HEDGEfolios year-to date stock performance for 2008 (through 02/29/08 close) was up 1.43%.

Over the same time period, the S&P 500 index was down -9.36%.

At the end of February, the HEDGEfolios universe consisted of 3,471 stocks.

Commentary: Another brutal month is over. Unfortunately, that does not mean the decline is over. Despite bailout plan after bailout plan, stocks could not withstand the pressure of economic weakness from housing, consumers, poor corporate earnings and credit markets. Inflation is accelerating, the US dollar is crumbling and the economy is barely growing (even if the government measurements are accurate.) During the month, HEDGEfolios increased bullishness to end February with 68% UP signals. While the leap day markets declined by 2.7%, HEDGEfolios managed to only lose 0.7% on the day. I would like to have been more hedged to the downside in front of this move, but my signals are almost entirely dictated by what I think the majority of investors expect will happen. For most of February, an optimistic tone was building. It will be interesting to see whether the last day’s action will wipe out the positive sentiment. Regardless of all the challenges, HEDGEfolios finished with a very small gain during February and is still in the black for 2008.

• 2007, HEDGEfolios performance was +21.78% vs. + 3.55% for the S&P 500 index
• 2006, HEDGEfolios performance was +25.54% vs. +13.62% for the S&P 500 index
• 2005, HEDGEfolios performance was +19.99% vs. + 3.00% for the S&P 500 index
• 2004, HEDGEfolios performance was +31.19% vs. + 9.00% for the S&P 500 index

Disclaimer: Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to HEDGEfolios. These performance figures have not been audited or verified by an outside party and are NOT in compliance with the CFA’s AIMR Performance Presentation Standards. They don’t net out any transaction costs such as commissions or management fees and 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.

Last fall, I wrote about my Senior Concerns and because my fears have only gotten worse, I am going to repeat them in another post. The markets since 2000 have been devastating a generation. Many seniors lost a large percentage of their investments when the markets crumbled from 2000-2003 and I doubt they rushed back in to participate in the four year rally that ended in 2007. The current crisis is even worse. Home prices are declining. Each time the Fed cuts rates, we are severely cutting into the incomes retirees make on Certificates of Deposit and other fixed income investments. Meanwhile, inflation and the weakening dollar is making their expenses for food, heating and medical care difficult to handle. All that is terrible and yet, it might seem that many of them can rely on pensions or cash held in money market mutual funds. As I have written here in the past, I question the true value of assets in those funds and I hope they do not worsen. Politicians can claim that the stimulus plan they already approved or the new stimulus plan they are working on will help everyone out. The words “too little…too late” are extremely applicable here. Nothing they can do will be sufficient. How many $600 checks will seniors need to compensate for the impacts our Fed policy has had? Our social security and medicare/medicaid programs were already a financial disaster before the credit crisis arrived. I fear the short and long term effects from current problems have provided them a deathblow. The Fed can do all it wants to stimulate the economy and even if it saves jobs for many citizens, it cannot save jobs for people that are already retired. The Treasury can bail out as many subprime borrowers as they want, but I wonder how many seniors were the cause of the mortgage mess. So what to do? As this devastation continues, please consider the needs of your older family members and neighbors. The government is making the situation worse for them so we should not simultaneously rely on the government to make it better.

I opposed the President’s Credit Card Stimulus Plan and I still oppose it. So hearing President Bush talk about the “stimulus package 2″ that people in Washington are working on set me off. I guess I wasn’t paying attention to know this was going on. But then it was reinforced when Senator Bennett (R-UT) said something like “as we formulate the stimulus package” during the Fed Chairman’s “guesstimony” in front of Congress today. Even before I know anything about what these people are drafting, I will tell you that I oppose it. Doesn’t matter whether I do or not because they’ll do whatever they want. But this is getting ridiculous. Actually, it was already “ridiculous” but I cannot find a word in my pretty decent vocabulary to properly convey how I feel. Maybe “obscene” might work.

Roger Clemens is being investigated for supposedly telling lies to a Congressional committee about taking performance enhancing drugs while playing a game. After watching the last two days of Bernanke “testimony” on topics that are actually important, I question the double standard between the treatment of rockets and helicopters.  Okay, so maybe Bernanke isn’t intentionally misleading the committee, but there is a lot of evidence he is not being accurate or telling it exactly like it is.  Far more evidence from credible sources than was the case with Clemens in my opinion.

“The Wall of Worry” is cited when the market heads higher despite (or supposedly because of) skeptics.

“The Slope of Hope” is cited when the market heads lower despite Permabulls and Pollyannas.

So now that we are in this sideways pattern I’ve decided to call it “The Plain of Pain”.

I know the market got excited yesterday when IBM announced a $15 billion increase to its buyback plan. I wasn’t overly impressed, as you may know that I am not a huge fan of buybacks (click here and scroll down). Bulls love to hype them when they are announced but the realities of share repurchases are not so exciting.

Listening to the cheerleaders cover the story yesterday, you might be led to believe that IBM increased its guidance and announced the buyback because they were going to be generating so much extra cash they wouldn’t know what to do with it. The reality is that the 5 cent increase in EPS guidance came directly as a result of the reduction in shares expected from the buyback. The cause and effect is exactly the reverse of what many investors were told yesterday.

Don’t take my word for it - here is what the company said in its press release:

IBM said it expects to spend up to $12 billion on stock repurchases in 2008. In January, the company said it expected 2008 full-year earnings per share of $8.20 to $8.30. IBM said the anticipated share repurchase activity could add up to $.05 to 2008 full-year earnings per share. The company now expects full-year 2008 earnings per share of at least $8.25, or year-to-year growth of 16 percent. The actual earnings per share impact will depend on the total amount spent, the timing of repurchases and market conditions.

In 2007, IBM had operating cash flow of $16.094 billion. During the year, they purchased $18.8 billion of their shares. I find it hard to get too excited about IBM’s ability to generate so much extra cash when more than 100% is spent on company shares. Where did the money for buybacks come from? Mostly it came from $21.744 billion of new debt.

According to IBM’s press release announcing this year’s repurchase plan, they intend to spend about $12 billion on their stock. Hopefully they’ll have more than that in operating cash flows this time. Don’t get me wrong - I thought the 2007 revenue growth and operating performance was good. However, as it relates to their 2007 repurchases and the new announcement for 2008 I was not impressed.

The rest of the market seemed to be and that is more important than what I think. (Note that I have had an UP signal on IBM since February 11, 2008.) The fact is that the average price per share of IBM stock repurchased during 2007 was $105.29. When yesterday’s buyback hype started, the stock was trading at $110, a whopping 4.4% higher than what they spent on 2007 repurchases. Sorry, but that doesn’t impress me as a great investment. Not a bad one, but not great either. What made it great to others seems to be the very act of announcing buybacks which caused a 6% increase in one day. I guess what this company needs to do to make investors happy is to just keep announcing $15 billion buybacks. That did much more for the stock than increasing revenues by 8%.

Microsoft bought Hotmail for about $400 million during the internet boom to enhance its online presence in 1997. If you go back in history and evaluate their investments into and purchases of other content companies to round out their internet offerings, it is not pretty - unless you like blackholes. Spending $240 million to invest in Facebook at a valuation of $15 billion is steep. $6 billion for aQuantive was pretty steep. And yet $44.6 billion for Yahoo is the current question. After yesterday’s comScore data on Google ad clicks, I have to wonder “what is Microsoft buying?” If you believe that the comScore data is indicative of future and prolonged economic weakness, then Microsoft is paying way too much to get into a business that is declining.

I like Google - primarily for the utility of their product and the respect I have for the corporation’s pursuit of innovation. As for the stock, HEDGEfolios has had a DOWN signal since November 12, 2007 when it was trading at $657.74. To be fair, I have been very even-handed on my opinions for the likely direction of the stock. Since I first started covering GOOG in September 2004, I have given 14 signals - 7 UP and 7 DOWN. Only one of those was wrong with a loss of 10%.

Throughout this whole time, I have watched Price Targets on GOOG get ramped up and often in $100 increments. Two years ago, I wrote a post called Moving Targets - if you read it, you know I don’t do price targets and I have little use for them. They are great for hyping stocks, especially for high profile / high growth momentum stocks like Google. When you had Cramer or some analyst seeking attention by slapping big price targets on GOOG as it was heading higher, they got a lot of positive attention like the $985 target given at the end of October, 2007. But just consider where we are today on this stock relative to the targets. Click here for the current summary of GOOG estimates. Pretty pathetic.

One of the big problems for using price targets is that they encourage you to buy when the stock slides. Take a listen to Cramer’s 11/14/07 explanation of how to buy GOOG on the way down and when you do, just know that the Michael Steinhardt he references is not me. For the record, I don’t advocate “averaging down” either.

The next time you hear a price target increase being hyped to encourage you to buy a stock, please consider this example.

To make people feel better about high oil, it is adjusted for inflation and we are told how today’s prices are much less than the record inflation-adjusted price per barrel. That used to work, except now the previous peak in late-1979/early-1980 is within a few “inflation-adjusted dollars” of today’s close. Click here for a nice chart and click here for some key dates in oil history (inflation-adjusted of course!)

Almost everything is adjusted for inflation these days, not just energy. You can find inflation-adjusted data on average earnings or food or education or housing or gold or wheat or corn (you name it!).

All these efforts are meant to convince us that current prices are nothing to worry about. After all, according to the experts, prices are supposedly less than extreme peaks that formed decades ago. Since I live in the here-and-now, I am not soothed by this strategy. What bothers me today is that if you look into the items I have mentioned, almost all of them are being mentioned at the same time. Right now! And if you pull up the historical inflation-adjusted records, you’ll see that current prices are often higher than or roughly equivalent to the inflation-adjusted records.

So you might imagine that when I listen to economists and fund managers and “financial journalists” telling me that inflation is not so high, I wouldn’t mind if they choked on their inflation-adjusted hot air. “Bulloons” were out in force to downplay the PPI data today. Hearing CNBC’s editor Dennis Kneale say that current inflation is “no big deal” and that it never will be is just classic. But while I expect to hear stupid stuff like this from him, it’s more troubling to hear the Fed’s #2, Don Kohn say the following:

“I expect the run-up in headline inflation to be reversed and core inflation to edge lower in the next few years.”

AND

“I do not expect the recent elevated inflation rates to persist. The adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States.”

It seems that Kohn is looking at a new figure I call “Inflation-Adjusted Inflation.” He has been downplaying and ignoring inflation for many months. Today he is claiming that the inflation we have now is going to head lower “in the next few years” and that it will not persist. He has no clue. He and the Fed failed to forecast the inflation we have now. What makes anyone believe he has the economic crystal ball to tell us that today’s “Inflation-Adjusted Inflation” is going to decline and when it’s going to decline? He has no clue.

The prospect of banks who have so little capital bailing out Ambac is absurd.  For much of the past 7 months, we’ve been hearing a lot of criticism about the cozy relationship between the rating agencies, banks and monolines.  Now that we have the rating agencies threatening downgrades, suddenly it becomes acceptable for government regulators to encourage an even cozier relationship between the banks and the monolines.  Desperate times call for desperate measures.  What’s next?  I keep waiting for someone to suggest that the rating agencies should invest a few billion in the monolines.  There seems to be so little integrity left out there that I wonder what conflicts of interest are unacceptable.