new enterprise income tax law, pursuant to which one of the Company's subsidiaries located in Pudong New Area of Shanghai is eligible for a gradual rate increase to 25% over the 5-year period beginning from January 1, 2008.

EPS

Non-GAAP, $37M earnings or 46 cents EPS - up 211%

Other Info

Total gross floor area reached 3.3 million sq meters, up 235%
Total value of new properties sold was $4.3 billion, up 314%

Guidance

The Company estimates that its revenues for the fourth quarter of 2009 will be in the range of $103 million to $106 million, an increase of 164% to 172% over the same quarter in 2008. E-House's revenues for the fourth quarter of 2009 other than revenues generated from the online real estate business that was merged into CRIC in October 2009 are estimated to be in the range of $90 million to $92 million, an increase of 131% to 136% over the same quarter in 2008.

E-House (China) Holdings Limited ("E-House") (NYSE: EJ - News) is a leading real estate services company in China. Since its inception in 2000, E-House has experienced rapid growth and is China's largest real estate agency and consulting services company with a presence in more than 30 cities. In addition to its national presence, E-House offers a wide range of services to the real estate industry through its various business segments including primary sales agency, secondary brokerage, consulting and information services, advertising and investment management.

[Sep 30, 2009: China Real Estate Information Seeks US IPO Worth $200M]
[Sep 29, 2009: E-House Holdings in Investors Business Daily]
[Aug 12, 2009: E-House Holdings (EJ) Benefitting from China Housing Bubble 2.0]

Long E-House Holdings in fund; no personal position

Dennis Gartman: Gold (GLD) is in a "Bubble" - Meredith Whitney Just Plain Confused by the Action

2009-11-17T08:00:00.001-05:00

It is always easy to say after the fact "gosh that was a bubble" or "clearly things were out of control". Most people will ignore the warnings, ride the good times and then never adjust when the music stops. That was myself in 1999 thru 2001. Other people will sit it all out, vying for safety while missing some fantastic (if lacking any root in sense) upside; over the long run they will be "correct" (and be called uber bears) and generally preserve more of their capital then the "bubble riders" because they never believe in the myth. But they will be mocked along the way, and be compared to a turtle while the hares party. Unfortunately the downside of bubbles tends to exterminate many hares.

Those are the 2 extremes; if one can find some happy middle she will be able to ride at least part of the bubble(s) that used to happen a few times a century but thanks to our central bankers now happen on 3-6 year cycles. Yet they can remain aware this is all a game of chicken, and jump off the railroad car before it fully falls off the tracks - certainly taking some blunt force damage but nothing mortal. And that is where we are now; countless traders recognizing that Ben Bernanke has given them a license to steal and knowing much of what is happening now, and to some unknown point in the future, is largely a mirage of paper printing. But each speculator remains confidant they won't be the last sucker standing i.e. the one without a chair when the music stops. Of course there is a bell curve, and with limited seating only a portion of those confidant folk will actually find a suitable place to sit when the day of reckoning arrives.

That sets the stage for 2 videos from CNBC yesterday. As with oil in 2008, we see a genuine thesis will be taken to extreme by the hot money. In the crude oil space the correct thesis was "Chindia will bring online X consumers, and demand for crude will increase - therefore prices go up." That explained a good portion of the move in 2006, 2007 - perhaps explaining the move to $70, $80 in oil. But then hot money flooded in and the parabolic stage was reached in 2008; when crude peaked near $150. It was not Chindians behind that portion of the move - that was due to Hedgians and Goldman Sachians. And so we will see the exact parallel in "the dollar is awful, precious metals are the only thing". It is based in reality - a government and central bank who treats paper money as if it's toilet paper. That will explain part of the move... but the Hedgians and Goldman Sachians will push this to some extreme that makes no sense. If it's "here and now" or in 4 months or 4 quarters or 4 years? Unknowable. But human behavior never changes.

Could I interest you in a tulip per chance?

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

Video #1: Commodities pundit Dennis Gartman says gold, which he was confused by 2 months ago [Sep 4, 2009: Dennis Gartman Scratching Head on Gold] is in a bubble but as with all of our breed, we're in it until the music stops. And we swear that none of us will be the one to be drawn in by the sirens when a "correction" turns into "a flood of lemmings all trying to exit the same door at once".

While not being comfortable with the current gold trade, Dennis Gartman, founder of The Gartman Letter, told CNBC Monday that the price of the precious metal will "continue to go up until it stops."
"It is a gold bubble," Gartman told CNBC. He called the trade on gold "mind boggling," but also said he is currently long — or betting gold will go higher. Gold's Friday low of $1,102 an ounce is the floor, according to Gartman. If it falls below that mark, he suggests investors should "head to the sidelines."
The trend for the dollar is "still down" and will continue, Gartman said. It's an "unbelievably crowded trade," he added.
As for where he'd park cash for good returns, Gartman tipped Canadian and Australian currencies. "If you're going to be any place, be there," Gartman said.
As for stocks, it will take bad economic data or political circumstance to knock them off their rally, Gartman said. When asked what is driving stocks' upward movement, Gartman answered: "Liquidity."

(Email readers will need to come to website to view video - 2 minutes)

Gold (GLD)

[Aug 21, 2009: Dennis Gartman Launches River Crescent Hedge Fund]
[Jun 17, 2009: Dennis Gartman Speech - Making It Through the Meltdown]
[Jun 8, 2009: Dennis Gartman Short Term Bearish on Oil]

Video #2: There was some hubbub late yesterday when Meredith Whitney, bank analyst to the stars, said she had not been more bearish in a year. She could not understand the rally. It was not rooted in fundamentals. It is all just very confusing. Sounds like she could write a great blog. Remember Meredith - you don't need to believe, you only need to partake... and make sure you jump off at the appropriate time. That's how it works in a bubble economy covered in the honey of a bubble market, as offered to us by our bubble policies. We love living in a mirage so we shall continue to do so; because leaving the Matrix is such an ugly place.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany (TIF), Bank of America (BAC), and Caterpillar (CAT) is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."
There's also been a real contraction in consumer credit. Whitney hasn't seen this much consumer credit contraction, "ever." Whitney said "in 1990, '91, yes, you had the market provide so am liquidity to the consumers, the consumer had more liquidity during that time. Now the consumer has actually a lot less liquidity. $1.5 trillion of credit lines on credit cards have been pulled from the system and that credit contraction is reaccelerating."
Whitney said "folks that are hoping for a robust consumer market, (consumer Christmas) are going to be disappointed. There's nowhere to hide at this point."
Whitney said there is "no way" the banking sector is well capitalized and it is time to reduce weighting in large-cap banks. Whitney also said she sees a double-dip U.S. recession.
"I don't know what's going on in the market right now because it makes no sense to me," she said.

(Email readers will need to come to website to view video - 11 minutes)

[Mar 18, 2009: CNBC - Meredith Whitney's Latest Views]
[Jan 30, 2009: Meredith Whitney Joins Roubini & Soros in Smothering the Kool Aid]
[Sep 23, 2008: Meredith Whitney and I Continue to Agree, Bailout or No Bailout]
[Aug 4, 2008: Meredith Whitney Continues to be Negative on Financials (and Housing)]
[Mar 26, 2008: I'm on Meredith Whitney's Side]

//

Bookkeping: Stopped Out of E-House Holdings (EJ) Short

2009-11-16T15:57:00.006-05:00

We continue to live in a student body left trading environment; the same since summer 2008. Trying to short anything is just about as fruitless now as going long anything for much of latter 2008 and early 2009. It's like stealing candy from a baby... except you are the baby. Long - short strategies are all deemed useless. Going "all in" is the only way.

We put a short on E-House Holdings (EJ) last Tuesday as our one sacrificial lamb and the market came and took our candy away, as our stop loss was triggered earlier today.

Since we are so lacking of short exposure, I thought I'd give it the college try since we have a low risk entry here. I've put on roughly a 3% short position around $19.50. We'll give this a 5% berth in terms of stop loss, which would also be a higher high than we saw this morning, i.e. $20.50ish.

And so we leave her; with earnings out tomorrow it is best this happened since we don't want to take the lemming risk. Could be +/- 15% this time tomorrow. On a relative basis this was a "win" as so many stocks have rocketed the past week while EJ has been butting its head against resistance and then constantly turned back. But today, a rising tide of Kool Aid was strong enough to lift even the weak boats.

As for the greater market, it is up every day but 1 in the month of November. We are all geniuses here... I feel even smarter than I did in 1999 when I could buy any stock on NASDAQ and beat my chest. Now the index is irrelevant, I can be a genius in any market; heck it doesn't even have to be stocks anymore. Thanks ~~Alan~~ Ben.

I continue to hang out near the emergency exit door while amazed at the quantities of Kool Aid being drunken. Even more amazed is as each punch bowl empties, a bearded fella in a suit shows up with a new barrel. But as we take out layer after layer of (ahem) resistance... we have to keep moving up mental stops and not stand in front of a freight train. Being intellectually correct in due time will be useless if we are flattened like Wiley Coyote. Unless / until we take S&P 1100-1003ish back out to the downside... you know the drill.

Long E-House Holdings in fund; no personal position