****Performance has been updated through 6/13/06 - please read through the following disclaimer and find the updated figures at the end of the post.

Before I discuss Hedgefolios performance, I want to cover myself with some cautionary language.

So here goes:

Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to Hedgefolios. That part is easy given that Hedgefolios is entirely free right now, but when I start accepting subscriptions - the same nonsolicitation clause will apply. Regardless, you should be very hesitant to rely on any newsletter’s performance figures unless they are audited or verified by an outside party. To be as transparent as possible and remove any question of Hedgefolios credibility, I am hoping to have audited performance figures by the end of 2006. Until then, you need to be aware that any performance figure on Hedgefolios is NOT in compliance with the CFA’s AIMR Performance Presentation Standards and does not net out any transaction costs such as commissions or management fees. They are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire Hedgefolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.

All this being said and under those parameters, Hedgefolios performance for stocks:
2005, the Hedgefolios performance was +19.99% vs. +3.00% for the S&P 500 index
2004, the Hedgefolios performance was +31.19% vs. +9.00% for the S&P 500 index

As the year goes forward, I will update this post periodically to let everyone know how Hedgefolios is doing.

UPDATE: Hedgefolios stock performance for 2006 year-to-date (through 6/13/06 close) was up 13.02%. Over the same time period, the S&P 500 index was down 1.97%.

Some stocks are bottoming. Some stocks are finally bending over. The market still looks bad to me, but not as bad as it looked two months ago. How’s that for being decisive? I wish I could provide some clarity on what’s coming, but that isn’t going to happen. Not because I don’t want to, but because I have no clue. And anyone that says they have certainty in either direction is just not believable. I admire their conviction, but it’s more of a wish or a guess than anything else.

At times during the past two weeks, I saw a glimmer of hope that we were gaining some positive traction - at least enough to slow the decline and then, it fails and we slip away once again. Last week, strong stocks got weak and weak stocks got weaker. I saw minimal leadership outside of defensive stocks such as some of the REITS, utilities and interestingly enough, small and midcap regional banks. But for the most part, there were very few stocks that were starting new and decisively strong upward moves and only a few that continued with prior positive trends. The only other good thing for me to say is that the downward moves were not as dramatic as recent weeks. I know that may be confusing given the declines we have seen, but from a technical perspective, it wasn’t as bad as it looks. That being said, I am not yet in the camp that says we are going to get a washout decline (I am still stubbornly holding off on my capitulation post.)

Today was pretty at times and ugly at times and at the end - it was just pretty ugly. The pretty part was the battle for most of the day that occured just north and south of the opening values in all the major indices. It really looked like we were finding some support in the face of uninspiring PPI and retail sales data. Best of all was the volume which was lending credibility to the back and forth action. Then the last hour came and we had the decline, rally and ending dropoff - as I said “pretty ugly.”

One trend that concerns me though is the support that I think is coming from international equities into US equities. It seems that we do ok until the foreign markets close, and then we sell off a bit easier. If I am right on that, then we may not benefit if international markets stabilize. While the CPI data will dominate Wednesday’s action, I am feeling a twinge of numbness to Fed data. I actually believe that investors are starting to get a bit tired of worrying about Bernanke. Maybe it is just my own desires to stop hearing the bs, but I think the decision to avoid monetary policy discussions in his speeches and Q&A sessions was helpful. I am hopeful that a bad CPI number will not bring on huge selling and that a good CPI number will not bring a return of the one and done crowd. Lastly, I am spending a tremendous amount of time watching the index based ETFs. I expect they will be the first vehicles that large investors will use to reenter the markets and when I see them start to stabilize, I will feel better about the possibility of a real rally.

Are you spending more time figuring out what to sell or what to buy? Unfortunately, most investors start thinking about selling when they should be deciding what to buy. Hopefully you are not in that crowd because they make money… not for themselves, but for other people. I know this sounds a bit nutty coming from someone as “negative” as me, but I really encourage you to start figuring out what to buy. NO, I AM NOT TELLING YOU TO BUY INTO THIS MARKET AND I AM NOT CALLING A BOTTOM. I am just saying that now is the time to work overtime and decide what stocks you would want to put in your portfolio once they stop declining. You probably have some time before we start an upward move but I don’t think it makes sense to put your buy list together in a hurry. Use this selloff to zig while others are zagging.

The saying “patience is a virture” applies to stocks as well as everyday life. Unfortunately, sometimes patience is a virtue, until…. it leads to ignorance and ignorance with stocks is not bliss. It is painful and as the pain continues you start to question why you are holding on. When I change a signal and the stock moves dramatically in the wrong direction, I evaluate whether I made a serious error or whether I need to be patient. If some fundamental news makes it clear that I was wrong, I’ll admit my mistake and change the signal accordingly. Often, however, I don’t find anything to alter my incorrect view, so I decide to tough it out. As weeks go by and the signal becomes increasingly wrong, it appears that ignorance is setting in.

If you sort MANAGE for the worst performing signals in HedgeFolios, you’ll see a lot of patience that apparently has led to ignorance. I have more signals that are wrong in excess of 10% than I have ever had since I started doing HedgeFolios over 3 years ago and I apologize for that. Each week I take a long look at signals that are so wrong and for one reason or another, I stay patient on most of them. Last week, POZN exemplified vindication for this strategy. If you pull up POZN on a chart and compare it to HedgeFolios, you’ll see that I gave a DOWN signal on 12/19/05 at $9.48. It promptly spiked up to a high of $18.62 ( March 2nd ) and by then, this signal had a loss of 96%. So much for patience! Fortunately, since March the stock has declined, and last week, it fell off a cliff to close the week at $5.52. In one week, this signal went from a 45% loss to a 42% gain. So much for patience!!

I know it’s tough to sit with a loser and be patient. You have to watch these stocks very closely and objectively evaluate anything that might tell you to admit your mistake. However, if after all this analysis you still believe in your current position, you might be better off sticking with the loser. Your patience may be rewarded just like mine was with POZN.

There has been a tremendous amount of hype and hope about trying to find bottoms. Are we there yet? Are we there yet? Is it over? Did we capitulate? Was it a short covering rally? Are the “bargain hunters” loading up on all those bargains? Did we bounce off a support level, complete an Elliott wave, end a fibonacci retracement, or was it some other form of technical voodoo? Sometimes the answers are less important than the questions. Whenever I hear people grasping to find any answer that will stick, I evaluate all these questions and the desperation that accompanies them. Usually, the answers we accept today, we reject tomorrow and begin the pursuit for the next answer that will inevitably be proven false. We have had 3 years of runup without a meaningful pullback and very few questions were being asked along the way. Obviously, most people assume that stocks should go up and don’t need an explanation when that happens. Now the questions are flying after a few weeks of market weakness and everyone wants to know how to find a bottom. I have always felt that bottoms find you, you don’t find them. I didn’t find a bottom in yesterday’s v-shaped action - but if we get a few more positive days, the bottom just may find me.

I need to learn how to speak Farsi so I don’t get confused by all the translated comments from Iranian politicians that are hurting our markets. Maybe we are being punished for starting Iran’s nuclear program during the Shah’s reign - as is often the case with our role in other countries (say Iraq / Saddam), we end up fighting what we helped create. I want to give the Iranians the benefit of the doubt and not assume that they are lying all the time. So I am going to blame it on the language barrier and give them a pass for now. NOT!! I don’t believe them for a second, but since I try really hard to avoid purely political discussions on Hedgefolios, I am going to focus on their impact on the oil and stock markets.

As I mentioned, I have been struck by all the conflicting statements coming from Iran so I spent some time googling the various promises and threats about their nuclear program. There are far too many to put on this post but just spend a few minutes doing your own research and I am sure you will get a flavor for what is going on. They promise, then they unpromise. They threaten, then they unthreaten. That isn’t good for global peace - but to me, what is worse is the way the markets are reacting to all of it - rallies on nice promises and selloffs when they are broken. I expect Iran to continue this back and forth behavior for quite a while and at some point, I suspect that we’ll get numb to all of it. In the meantime, I am going to try to ignore comments from Iran when I look at the Hedgefolios signals each week.

Pick an asset, any asset - they are all getting kicked. One of the troubles I had with investments for the last year is that almost every investment asset class was highly valued, if not overvalued. Gold, Industrial Metals, Oil, Real Estate, US Equities, International Equities and some portions of the yield curve were pretty lofty. Now we have a situation where they are all declining at the same time and you have very few choices to park your money. Mattresses almost look like the best place, but in reality, I expect that the most likely receptacle for all this capital is US Treasuries. We were finally coming out of Greenspan’s “conundrum” and now, a return to a flattening yield curve and at the worst case, another inversion seems probable. I have no clue how long it will last but my guess is that the first opportunity to put money back to work and we will be hearing a lot about money on the sidelines. If you play with fixed income, I hope you have a very strong stomach. The volatility of debt instruments is tough under any circumstances but it’s going to get ridiculous if money comes in and out every time we have a love or hate relationship with other asset classes.

There were the inevitable reports of “Bargain Hunters” swooping in to the market this morning. I guess it was due to yesterday’s commentary that the market action was a positive. Yep - a positive - because it didn’t finish on the bottom, the smart money came in at the end of the day, and that all-important indicator: the Dow finished above 11,000. I know it was only 2 points above 11,000 but who am I to criticize? By the way, in an earlier post I was on the lookout for fundamental smarties who would suddenly spout the most ridiculous forms of technical analysis and this almost qualified. If only they had thrown in some good techie buzzwords like “wave” and “fibonacci” - but they didn’t.

I am wondering how much worry we need for the wall to be perfect. I have been worried for 2 months - maybe I should measure my wall. Actually, I always found this “wall of worry” talk to be a little goofy so I won’t be building any walls or trying to climb them either. I’ll leave that up to the true believers or should I say “true worriers?”

Bob Pisani of CNBC fame just mentioned the “C” word - capitulation. He was careful to say it wasn’t his word but that he was just repeating what he had heard on the floor. I have been saving my capitulation post for an appropriate time and this isn’t it. As you might expect, I have a different take on this often misdiagnosed phenomenon and I don’t see its relevance right now.

Back to those “Bargain Hunters” that inspired this post … What does a Bargain Hunter look like? I have never figured out how to identify them. I have seen quite a few stock order tickets and never noticed a box that required me to check when I or a client was a “Bargain Hunter.” Do bargain hunter floor traders wear a special jacket to signify their intent? I know what a bargain hunter looks like in my neighborhood. They typically drive around early in the morning with their overflowing pickup trucks and dig through the trash before the professional garbage collectors come. I also can identify bargain hunters during garage sale weekends. But for the life of me, I cannot figure out what a stock bargain hunter looks like and I also have the same vision problems when trying to identify their archenemies - the Profit Takers. Since they bring it up quite frequently, other marketwatchers must be much better at it than me so I am confident I will get some help with this some day. In the meantime, I find it hard to believe that the small decline we have had over the past few weeks has suddenly turned stocks into bargains. Besides, when the Dow was above 11,000 for the past 3 months, I never heard these bargain hunters claiming that the market was overly expensive or fairly valued for that matter.

Oh, and by the way, if Bargain Hunters really did swoop into the market this morning, they didn’t do a very good job.

Ben Bernanke apparently has a new title and it’s a bit of a promotion - from “Chairman” to “Whipping Boy.” It used to be said that Chairman Greenspan was the second most powerful man in the world and / or the most powerful man in finance. Based upon a lot of the recent commentary and market action, Whipping Boy Ben may be even more powerful than his predecessor (hence the “promotion”.) It now appears that Ben is responsible for ALL the faults and shortcomings of everyone in the market. Sorry Charlie - he is the real “All Powerful Oz.” When a stock goes down, blame Ben - he controls everything and allows you to take no accountability for your own decisionmaking. It’s so much easier. You still lose money, but isn’t it great to blame one guy (as long as it’s not yourself) for the market’s problems?

Of course I am being sarcastic, but there is way too much truth to this absurdity. This market is way too focused on what one guy is saying and doing or what he should say or should be doing. The last time I checked - our market is made of millions of investors who are responsible for determining equity prices. I’d like to get back to the days when we believed that individual participants impacted the market and individual companies were responsible for their financial performance.

Let’s reflect on some facts - the prior Fed helped to inflate the economy in the 90’s and then helped to deflate it. Most likely, they went too far on the way down to 1% but not too many people were concerned about that. Chairman Greenspan’s Fed raised rates 14 times in a row and except for the last few of his moves, I didn’t hear too much complaining. Even before Bernanke took his oath, investors started betting that would put an end to it. Now that he has disappointed them two times, Ben is somehow getting it all wrong. I have heard commentators (many of whom are economists) appear on CNBC and Bloomberg who are now talking about Ben’s “credibility” problem and his “image.” It’s laughable coming from economists that place their bet on almost every economic data point and as you would expect, most miss the actual results when they are released. It’s way too tough to predict those things and it’s even tougher to predict what the Fed has to predict. As far as I am concerned, the real credibility problem is with the rest of us - investors, economists and financial media that are focused on blaming Ben rather than looking in the mirror. For my part, I cannot remember one wrong signal in Hedgefolios that was a result of anyone’s failures except my own and I know for certain that Ben had nothing to do with it.

As we know, “Don’t fight the Fed” has a traditional expectation that as the Fed tightens, stocks decline and vice versa. The past two unidirectional moves of the Fed have not supported that theory. From January 3, 2001 when the Fed Funds Rate was at 6.5% until they stopped lowering at 1% on 6/25/03, the S&P 500 declined 27%. The current sequence of rate hikes started on 6/30/04 and yet, the S&P 500 is up 11% over the past two years. I am sure all the experts who are critical of Ben have a very good explanation for this and yet, I really don’t care.

This market has problems and in my opinion, the infatuation with Bernanke is only masking the bigger issues. I want the Fed to be done so I don’t have to hear all this “credibility” talk. Maybe then we can get back to a market that has more to do with companies, profits, losses, valuations, investors, etc. and less to do with a whipping boy.

There’s been a giant Snow Job going on around this country for the past three years and it is has been unjustified. Almost since his arrival, Treasury Secretary John Snow has been rumored to be on the way out. I am not quite sure what he did wrong and in the age of politicians getting credit or blame for stuff they had little or no actual control over, the results were rather good by my count. From the date of his nomination to the date of his resignation, the S&P was up 38%, the Dow was up 28%, and the Nasdaq was up 50%. Economically, the GDP had an average annual growth rate of approximately 3.8% - a figure matched or exceeded by only a few prior Treasury Secretaries. Significant tax legislation was passed, regulation was improved and the dollar was relatively stable.

So what went wrong during his tenure? Iraq & Katrina come to mind but he didn’t have anything to do with unnatural or natural disasters. China and the rest of BRIC became economic powerhouses and created huge trade deficits because American consumers liked the products and the pricing. For whatever control he has on the trade deficit, I don’t see how he could have prevented BRIC’s influence. Oil went up over 100% but I struggle with his part in the energy crisis or for that matter, the rise of other commodity prices. I have heard that he did not do a good job defending himself or promoting how well the economy was doing - maybe he was too busy actually trying to do his job. He also failed to tell another country (China) what to do with its currency. At some point, I believe we need to stop expecting that the United States or its Treasury Secretary should be able to dictate what other sovereign countries do.

Regardless of the justification, Secretary Snow is gone. Out with the old, in with the new. I only hope that the nominated Hank Paulsen does as poor of a job as Mr. Snow has done. We should be so lucky.