November Performance - Up 1.5%

Performance Overview
In November my IRA account balance increased 1.5%, which is after all expenses and fees. The S P 500 was essentially flat. November was a wild ride as the portfolio raced up about 5% in the first half of the month before settling back.

During the month I entered a few more positions, reducing the percentage of cash in the account to about 10%. Domestic equities account for 38%, international equities 23%, commodities 15%, and inverse bond 14%. Within the equity positions, hardware is now the largest position followed by industrial materials. This weighting, coupled with the commodities positions, continues to highlight my opinion that deeper in the economy's supply chain, where I believe inflation is building, is a better place to position investments. In addition, it highlights a large weighting towards international with a large portion of revenue for domestic companies coming from overseas, specifically China and Asia. This weighting reflects my view that inflation, in the form of asset prices, likely continues to grow in this region for the foreseeable future. It also reflects my view that the yuan likely appreciates against the dollar as the Chinese government is forced to loosen the exchange rate in order to lessen inflationary pressures.

The largest drivers of growth in the account came from American Axle and Mfting (ticker: AXL), Kulicke and Soffa (ticker: KLIC), Huntsman (ticker: HUN) and ETFS Palladium (ticker: PALL). Each are positions greater than 4% and were up 11%, 11%, 12% and 8%, respectively. The reasons for the increases in AXL and KLIC, in my view, include relatively low expectations coupled with a brightening fundamental outlook. For AXL it appears as though car and truck sales have stabilized and 2011 should provide modest growth within the U.S. and international markets remain bullish. For KLIC the business is quite volatile but the U.S. economy continues to improve and the secular driver of the adoption of more copper components should drive business in 2011. For PALL the improving U.S. economy and robust growth in Asia is driving demand for Palladium.

The worst performances came from GT Solar (ticker: SOLR), MKS Instruments (ticker: MKSI), and China Gerui Adv Materials (ticker: CHOP), which were down 19%, 6% and 4% respectively. GT Solar has suffered from estimate cuts as analysts have fretted over supply growth outpacing demand, especially as government subsidies for solar likely come under pressure. I don't argue against the possible weakening of fundamentals as supply increases, however I believe the demand may prove more robust than expected and a weakening dollar should help the company. SOLR is trading under 6x the lowered consensus EPS estimate for C2011, suggesting a healthy risk/reward. MKSI is trading under 8x the consensus calendar C11EPS estimate, and thus my belief that the economy is improving should prove this valuation conservative. I do expect CHOP to begin to move upward, at the latest, when either production comes on-line mid-2011 or investors' risk appetite increases.

Proshares Ultrashort 20+ Yr Treasuries (ticker: TBT) has moved sideways during the quarter. An interesting tug-of-war is occurring in which Fed Treasury purchases, European contagion fears, and political unrest on the Korean peninsula are raising prices. Alternatively, healthy holiday demand trends thus far by U.S. consumers and rising inflationary concerns in Asia and in the U.S. are pushing prices down. I see the forces pushing the prices up and yields down as temporary in nature, and therefore I expect TBT to perform quite well during 2011.

Summary
The following is a summary of my positions and their performance during November:

Name	Ticker	% Portfolio	Chg
RF MICRO DEVICES INC	RFMD	2.1%	(3.8)%
KULICKE and SOFFA INDS INC	KLIC	4.4%	10.8%
HUNTSMAN CORP	HUN	4.8%	11.7%
FREEPORT MCMORAN COPPER and GOLD INC.	FCX	4.1%	6.9%
GT SOLAR INTL INC COM	SOLR	3.4%	(18.9)%
DUOYUAN GLOBAL WATER INC SPONS ADR	DGW	1.5%	0.0%
JEFFERIES GROUP INC NEW	JEF	2.9%	0.9%
CA INC COM	CA	1.9%	(1.3)%
LYONDELLBASELL INDUSTRIES N V COM CLASS A	LYB	2.4%	8.7%
CHINA GERUI ADVANCED MATERIALS	CHOP	3.6%	(4.3)%
PERKINELMER INC	PKI	1.9%	(0.6)%
AMERICAN AXLE and MFTING	AXL	6.6%	10.9%
MKS INSTRUMENTS	MKSI	2.5%	(5.9)%
MULTI SECTOR COMMODITY TR PWR DB AGR	DBA	9.5%	(2.1)%
ETFS PALLADIUM TR SH BEN INT	PALL	5.6%	8.1%
PROSHARES ULTRASHRT LEH BROS 20+ YR TREAS	TBT	14.3%	2.3%
ISHARES INC MCSI CHILE INVESTABLE MKT INDEX	ECH	4.7%	1.0%
ISHARES INC MSCI HONG KONG INDEX FD	EWH	4.6%	0.9%
MATTHEWS CHINA FUND	MCHFX	10.0%	0.5%

China Gerui Adv Materials (ticker CHOP) - Doubling Capacity Next Year

Bought 4% position in China Gerui Adv Materials (CHOP $5.83).

Reasons for Buying
Plans to double capacity by the end of 2011, with the majority of capex completed. Capacity coming on-line mid-2011, providing a growth driver since there is a shortage for cold-rolled steel in China and the company is running at capacity. Until more capacity comes on-line the company has adopted a cost-plus model, protecting gross margins and offering revenue growth from rising steel costs (limited upside growth over next few quarters). Chinese consumer ultimate end-market for product, especially the growing middle class.

CHOP trading at 5x the consensus C11 EPS estimate of $1.13, despite net cash on the balance sheet, healthy cash flow, mid-teens ROI, and growth potential next year. On an EV-to-TTM EBITDA, trading at 3.5x. At this level I am comfortable that the market is more focused on the risks than the returns.

Analysts almost all at Buy/ Strong Buy. Management providing investor conference on December 9, offering a potential catalyst at management details 2011 growth plans.

Concerns
Some delays in construction due to flooding in North China, raising some concern about execution. Exposure to risks in declining commodity prices, foreign exchange, and tightening Chinese monetary policy slowing growth.

Company Description
China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. The Company produces high-end, high-precision, ultra-thin, high- strength, cold-rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The Company sells its products to domestic Chinese customers in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.

Duoyuan Global Water (ticker DGW): Beating Expectations

My ~2% position in Duoyuan Global Water (DGW $13.02) is up ~8% after reporting third quarter results that exceeded expectations. While all three segments helped drive the 35% revenue increase, the main growth driver was water reuse equipment, up 42% y/y. Most important, management expects revenue to increase 29% in constant currency for C2011, compared to the street estimate of 23%. Given my expectation of the yuan rising against the dollar, the growth should look larger for U.S. investors.

Part of what I love about this position is the high short interest, 11% of shares outstanding. These are buyers at some point. As fundamentals continue to favor bulls these shorts will eventually cover. DGW currently trades just over 8x the consensus C2011 EPS estimate, which likely goes up when the updated estimates come out tomorrow since the current consensus projects only a 7% increase next year.

Tip of the Hat to Two Analysts

American Axle and Manufacturing (AXL $11.15) is up ~7% today and ~15% from my blended cost on the ~6% position. An upgrade from JP Morgan after the company announced a 20% y/y increase in forward 3-year backlog is the primary reason for the increase. With most of the analysts at a Hold rating, and the stock trading at 7.5x the C11 consensus EPS estimate, the upgrade provided extra juice as the analyst was rewarded for a non-consensus call based on fundamentals (even though the news was out).

GT Solar (SOLR $7.46) is down ~11% today and and ~7% from my cost on the ~4% position. An analyst Credit Suisse Group downgrade to Market Perform from Buy is the primary reason for the weakness. The analyst is worried about supply/ demand issues impacting the company. This analyst also took a non-consensus position since almost all the analysts rate the stock a Buy.

While I obviously agree with the analyst on AXL and I am considering the analyst's opinion on SOLR, both these rating changes highlight the power of sell-side analysts who use their rating changes wisely. The best way, in my opinion, to beat the market is make correct non-consensus calls on stocks. A surprisingly limited number of analysts do this, choosing to move with the herd. The opportunities are relatively rare for an analyst to make correct non-consensus calls, since they typically represent a major change in the business, but from experience (I ranked in the top 10% for stock picks in 2006 by all Wall Street Analysts) I've found the challenge isn't so much in identifying the opportunity, but having the conviction/ "balls" to make it.

So I tip my hat to both these analysts for making the call. It remains to be seen if they are right.

Kulicke and Soffa (ticker KLIC) - At 2x EV-EBITDA, Buying More

Expanded my position in Kulicke and Soffa (KLIC $6.00) to ~4% from ~2% because:

(1) Secular Driver
Secular trend of its semi customers converting from gold to copper with less than 20% complete. Both Siliconware Precision Industries (SPIL $5.15) and ASE Inc. (ASX $4.55) have voiced their intent to continue their migration to copper from gold. They expect to have about 20% of their product migrated to copper by the end of this year and increase this percentage to over 40% by the end of 2011. This planned migration, in addition to other players investments, should provide a healthy tailwind for the company next year. While other companies are entering the market with copper solutions, the company should maintain a lead in bringing the performance of copper up to that of gold. (backlog up 500% y/y).

(2) Improved Visibility
No secret the business is a roller coaster with the current period fairly uncertain as to whether the business slides backward or continues to grow. That said, the backlog increased 500% y/y last quarter to $252 million and only about 25% of the backlog is expected to be used in the December quarter. I understand why investors are nervous since historically the business has slowed materially after a good year. However, I believe the secular trends and unusual business recovery (more elongated and shallow than normal) should enable the company to produce a stronger -than-expected 2011.

(3) Low Valuation
Low valuation of under 5x the estimated updated consensus F2011 EPS of $1.30. Assuming a healthy cash collection from A/R during the December quarter, the net cash balance should reach ~$100-$120 million, or around $1.50 per share. Assuming an EBITDA of $20 million in the December quarter, slightly lower on a y/y basis, the EV-to-C10 EBITDA is less than 2x. At the very least, at these prices the company should attract some interested strategic buyers.

Kulicke and Soffa (ticker KLIC) - Is December Q the Bottom?

News Summary
Kulicke and Soffa (KLIC $6.37, down to $6.00 in the aftermarket) reported September quarter financial results of revenue of $259 million and non-GAAP EPS of $0.78 (non-GAAP was $0.89), versus the consensus estimates of $260 million and $0.82 for GAAP. FY10 actual GAAP EPS was $1.92.

Management had pre-announced on October 7 that revenue would be near $260 million. Guidance for the December quarter was revenue between $125 and $135 million (flat y/y), relative to the consensus estimates of $215 million. Management had made comments on October 7 that the revenue in the December quarter would be "significantly below" the September quarter due to softness in demand. Based on management's comments, I expect the December quarter GAAP EPS consensus estimate to move to around $0.20 and non-GAAP to move to around $0.28, both relatively flat y/y. The consensus GAAP EPS estimate for December is $0.55.

Currently the consensus revenue and GAAP EPS estimates for F11 are $756 million and $1.69, flat revenue growth and a 12% decline in EPS. We'll have to wait until the morning to hear any hints into how management foresees F2011 playing out. That said, the press release alluded to expected strengthening demand in the December quarter and unless the consensus FY11 EPS estimate drops below $0.60 (unlikely, in my view), KLIC will be trading on a single-digit P/E.

Investment Call
The morning conference call likely determines how weak the stock is tomorrow. That said, I will watch for signs that this may be a bottom for the stock.

American Axle and Manufaturing (Ticker AXL) - Driving Higher

American Axle and Manufacturing (AXL: $10.60), a ~6% position, is up about 5% today. The positive results and raised guidance from Chrysler's 3Q announcement appear to be the main reason, highlighting the continuing improvement in the U.S. automotive industry. The 12.5 million shares short AXL, representing 20% of the float and short ratio of about 6 days, offers plenty of potential buyers of the stock should the fundamentals continue to improve.

AXL is trading at about 7.5x the consensus C11 EPS estimate of $1.39, relative to Dana Holding Corp (DAN: $14.75) at 15x and Federal Mogul Corp. (FDML: $19.80) at 11.5x. Assuming AXL's investments continue to pay-off and the automotive industry continues to recover, I would expect the C11 based P/E to expand to the low double digits, implying a stock price around $17.  

GT Solar (Ticker SOLR): Nice Quarter and Guidance

News Summary
GT Solar (SOLR: $9.50) reported revenue of $229 million and diluted EPS of $0.28, beating estimates of $199 million and $0.24. Management raised guidance fiscal 2011 (FYE March) to $775-850 million and $1.08-1.18 (accounting for share 26.5 million share repurchase), relative to street expectations of $753 million and $0.93.

Management's comments were quite bullish
"The sustained strength in PV bookings in our Q2 and the first five weeks of Q3, combined with the continued stability and potential of our polysilicon business, provide the basis for us to significantly increase our guidance for the balance of the fiscal year."

"We have effectively sold out our material capacity for the balance of this fiscal year, and the demand we are seeing is in excess of the capacity that we plan to put in place in fiscal 12. In addition, the sapphire equipment business has advanced more rapidly than originally expected and we believe that we will be signing sizeable equipment orders before the end of the fiscal year."

My interpretation beyond the obvious is: pricing power (although careful with this power), which can equal accelerating revenue growth and margin expansion.

Takeaway
Keeping the ~4% full position to ride the secular trend of demand for solar energy and weakening dollar. Assuming C2011 moves to around $1.20 (only 2 cents higher than the top end of F11 guidance), SOLR is trading at a P/E of 8x, compared to First Solar (FSLR: $140.90) at 16x, MEMC Electronic Materials (WFR: $13.00) at 13x, and LDK Solar (LDK: $13.20) at 11x.

Given the median P/E of the comparable companies in the low double digits, and the strong bookings of the company suggesting on-going momentum over the next couple quarters, I believe the C2011 P/E for the stock can move into the low double digits for a price target over the next six months around $15, or over 50% upside from here. 

ETFS Palladium (Ticker PALL): Still Riding the Tiger

ETFS Palladium (Ticker PALL) has increased over 25% since I established the position on September 21. Given the strong move and increase in my portfolio (now over 5%), it is a good time to re-evaluate the position.

The spot price for immediate delivery of palladium is around $686 US/ ounce. The price has increased significantly over the past 2 years, from a low below $200 US/ ounce. As can be seen in the linked chart, this price is well below the all-time high of over $1,000.

Palladium is widely used  in manufactured products, either as a part of the final product or during the manufacturing. The largest single use of the metal is for catalytic converters, which are installed in automobile exhaust systems. Not surprisingly, the price of palladium closely follows the demand patterns of the world's automobile industry. In addition, palladium is widely used in electronic products, like cell phones and LED televisions. Thus demand trends in these industries also impact the price.

Given the strong growth in the automobile industry in China, as well as an improving outlook in the U.S., I believe the demand for palladium continues to grow. In addition, I believe the U.S. economy likely continues to improve over the next couple quarters, which should improve demand for consumer electronic products. Finally, with the introductions of ETFs focused on the metal, there appears to be growing interest by investors to invest directly in the metal as both a way to diversify and to play the rising prices. I believe these forces, coupled with a weakening dollar, likely carry palladium back near its all-time high above $1,000 over the next couple quarters.

My exit from the ETFS Palladium investment is likely either at a price for palladium above $1,000 or changes in the economic outlook that would impact its demand.

MKS Instruments (Ticker: MKSI)

Bought a ~3% position in MKS Instruments, ticker MKSI, at $21.64.

The company has a broad customer base of over 4,000 companies. Many of the industry verticals to which the company is selling are expected to exhibit double digit CAGRs over the next couple years. Customer industry verticals include Semiconductor Equipment and Manufacturers, Data Storage, Solar, Environmental, LED and MEMS, and Life Science. The three business segments are Instruments and Control Systems, Power and Reactive Gas Products, and Vacuum Products - representing about 50%, 41%, and 9%, respectively of revenue.

The company should benefit from President Barack Obama's proposed capital investment tax break, assuming it is passed by Congress. The tax break should encourage businesses to invest in capital, including company products. The company should also benefit from the weaker dollar since it should improve the price competitiveness of its products overseas, where the company realizes about 40% of its revenue.

Management expects to have about $400 million of cash (almost no debt) on the balance sheet (close to $8 per share) after benefiting from a $26 million income tax refund in the fourth quarter.

The consensus revenue and EPS estimates for C2011 are $880 million and $2.61, implying flat growth. This conflicts with management's outlook of successful penetration into new markets and an improving global economy. It also seems quite conservative to me since I believe the U.S. economy likely appears to accelerate over the next few quarters and foreign economies continue to perform well, albeit with greater worries about inflation.  

At a stock price of $21.64, the EV-to-TTM EBITDA is about 4x and the P/E is 8.3x. Both of these appear to price in a more challenging economic environment and/ or miscues by the company. Therefore I believe there is opportunity for both the estimates to increase and the multiples to expand.

Outlook Update - "Hair of the Dog"

Interesting week with the elections and comments by the Fed. On the surface it would appear the outcomes ("pro" business Republicans taking the House and the Fed $600 billion QE2) are bullish for the equity markets.  

My take is that this week has pushed off the day of reckoning into at least the second half of 2011. The party in equities likely rages on into at least the first quarter, the dollar likely continues to slide, treasury yields are managed into an acceptable range, and we, as a country, take another pull of loosely crafted investment spending hooch that likely leaves one hell of a hangover when the sun comes up (or spurs the Fed into QE3, 4, 5...).

In all the headlines, I rarely see any politician, economist, or pundit put their finger on what I believe is the fundamental issue: An Accumulation of Years of Rotten Investment Decisions Fueled by Too Loose Monetary Policies. If we had taken our medicine in 2000, or any years since then, the issue would have been smaller. Instead, we keep prescribing ourselves a heavy dose of "hair of the dog" and hope to avoid any evil consequences.

Inflation Building from the Bottom-up
The anticipated wave of inflation appears to be rolling up through the supply levels in the economy, illustrated by the increasing talk about food companies raising prices to offset higher commodity prices. I believe it is very important for investors to identify companies with pricing power. Or, put in Porter terms, companies with clear competitive advantages, negotiating power with customers, and in segments that have not had excess investment spending in recent history. Industrial equipment, IT and basic materials like chemicals look attractive as businesses update their infrastructure and less competitive pressure allows them to pass along price increases. In addition, some basic food companies with strong brands likely perform well.

Weaker Dollar Raising Import Prices and Helping Exporters
As QE2 likely keeps bond prices where they are, and therefore yields relatively low, the U.S. dollar weakens. The weakening dollar, as should be expected, is helping to improve manufacturing activity and exporters.  The Institute for Supply Management's index of overall manufacturing activity rose to 56.9 in October from 54.4 in September. A number above 50 implies expansion. The largest increase in activity within the index was for new orders, followed by exports. The activity appears mixed between industries, with many saying commodity prices are hurting margins while others are more bullish, like this comment, "Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products) This is where I want to play.

Once Again, the Outlook Clouds as Washington Reaches for the Levers.
In widely expected election results, the Republicans will take control of the House of Representatives in January. Rolling-back health care reform, avoiding tax increases, and tightening spending are likely priorities of the House starting in January. How the Democrats work with the Republicans for the remainder of the year, both from the current leaders in the House and the White House, will illustrate how 2011 likely plays out. Will it be gridlock? Probably not since the Republicans learned a lesson when they shutdown the government in the 1990's. Will the President make concessions in order to ensure important economic initiatives are tackled? I certainly hope so. From an investing standpoint, I believe this government will work harder to appease concerns within business. A government constantly tinkering with business rules can lead to uncertainty. A more sympathetic government should encourage business leaders to ratchet up investment decisions as their future tax and benefit cost structures clarify. My general view is that the results should help equity markets.

In terms of the Fed, it appears as if the Fed's actions are increasingly causing ripples outside of the country. An increasing number of foreign central banks are leaning towards tightening as the excess liquidity injected by the Fed sloshes into foreign markets, stoking inflation overseas. The combination of loose monetary policies in the U.S. and tightening overseas likely keeps downward pressure on the dollar for the foreseeable future. Even if the Fed slows its asset purchases, I believe the low discount rate likely continues to cause a sliding dollar, although this signal is a good time to re-evaluate the outlook for the dollar.

I expect the Fed to become much more fearful of inflation as we roll into 2011. Already there is a growing chorus of very well respected fund managers attacking the strategies of the Fed. Basically, the argument is that the Fed is causing long-term harm to the economy through its aggressive monetary actions. As I wrote in Liquidity Trap, the Fed is enabling diminishing returns in the economy by not holding business managers accountable for more and more marginal investment decisions. I agree with Gross and Grantham and have felt since 2000 that the Fed was just digging us in deeper. However, who am I? In the short-term I believe there is ample monetary stimulus to drive rising inflation due to the discount rate and declining reserves in banks.

So, does the Fed listen to these heavy weights in 2011, and prescribe a big dose of bitter medicine that could slow economic growth, or is it "Damn the torpedoes! Full speed ahead!"? In the thought-process of my sagflation theme - is deflation now more likely in the second half of 2011 after rising inflation through mid-2011? As we roll closer to 2011 we'll just have to see how drunk everyone is on the current stimulus.

AXL - GM October sales Bullish

Expanded my position in American Axle and Manufacturing (ticker: AXL) to 6% from 4% at $9.28. AXL is now my largest single stock position.

General Motors October U.S. sales exceeded the low expectations set by the street. October U.S. sales increased 13%, highlighted by a 27% increase in the Chevy Silverado and GMC Sierra hevy duty pickups. for the company Chevy increased 7%, driven in large part by truck sales. Expectations were for sales to drop 6.3% in the month.

AXL is the exclusive supplier of drive-line components to GM for its rear-wheel drive light trucks and SUVs manufactured in North America, supplying substantially all of GM’s rear axle and front four-wheel drive and allwheel drive (4WD/AWD) axle requirements for these vehicle platforms.

The low GM sales expectations likely weighed on AXL earlier in the week but the actual results should boost AXL as the trends in the quarter appear to remain quite healthy.

Wall Street is looking for a sequential drop in revenue ($570A million to $564E million) and EPS ($0.39A to $0.30E) in the December quarter. In 2011 the consensus is for revenue growth of 7% and EPS growth of 5%. The P/E based on consensus 2011 EPS of $1.35 is under 7x. Based on GM October sales trends, GM's plans to ramp-up advertising spending, and strong trends outside the U.S. for vehicle sales; I believe there is significant upside potential to revenue, EPS and the P/E should expand.

Ticker: AXL - October Truck Sales a Possible Catalyst

New vehicle sales in the U.S. are expected to be announced on Tuesday and Wednesday this week. As highlighted in WSJ, sales are expected to register the best month of 2010. The cautionary footnote is that the overall sales improvement is not fast enough to please management teams looking for a "normal" recovery.

Reading further into the article, it highlights that truck sales should continue to improve at a rate faster than the industry. Should this in fact occur, I believe it would provide a nice bump to AXL since the majority of the company's sales are incorporated into trucks. Of course, a lower-than-expected sales number could further hurt the stock.

AXL trades at 6.5x the 2011 consensus EPS estimate, a relatively low multiple that appears to heavily consider the financial leverage (~3x EBITDA) and mixed economic outlook. As a result of the low multiple, I believe the stock is quite attractive in light of my assumptions of an improving economy and potential of growing inflation.