Uncle John's Cabin

Cisco Started this All

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Last quarter, a shock was felt around the investing market as Cisco made headlines by saying the financial fallout IS spilling over into the rest of the ecomony. The tech sector has not recovered since that comment despite good earnings from Cisco as well as other major hi-tech stocks.

IBM reported a stellar quarter to get a quick bounce and a even quicker round of profit taking. Since then, the market has been dicy at best for tech and companies that didn't beat earning like a red headed step child were taken out to the shed.

In this market there is no certainty. I still believe Cisco is a very solid and profitable company. If this contest was 3 years long, I'd load up on as much CSCO as possible and hold it at these prices. Since the game is short term, I have to think the same way.

I am buying CSCO at the end of the day right before earnings. I believe the numbers will be good and the CEO will moderate his comments this time about the larger economy during the conference call. What is my expectation? CSCO will beat handily and the market will reward the stock for a day before profit taking and the nation pastime, obsessing on a recession will take hold again and bring the stock down over the next week.

How much more can Cisco be beaten with the ugly stick if they produce good numbers? I believe the downside risk is small and the very short term upside is much larger. This is surely a short term trading play but one I'm fairly comfortable with.

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Whale Watching

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I have know for a while that Warren Buffet has been increasing his stake in the railroads, especially BNI. I'm gonna try to ride that train but I was not able to get in at his price point, under $80, but I need to get into compliance and went ahead with a purchase anyway.

Here's my take on this trade.
1) Rail looks cheaper these days to transport with oil prices in the 80-90 dollor range.
2) More bulk commodities (corn and coal in particular) need to be transfered then ever before considering the ethanol boondoggle and the coal shortage overseas.
3) Buffet is no fool and I will ride his train all the way to the bank. The market psychology has picketed up on his move and many people will be happy to follow his lead, so for better or worse, this stock should move up as people try to jump on this bandwagon.

Should I have waited for the same price point to get the most value out of BNI? Sure. But... we may not see $80 for a while now that everyone is aware of Buffet's intentions.

As always, good luck to my fellow contestants,
Uncle John

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Is the House of Mouse Fooling Us?

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Disney as a company and as a stock poses a serious dilemma for me. Again, I will state, like I did for Cisco, that I believe this is a very well run company with very profitable divisions and a clean balance sheet as well as some good global exposure. For a long term portfolio, I would love to buy this on a dip and hold. From a macro, long term perspective, it's hard not to like this stock.

But here is the dilemma. Is DIS a good stock to own for the short term, especially for a 6 month competition?

Consider how their comments after earnings were perceived. I heard numbers like 85% percent of their cruise lines were booked for the year. Their hotels at the parks have not seen slower demand yet. They have properties like ESPN that has not been hit with the writers strike and it sounds like ABC will do better with the writers strike about to end soon. Everyone seemed to love the optimism that Disney said about the consumer and in particular, about the travel economy. I believe I remember hearing even the other cruise lines went up on this news.

Given that, let me make an argument that all is not a rosy as Disney would have us believe. I took a honeymoon cruise on Disney a few years ago. (Yes I can truly say my wife and I had a Mickey Mouse wedding.) We booked 11 months in advance to secure the cabin we wanted. It was a wonderful cruise and a great experience even for a couple with no children. But what does that say about Disney's "85% booking" on their cruise lines and the park hotel business? People in general, have to plan these types of vacations well in advance. Even on non-Disney cruise lines, a couple members of my family booked a post New Years cruise last summer when things didn't look so bad for the consumer and just came back. Are they planning on booking another anytime soon? No.

My point is Disney will not see a slowdown as fast as other companies because of the amount of lead time it takes to plan a "Disney Vacation" in either the parks or the cruise lines. They are probably 6 to 9 months away from seeing a slowdown in room occupancy no matter what. People that put the deposits down and planned last summer and fall to go are probably going to take those vacations this year like they planned but will probably spend less on the ships and in the parks. Now, I have to wonder what the 12-18 month projection is for the Disney vacation properties. Who is booking a Disney cruise or theme park adventure today? Probably fewer and fewer people as this economy continues to get rocked.

Here's what it comes down to. Within 6 months, will Disney's outlook on the future of their travel business sound less confident? I have to think yes. They might even see profits dwindle before then in the next 2 quarters with people that already committed to a vacation going to the parks and cruises but spending less on mouse ears and other souvenirs, dropping margins and profits with some even canceling.

So, do I buy Disney while it's hot and "sounds" like it is not seeing the consumer slow down? My answer is no. Probably by next quarter's earnings or at least within 6 months, the numbers may look OK, but the guidance will start tending lower which will drag the stock down. Don't be fooled by optimistic guidance based on an 85% booking rate on their cruise lines. This number is not a valid indicator for the current traveling consumer sentiment because it lags by at least 6 to 9 months due to the time necessary to plan and book vacations like these. If, on the other hand, you believe the company will make money elsewhere, in movies, merchandise TV and DVDs, then I could understand buying this stock now. Just don't be fooled by the false optimism about the consumer based on their vacation projections for 2008.

Good luck as always fellow investors,
Uncle John

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A Homebuilder? Are you Serious?

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Yup. I bought a home builder. Didn't think I'd be doing that anytime soon. Well, I honestly never heard of GFA before today. Since the start of this round, I started out by basicly shorting most of the US indicies while I could form a plan and start picking some stocks just to get into conformance. Now I've made a couple bucks and am starting to make a few trades and take a few long positions in individual stocks, trying to be patient enough to wait for a good price, trying to diversify and try to get some global and domestic stocks.

Brazil has sounded good to me for a while. The economy has not overheated yet and seems to be growing a nice new middle class. I can't count the new of times I've heard it mentioned in reference to the BRIC economies and I've heard of Petrobras so often, that being the contrarian I am, I can't get myself to buy into something that well known and hyped up.

Then I heard about GFA. It's a home builder in Brazil. Why risk getting into this sector? A few reasons. Recently, the laws have changed in Brazil that now allow lenders to reposses houses in as little as one year from dead beats. Before that, it took well over 5 years to evict anyone. With that type of law, who would be willing lend out money for mortgages? The answer was very few. Thus, Brazil has very little supply right now. They have an emerging middle class itching to buy new homes and new laws that make it much easier for banks to be comfortable orginating loans. They seem to have little to no exposure to any sub-prime mess. Hopefully, without any huge slow down in Brazil or financial messes, this little company, (I believe it's the second largest homebuilder there,) could very well meet the double digit growth expectations and hopefully will do quite nicely this year.

Good luck as always,
Uncle John

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"It's the Monolines, Stupid!"

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To paraphrase a quote from a previous presidential race and put it in today's context, "It's the monolines, stupid!".

Warren Buffett today announced that he would be willing to take the muni bond liability off the hands on the monoline insurers (MBIA, Ambac etc.) While I watch the pundits argue this on TV, the Dow and all the major indices have spiked based mostly on this single piece of hope. (Disclaimer: I am not a financial wizard and cannot even come close to saying I understand the CDO market but I cannot contain myself by today's news and will try to explain why this is important in my view.) It is only hope and as is, the proposal will not likely happen without help on the other side of the equation as explained below but the markets are telling us exactly what they want. They want clarity. They want insurance. They want a backstop to the losses and a plan to get into recovery. Buffett's plan provides half of the solution. To examine the other side we need to examine the monolines and CDOs in some detail.

What's wrong with this economy? Well, that's pretty easy. Home prices are falling. Consumer spending accounts for about 70% of the economy, and they no longer have the means to use their homes as ATMs anymore to continue to spend at the rate they have been. Lenders have given out too much money, too liberally and are now and will continue to pay the price for this practice for a long time to come. To justify this and protect themselves from loss, they went to the monoline companies to get insurance for new financial instruments, called CDOs from the monolines whose main business until that point was insuring very safe, AAA rated muni bonds.

What is a CDO? If I understand this correctly (and it's quite possible I may be wrong, I'm no rocket scientist here), a CDO, is a bond consisting of asset backed mortgages wrapped up and sold as a AAA bond while the contents within the CDO is and should never have been rated triple A. There are certainly other credit derivatives involved in this mess as well but I will focus on what seems the be the biggest factor here, CDOs.

This new financial instrument (within what, the last 10 years?), and the insurance for them, has built a house of cards that ripple throughout the financial markets and the entire economy. Here's what happened in a simplified form as I understand it. Lenders originated loans to home buyers which were backed by the assets of the homes. Then, they wrapped these mortgages up into bundles as bonds and called them CDOs and sold them to various institutions. At some point, the monolines got involved and insured them as AAA rated bonds. Banks, mutual funds and even usually safe money market funds bought these for their interest rates. They are spread throughout the US and even the globe like cockroaches. (I'm not sure that's a fair comparison to the unloved cockroach.)

In the spring and summer of last year, as banks and lenders realized the assets in these CDOs were not worth what the bond was thought to be worth and started to write-down the value of these assets taking increasing larger and larger losses. As more subprime, alt-a and even prime borrowers started defaulting on their mortgages, in combination with falling home prices, more and more homes were being dumped on the home market in the form of foreclosures and short sales because the homes were not worth what was owed on them. This creates a cycle that continues to decrease the value of homes in neighborhoods where this is occurring making more people go upside down on their home loans depressing home prices even further.

OK, let's bring back the monoline companies. The banks and other institutions that hold these CDOs have to make claims to the insurance companies (the monolines) to cover their losses from foreclosures, short sales and auctions etc. These companies severely underestimated the possible losses that could be generated from the insurance they issued and now are struggling to keep enough capital to back these bonds and hold on to their own triple A ratings and have to continually raise cash as the losses mount. This ripples into even the lower risk assets, the muni bonds because the monolines insure them as well (for a nice profit.) The house of cards keeps collapsing as the possibility of the monolines lose their AAA ratings increases because many of the safe muni bonds which are in all kinds of restricted portfolios, including pension funds, mutual funds, money market funds etc that are mandated to only hold AAA rated bonds. If the monolines lose the AAA rating, these safe muni bonds will have to be sold (at a loss) all around the country.

This is what is creating the credit crisis, the credit freezing etc and the entire downfall of the economy and financial markets. Even the Fed cutting rates cannot stop this from happening.

Here's the cycle:

- house prices fall
- the consumer spends less
- the economy suffers from lower spending
- more loans go into default
- more insurance money is paid out by the monolines
- monolines become cash strapped and endanger their AAA ratings
- the value of the CDOs goes lower and banks have to write them down taking huge losses
- the banks can no longer sell the CDOs making them very illiquid - freezing the credit market
- the monolines start to lose their triple A ratings and muni bonds now have to be sold like junk bonds
- more and more houses go into default and get put on the market for reduced rates
- more houses and lower sales comps means lower home prices
- the consumer spends less
- the cycle repeats itself ad nausem.

Eventually the monolines will have to go out of business and declare bankruptcy causing the banks to continue to write down the CDO to virtually 0, creating more losses, more homes on the markets and less consumer spending.

So, why does Warren Buffett represent such hope to the markets even though the monolines will most likely not take him up on his offer to take the muni bond insurance portion of their business off their hands? His involvement with Berkshire Hathaway, has enough capital to back the muni bonds with no risk of losing it's triple A rating. This provides some sort of "backstop" if you will, for the market and taking other, safer bonds out of the equation of this death spiral.

The problem here is, what are the monlines left with if they lose the safest and most profitable potion of their business? Well, they have a little more capital to delay the downgrading of their bonds. Other than that, the spiral will just end quicker and they will fall into bankruptcy even faster.

Where's the solution? I have heard a couple of variations, and the one I like best of the "Cramer Solution". Jim Cramer suggested last month, that instead of a government stimulus package costing $150 billion that will do very little to fix the economy, the government should disband the monlines outright. They would sell the muni bond business to someone that has the cash to operate it like Warren Buffett and then guarantee the banks and other CDO holders 50 cents on the dollar for the insurance losses. This provides a "backstop" for the entire industry and economy. The figures tossed around were about 500 billion in possible losses for the CDO business. At 50 cents on the dollar, the government and tax payers are on the hook for up to a maximum of a $250 billion bailout. Now, that does not mean the government has to pay that money up front nor is it an absolute that this is a complete loss. It won't be. The government would most likely only end up with paying out over time, at most about half of what they were on the hook for, about $125 billion. That's less then current stimulus package that is about to be signed into law and it would be paid out over time.

The beauty of this deal is the value of the CDOs and their risk becomes a known quantity. The banks and other institutions can finally write down (or up) the value of these assets knowing at worst, they are worth half of their original value. Yes, the banks will take losses but the continual write-downs and unknown exposure and losses will end. The market abhors the uncertainty which the CDOs and their losses represent.

If such a plan were enacted, the market would probably shoot up 1000 points in a couple of days and stay there as a new bottom and start to recover. The housing economy would start to slowly rebuild as the rest of the fallout from the remaining people that cannot afford their homes will default but home prices will stop falling so fast and the spiral will be broken. Banks will start lending again (albeit more carefully) and homebuyers will enter the market again knowing the end is near. The CDO market will unfreeze and will become tradable and liquid again. The pension funds, retirement funds, money market and mutual funds will not have to sell those nice yielding tax free muni bonds. And, as a bonus, the government will probably earn some money back that was risked but not paid out as the housing market improves. (This was true during the SnL bailout in the 90s.)

This process would still take years to sort though the system but, it would provide what the equities markets and the home markets want so desperately, a clear path to recovery. Without fixing and more likely removing the monlines entirely, any recovery will take many more years of pain and frustration for everyone in this country and in many parts of the world.

In the end, if I were in a presidential/economic/recovery debate, I would turn that now famous line into "It's the monolines, stupid!"

/end rant
Uncle John

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Shopping List

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Today I removed most of my temporary index shorts when I started this competition that were bought just to get into compliance while trying to figure out what will play in this volitile market.

With this cash I went shopping a littl emore diversified portfolio. Mainly I focused on the types of stocks that recover first in a recovery as well as looking for global exposure, mainly in materials and infrastructure while mixing in a little consumer staples. In general, I tried to stay with best of breed in each sector but had to make some compromises based on value. With that said, not all the companies I bought were well off thier lows but still looked like they had a continuing upbeat outlook.

To this end, my shopping list consisted of:
- a couple ag plays, Potash (POT) and Monsanto (MON)
- some materials/infrastructure US Steel (X) and Arch Coal (ACI)
- China Telecom (CHA)
- extended my holdings in Brazilian real estate (GFA)
- consumer sin/staples (MO) and Coca Cola (KO)
- holding transportation (BNI) but looking for an entry point for more

This is a basic rotation that has already worked well and I am hoping I will not be too late to the party. These stocks give me some good diversication, some growth and global exposure. I'll have to see how long these stocks hold out until the next sector rotation. (I do fear I was very late to the ag party but the prospects look so good I bought them anyway.)

Let's see how this holds up.

Good luck,
Uncle John

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Looking for blog help from experienced players...

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Hi everyone,

EDIT: I just fixed the commenting problem not being enabled. Thanks Tom!

I would like to ask for a little help with my blog posts if anyone (experienced and new players) has the time.

I am very pleased (and somewhat apprehensive) to see that I have been quoted and linked to my blog in a couple newsletters and would like your opinion on how to improve my posts. (If it's not obvious yet, it will be soon in the rankings that I clearly have no idea what I am doing although I do try very seriously. /wink) I'm very new to this competition and some of the other posts linked are so good, with technical and fundamental evaluations, facts and real "investor speak" about what they are doing when I all I can do is try to explain what I "think" is happening and expound on my theories on certain companies or the market in very general terms.

Is the somewhat humorous (attempt at least) approach working?
Are the general market rants worth writing?
Is the "every man's blog" angle the type of thing that can work without all the charts, technical evaluations and quoted fundamentals of the companies?
Are the bold statements, shock and controversy what catches your eye?
What is it that you do like about my posts so I can continue doing it? /grin
What should I stop doing?
What would be good for me to add to my posts?
There are obviously a bunch of techinical traders and some good fundamentalists posting so do my posts have some value as a counterpoint to the others to mix it up a bit?
Does (do?) spelling and grammer count? /lol

When I see a quote or post linked back to me mentioned in the newsletter or the front page, I am shocked to say the least and I am worried that I will be discovered as a fraud or at a minimum, an idiot. /hehe (Yes, I really do actively manage my wife's and my IRA portfolios trying to "beat the street" but I don't know if thats really enough to qualify me as a "knowlegable source.") Any advice or insights to what you look for (and what could be considered useful to the community) is much appreciated.

Curious and slightly concerned. /vbg

Just trying to improve and learn here,
Uncle John

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Looking for blog help - part 2

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Hello again,

It turns out technical difficulties prevented comments from being enabled on my first post (it was a KCI error - that's computer biz talk for "Keyboard Chair Interface" -) so of course, no one was able to reply. Not sure that anyone would bother anyway but just in case, I am putting the link back to my original post here in case anyone did have any suggestions to help me improve my blogs while I continue to learn by reading all of yours. (Comments should enabled for the orginal post now thanks to Tom Armistead.)

Looking for blog help from experienced players

Thanks again,
Uncle John

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Leaving Money on the Table - CHA

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Having just turned most of my initial short ETF positions into more diversified positions in individuals stocks this week, I did a quick check on my portfolio. Mainly, I'm down a bit but I'm not too unhappy with that having only held these positions a couple of days. Yes, I could have done better holding those shorts a couple days longer but as everyone knows, timing the market is difficult in the best of circumstances.

This brings me to a trade I didn't expect so soon. I had just bought China Telecom (CHA) 2 or 3 days ago. After double checking my research, I realized I was not as happy about my position here. The severe storms in China have created some very large outages for the phone company and they will be spending a good chunk of cash on repairs which should lower their profits for this quarter. I came to the conclusion that I had just picked a China name I had heard but really did not do a good job of research.

I sold my entire position after a quick 5% gain to lock it in and look for a better opportunity in China/Asia or elsewhere after some more research. Did I leave money on the table? I'm pretty sure I did. Did I get lucky to get out with a profit? Probably, but luck depends on how long you trust it. I'd rather lock in a quick 5% gain in a company that I was a little unsure of (poor research on my part) then hold a position where I did not know the company that well. CHA could very well continue to go up but I would rather take a small profit then get slaughtered in the long term for being greedy, especially when I realized that I had fooled myself into thinking I had done all the research.

One piece of advice which lead me to this action was one of Jim Cramer's comments on managing a portfolio. He advises that you spend at least an hour a week reviewing each of your positions. (Whether you think he is a nut or not in general seems immaterial, this sounds like very good advice to me.) So, I guess this week, taking a small profit in CHA was a result of doing my homework. Only time will tell what grade I got today.

As always, good luck to my fellow investors.
Uncle John

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Citi??? Only if you put a gun to my head!

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In answer to the question of the week, Citigroup is only a screaming buy if someone held a gun to my head and made me buy it while screaming for my life. Even then I might consider it for a while first. /grin

There are a number of reasons I would stay away from this stock at this time.

First, just because it's down doesn't make it a value. For better or worse, the big (C) is going to feel some pain for a long time to come but most certainly in the next quarter or two. Typically if I were going to buy into a distressed sector like this I would lean towards best of breed here and baby, Citi just ain't one of them. I have to consider Gold Pants Slacks, umm, oops, (GS) and possibly (UBS) as best of breed in this sector (unless you want to count the regional banks, which I might prefer.) Given that, seeing the excessive writedowns UBS just had to take leads me to believe yet another round of very large writedown are in the making.

New leadership. I don't know how Pandit is going to run this ship. He says he doesn't want to break the company up and thinks the synergies are good. Maybe he's right, maybe he's wrong but the company's businesses do look a little bloated to me. A little streamlining and getting back to basics is what most of these banks need right now IMHO.

Certainly the analysts don't like it. The techinicals are not good for short and intermediate trends and still, nobody really knows exactly what is on their books.

Could Citi just skyrocket up? Is it undervalued? Yes and probably. But, for the next few months, C is really just a lottory ticket and quite honestly, I don't like gambling when the government is involved. I play poker, even go to Vegas but I won't play if they can change the rules mid-game. How do you know the true odds on your bet when DiNallo, congress and even the NY state governer are trying to change the rules? The only bet I'm making is more writedowns and more pain next quarter while the politicians jockey for votes.

Well, I guess the banks almost always make money long term and the government's position is to make sure that happens which is fine. Bernanke has ensured a steep curve between the 2 and 10 year notes and we will likely see more cuts to come which will always favor the banks in the long run. If you buy and hold for 2+ years I'd bet that you'll make out just fine. There are 2 things I personally need to see before I put any long term money into Citi or any other bank right now and those are a permanent resolution to the monoline and CDO issues and one good quarter in the books. I will probably miss the bottom by then but whats the hurry? I have enough gashes in my hands from trying to play the "catch a falling knife game" right now.

Good luck to all,
Uncle John

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"Breaking up is Hard to Do"

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Breaking up with your stocks in your portfolio, that is. Recognizing your weaknesses is critical in learning and improving your abilities in everything you do. This is especially true with managing a portfolio. My personal weakness, and I suspect most others, is not knowing when to "breakup with" (sell) a stock. I have recently put a new set of rules in place for myself to try to improve this aspect of my investing.

Many people that do their home work and research can pick stocks reasonably well but still do not perform well. This is at times especially true for me. Why is this? Buying the stock is pretty easy. Parting with it is so much harder. You might have a stock that is down but are hoping to make a comeback. Nobody like to sell and take a loss in their portfolio. You might have a stock that is up a nice piece of change, 5-10% or so in a short period of time. Do you sell and lock in those profits or do you risk these gains by holding hoping for increasing returns?

I have no surefire way to handle this myself and do not have a plan that will guarantee you that you will sell at the right time. But, I have some ideas on the subject I am trying to put into place. I try to split my stocks into 2 basic categories, like most people I would imagine, "investments" and "trades." To me, an investment is a longer term position that I expect to do well over time. Typically, there is a good story as well as fundamentals that support this thesis. A trade on the other hand to me, is a stock that has a specific catalyst that you expect some movement on and really has no extra value after the catalyst has happened.

Let's look at a couple of examples to illustrate my point.

One of my earliest posts was about Cisco (CSCO) right before earnings. I believed that Cisco would beat their numbers and get a bump in the price the next day. To me, this was a trade because, it seems the trend for tech stocks in particular in the current environment is to raise on good earnings but get beaten down shortly afterwards no matter what. My thesis to go long Cisco went like this:
- the stock had been pummeled lately and IMHO, undervalued
- I believe the long term prospects of the company are good
- companies like IBM that has recently beat earnings, only held on to those gains for a few days before giving them back
- I believed last quarter's fall from grace was based more on the outlook than it's actual number which were pretty decent
- and mostly, I believed (hoped) the CEO had learned his lesson last quarter about not talking about the economy as a whole and how bad it was instead of making specific positive comments on his own company's stock.

Well, as I watched the earnings come in, I saw somewhat positive news. They didn't beat handily like I had hoped but were in line with guidance at least. But, here's where I went wrong. The CEO again, talked about the slowing financial sector and how it might impact the tech business as a whole including his business. So, my catalyst for my trade was now over and since it didn't go the way I expected, I sold almost immediately the next day. I could have made a little money instead of losing a little money by holding because of recent upgrades etc but I had no compelling reasons to hold after my catalyst broke.

Now for an investment example. I recently purchased US steel (X). My thesis went like this:
- early recovery sectors tend to rise before recessions are over (industry, infrastructure etc)
- steel, an infrastructure play is a big global story
- iron ore and coal prices had threatened the margins in steel but US Steel and it's competitors announced that they were able to pass on this increase to customers, reaffirming my idea that the infrastructure play was not over. They had pricing power.

Based on this, I picked up (X) on a small dip and got a nice upside surprise within a week getting an 8 percent pop. I was faced with 3 decisions, take some or all off the table, hold, or increase my position on the next dip. Because I considered this an investment (longer term) for now, I ruled out profit taking. I thought that the quick gain of the previous day would retrace and allow me to by more US Steel at about $5 less than the previous day close and decided to increase my stake here. (Holding might have been the better option but we will see.) When the Fed Philly number came out looking bad for industrials the next day, I bought in for more about 4-5 bucks lower than the previous day's close.

Only time will tell if these were good decisions. Like in poker, the game is not really about winning every hand but trying to always make the right decision. If you do this, you will come out ahead in the long run in poker and I believe, in investing.

Like I stated earlier, my weakest part of my "investing game" was knowing when to sell. These rules I just described about categorizing trades vs. investments and when to sell are a new test for me to put a little more discipline into my strategy. For trades, I wait for the catalyst to happen and then take the profits (or losses) quickly. For investments, I try to hold and buy in on the dips while I still believe my thesis is working. When the thesis no longer works, it's time to sell and move on, even with investments.

Did I panic sell Cisco too soon? Probably by a small amount, but it was a trade and not an investment for this game. It just didn't turn the way I expected.

Did I lose the chance to lock in my profits from US Steel after a sharp rise in one day and end up risking more money by buying a dip? Yes, I risked a short term profit but my thesis still seems to be holding up there and I am not unhappy about a small loss at this moment.

I guess we will see if this is a good strategy to pursue and no matter what, I still know I need to continually look at how and why I sell so I can become a better investor. Any comments or other theories would be much appreciated here as I know this is a difficult topic for many.

Thanks and try to make good decisions as always,
Uncle John

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OT: What do I need to do to get ranked?

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I can talk all I want in my blogs but what good is it if I don't show my progress in the rankings? As of the end of Thursday, I am supposed to be up 3.5% for "the current round" (NAV 10.35) but have continually shown as 0.00% while my "since inception" stats are not correct but at least not 0. This would at least put me in the top 75. I understand I started a few days late and did not get into compliance until about Feb 4th but I show an 81% compliance record. I know the standings lag a day (or two at times) and that's fine but I honestly can't even figure out where they get the numbers for me at all. If they can't get my numbers right, I suspect there are many others with the same problem.

Now one sixth of the competition is over and I am bunched with about 40 other people that are up (or down) by some amount and show up as 0.00% gains for the current round. These are not the same people that are all in cash who are all down 0..07% I assume due to management fees.

Now I know I played the "ah shucks" bit pretty hard early on because I am new, would make mistakes early and wasn't honestly sure I'd have time to do this. Secretly though, I suspected I could compete and at least make a good showing of it (I would be surprised if I won but top 100 or even 50 I believed to be possible) and decided to let my portfolio do the talking. Well, it's not talking at all. For better or worse, I'd like to get rated before the game ends.

I've emailed the "service" address a couple of times now and they are "looking into it" but I am not the only one here.

I really would like to see the rankings fixed. I would suggest that contestants should be ranked first by compliance (meaning everyone that was compliant a majority of the time - rules are 51% right?), then ranked by current round portfolio performance. This way the all cash folks would be down at the bottom and the people actually playing the contest would be nearer the top. As the cash folks got into positions and compliance they would start working their way up. My opinion and interpretation of the rules makes me believe even the people that are currently down but are investing and in compliance should be ranked ahead of the people not playing yet.

Sorry if this seems a rant but having been in the software business all my adult life leads me to believe this is just sloppy design or coding and not impossible to get right. But first, don't you have to clearly define what is right?

1) Sort out all the compliant people (51% or better since the current round or whatever the rule is), put them in 1 group and put the rest in the other group.
2) Rank the compliant group of people in order of highest to lowest "Current Round" gains/losses.
3a) Rank the non-compliant people from highest to lowest current round gains
3b) or, if the information is available and has value, be more detailed and rank them by compliance percentage first and then sort by current round gains.

That seems to be fair and also seems how the contest ends (before picking the winner for the top X people based on posts.) Why not let us really see where we are relative to each other correctly now?

Is this too much to ask? Am I doing something wrong here? Am I missing something here? Sorry for beng such a noob.

Thanks in advance,
Uncle John

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Stagflation or Agflation?

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I do not believe we are in a similar pattern to the 70s stagflation era even though there are some similarities. Growth is slowing, inflation and unemployment is rising and commodities especially energy is nearing an all time high (adjusted for inflation.) But, the unemployment is still well under 6%, no where near the levels of the 70s. The inflation, although rising, is not comparable either. In the 70s, the oil crisis was due to a number of factors including price controls and a short supply thanks to OPEC.

Today, thanks mainly to Regan, we no longer have price and wage controls and much less industry regulation which reeked havoc on the economy. Thus, the slow down in economy is different. Today it is caused mainly by a home market bubble bursting and the inevitable fall out in the financial and credit markets that ensued. Reckless? Yes. But, eventually the market will work it all out although we will still be in some pain for a while.

As far as inflation goes, you have to look at two things, energy and food. Almost everything comes back to these two items. The food commodities have broken out to all time highs and show no signs of retreating. The energy prices are not caused as much by a lack of supply but geo-political concerns and an ever growing demand from emerging markets. I think we may see a reduction in price below the $100 oil soon but we won't see $50 oil any time soon, if ever.

Here's where the rubber meets the road. It's all about "agflation"!

Again, there are a number of reasons for this. The most obvious reason is the increased demand for food, particularly meat (beef, pork, poultry and fish) in emerging markets. As the people in these countries earn a better wage, they learn about protein from meat and once they eat meat, they never go back. (That reminds me of a joke that would not be appropriate here. /grin) As far as the cost of meat is concerned, it takes many times the number of grams in grain to produce 1 gram of meat depending on the type. For example, I believe it takes something like 7.5 grams of grain to produce 1 gram of beef.

The less understood reason for agflation is that we are burning 35% of our corn crops in the US to create ethanol! This should be a crime. Ethanol is a terrible fuel. I do remember working through school at a gas station and I remember when the first gas that "contains up to 10% ethanol" was introduced at the pumps. Many cars could not handle that type of gas for a few years until the automakers made some big adjustments to their combustion engines. If anyone remembers correctly, this was shortly after the laws about new cars using unleaded fuel only. (Anyone remember the nozzles of unleaded pumps were smaller so leaded gas could not be pumped into newer unleaded gas tanks?) The first gas pumps that contained ethanol were the unleaded pumps as the older cars could not handle it. It burns too hot for one and is more corrosive causing all kinds of problems with things melting and gumming up inside the engines causing poorer mileage performance if not complete break downs.

Ethanol is also a terrible product to make. Consider how ramifications of the new government laws promoting this fuel affect the economy. The most obvious is that more and more land is needed to grow corn (remember food and animal feed?) just so it can be converted to fuel. These means less land is being used for soy, wheat and other grains that would normally be planted in fields next to the corn. The effect is the rising commodities prices for almost all kinds of grain foods which then filters into almost all areas of the food industry. The restaurants, the prepared food makers, the snack food makers, the meat producers, and the raw grains have all gone up in cost at the stores due to this. Take a simple taco and work it out. Corn for the shell, the feed for cows for both beef (or meat of choice) and the cheese from cows have all gone up in price.

A lesser known fact about ethanol is that it takes huge amounts of clean water to produce. This will even raise the prices of things that need to be watered as well as your bottled water from Costco. Clean water is shrinking commodity in this world as well and we will soon wake up to that fact. So, we listen to Al Gore trying to "save the planet" buy polluting more of our drinking water supply to save us from the evils of oil by mandating ethanol production be increased? (BTW - I can't back this up but I have heard it takes a huge amount of power to do the conversion from corn to ethanol as well, lessening the effectiveness of ethanol as an alternative fuel.) On a side note, Cargill, a private company that makes ethanol refiners among other things, just pulled the plug on the construction of a new 220 million dollar ethanol plant citing the high cost of corn is not making it a viable solution at this time. Now it's too expensive to make ethanol too!!! Need I say more on the ethanol topic? Please write your congressman.

The ethanol laws IMHO should be repealed and we should stop burning our food!

OK, back to stocks. So what stocks work for the agflation play? Here's the short list.

Monsanto (MON) creates genetically altered seed to produce a higher yield per acre. They aren't making land anymore and some of it is now used to burn fuel. You have to optimize the land you have to produce the most you can.

Mosaic (MOS), Potash (POT) and Agrium (AGU) are all fertilizer companies which again, help the farmers maximize the output of their land. Among these, I like POT (hmm... that didn't sound right) but since most of these are at or near a 52 week high, I am waiting for a pullback in any of these to buy into them. As I write this, they are all trading down right now.

The last piece of the puzzle after planting the seed and getting it to grow is finally getting it out of the ground. This is where Deere (DE) comes in. This company is by far the best in breed for large combines, tractors and construction equipment as well. In addition, they just bought into a Chinese company to continue their penetration into that market.

There are certainly other companies that can play into this theme as well including chemical companies like Dow Chemicals (DD) that produce liquid fertilizers and pesticides and other seed manufacturers.

None of these stocks are cheap by any traditional methods of valuation. But famine and growing populations that now have learned the joys of BBQing or at least some form of meat do not go away. The population is not shrinking and more and more people can now afford meat in their diets and will not go back. Add to this the idiotic laws on our books causing more than 1/3 of our corn crops to be used for ethanol instead of food and you will see this is a multi-year trend. I am waiting for pullbacks in any of these stocks to get into them. They are only going higher.

Good luck as always,
Uncle John

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Of Mice and Buffett

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