December Performance - Up 8.5%

For December the balance increased 8.5%, after all fees and dividends received. The performance exceeded the increase in the SP 500, which increased 6.5%. By the end of the month I moved to a more conservative portfolio with almost 30% in cash. For the quarter the value of my IRA increased 13.4% relative to the 10.3% increase in the SP 500.

The largest position remains the inverse 20+ year Treasury ETF (ticker TBT) at 14%. Commodities also account for a significant portion of the portfolio, with the agricultural market basket (ticker DBA) at over 11% and palladium (ticker PALL) growing to 6%. The geographic positions each account for over 4%, with Matthews China Fund (ticker MCHFX) at 9%, Chile (ticker ECH) at just under 5%, and Hong Kong (ticker EWH) at just over 4%. For individual stocks the largest position is Citigroup (ticker C) at just over 4%. The weightings highlight an on-going belief that debt costs likely continue to rise in the U.S., benefiting banks, and commodities and inexpensive manufacturing likely outperform the market, in general.

Every position but two increased during the month, highlighting the breadth of the market rally during the month. GT Solar (ticker SOLR) bounced back after a weak November, increasing 33% up until I sold the position on December 22. American Axle and Manufacturing (ticker AXL) and MKSI Instruments (ticker MKSI) both increased almost 20%.

My positions focused on China underperformed during the month, which I believe is largely due to concerns about a rising interest rate environment. While a short-term concern, I remain confident these positions should perform well due to healthy trends in the Chinese economy and increasing pressure to allow further appreciation in the yuan relative to the dollar.

After such a strong run in December and spotty U.S. economic indicators (notably housing and unemployment causing concern), I expect somewhat of a pullback in the market in the first half of January. I plan to use this anticipated pullback to re-enter positions at more attractive prices.

		31-Dec	Dec.
Name	Ticker	% Portfolio	Chg
RF MICRO DEVICES INC	RFMD	0.0%	11.3%
KULICKE and SOFFA INDS INC	KLIC	0.0%	12.1%
HUNTSMAN CORP	HUN	0.0%	1.3%
FREEPORT MCMORAN COPPER and GOLD INC.	FCX	0.0%	15.9%
GT SOLAR INTL INC COM	SOLR	0.0%	33.3%
DUOYUAN GLOBAL WATER INC SPONS ADR	DGW	1.4%	2.1%
JEFFERIES GROUP INC NEW	JEF	2.9%	10.3%
CA INC COM	CA	1.8%	6.8%
LYONDELLBASELL INDUSTRIES N V COM CLASS A	LYB	2.6%	17.8%
CHINA GERUI ADVANCED MATERIALS	CHOP	3.5%	5.4%
PERKINELMER INC	PKI	1.9%	10.8%
AMERICAN AXLE and MFTING	AXL	0.0%	19.5%
CITIGROUP	C	4.3%	7.7%
EXCEED COMPANY	EDS	3.1%	(7.8)%
MKS INSTRUMENTS	MKSI	2.8%	20.3%
MULTI SECTOR COMMODITY TR PWR DB AGR	DBA	9.7%	11.2%
ETFS PALLADIUM TR SH BEN INT	PALL	6.0%	14.5%
PROSHARES ULTRASHRT LEH BROS 20+ YR TREAS	TBT	13.9%	6.5%
ISHARES INC MCSI CHILE INVESTABLE MKT INDEX	ECH	4.5%	3.9%
ISHARES INC MSCI HONG KONG INDEX FD	EWH	4.3%	0.2%
MATTHEWS CHINA FUND	MCHFX	9.0%	(2.1)%

Sold Positions in Conservative Shift

Sold all of the following positions (performance from purchase):

AXL @ $12.95 (+ 34%)
FCX @ $116.49 (+ 17%)
HUN @ $15.79 (+ 36%)
KLIC @ $7.46 (+ 24%)
RFMD @ $7.81 (+ 21%)
SOLR @ $8.92 (+11%)

Each of these stocks are relatively high beta and have performed well. Given the recent strength of the market I am looking to shift to a more conservative portfolio into the beginning of next year and re-evaluate some weightings.

I continue to have significant exposure to commodities, inverse treasuries, and China. For now, I expect to leave these positions in place. I may establish a position in a volatility-related ETF since the VIX is near a record low. I believe the market may be positioned for a brief reversal since companies are taking hard hits, like Nike ticker NKE, after reporting strong results.

Note: Nike's stock has dropped because of "only" 11% growth in future orders, in my view. Exceed Company, ticker EDS, reported a 25% increase in 2011 wholesale orders.

Established ~3% Position Exceed Company (Ticker EDS)

Established a ~3% position in Exceed Company Ltd, ticker EDS, at $8.95.

Purchased the position for the following reasons:
(1) Exposure to growing middle and upper class young Chinese who are enjoying rising incomes and increasing interest in living healthy.
(2) Strong 2011 sales fair with a 25% y/y increase in wholesale order values relative to 2010. "One of the strongest growth rates in the industry."
(3) Exceed has been aggressively opening new stores, increasing the number of units by 15% over the past year.
(4) Rising prices for footwear and apparel improving gross margins with management's expectations of continuing to expand margins through economies of scale.
(5) Expansion of apparel and footwear product lines increasing interest from consumers. This expansion is backed by an aggressive marketing campaign around a "happy lifestyle," with a popular Taiwan music group - By2.
(6) $95 million net cash on balance sheet (over $3 per share),  with healthy CFO of $19 million last quarter.
(7) EDS is trading at 4x the C11 consensus estimate, which includes only one estimate for an under-followed stock.

Concerns:
(1) Low visibility into demand trends, business and reporting is not up to U.S. standards.
(2) Currency and country risk.

This is an investment considered quite high risk, but the cash on the balance sheet and low P/E makes the rick-reward tolerable, in my view.
 

Company Description
Exceed Company Ltd. (Exceed) designs, develops and wholesales footwear, apparel and accessories under the Xidelong brand name. It has three principal categories of products: footwear, which mainly comprises running, leisure, basketball, skateboarding, canvas, tennis and outdoor footwear; apparel, which comprises of sports tops, pants, jackets, track suits and coats, and accessories, which comprises of bags, socks, hats and caps. In October 2009, Exceed Company Ltd. announced the completion of the acquisition of Windrace International Company Limited. The Company sells the products mainly through the Xidelong retail stores. Exceed’s 22 distributors own and operate all Xidelong retail stores. As of December 31, 2009, there were 3,694 Xidelong retail stores, of which 1,000 were operated directly by distributors and the remaining were operated indirectly through authorized third party retail store operators.

Sold ~25% of American Axle and Manufacturing (Ticker AXL)

Sold ~25% of my ~7% position in American Axle and Manufacturing at $12.54.

AXL is up almost 30% from when I built the position in October and November. The stock trades about 8.5x the consensus C10 and C11 EPS estimates, which remains attractive for a company that I believe will continue to strengthen over the next year. The primary reason for the sale is to re-balance the portfolio. A secondary reason is to move more conservative into the year-end and hopefully lock-in some profits after a good move up in the portfolio.

Should AXL decline in the near-term, I would likely add back to the position.

Sagflation May Make Consumer Stocks A Minefield

The 2010 herd movement into consumer discretionary has produced strong movements in many stocks, as highlighted by the 25+% increase in the sector YTD. The sector now trades at a beefy 22x TTM earnings. I understand that this is a sector that has traditionally outperformed the market during periods of economic recovery but the market appears to expect great things in this segment. Another sector that has typically led the market during recoveries is financials, which has increased a more modest 5% YTD, highlighting the non-traditional nature of this recovery.

Under my sagflation theme, the next year likely exhibits increasing instability in prices and relatively modest real economic growth. The price instability may ultimately come out in rising CPI numbers, however I believe a more likely scenario is distinct bubbles in segments of the world economies as central banks continue activist policies and exert pressure on exchange markets. I would argue the rising inflation in China and Brazil are a couple proof points of this price instability. Within the U.S., the price instability has revolved around producer prices, with these price increases accelerating to 4-6% in 2010 after declining 2.6% in 2009.

My point in this post is that consumer discretionary is a minefield, in my view. As highlighted by the lower-than-expected guidance from Talbots, ticker TLB, fickle consumer tastes can take down a stock fairly quickly. I also believe consumers remain very price conscience. However, the real reason for my general skepticism about consumer discretionary, as a whole, is rising costs in cotton and potentially oil pressuring margins. So far I suspect companies have offset rising costs by substituting for lower quality materials and altering the mix of products marketed and emphasized in stores. A combination of rising interest rates on consumer debt (tamping down demand) and rising production costs (hurting margins) may ultimately prove the discretionary part of consumer discretionary.

A broader point, and one I expect to explore further in later posts, is that the current stock rally likely continues for a couple quarters but is based more on nominal growth than real growth.

GT Solar (SOLR) Up over 7%

The price of shares for GT Solar, ticker SOLR (a ~4% position), are up over 7% today after analysts have highlighted the low valuation of the stock and potential high accretion if the company is bought. Obviously I agree since valuation was one of the primary reasons for buying the shares. SOLR is trading around 7x the consensus C11 EPS estimate, which I believe is a relatively low valuation for a company expected to grow earnings in the mid-teens next year and at an annual rate of 50% for the next 5 years (probably overly aggressive, but this gives lots of room to lower to a more reasonable rate of around 20-30%). TTM ROI is in excess of 50%, and the company has net cash of almost $2 on the balance sheet.

While investments by competitors likely increase competitive pressure next year, assuming demand continues to grow at an accelerated rate in 2012 and beyond, the stock should have a higher multiple.

I plan to hold on to the full position for now, or until the multiple expands closer to the expected 2011 earnings growth rate of the mid-teens, implying a price target in in the upper teens.

Citigroup (ticker C) Exits Government Bail-out

Citigroup, ticker C, is rallying after the company announced plans for a follow-on offering to exit the government's ownership position in the company. Obviously the market likes the announcement, and I concur with the following points: the deal removes stigma of government ownership, the deal removes conflicts between company interests and taxpayers' interests, it removes a known large seller, and it likely increases ownership by funds. All-in, a positive announcement that likely takes some time to exhibit its deeper benefits.

No plans to change my ~4% position.

RF Micro Devices (Ticker: RFMD) Pops

RF Micro Devices, ticker RFMD, is up 7% today and has established a new 52-week high. While Next Inning Technology released an updated report on the company, to which I do not have a subscription, my best guess as to what is driving it higher is something management may announce tomorrow morning in conjunction with their presentation at the Barclays Capital Global Technology Conference.

I plan to let the ~2% ride through tomorrow morning. RFMD is now up over 13% from when I bought it on October 11. Since it is a smaller position and the stock is trading just over 10x the consensus C11 EPS estimate, I don't expect to take any profits unless the announcement changes the end game for the company.

Citigroup (ticker C)

Established a 4% position in Citigroup, ticker C, at $4.39.

Reasons for buying include its large exposure globally, which should benefit from growth in Asia and South America; a potentially steepening yield curve associated with an improving outlook in the U.S. that should benefit the company domestically; and a C2011 P/E under 10x.

The stock continues to creep closer to $5, which should enable a wider group of funds to invest in the company. In many cases, funds avoid stocks under $5 due to internal rules, higher transaction costs, and the perception of poor quality.

Sold Some Huntsman (ticker: HUN)

Sold a quarter of my position in Huntsman, ticker HUN, at $15.39.

HUN is up about 33% since I established the long position on September 27. The sale is harvesting the gains in the position and re-balancing the position back to ~4%. I remain positive about the outlook for the company and its ability to pass along price increases and benefit from an improving economy. Therefore, I am maintaining a fairly large position as a percentage of the portfolio.