HEDGEfolios gives (mostly) great ideas for trades that you need to research further on your own. Or if you already have done your homework and just want some additional confirmation, it works great (usually) for that too. What’s with the (parentheticals)? I am covering my ass and pointing out that I am not right all the time and more importantly, you need to be your own investor. YOU SHOULD NOT DO PIGGYBACK INVESTING!

CNBC and Bloomberg (and the rest of financial media) love to highlight what the biggest and “best” investors are doing. Whenever Berkshire’s 13F comes out, there’s a ton of piggybacking going on by the Warren Wannabes. Last week, when it was disclosed that Joseph Lewis bought a stake in BSC, there were tacit recommendations that other investors should now jump into this mess. The same thing happened when Bank of America bailed out (temporarily) Countrywide and investors were encouraged by the wrong assumption that CFC was no longer in trouble. As for listening to Cramer, I hope you have fun with it.

The list of Piggyback Investing opportunities is endless. But just take a look at the recent examples and you’ll see that it isn’t a successful strategy - at least not in the short term. Remember that most of these disclosures are often weeks and months old. Getting in when they are made public is foolish. The best and most successful strategy for investing is doing your own homework and using a blend of fundamental and technical analysis.

Berkshire Hathaway’s 13F got filed yesterday and I guess I shouldn’t be surprised by the attention it gets - but it’s disappointing nonetheless.  “Warren Wannabes” are sifting through all the stocks in order to find wisdom from last quarter.  I know everyone wants to invest like Buffett but that is not possible.  YOU ARE NOT HIM - YOU DO NOT HAVE HIS CAPITAL.  I suspect you know that already but watching and reading the news gives the impression that it’s a good idea to buy stocks that he bought or sell what he sold.  I am confident that the Oracle would advise you against that.  Buffett does his homework on investments, but he is not doing yours for you.  If you want to invest like him, go read a bunch of the books on the topic and hone your value investing skills.  But if he is buying Financials today, that does not give a green light to the sector and it does not set a bottom.   We all need to be our own investor and avoid the temptation to copy off the smart kid’s test paper.

Now that the credit markets are putting Private Equity deals in question, the speculative M&A premium that has been propping up the market is being removed. That is making stocks cheaper so its no doubt that value investors should be working on their buy lists. But that is no excuse to abuse Buffett by suggesting companies he might be interested in.

The way I see it, the rumor mongers who call themselves fundamental analysts and financial journalists are largely responsible for a year’s worth of pumping up stocks in any industry that had an actual Private Equity deal announced. Immediately, we would see “the most likely to be acquired too” lists that had nothing to do with fundamental long term investing - just short term speculation. And the markets ate it up.

Well, now that they won’t be so busy hyping the speculation on Private Equity deals they have some time on their hands. A few weeks, ago there was a rumor that Warren was buying a chunk of HOV and everyone saw how easy it was to push homebuilding stocks higher (at least for a few days.) So now it seems the Bloomberg has nothing better to do but to play the M&A speculation game once again - not with Private Equity rumors - but by abusing Buffett.

On July 13th, there was a rumor that Warren Buffett was buying a chunk of HOV. The stock spiked about 10-15% higher and right away there were calls that the bottom was being found in homebuilders. For Warren’s sake, I hope that it was nothing more than a rumor because HOV is trading about 35% lower than the July 13th close. I understand the desperate attempts for the bulls to suggest bottoms are being set in homebuilders or subprime is being contained but using the Oracle’s name was shameless. If there was a bottom then, it has fallen out today.

The bulls will tell you this is a great time to get in - a great time to invest. But is this a market based upon traditional investment principles? From a fundamentalist point of view - we are schooled on the merits of Price-to-Earnings and dividend yields and growth rates etc. True long term investors like Warren Buffett are certainly still following those time-tested approaches and considering the appreciation of BRK/A over the years, it works. But what about the rest of the market? It seems to me that much of what has been fueling this run is based upon buybacks, M&A activity, short covering, technical breakouts, guessing on Fed cuts, and other things that are not predictable. Last time I checked there was no analyst estimate of who was going to announce a buyback and when or how big that buyback would be as a percentage of the float. Yet, “investors” are chasing these announcements and to me that is more about speculation than investing fundamentals. The same thing goes for the contribution to record highs brought on by Private Equity and other M&A activity. Unless you have definitive inside information, it’s impossible to evaluate which deals are going to be done next and at what share price. Instead, “investors” are buying stock whenever the media reports a rumored transaction. Today, the Financial Times story was VOD buying VZ and despite Vodaphone management’s clear denial, VZ is up on the news and the market has gotten a positive tone as a result. Once again - this is speculation. Last week, the market popped 2% on minimal news and most of it was a spin that retail sales data was slightly better than crappy. Most likely, much of the gains came from a short covering and technical breakout above a triple-top resistance pattern into historical record territories on the S&P. None of that is stuff you would likely read in an Investing 101 text book. So let’s not confuse what our market is mostly about - speculation based upon short term hype and positive momentum.  Enjoy it while it lasts.

Declaring your independence isn’t easy and it certainly can be dangerous. When the Founding Fathers drafted the Declaration of Independence, voted on it and signed it - they were all risking their lives. On this 4th of July, I challenge you to declare your investing independence. Who does your thinking? Whom do you listen to? In the financial world, it’s all too easy to watch CNBC and Bloomberg and listen to great thinkers who find it so easy to tell others what they are doing or what listeners should do. Alternatively - you can read investing books to learn how to invest like Warren Buffett or follow some other guru’s style. All of this may be helpful in certain ways, but nothing is more important than developing your independent investing style that conforms to who you are as a person and investor.

My style is my own. I do technical analysis, and I might do it just like a great technician like Ralph Bloch, but probably not. I do fundamental analysis and I might do it just like a great value investor like Warren Buffett, but probably not. I am certain I do a lot of the things they do, but that’s only because I believe in the concepts, not because they believe in them. As you develop your own investing style you may adopt the techniques of one great investor or the other, but copying it will never work. For it to be successful, it must make sense to you and fit with who you are - not who they are. Buffett certainly followed Benjamin Graham’s teachings, but his success was not the result of copying his mentor. His style derives from his life prior to meeting Graham and all the experiences in the years since. It is independent. Yours should be too.

I built HEDGEfolios to help investors through 90% of the investing process - the last 10% needs to be your own. One of the great criticisms of my work is that I don’t tell subscribers what to buy or sell. By design - I am guilty of that and I am certain it is costing me in terms of subscription revenue. But I am hopelessly independent and I encourage you to be the same. Each week at HEDGEfolios, you could buy all my new UP signals and sell all the DOWNS and historically you would have likely outperformed the index by a wide margin. But that would be dangerous and stupid. The only person that knows how you should invest is YOU. Listen to others but do your own thinking. If you haven’t already done so, declare your investing independence today.

Today, Dylan Ratigan of CNBC claimed that all the smartest guys in the business are bullish and buying stocks. As evidence he mentioned Warren Buffett and of course Private Equity. Somehow this comment is supposed to assure you that all is well and it would be reasonable to infer that if you buy stocks, then you are smart too. How wonderful. You can improve your IQ and be just like Warren by the simple act of buying stocks. Of course, Warren is smart and so is “Mr. Private Equity.” But comments like Dylan’s are not smart. I am bearish and you can decide whether I am not smart. When I think of the people selling today, I don’t presume anything about their investing intelligence. Many people were buying stocks prior to February 27th and yet, I don’t think they felt too smart a few days later. Many of these comments were thrown around in 1999 and early 2000. You were stupid to be afraid and not buying stocks back then too. But not so stupid a few months later.

If you think “catching a falling knife” is tough….good luck trying to catch a falling house. Much of the bull market thesis rests on the ability to have a soft landing in housing. Over the past few weeks, the housing stocks have started to firm up and the HEDGEfolios signals have reflected investor willingness to believe they are catching a bargain. It seems no matter how bad the housing data is coming out from the economic reports, mortgage industry releases or homebuilder earnings / comments, we get a muted or slightly positive spin. Even Warren Buffett came out with somewhat qualified (but optimistic) thoughts on the ability to contain the subprime disaster. It all might turn out okay, but after looking at the related charts this weekend, I am getting an eery feeling - kinda like a house is falling. Can you catch it?

Warren Buffett opined on the subprime fiasco at the Berkshire annual shareholders’ lovefest. According to Warren, the mortgage crisis won’t be “any huge anchor” to the economy. Although he did forecast that lenders and borrowers will suffer through “plenty of misery,” his comments suggest that he expects the effects to be limited to the participants rather than a trickledown into the economy. It should be obvious that I greatly respect Warren, but in this case, I just disagree with him. Unless of course you want to rely on the outs that he used to qualify his statement which were that unemployment doesn’t increase “significantly” and interest rates don’t go up “dramatically.” I leave it up to you and Warren to determine how to quantify “significantly” and “dramatically.”

Here’s my unqualified forecast: I expect the subprime problems to expand into Alt-A and then into Prime mortgages. As this happens I expect pockets of the country to see their home inventory rise and prices to fall to the point where mortgage balances exceed the price they can get. And regarding Warren’s two caveats, I expect unemployment to rise towards 5% by the end of 2007 and 10-year Treasury rates to bounce between 4.5% and 4.9% throughout the year.

Eddie Lampert is an investing genius. He is this generation’s Warren Buffett. Just take all the other hero worship language and insert it here. Lampert found ways to make more money on Sears and Kmart than anyone else did and he did it at a time when almost everyone else saw a bunch of crumbling retailers. So now that we have all the ass kissing out of the way, let’s get to the point. I am seriously thinking of removing SHLD from the retail industry classification in HEDGEfolios and putting it into the Investment Management group.

Today, SHLD said that 4th quarter earnings could rise about 30% despite the fact that their retail sales figures are sucking wind. Oh well - investors are cheering today and giving a 3% push to the stock. I have no problem with what Lampert is doing as it all appears legal and investors seem to love worshipping him. I just need to make sure I put them in the right category. The board has given Lampert free reign to use excess cash for investments outside of retail and it seems, whatever Eddie wants to do with it, he can. Sounds like a publicly traded hedge fund to me. One difference between Buffett and Lampert is that Berkshire has been accused of being a big mutual fund and I don’t think anyone ever accused BRK/A of being a hedge fund.

Last year, SHLD generated about $3 billion of excess cash in the 4th quarter. This year, it appears they are going to generate only $1.5 billion or so. Last quarter, approximately half of their earnings were from investments and they had about $100 million in profits from something called “total return swap investments.” Returns are big in retail but these kind of returns have nothing to do with bringing back merchandise that you didn’t want and the swaps have nothing to do with in-store credit so you can swap an ugly sweater for a less ugly sweater. The real definition goes something like this….”derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities.” Clearly, SHLD is in the business of derivatives trading and sometimes, like last quarter it works great. However, this quarter the company is reporting that it’s going to have a gain of about $20 million pretax from the net of real estate asset sales and losses on derivative transactions. Not much detail other than that and if you were counting on Lampert to generate $100 million in recurring revenue from running a hedge fund every quarter you might be disappointed. But no matter, the stock is going up anyway. Hopefully, there will be enough real estate to sell every quarter that derivatives trading doesn’t go so well.

With all the hubbub about hedge fund regulation these days, I like the brilliance of Lampert. Just buy an operating entity like Sears / Kmart and then run it like a hedge fund. If the hedgies have to disclose all their positions, will the SEC be fair and start demanding any public company will have to provide the same level of detail? If not, they should follow the SHLD model.