I’ve been sitting on larger-than-desired cash position of 12.5%, and waiting out what I saw as the potential for a 4-5% pullback in the major indexes. That pullback just doesn’t seem to have gathered its critical mass, with all due nods to the anemic volumes we’re seeing of late. Meanwhile I’ve been poring over sectors that I feel are either undervalued or due for a consolidation wave. Energy fits both criteria with a bow on top.

Valuations are largely in the eye of the beholder, but I am feeling ever more confident in the fact that S&P operating earnings for 2009 will put the market in the range of 15-18x, which is more than fine for this point in the business cycle, and gives us plenty of breathing room for further gains.

Everyone’s favorite home for 5 lb. cracker bags, 50 rolls of TP, and grab-bag inventory, Costco (COST) is finally breaking through the $50 level that has plagued shares since the beginning of the March rally. On no less than 5 separate occasions, shares of this low-beta name have pushed strongly from the $46 level towards $50, but only ending a dime above that resistance level for one day before drifting back down.

There’s little to do when one is wrong but admit, find a lesson, and move on. In that spirit, my decision to trim the majority of the Petrobras (PBR) position in the Secular Trends Portfolio was ill-timed, to say the least. I was concerned about several straight weeks of rising crude inventories, and I didn’t like the company’s leveraged position to crude futures in that light. As mentioned in my previous post:

I’ll be looking to re-beef the PBR position as soon as crude inventories stop shooting to the moon…

There hasn’t been a lot of activity here for a couple of weeks, the unfortunate result of other obligations and my ongoing intent to put in 5-6 hours of good reading and research time for every hour spent writing up my conclusions. But hey, if it’s not broke; The Secular Trends Portfolio continues it’s alpha generation, beating the S&P by roughly 30% since its inception last September.

I’ve said repeatedly that I’m not a big believer in technical analysis, and it will certainly never be the sole impetus for a change to the Secular Trends Portfolio. But I’m a little worried about the crude oil chart in the face of rising inventories and a possible shift in regulatory stipulations surrounding speculators. And because Petrobras (PBR) tracks crude so closely, I want to reduce the potential risk of this larger-than-average position in the portfolio. I’ll be looking to re-beef the PBR position as soon as crude inventories stop shooting to the moon…

The Secular Trends Portfolio gobbled up a few more scraps of alpha Tuesday as largest holding Caterpillar (CAT) breezed past consensus estimates for $.22 per share in Q2. Net profit (that’s right folks, net) came in at $.60/sh, or $371 million. Ex-out the one-time restructuring costs and Caterpillar posted $.72, so it appears that the first quarter of 2009 will be the only one with a net loss. Considering the company’s leverage to early-business cycle activity, that’s an astounding feat. CAT shares are the destination of choice should they toss up a great quarter:

They [CAT] have footprints in many businesses on the leading edge of the business cycle, so their comments tomorrow will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.

As second quarter earnings roll on, an amazingly high percentage of companies are soundly beating estimates - over 70% thus far. To the eternal pessimists out there, it’s no real harbinger because estimates were set embarrassingly low. However we’re not just seeing minor beats, but an increasing number of major beats - beating estimates by 20%, 30%, or more.

Most of this has come from major improvements to gross & net margins, as companies are working harder than ever to wring efficiencies out of their business models. Yes, we all know that revenues are down year-over-year in nearly every industry. But if companies can turn in a fundamentally impressive (albeit lean) quarter, we can go a long way to bringing back the essential art of fundamental investing, which has been on a forced sabbatical for several quarters.

The weak dollar trade is back on today, as the USD is down against most major currencies. This has pushed gold, copper, and other hard commodities up to or near their highest levels of the month. Days like this are generally good for the Secular Trends Portfolio, and in early morning trade the model has picked up a quick 2 percentage points on the strength of Las Vegas Sands ((LVS) - up 12%), Petrobras ((PBR) - up 4%), Alcoa ((AA) - up 3.5%), and Peabody ((BTU) - up 4%).

Caterpillar a Key Earnings Report Tomorrow

Caterpillar (CAT) is seeing strong early buying today ahead of Tuesday’s earnings report. CAT shares are up 6% this morning in advance of what is - for these eyes - the most anticipated earnings call of the season. The folks at the local “home office” paper in Peoria, IL did a nice preview piece Sunday that talks about the difficulties in estimating what kind of numbers Caterpillar will report. Sales are sure to remain down year-over-year in a big way (35-40%), but the recent weakness of the dollar is a strength to this company that does more than half its business overseas. And after taking big charges in the first quarter to curtail production and lay off workers, how much more was needed in Q2?

Bloomberg reports that a Brazilian newspaper has hinted at a pending $25b bid by mining giant Vale S.A. (VALE) for The Mosaic Company (MOS), the world’s largest phosphate producer and #2 potash producer. This follows up on earlier reports that Australian miner BHP Billiton (BHP) was interested in snapping up North American potash assets. Mosaic shares were up 12% yesterday on the rumor/news, with the market cap now topping $22 billion.

You heard it here first, or if not first then I’ll settle for most bluntly - this news is just the opening salvo in an all-out agriculture bidding war that has likely just begun.

I have to say that I’m pleasantly surprised by many of the results we’re seeing in week 2 of this vital earnings season. So far 67% of the 43 companies in the S&P 500 that have reported have beaten estimates.

As I have been spending some time collating earnings results to get a feel for the overall profit picture year-over-year (expectations going in were for a 34% drop in corporate profits), it’s worth noting some of the anecdotes that prove capitalism is still alive and well in America.

As I’ve contended from the beginning of the Secular Trends Model, this has probably been the most challenging time in history to invest based on long term trends. Hardly a day goes by that I don’t hear a new media outlet ask the question (or state outright) that “buy and hold investing is dead”.

Well, 9 months into its inception, the Secular Trends Portfolio has outperformed the benchmark S&P 500 by 25 percentage points. That’s a nice chunk of alpha, and I’m even more optimistic about the future prospects of the Secular Trends Portfolio. Many of the largest holdings have been under-loved by investors thus far, but as the structure of an economic recovery becomes visible to a larger audience, I feel that stocks like Caterpillar (CAT), Costco (COST), Potash Corp. (POT) and Alcoa (AA) will see more bids. I owe the alpha thus far to well-time purchases of Goldman Sachs (GS), NVIDIA (NVDA), Schering Plough (SGP), and Freeport- McMoRan (FCX), as well as several holdings that have outperformed simply by staying flat thanks to their superior fundamentals.

In many ways, Monday’s action of adding St. Jude Medical (STJ) to the Secular Trends Portfolio is the culmination of a multi-year stock crush on my part. I have been following the company since before the wave of product recalls put a big bruise on the cardiac rhythm management (CRM) space as a whole. These events directly affected competitors like Medtronic (MDT) and Boston Scientific (BSX), but St. Jude avoided the issues, which served to clue me in on what is likely the best competitive advantage of the company - stellar management.

While Medtronic became bloated and lost its focus, and while Boston Scientific went out and made easily one of the worst acquisitions in sector history (the $12b Guidant purchase), St. Jude was happy to stay small and execute the pants off the other two. As a result, comparing the fundamentals of the three companies is a joke; there’s just no comparison. St. Jude wins out on margins, sales growth, earnings growth, and debt/equity ratio.

While earnings season is officially underway, investors have been bypassing the earnings appetizers and awaiting the main course, which begins serving this week.

Alcoa (AA) is the standard torch-bearer, but it’s not a bellwether for much more than aluminum prices these days. (you can read my earlier notes on Alcoa at the end of this post on the ISM report).

Cash No Good...

Following the recent sales of Pfizer (PFE), Schering (SGP), and Freeport (FCX) in the Secular Trends Portfolio (the links will take you to my coverage of all 3), the cash position in the Secular Trends Model has shot up to 15%. This is far too high for an all-equity model, and I’ve been openly adamant about fleshing the model out as soon as I completed the all-important due diligence.

Shares of Amgen (Nasdaq: AMGN) are soaring following the news that a Phase III trial of the company’s Denosumab drug for osteoporosis showed superior effects in treating adverse bone reactions in patients with advanced forms of breast cancer.

In the trial summary data released after Tuesday’s close, “Dmab” went head-to-head with the existing treatment option, Zometa from Novartis (NYSE: NVS), and showed a “statistically significant” (magic words in pharma-land) improvement in delaying or preventing bone factures, spinal cord compression, and other injuries related to bone weakness.

I suppose every analyst has their favorite economic indicators, whether due to the specific sectors they follow or their slant towards bottoms-up or top-down analysis. To the latter, I try to as much of both as my resources allow, and to the former, I am a big fan of the ISM services report. (you can check out today’s release here.)

The PMI report from the Institute still gets the majority of press coverage, but let’s get real - we haven’t been a manufacturing economy for quite some time.

I’ve been doing some thorough review of the holdings within the Secular Trends Model, as I see this earnings season as a major harbinger for the rest of the year. NYSE Euronext (NYX) has been under the microscope the past few days, although I’m still awaiting the volume report for June, which should be released in the next 48 hours.

Trading is Alive & Well - Volatile, But Well

To say that today’s market is baffling would be both unsurprising and boring; to say it’s “unprecedented” would employ needless hyperbole….and also be unsurprising to anyone with a dollar and a pulse. But how’s this for surprising; the parent of the stodgy ole’ Big Board has a higher Beta (1.84) than either Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE), or Nasdaq OMX Group (NDAQ) (1.37, 1.72, and 1.17, respectively) despite NYSE Euronext sporting a 4.60% dividend yield?

This post is chiefly for time-stamping purposes; I’ll be attaching my notes and thesis statement for Beckman Coulter (BEC) at a later date. As to Corning (GLW), this has been a small weighting in the model thus far, and I’m taking it up to 4.5% with the addition of 900 shares.

See my earlier commentary on the company’s cheap valuation and growth prospects here.

When you lose, Don’t lose the lesson - The Dalai Lama

For the better part of 5 months I’ve been kicking myself over not dumping Pfizer (PFE) from the Secular Trends Portfolio the day they announced the Wyeth merger. The second I heard about the deal I honestly thought the TV announcer had made a mistake; “No no, it couldn’t be Wyeth. That would just be stupid”

This morning there’s going to be some big changes to the Secular Trends Portfolio; as stated earlier there’s far too much cash sitting around. There are several themes that deserve representation, and a few sectors where the level of underweight (compared to the S&P 500) is more than I care to hang my hat on.

The doc below is as little spreadsheet where I’ve highlighted the current sector weightings of the broad S&P as well as the model portfolio. The top level is just a frame of reference; it shows the current estimates for operating earnings across the S&P 500 for 2009, as well as the historical results from ‘08.