Week 50 Liverocket Performance - Down 2.19%

The TRID experience hurt (almost 100% of our loss this week). The tight stops I set also mean that we have a significant cash position: almost $103K or 77% of the total value.





I expect the market to soften and for us to be in cash 100%. If there are sever market crashes, I will look to re-enter several of our positions:
TRID
UCTT
ILMN
OCN
Among others.

With earnings season ending, I am going to do a robust analysis of stocks to find some additional gems.

My trading approach is to assume that the market will retreat. A lot of people talk about a year-end rally, but I am holding back for these reasons:
1. Pullback after earnings season
2. Run-up since August without any pullback
3. Election nervousness - gridlock is possible and the markets won't like it
4. The usual various panic moments (interest rate fears, inflation fears, rising oil prices, and so on)
5. Strange disconnect between disappointing economic data (GDP, employment, inflation) and market reactions

So I'll buy on panic moments.

My investment approach is that there are some gems worth buying, regardless of overall market conditions. However, I believe that we are in that period of lag between real falling economic conditions and when the data appears. I noticed that an awful lot of companies reported earnings that beat but did not smash expectations.

More critically retailers are nervous. Whole Foods is expecting a slower 2007. Walmart is launching a price war. Retailers are responding to a slowdown. I was clearly and furniture makers - not because I was wrong (I was dead right that they are crashing) - but because the market won't let the stocks die. It's only a matter of time tho.

Where will I focus?
1. Avoid contrarian moves. Market is following the traditional belief that a slowdown is coming, so avoid the usual suspects: manufacturing, raw goods, consumer durables and so on. This includes oil and autos.
2. Housing is the plague. Avoid it at all costs. Avoid financial companies unless tied to M&A. Avoid construction and anything home related
3. Anything airplane related is hot. Same with entertainment.
4. Healthcare will enjoy some focus as a defensive move (we have ILMN)

I'll have more in a week or so.

To buy back or not?

I have said before that I did not want to put more money into this market at this time. The only reason that I bought TRID when I did was because I expected them to present great quarterly results (they did) and to resolve the option sissue (they did not).

I think the market is overbought. Not only because of the ~10% 3 month growth as the economy slows. I also note that oil prices have been dropping but the market is not responding favorably.

I want to see a major pullback in this market before buying back (say, another 3% or 11,600). I am a strong believer in KSU, UCTT, TRID and OCN and I do want to be in them. (TRID I will buy within 3 weeks before they release earnings corrections). However, I believe that they will get dragged down in a market pullback. I do see more bad news in general on the horizon. Ideally, wait until December to buy. That is when some attention will come back to earnings.

Market crashing? Stopped out of KSU, TRID, UCTT

I have spoken previously about my concern that the market momentum is disconnected from the underlying fundamentals. Put simply: why is the market going up when the economy is starting to show signs of a slowdown?

How do we know the Economy is slowing?
1. GDP was averaging 3%+ and is now at 1.6%
2. Consumer spending is falling
3. Manufacturing is falling (except planes)
4. Housing construction is falling

Go back to the concept of the business cycle. A specific indicator of the end of the business boom is that wage pressure grows as GDP trends down.

But the market reached a new peak. I think that the market is overshooting and we need to be prepared.

In many ways, we could follow the path dictated by the economic cycle: focus on utilities, healthcare and consumer non-cyclicals(dividends) and exit all capital goods, metals, industry, technology & so forth. I put us in ILMN and AET for healthcare, TRID for non-cyclicals, and OCN as counter-cyclical (it should rise as mortgages foreclose). I also put us in T because in many ways I see them as a utility (without a dividend).

I also continue to choose the path of focusing on companies with unique positions. UCTT for example.

I have invested heavily in oil equipment and services and they are taking a beating. The market believes that we are at the tail end of a boom and that any US downturn will turn into an oil oversupply. Or more simply - Goldmann Sachs got out of oil so other funds did as well. I am waiting to late November to decide what to do. I expect the price of oil to change according to weather conditions here, and so far they are mild.

KSU Rocks earnings, stock falls

Some really bad reporting on this stock. Most of the headlines report that profits did slide. When you exclude last year's one-time gain, profits roared.
* Sales up 8%
* Earnings down from $1.14 last year to $0.32. BUT take out a one-time tax gain, and earnings surged from -$0.29 to $0.32. Or from a loss of $22M to a gain of $26M.
* Beat expectations by 50%: $0.32 vs expectations of $0.23

These are incredible results, and I will be buying more on the weakness.

TIE kicks ass, stock drops 10%

TIE wsa not scheduled to release earnings today, but they did.

TIE kicked ass again
* Sales up 43% to $272M
* Earnings up 45% YoY. If you back out last year's one time $0.03 per share tax credit, the actual increase was ~70%

Some exciting things reported were:
1. Sales prices increased: 37% for mill products and 68% for melted titanium.
Product mix shifted away from mill and towards the higher priced melted titanium.
2. Backlog increased to $1B (another 15% since last quarter)
3. Expansion is on target. The Nevada plant comes on line this year and will increase sponge production almost 50%. There is another expansion coming on line in early 2008, but that's too far out to matter right now.

The airbus problems do have an impact if Boeing does not expand production. That is, if 300 planes can be sold each year but Boeing only manufactures 150, then demand is unmet and titanium demand slips. I think Boeing will announce expansions, it's the smart thing to do.

Stock drops 4% in after hours
First of all, the stock has had a significant run-up: from 22 to 33 in 3 months. A pullback after earnings is more the norm than the exception (of course, I try to find the exceptions).

Secondly, the idea that they missed earnings is absurd. ONLY 1 ANALYST COVERS THIS STOCK. That is meaningless.

Third, they are down on 20,000 shares in afterhours. Wait for tomorrow.

Fourth, ATI also reported similarly: sales up strong, prices rising, and demand stronger than ever. The market turned against cyclicals already, despite the ongoing strength (Alcoa, Nucor, etc). Titanium is not your ordinary commodity and will definitely buck the trend.

It is made in volume by only 5 companies in the world (OPEC is jealous). More importantly: titanium is used in 3 huge growth industries that are immune to an economic slowdown:
1. Military. The US government is using more titanium in weapons. Tanks, submarines, planes - you name it, the amount of consumption is surging.
2. Airplanes. The economy could plunge, and China and India and the Arab countries still want airplanes.
3. Oil drilling. The rise of offshore oil drilling demands more titanium pipes.

Last year they expected to see 2006 earnings of ~$272M. They expect to hit ~$365M.

The key issue going forward is capacity constraint. (I am surprised that they need 2 years to expand their plant, but I don't know what is required.) The 45% (or 70%) growth is quite exciting, but looks low for TIE after the last few years. That's where the supply can help, but it's simply too far out.

HOWEVER, their earnings did decelerate and I didn't hear good explanations (cost of raw materials increased). That may contribute to a drop in price - the perception that things are winding down.

Week 49 Liverocket Performance - Up 0.16%

Well, considering that TRID fell by 9% and we still went up, not bad.
Why did I buy TRID? I saw that it had fallen 20% from its recent high and I felt that earnings would be strong. They were, but the stock still sank.

We were stopped out of ISIL at $24 after all.

We got back into UCTT and I feel good about that.

I have already reviewed most of our stocks and written up my take on their results.

Quick bits

I will post the weekly review later this evening (including new STOPs). In the meantime

1. Economy heading for problems sooner than I expected. The GDP was a lot lower than I expected and lower than what I feel is a growing economy. That plus today's consumer spending numbers points to a slowdown sooner than I thought. I was thinking next Spring we'd see the signs. This pulls in the recession a lot sooner: I was thinking early 2008 but now I see late 2007. I base this off the fact that the housing effect has only just begun.

I don't see stagflation in the cards - inflation is still very moderate by historical terms. I do see deflation over the next 2 quarters as housing prices continue to drop and a slowdown works its way through the economy.

2. Oil is still bouncing around the low levels. An economic slowdown typically translates into less fuel consumption. And that means lower fuel prices. Not likely: the China/India genie is out of the bottle. Their surging demand will make up for any shortfalls in the US.

3. Semiconductors are not rebounding as I thought. We were stopped out of ISIL and that's ok. I thought there would finally be some sector rotation, but I am not sure now.

4. Could be a good time to consider bonds in anticipation of