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.

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.

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%

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.

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.  

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.

October Performance - up 2.8%

Performance Overview
In October my IRA account balance increased 2.8%, which is after all expenses and fees. The SP 500 increased 3.7%. Given the substantial cash position of 62% at the beginning of the month, I am pleased with the return.

During the month I entered multiple positions, reducing the percentage of cash in the account to 21%. Domestic equities account for 27%, international equities 23%, commodities 15%, and inverse bond 14%. Within the equity positions, industrial materials is the largest position followed by hardware. This weighting, coupled with the commodities positions, highlights my opinion that deeper in the economy's supply chain, where I believe inflation is building, is a better place to position investments.

The largest drivers of growth in the account came from Huntsman (ticker: HUN), ETF Palladium (ticker: PALL) and RF Micro Devices (ticker: RFMD), up 19.8%, 14.4% and 12.8%, respectively. The reason for the increases, in my view, include a weaker dollar driving commodity prices, ability of Huntsman to hold onto price increases amongst strengthening demand, and improving execution by RF Micro Devices' management coupled with strong secular demand in wireless.

The worst performances came from Duoyuan (ticker: DGW), VIX (ticker: VXX), and Teradyne (ticker: TER). I sold both VXX and TER for losses of 18.3% and 5.4% during the month. Volatility was relatively mute during most of the month and the VXX constantly bleeds value, placing a ticking clock on my position. For TER the December guidance was much lower than I had expected so I decided to move to the sidelines until the stock has settled. DGW was down 9.3% from when I bought it. At this point I plan to hold on to it but will be watching future losses closely.

Poor execution happened on the second purchase of American Axle Mfting (ticker: AXL) as I bought on the open at $10.10 only to see the stock fall to $9.22 at the end of the day. The company announced the September quarter that beat estimates and raising full year revenue growth. I missed that the full year growth combined with results of the third quarter implied a management's guidance for the mid-point of December revenue was below the street consensus. After re-evaluating the position and listening to the conference call, I believe the fundamental trends remain quite healthy and believe the take-away from the sell-off is the market's unwillingness to overlook marginal issues around this stock. It also may suggest that the market remains skeptical about the economic outlook next year. 

Summary
The following is a summary of my positions and their performance during October and relative to their cost.

		29-Oct		Change		Cost/	Sale/
Name	Ticker	% Portfolio		October		30-Sep	29-Oct
HUNTSMAN CORP	HUN	4.6%		19.8%		$11.56	$13.85
GT SOLAR INTL INC COM	SOLR	4.1%		(1.7)%		$8.37	$8.23
FREEPORT MCMORAN COPPER	FCX	3.9%		(5.0)%		$99.84	$94.80
AMERICAN AXLE MFTING HOLDING	AXL	3.8%		(6.5)%		$9.87	$9.22
JEFFERIES GROUP INC NEW	JEF	2.9%		5.5%		$22.69	$23.93
LYONDELLBASELL INDUSTRIES	LYB	2.2%		(4.1)%		$28.00	$26.86
RF MICRO DEVICES INC	RFMD	2.1%		12.8%		$6.46	$7.29
KULICKE & SOFFA INDS INC	KLIC	2.1%		5.4%		$5.90	$6.22
PERKINELMER INC	PKI	1.9%		1.9%		$23.02	$23.45
CA INC COM	CA	1.9%		1.1%		$22.94	$23.20
DUOYUAN GLOBAL WATER INC	DGW	1.6%		(9.3)%		$13.79	$12.51
MULTI SECTOR COMMODITY	DBA	9.8%		8.1%		$27.48	$29.70
ETFS PALLADIUM TR SH BEN INT	PALL	5.3%		14.4%		$56.38	$64.48
ULTRASHRT LEH BROS 20+ YR TRE	TBT	14.1%		8.8%		$31.25	$33.99
MATTHEWS CHINA FUND	MCHFX	10.2%		2.2%		$29.37	$30.02
ISHARES INC MCSI CHILE	ECH	4.7%		2.6%		$73.91	$75.84
ISHARES INC MSCI HONG KONG	EWH	4.7%		(0.6)%		$18.85	$18.73
TERADYNE INC	TER	Sold 10/28		(5.4)%		$11.64	$11.01
Barclays Bank 500 VIX	VXX	Sold 10/13		(18.3)%		$17.29	$14.13

American Axle & Manufacturing Holding (Ticker: AXL)

Increased position from 2% to 4% in American Axle & Manufacturing Holding (Ticker: AXL) at $10.10.

AXL reported revenue and EPS of $618 million and $0.52 that beat street expectations of $559 million and $0.38. Management provided full year revenue growth of expectation of 45-50%, up from 40-45% offered three months ago. However, given the strong third quarter results this guidance implies revenue in the fourth quarter between $507-583 million versus consensus of $559 million. This suggests analysts will modestly drop their revenue estimates for the fourth quarter (reason for stock weakness today), although 2011 revenue likely remains stable. Management said on the conference call that they do not foresee any changes in the cost structure that will pressure margins in 2011, allaying some of my concern about the impact of higher commodity prices. They expect EBITDA margins likely at the higher end of the their long-term range of 11-15%

Assuming the consensus 2010 full year revenue estimate remains around $2.2 billion (low end of 45-50% growth range), a modest 10% increase in top line (below the minimum run-rate in order for management to double revenue by 2013) moves the consensus 2011 revenue estimate to $2.4 billion (from $2.3 billion). A conservative 14% EBITDA margin in 2011 (given management's expectation of few changes in the cost structure to reduce margins for 15% 2010 levels) produces around $340 million. The current market price of $9.30 implies an enterprise value of $1.46 billion and produces an EV-to-2011 EBITDA estimate of 4x.

New to my thinking since yesterday: Higher than expected sales, a growing tailwind from GM marketing spending and recovering orders for vehicles, and a stable cost structure suggest the company could provide above average EPS growth for the 2-3 years. My biggest worry is an economic slowdown, which I continue to believe is remote in the next few quarters.

American Axle & Manufacturing Holding (Ticker: AXL)

Bought ~2% position in American Axle & Manufacturing Holding, ticker AXL, at $9.63.

Bought AXL for reasons including: largest customer (General Motors - 78% in 2009) planning significant advertising campaign to boost growth into its IPO, management expects to double sales by 2013, investing in high growth markets like South America and Asia, $1 billion of backlog, expanding into passenger cars (historically focused on trucks), increasingly diversifying its revenue from primarily General Motors, financial leverage has improved with no major debt maturing until 2013 and thus financially more stable, AXL trading around 7x C2011 EPS estimates.

Worries include cost pressures from rising commodity costs, competitive pressures within GM, GM costs cutting affecting company, management execution into new markets, union pressures once profits improve, and an economic slowdown.