HEDGEfolios year-to-date stock performance for 2008 (through 05/30/08 close) was up 13.17%.

Over the same time period, the S&P 500 index was down -4.60%.

At the end of May, the HEDGEfolios universe consisted of 3,420 stocks.

Commentary: At the end of April, I said that I doubted the soft landing concept and that HEDGEfolios would stay so positive this month. I was not so accurate on those assumptions. The economic data (as presented) was certainly Goldilocks-like and appeared to conform to the possibility of a soft landing. Jobs data wasn’t so bad, inflation was bad in the PPI, not so bad in the CPI /PCE measures, etc. etc. But like anything else, we all see what we want to see. Those who feel the worst is behind us buy into any number that support their cause and the doom-and-gloom crowd love to pick apart the data and explain how fraudulent or wrong it is. In the end, at least in my world, the bulls had the final say during May. Other than a sudden awakening to and fascination with high oil prices, the stock market as measured by the S&P 500 index was relatively calm and boring with a slight upward bias of 1.06%. I started off the month with 80% UP signals and had expected that to decline. It did - but only dropped to 76% and during the month, turnover was lower than normal with almost an equal number of new UPs and new DOWNs each week regardless of the dominant market direction. To say the least, I am impressed by the bullishness - justified or not.

Here is the performance chart of HEDGEfolios vs. the S&P 500 for 2008.

Prior Years’ Performance:

• 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.

Yesterday’s oil price decline was impressive given the inventory report. However, this one-day oddity was made out to be some evidence of the bursting of the “oil bubble.” The stock market bulls and their spin of the oil bubble is quite a farce.

What do we mean by “bubble” anyway? One way to define a bubble is to call it a surge in prices beyond what supply and demand would predict. Problem is that we do a pretty poor job of predicting supply and demand.

First of all, I have no idea whether oil is a bubble or not or whether commodities as a group are a bubble. I don’t waste much time on pursuits like that. More importantly, I have no real idea what good it does to either define it as a bubble or to quantify what percentage of the bubble we should blame on specific groups. None of this “analysis” will result in lower prices.

But the bubble talk certainly is a fun tool for the tools permabulls. Somehow, they have become experts on what constitutes a bubble despite their failures to recognize it in the 1999-2000 tech stock bubble. Oh yeah - most of them didn’t believe the housing market from 200-2006 was a bubble either. But now, they know a bubble when they see one as it relates to oil. Okay - I got it.

The Nasdaq Tech Bubble of 1999-2000 ran up about 150% in less than two years and then declined about 75% from peak to trough. And yet, most permabulls kept denying that anything was bursting until the fall of 2000 despite losing 20% from the top.

The housing bubbles in certain metropolitan areas like Phoenix, Miami, San Diego et al saw prices run up a few hundred percent from 2000-2006 and there were quite a few people saying it was pure supply and demand - not a bubble. Since the stock market benefited from the housing bubbles, you didn’t hear too many of the bubble experts we have today opining on the size of the bubble or what would happen to the economy or stocks if it burst or what percentage decline signified the beginning of a bubble bursting. Yet, now many of these same morons proclaim that a 25% decline in some of these markets is a bottom. I am not sure how they know that.

And neither do I know how they are so certain that oil is a bubble. Consider their past performance.

Somehow, yesterday became evidence that the bubble in oil was bursting. It’s funny really. We don’t know even know if there is a bubble. I know we want to believe it’s a bubble because that means it’s not our fault and its only temporary. But none of that makes it true. And if we concede that oil prices are totally out of whack, then what evidence do we have to know that it won’t get bigger? Optimism is not fact.

Regardless, the permabulls and the media love this bubble spin. And what it really comes down to is that if they convince everyone that it is a bubble, that is good for stocks. If it’s not a bubble, then the economy is going to tank even worse than it already will. And we cannot let that appear to be a possibility. So spin away. Keep telling everyone that it’s just a bubble because bubbles burst and then we get lower prices and then the economy and the stock market will be back to La La Land - and hopefully rebuilding its own bubble that everyone seems to love. They suggest that all the fast money speculating in oil will have to find its way to stocks and voila - you get an asset allocation rally. So yesterday’s decline in oil prices was just perfect for the permabulls. To them and anyone else desperate for lower oil and stock market rallies, a 3% decline was proof that the bubble was beginning to burst. After all, if we claim that it is bursting, then it must have been a bubble, ipso facto.

So it’s all spin. If you just look at the facts, oil declined to a point where it was one week ago. That’s it. Maybe oil prices will come down a bit. Let’s say its down 25%, and we get to $100 per barrel. Is that the size of the bubble? We lost 75% of the tech stock bubble. Are we going to lose 75% of current oil prices? That would put us back to about $32. But what if this oil bubble is only as big as the housing bubbles that people want to limit to 25%?

We have multiple standards for bubbles. We fail to recognize bubbles that benefit us (housing and stocks) and we are quick to identify bubbles that hurt us (oil). We underestimate the size of the bubbles that benefit us and we exaggerate the size of bubbles that hurt us. We find it really easy to say a decline in a bubble that benefits us is only a temporary and healthy pullback, while we are quick to suggest that a decline in a bubble that hurts us is the start of a massive bursting and return to “normality.”

Stop reading my negativity - go back to the regular media and all that bubble spin.

The old saying goes that “hindsight is 20/20″. Many people think that 20/20 vision supposedly means perfect, but it just means “normal.” In the ophthalmologic sense - to have 20/20 vision means that when you stand 20 feet away from an eye chart - you can see what the “normal” human being can see from 20 feet. (in metric it’s called “6/6″ vision). So what is 20/200 vision? In the United States, 20/200 is the cutoff for “legal blindness.”

In the figurative sense, “20/20 Hindsight” suggests that if we look backward, we have full information and everything is suddenly so obvious, regardless of what we thought in the past as things happened and we had imperfect knowledge. Usually, the term is sarcastic in response to criticism of a decision and implies that the critic is unfairly judging the situation.

Investors are fond of saying “The market looks forward, not backwards.” As I have written before, that concept is grossly misused. It’s a great way of forgiving serious forecasting errors in the past and ignoring the serious realities of the present and dreaming of better things to come in the future. The problem comes when investors listen to today’s pronouncements from commentators who were so wrong in the past. I’d prefer that each of you and for that matter, every investor would make up their own mind after doing their own research and analysis instead of blindly following the thoughts of others. That goes for whatever I write as well.

This morning, Bloomberg’s Betty Liu interviewed Douglas Altabef, Senior Managing Director of Matrix Asset Advisors, and asked (I am paraphrasing here) - .”…inflation really starting to hurt companies. How can you see a market rally with that possibility?” The response went something like - “Well, let’s remember what the market is - which is a forward indicator. And the market started to sell off last July anticipating what we are in right now - which is economic slowdown. It might be a recession - it might be a slowdown. We will only really know that in retrospect.”

I almost fell over laughing at that one. First of all, I won’t remind you why the market started declining last July but I will suggest it wasn’t due to foresight or anticipation.

Please click on this link and hit the play button to watch the Bloomberg video so you can see and hear it for yourself in its entirety.

In light of that commentary, let’s evaluate his previous comments on Bloomberg over the past year. 20/20 or 20/200? You decide. Did Altabef forecast inflation problems last year or the rising cost of oil or that the economy would slow because of those factors or that the subprime/credit crisis would hurt the economy and the stock market?

On oil, inflation and the stock market:

Douglas Altabef from Bloomberg’s archive on June 14, 2007 (almost exactly 1 year ago).

“The core news was as expected,” said Douglas Altabef who manages $1.7 billion as senior managing director at Matrix Asset Advisors Inc in New York. “If you contextualize the higher number and say it’s because of energy, then focus on the core and it’s steady as she goes.”

Douglas Altabef also from Bloomberg’s archive on June 14, 2007 snippets from the article Matrix’s Altabef Says Energy Prices Not Affecting U.S. Stocks

“The market has been living with oil at 60-plus dollars a barrel for two years now. I don’t think that the shock factor is going to be very significant. I think there’s really more of an effort to look at the overall economic picture.” “The fact that we had a higher-than-expected PPI number today, mostly due to energy prices, and that the market is up so high this morning tells you something about the resilience of the market, vis-a-vis energy prices.”

On subprime, financial stocks, the credit crisis and the stock market:

Douglas Altabef from Bloomberg’s archive on August 27, 2007 snippets from the article Matrix’s Altabef Says Stock Market May Have Overcome ‘Hysteria’ or you can click here and watch the video.

“I don’t know if we have seen the worst, but we have probably seen the worst of the hysteria” in the stock market.”In a moment of hysteria, the market paints with one brush. It doesn’t differentiate between the great, good and mediocre,” though once we get over that and reach the stage of anxiety, “there is selectivity. People start to look again and see where the opportunities are.”

“I do think that we have come into a time where people are starting to step back and are looking at the overall economy” and realize that, so far, the subprime issue “did not sink the economy. It may have slowed it down, but it did not stop growth. And we do not think this will stop growth.”

Douglas Altabef from Bloomberg’s archive on December 18, 2007 (click here for the video). In it he suggests that financial stocks would do well in the next few months and the selloff in their shares was “overextended”.

20/20 Hindsight is “normal”. A “normal” person can look back and see what happened over the past year and know all that there is to know. We should all do that. We should learn what we did not have the foresight to predict and maybe it will make it better the next time. However, we should never look back and be blind about what really happened. That is 20/200 Hindsight. More importantly, we should never use that failed assessment of the past to predict the future.

Investors want to participate in the amazing growth of China and that is understandable. With all the Chinese stocks trading in the US markets, it has become increasingly easy to play along. And for most of the time since listings began, the normalcy of trading these stocks has allowed American investors to forget that they were investing in companies that exist in a Communist country. However, last weekend’s reorganization of the Chinese telecom industry by the government to make sure that there was sufficient competition and that no single company became too powerful should serve as a very important reminder. Communist governments reserve the right to adjust key aspects of their economy and communication certainly qualifies as a critical part of their country. If you bought China Mobile last week because you liked their dominance in the industry and the future earnings potential that dominance suggested, your investing thesis was changed overnight. You may not like it, but that is part of the deal when it comes to investing in Chinese stocks. The Chinese government dictates what happens there and since it is their country and their system, it is not our place to judge. Unfortunately, this risk has been largely ignored for a long time and I suspect that this telecom rearrangement will not do much to change how American investors look at Chinese stocks.

“This InBev’s For You.” That doesn’t sound right. “This Stella’s For You.” That doesn’t sound right either.

Hopefully, this will be the last time I mention how much I dislike rumors about buyout deals being used to sell newspapers and increase stock prices. I doubt it.

Maybe the InBev / Anheuser Busch deal finally gets done or maybe it just keeps going stale like when it was rumored in February 2007 (click here) or when it was rumored in October 2007 (click here) or when it was rumored in February 2008 (click here).

I love beer - I hate stock rumors. If this deal doesn’t happen, I suspect there will be a few investors crying in their beers over the drop in BUD stock.

Much of capitalist finance theory is based upon the concept of “maximizing shareholder value.” Without a doubt, I believe in decision-making based upon increasing the value of the firm, whether public or private. However, this concept is abused in its use and assumption. There are times when investors are comforted by the assumption that management’s decisions are “in the best interest of shareholders.” Whenever they hear that a decision is going to “maximize shareholder value” or that it’s “in the best interest of shareholders” - they really should be concerned.

Jerry Yang and David Filo tried pulling that line when the played hard to get with Microsoft. A few big investors even jumped on board and applauded them for trying to maximize shareholder value. Now some of those people may have a different view of that concept. As for the Yahoo board, they are still believing their own bullshit. Just consider their letter responding to Carl Icahn’s attempt to replace them. Here are some excerpts including the magical words (I highlighted):

Unfortunately, your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal. A fair-minded review of the factual record leads to one conclusion: that Yahoo!’s ten-member board, comprised of nine independent directors along with Yahoo! CEO Jerry Yang, remains the best and most qualified group to maximize value for all Yahoo! stockholders.

Conversely, we do not believe it is in the best interests of Yahoo! stockholders to allow you and your hand-picked nominees to take control of Yahoo! for the express purpose of trying to force a sale of Yahoo! to a formerly interested buyer who has publicly stated that they have moved on. …

From the beginning of the process with Microsoft, Yahoo!’s independent directors focused on one central goal: how best to maximize stockholder value.

It concludes:

In short, Yahoo!’s board was at every point in this process prepared to enter into a transaction with Microsoft that would maximize stockholder value — and included certainty of value and closing. What Yahoo!’s independent board refused to do was to allow control of this company to be acquired for less than its full value.

Just saying those phrases does not make it true.

Companies make many decisions that are said to be done to maximize shareholder value. Just consider the acquisition strategies of AT&T in the late 1990’s when they bought TCI and MediaOne cable at ridiculous prices with too much debt. At the time, CEO Armstrong said

“And as I said before, the third reason is that we believe that we have announced the foundation and the path for the creation of long term shareholder value that will enable these companies to be even more performance marketed, customer focused, faster in response times, more competitive in their offerings.”

I guess splitting AT&T back into pieces and selling them off was also done in the best interest of shareholders. AT&T was one example. But you can pull up almost any announcement of an M&A transaction and find these statements of the obvious in the overly-optimistic words of management. Sometimes they turn out to be great and the decisions were truly in the best interests. Other times….not so much.

Buybacks are another common place to hear that management is looking out for investors. Countrywide Financial proudly announced the 4th quarter 2006 multi-billion dollar repurchase program and other optimistic promises in its press release. Here is a snippet:

“While we expect the continuation of a transitional environment in the near term, we are bullish on the positive long-term growth prospects for the mortgage lending industry and Countrywide in particular, as a result of the proven power of our business model and our strategic positioning. We believe Countrywide’s core strategies of profitable market share expansion, growth in our mortgage loan investment portfolio and associated spread income, continued synergistic diversification, and ongoing capital optimization will continue to deliver long-term shareholder value.”

Okay. I got the message.

Almost every major decision that management makes is announced with the assurance that it is “in the best interests of shareholders” and will “maximize shareholder value.” After all, you would never feel good if they did something stupid and said “This decision is in the best interests of management and the board of directors and may turn out to maximize our shareholder value while destroying yours.”

As a shareholder, you must expect that management is acting in your best interests. Do you really need to hear these phrases every time they do something big? Are they comforting? Not to me. Whenever someone goes out of their way to assure me of something I thought we both understood already, I get suspicious.

With all the oil talk in the media, it’s easy to fall into the trap of their One Track Mind. Yes - oil is high relative to the past. Yes - gas prices are high relative to the past. But energy is not the only thing going on in the stock markets.  We went through this with financials last fall and winter.  We went through this with the Yen Carry trade last spring.  A week ago, high oil prices were largely ignored.  A few weeks ago, the rise in the Dow Transports was seen as a huge buy signal by the Dow Theory cult, especially because it was happening while oil prices were high.   How has that worked out?   Now, oil is so important that CNBC has devoted a special ticker on its screen to the price per barrel.  Once again, I will remind you…. there is more going on right now than oil.  Please do not lull yourself into believing that if oil starts to go down, that all the problems are solved.  Certainly, this relief reflex will happen.  At least until something else becomes a problem or at least until oil starts to turn higher again.   Investing is a very complex process and when we get so focused on one factor, we run the risk of getting hammered by other things being ignored in the background.

David Walker is on CNBC this morning (click here for bio).  I recommend listening to David regardless of where he is appearing.  Straight talk about what is wrong with America and how to fix it is a rare thing and David is superior in that regard.  If you miss today’s discussions on CNBC, try to watch it using their annoying video clips or whatever source you can find.  I am often told that reading my posts and listening to my conversations are negative and cause people to worry too much - maybe even look for razor blades.  I guess that is why I respect David Walker so much.  People may not like what David has to say, but the truth hurts and a lot of pain is on the way.

While the US is the biggest oil guzzling nation on the planet (nothing to be proud of), we are not the only one with a Strategic Petroleum Reserve (click here) even though ours is the biggest at about 700 million barrels. The US politicians who voted to block the continued filling of our reserve did little to nothing to reduce oil prices - which is typical for a crowd that has no clue about developing an effective energy policy. They have no control over China and Russia and India and many other countries to force them to stop filling their reserves (thankfully). In case any US politician is listening (doubt it)….OIL IS A GLOBAL PRODUCT. So just like the repeated questioning of 5 oil companies, our Congress shows it has a very limited understanding of the global oil situation. In January of 2007, I wrote about my concern for the rationale of President Bush’s plan to double the SPR not because I thought it would dramatically increase prices, but rather - I feared that it would signal either a desire to go to war with Iran or a gluttonous increase in future US oil consumption. Obviously, the gradual filling of the US SPR has a minimal impact on global oil prices. However, it is unclear how much stockpiling is actually going on around the planet. Regardless of the transparency and accuracy of the global SPR reporting, I think it is important to recognize that some of the countries that are some of the biggest energy consumers and the ones growing the fastest, have just started to fill their SPRs. To catch up to the IEA recommendation of 90 days of supply, their filling of reserves is mathematically different than the gradual increase in established reserves (like the US).

The bottom callers announced that the Fed bailout of Bear Stearns marked the end of low stock prices. Supposedly, this unprecedented and illegal (in my opinion) action provided a backstop of epic proportions. As a free market capitalist, this whole episode and especially, the happy and comforted reaction of many market participants has greatly damaged my opinion of this country and capitalism. Nonetheless, it was done. I detest it, but I deal with it.

Here’s the problem….if the only thing that stopped the last market decline was the Fed’s bailout, then what do we do now? After all, the bulls have been mooing for quite a while that the bottom was set and the worst of the credit crisis was behind us. UH OH!! I guess that means that the next decline is not going to be worthy of a Fed bailout.  We are on our own this time. Logic right? If there is no new credit crisis on the horizon, then the Fed will not be needed to save us again. As for the economy, the bulls were saying that all was not bad - at least they were saying that last week when stocks were heading higher.   So as for renewed rate cut calls, they can try that but it will be pretty pathetic when compared to last week’s optimism.

It’s premature to suggest that the last two days marked a return to continued and meaningful downward pressure, but the bulls better hope so. If we approach prior lows, you can bet that there will be serious attempts at programmed trades to defend 1320 to try and create an inverted head and shoulders pattern and if that doesn’t work, to defend the March 17 support levels.  However, the next bottom will be a real test of the bulls beliefs.  And this time, it will be without the help of the Fed.  Unless of course, there does happen to be a credit crisis moment that has been hiding in the background (maybe in Europe?) that will magically be revealed so the Central Bankers can be justified in their reappearance.

I hope the next bottom is earned by market participants.