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.

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.

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.

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. 

Third Quarter Performance and Outlook

This quarter marked my re-entry into the market, apart from one small position I've had for over 5 years. The positions were entered during the quarter, and thus each is a relatively short-term position of less than a month. The following is a summary of performance:

Positives (> 2% growth in quarter)
SOLR - $8.37, +3.76% change from purchase, 4.3% of portfolio
PALL - $56.38, +6.85%, 4.8%
JEF - $22.69, +7.78% change during Q, 2.8% (LT position)

Neutral (> neg 2%, < 2%)
HUN - $11.56, -0.43% change from purchase, 3.9% of portfolio
DBA - $27.48, -0.39%, 9.3%
Cash - 60.7% of portfolio

Negatives (< neg 2%)
TBT - $31.25, -5.66% change from purchase, 13.3% of portfolio
VXX - $17.29, -4.03%, 3.7%


Q3 Change in Portfolio Balance, net expenses - Negative 31 bps.

Potential Trades
The one position I am looking to change is VXX, which I expect to exit during a period of volatility in the next month. Otherwise I expect to be 90+% invested by year-end.

Macro Outlook
As worries about a double dip fade into the background, I believe investors appetite for risk may increase during the fourth quarter. The Federal Reserve likely lets the large growth in money supply continue to slosh around the world economies, encouraging inflation and bubbles in asset prices. Should equity markets begin to rally on the Fed's inflationary efforts, investors may increasingly shift funds away from bonds. The 13% position in TBT is designed to take full advantage of this anticipated swing. TBT has worked against me so far, but I remain confident it will ultimately prove profitable.

As rising inflation allays deflationary fears and creates the feeling of improving economies, I expect commodities and companies deep in the supply chain to rise first. The positions in PALL, SOLR, and HUN are designed to take advantage of this anticipated trend. Weaved into these positions are also high exposures to U.S. exporters and an effort to gain exposure to anticipated high growth industries, such as solar energy. A weakening dollar and health in developing economies are expected to aid exporters. I expect to put in additional equity positions on an opportunistic basis designed to take advantage of these trends.

Playing on rising inflation and improving developing economies is the DBA position, which should also diversify the portfolio somewhat into commodities not related to technology and industry. The VXX position is designed to take advantage of any near-term volatility in equity markets. I expect to be out of this position in a couple weeks, either because it worked or didn't.

Quick Company Outlooks
SOLR - FY11 (Mar) EPS guidance of $0.90-$1.00, FY12 EPS estimate of $0.89. FY12 appears quite conservative given SOLR's largest customer recently received new financing arrangements to make capital purchases. A P/E of 9x FY12 would appear to expect a slowdown in earnings, so any EPS increases should enjoy multiple expansion.

HUN - C10 EPS estimate of $0.45, C11 EPS estimate of $0.88. Analysts expect a robust bounce next year in earnings, although growth is skewed somewhat by a large special charge in 1Q10. A return to a more normal demand environment likely returns the EPS to well above $1. Estimates may prove aggressive in 2011 but with a 3+% dividend yield there should be support for stock. If estimates prove fair, stock should perform quite well with multiple expansion.

GT Solar International (Ticker: SOLR)

I established a 4% position in GT Solar International, ticker SOLR, at $8.06

SOLR designs and sells capital equipment and related services used in both the polysilicon production and ingot production segments of the PV manufacturing process. 

Positives:

(1) Positioned as supplier to accelerating solar industry. Equipment supplier to manufacturers of solar cells and panels, an industry expected to grow at an annual rate of well in excess of 20% over the next few years. Through the Crystal Systems acquisition GT Solar is also a provider in the LED market, expected to grow at an annual rate in excess of 20% over the next few years.

(2) Largest customer, LDK Solar (Ticker LDK) yesterday announced a major financing arrangement for $8.9 billion to enable it to expand its capacity. This financing should translate into future orders for GT Solar, which may come sooner rather than later if LDK has been waiting for financing before placing orders.

(3) Hitting positive screening points. Raised F11 revenue and EPS guidance in August to $700-775 million and $0.90 and $1.00 with a book-to-bill of 2.6x. P/E of 9x on the consensus F11 EPS estimate of $0.92, with F12 appearing conservative at $0.89 offering opportunities for estimate increases. High Return on Investment of over 50% during the past year. No debt and healthy cash balance of $276 million, driven primarily by health free cash flow. Exporter of durable goods that should benefit from a weakening dollar. Company should be able to pass along cost increases of raw materials. Potential acquisition target if industry consolidates vertically.

Negatives: 

(1) Spotty operating history with large sporadic orders for equipment that can cause revenue and earnings misses.

(2) Potentially hurt by trade war between the U.S. and China. 

(3) Competitive marketplace with national interests potentially skewing orders.

(3) Large Private Equity shareholder likely provides selling pressure in future, although the company just completed a follow-on offering as a liquidity event for investors.