Lindsay sits down with Michael Covel, author of “Turtle Trader” and “Trend Following”

U.S. Equity Deal-Making: From Rebuilding To Re-leveraging

13:19:00, May 25, 2007

After several years of aggressively rebuilding balance sheets, the U.S. corporate sector has started to re-leverage, which is equity-bullish but corporate bond-bearish. Our U.S. Investment Strategy service noted last week in a Special Report that corporate bond spreads have stayed tight, and the level of bond yields remains low, acting to turbo-charge the stampede to buy/retire equities. The wide gap between equity and corporate bond valuations is being arbitraged and will persist until the valuation gap is closed. If a mania develops like in the late 1990s, then the gap could even move into negative territory. Although such a shift seems a long way off, M&A activity is expediting the re-leveraging, and the financial and investment communities are rushing to take part in this stampede.

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Risk is high for a downturn in the market for the next few months but patience and maintaining exposure to the strongest players will be rewarded

My favorites right now (in order of preference) are:

Big positions*
Google (still the most exciting company in the world and offers the best exposure to the growth of the internet and future growth in computing in high technology such as genetics),
Whole Foods [combines natural, healthy food with indulgence and a somewhat ethical, feel-good culture; It is the best (alternative) grocer in North America].

Next best
Powershares DB Agriculture (offers exposure to corn, wheat, soybeans, and sugar futures.
Apple (exposure to the future of personal computing, net media and gadgetry),
Microsoft (it's still the king of software and will benefit with the growth of the net and computing).

More risky favorites (and thus smaller positions)
China Life Insurance (offers great exposure to the mainland Chinese stock markets),
New Oriental Education (private education company in China),
CDC Corporation (enterprise software, mobile apps, and digital gaming in China),
Shanda Interactive (innovative digital game company in China),
Echelon Corporation (makes power grids more efficient, saving energy and money).

There would be others, but I choose to stay away from heavy industry, mining, pharmaceuticals, biotech, and companies whose business is primarily military contracting. My favorites also preclude companies, sectors, industries, and countries I don't understand well enough.

*With big positions come big risk.

What Could End The Emerging Markets Bull Run

by BCA Research: 11:40:00, May 23, 2007

The conditions which have historically ended emerging equity bull markets are an inflation outbreak or debt deflation. Our Emerging Market Strategy service argues that neither are currently present. With regards to inflation, core CPI is either low or falling in the vast majority of emerging economies, despite five strong years of global growth. Rampant productivity gains in the global economic system have resulted in both healthy profit margins and disinflationary pressures. Specifically, falling unit labor costs continue to offset the impact of rising raw material costs and reduce the pressure on the corporate sector to aggressively hike selling prices. China presents a good example. The country is the epicenter of global growth and consequently, it is natural to expect that inflation will first begin creeping up there. Moreover, monetary conditions in China are extremely stimulative, with a cheap currency and borrowing costs substantially below nominal GDP growth. However, inflation is not a problem in China: Core CPI running as low as 1%.

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Equities: Enjoy The Rally, Think About Insurance

by BCA Research: 15:16:00, May 22, 2007

According to our Global Investment Strategy service, equities momentum might look stretched, but waiting for a correction is likely to prove too costly. While many technical indicators are warning of a correction, the global equity market has continued to grind higher aided by an avalanche of liquid public savings moving into stocks. Recent market behavior resembles that of the second half of the 1995, when the Fed went on hold and share prices escalated. During this episode, stocks consistently looked overbought and ready to correct, however, a sizable pullback only came in 1998. Waiting on the sidelines proved extremely costly. This leg of the bull market is typically both rewarding and volatile. Correspondingly, investors should stay invested but consider an insurance strategy. Bottom Line: The market is overbought but a hard correction is unlikely. Hedge potential volatility, but stay long.

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Google

I doubled my position in Google to 8.3% of my overall portfolio today. I think Google has about 30% downside risk from here, but I would assign low probability to that. It is much more likely that Google will be up 30% in the next 12 months and will at least double in the next 3 years.

Portfolio as of today

Today I bought Whole Foods just under $40 and doubled my position in Google at $461. CENTRAL GOLD TRUST
25.00	11-May-06	78.69	26	1,883.44$1,883.44	ISHARES COMEX GOLD TRUST
25.00	31-Oct-06	9.51	370	3,714.80$3,714.80	CENTRAL FUND OF CANADA LTD CL A
25.00	11-May-06	118.00	20	2,838.46$2,838.46	ISHARES SILVER TRUST
25.00	31-Jul-06	51.17	70	3,974.62$3,974.62	IPATH DJ AIGCITR ETN
12.00	12-Jan-06	27.00	190	5,305.01$5,305.01	POWERSHARES DB AGRIC
25.00	31-Jul-06	51.23	70	3,192.05$3,192.05	IPATH GSCI TRI ETN
25.00	31-Aug-06	27.39	36	2,110.04$2,110.04	DAWSON GEOPHYSICAL
25.00	4-May-06	8.70	115	1,802.18$1,802.18	ECHELON CORP
25.00	20-Jul-06	22.15	45	1,097.03$1,097.03	AQUA AMERICA INC
25.00	28-Aug-06	29.78	32	1,206.01$1,206.01	PENTAIR INC
25.00	29-Aug-06	15.66	60	1,618.32$1,618.32	FUEL TECH INC
25.00	31-Oct-06	28.66	70	2,400.22$2,400.22	MICROSOFT CP
25.00	16-Mar-07	89.60	25	2,961.51$2,961.51	APPLE INC
50.00	3-Nov-06	465.66	10	5,215.72$5,215.72	GOOGLE
9.95	22-Nov-06	28.40	80	2,578.89$2,578.89	YAHOO INC
25.00	8-Nov-06	39.45	45	3,139.63$3,139.63	AMAZON.COM INC
25.00	31-Aug-06	26.77	37	1,651.70$1,651.70	BLACKBOARD INC.
25.00	29-Aug-06	41.21	24	1,270.29$1,270.29	MONSTER WORLDWIDE
29.00	28-Sep-06	25.90	40	1,847.43$1,847.43	NINTENDO CO LTD ADR
25.00	16-May-07	39.43	115	5,053.72$5,053.72	WHOLE FOODS MARKT
25.00	29-Dec-05	15.43	70	3,379.78$3,379.78	GUANGSHEN RAIL CO LT
25.00	26-Oct-06	23.17	100	3,629.74$3,629.74	HOME INNS & HOTELS
25.00	8-Sep-06	21.47	46	2,385.98$2,385.98	NEW ORIENTAL EDUCATI
25.00	4-Jan-06	18.23	60	2,604.94$2,604.94	FOCUS MEDIA HOLDING
25.00	6-Jan-06	32.60	34	2,709.49$2,709.49	CTRIP.COM INTL LTD
25.00	6-Jan-06	16.90	60	1,238.90$1,238.90	51JOB, INC.
25.00	8-Sep-06	33.23	30	1,589.18$1,589.18	CHINA MOBILE LIMITED
25.00	23-Jan-06	4.17	250	2,036.14$2,036.14	ASIAINFO HLDGS INC
50.00	28-Mar-06	62.36	24	3,436.61$3,436.61	BAIDU.COM, INC.
25.00	8-Nov-06	15.54	110	3,235.20$3,235.20	SHANDA INTERACTIVE
25.00	2-May-06	4.66	215	2,016.83$2,016.83	CDC CORPORATION CL-A
50.00	18-Jul-06	19.69	100	2,682.85$2,682.85	CTC MEDIA, INC.
25.00	8-Sep-06	59.99	17	1,878.18$1,878.18	VIMPEL COMMUN
50.00	20-Sep-06	32.00	66	3,200.48$3,200.48	BANCO ITAU HLDG ADS
25.00	31-Aug-06	19.02	50	1,630.57$1,630.57	TELVISA S.A.

Agriculture

by Nicholas Vardy

China has lost fertile land equivalent of about the size of Maine each and every year for the past decade. To feed its population adequately, it should be adding that amount. Even Mervyn King -- Ben Bernanke's counterpart at the Bank of England -- recently blamed food prices on a weather-induced drop in supply.

Australia is facing such water shortages that the government is on the verge of turning off irrigation to 50,000 farmers. Rice production has dropped over 90% and cotton production has more than halved. Even wine grape production is impaired. With food prices set to triple, Australians may be set to go on a national diet.

Investing in Soft Commodities: The Biofuels Revolution

The emerging mania surrounding biofuel only exacerbates the problem. With corn-based ethanol the latest (government subsidized) rage, demand for crops as biofuel is set to double by 2030. Today, one out of five bushels of corn produced in the United States is going toward ethanol. With half of Detroit's cars set to run mixed fuels by 2012, ethanol demand is set to jump substantially. To meet its green goals, Europe will have to allocate 25% of arable land toward ethanol production.

Here the law of unintended consequences kicking in. Land shifted toward corn in the United States make soybeans more expensive. Ditto with wheat and barley, as traditional fields are turned toward rapeseed crops. The new demand for corn means a bidding war has erupted between livestock producers and the ethanol industry. We'll be driving cleaner cars, but eating less meat as global output of beef, pork and chicken is expected to plummet by $2 billion as a result.

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Killer apps, proprietary edge, and sustainable high margins

By Jim Jubak

Look for the killer app. The killer application -- the software program, piece of hardware, product improvement or whatever -- that everyone has to have is what powers hockey-stick growth. It took everyone a while to figure out what an Internet browser was and what it was good for, but once that period of slowly growing use was past, everybody had to have one, because being browserless was just inconceivable. Same with digital cameras and wireless phones and, before that, with routers and personal computers themselves.

Look for a company with sustainable high margins. In the technology markets of the 1990s, a company could ride a sustainable proprietary edge -- and a willingness to use that temporary advantage over the competition as if the devil were at its heels -- to years and years of outsized profit margins.

or else:

There's so much capital in the world now that a high profit margin becomes a red flag that draws a horde of well-funded competitors from around the world -- and at least a few of those are willing to run at a loss for years because the government that has arranged the financing has goals besides profitability.

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Chinese "core belief" of "anything not expressly permitted is not permitted at all" may pose challenges ahead

Rich Karlgaard 05.07.07, 12:00 AM ET

For every Chinese entrepreneur like Alibaba's Jack Ma (check him out on Wikipedia), there must be 10,000 who fear sticking out, bucking authority or going off-script. You see this everywhere. One afternoon at the Shangri-La, my wife, kids and I decided to abort a long elevator wait and take the stairs. Up we trudged to the 13th floor--they have 13th floors in China--but on the 12th we were met by a startled hotel employee. He nearly passed a brick seeing us on the stairway. He shouted for us to walk back down.

"Just one more floor," we begged. "Down! Down!" he shouted.

Another anecdote among several: One night the hotel left a complimentary bottle of wine in our room. We took it to dinner in a hotel restaurant. This confused the waitstaff no end. Four or five of them consulted frantically. Finally, their leader stepped forward to say that bringing the bottle of wine was "not permitted!"

"But it's a gift from the hotel," we protested.

"Not permitted," repeated the waiter. He wasn't angry. He wanted to do the right thing, but he was afraid. You could see it in his eyes.

Perhaps my Western eyes see this unfairly, but it seems to me that 99.99% of Chinese wake up each day with a core belief: Anything not expressly permitted is not permitted at all.

But that's most of life: Not permitted! Ask yourself: How far can China really go if "not permitted" is the default mental mindset of the country's vast majority?

Maybe this won't be a key question during the next 10 years. China has so much catching up to do it can easily grow 10% a year for another decade. Crunch time, I think, will come in the 10- to 20-year time frame. Unless attitudes change, that's when the "not permitted" mental default will begin to slow China's incredible march forward.

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Cheap money means either higher stock prices or higher interest rates

Rich Karlgaard 05.21.07

Ken Fisher, fellow FORBES columnist and founder of a $39 billion fund, would never predict an 18,000 Dow. That's only because Fisher hates using the Dow as a reference. But he does say U.S. stocks are undervalued by about 40%.

"We live in a unique period of history," Fisher recently told attendees on the 11th FORBES Cruise for Investors. "All around the world earning yields--flip P/E to E/P to gets earnings yield--are higher than ten-year government bond yields. For the American S&P Index the E/P is 6.7%. Compare that to the cost of borrowing. The average S&P company can borrow money at 5.8% pretax, or about 3.8% aftertax."

Call it the Fisher Spread. It's nearly three points. Historically huge.

The Fisher Spread leads to Fisher's calculus: S&P Index companies borrow money at an aftertax average rate of 3.8% to buy back their shares, which, on average, are yielding 6.7%. It's no surprise that companies are buying back their shares. (Globally, the Fisher Spread between E/Ps and ten-year government bonds is even wider.)

Private equity firms play the same game. In fact, they play it better and more aggressively. That's their sole purpose. By smartly playing the Fisher Spread, private equity firms can't lose in these conditions:

If the stock market goes up--thus narrowing the Fisher Spread--the private equity firm can take its companies public. If the stock market goes down--thus expanding the spread-- the private equity firm can mark up its companies and sell them to other companies. "This game will continue until the earnings-yield/bond-yield gap closes," says Fisher. That is, when the Fisher Spread ceases to exist. When it ends, it will end badly. Companies will fail to grasp that the Fisher Spread, not CEO genius, makes acquisitions work. Private equity firms will become overextended and go bust. But for now--and likely for another 24 to 36 months--the case for buying stocks has never been stronger. link

Risk, returns, and labour arbitrage

-How much risk you are willing to take will determine how much gains you can make (if you don't know what risks you are taking you're in trouble).

-Since you're job (and more broadly your country's economy) is probably competing with one in China or India or elsewhere, eventually your salary is going to go down. You should invest your temporarily higher income so that you will benefit, not lose, from this transition.

Professional Money Managers Have Other Priorities. However, You Need Time To Manage Your Own Money

Being real about it, one of the reasons why it's possible to beat professional money managers is that their priority is not making you money. First they want to make themselves money, secondly they don't want to do anything that would be seen as outlandish (therefore they need to remain within the bounds of traditional thinking), and thirdly they are handcuffed by rules and regulations.

Of course, in order to actually beat these guys you need to have at least $1500 to invest, a lot of patience, and enough time to spend learning the ropes, gaining an understanding of what causes what and what's going on, and staying aware of what's changing. If you can do this, or if you can get someone else to help, in my opinion you can do much better for yourself. For example, I've been doing this for almost five years now, and I've averaged 20% per year in Canadian Dollars (almost 30% in US Dollar terms because of the fall in value of that currency). Of course, the market has been going up (and that's the best time to learn the ropes- when your mistakes can be hidden by a rising tide), but compared to your average mutual fund... I'm doing three times as well. In fact, the most widely held funds have single digit returns in the last five years (as I recall).

According to the table below, the returns are slightly better. However, this makes things look better than they are because the most widely held funds now are usually the most widely held funds because of recent performance (they are invested in after the good returns came, not prior).

Large funds: These funds have the most assets under management in all categories *

Company	Net Assets	1-year	3-year	5-year
American Funds Grth Fund of Amer A	83.87 Bil	11.02	12.84	10.84
American Funds Invmt Co of Amer A	73.62 Bil	15.06	12.03	9.38
Vanguard 500 Index	70.35 Bil	16.05	11.39	8.60
Fidelity Contrafund	68.71 Bil	10.66	14.44	12.19
American Funds Washington Mutual A	67.82 Bil	17.81	11.54	8.61
Dodge & Cox Stock	67.56 Bil	16.59	15.85	13.74
American Funds Capital Inc Bldr A	65.66 Bil	20.25	16.17	13.11
American Funds Capital World G/I A	64.47 Bil	18.98	20.28	17.16
American Funds Inc Fund of Amer A	61.81 Bil	19.25	13.50	11.36
American Funds EuroPacific Gr A	56.23 Bil	16.04	21.22	16.65

* Performance numbers for periods greater than one year are annualized. Excludes mutual funds closed to new investors.

http://moneycentral.msn.com/investor/partsub/funds/topfundresults.asp?View=Large&Category=All&Symbol=$LRGF