In Dan Weiss' post yesterday he presciently offered Cisco (CSCO) as an alternative to GM as a member of the Dow. Well done, Dan.

He also wrote:

A few months ago I wrote about fear indicators and how, at the time, they were all flashing bright screaming red. I also watch spreads between Corporate bonds and Treasuries. This graph is the one month price action on the spread between the iShares Investment Grade Corporate Bond ETF (LQD) and the iShares 7-10 Treasury ETF (IEF). It's not a perfect representation of credit spreads but it's sufficient for my purposes.

Yesterday Ben Bernanke said the hundred year storm/perfect storm/hurricane/gale force/tsunami/overused Mother Nature metaphor of your choice that's mangled credit and equity markets for the last year isn't yet done. Warren Buffett echoed those thoughts. Three months ago, JPMorgan CEO Jamie Dimon referred to his company's absorption of Bear Stearns (a deal at the epicenter of financial market turmoil) as "mission not accomplished" in an unsubtle dig at our current President.

The market is littered with money managers who've called the bottom in housing, banking, retail and the market generally over the last year and each one of them, I assure you, thought of him or herself as a contrarian (of course, if everyone's a contrarian, then no one is). Bernanke, Buffett and Dimon are each, to a man, smarter and more accomplished than me, so fading them is a fool's game. I've written repeatedly that I have no clue if we've bottomed and put no effort whatsoever into figuring if we have. If I could reliably pick tops and bottom I'd be living in a far sunnier, sandier place than Chicago (except during baseball season).

A friend of mine asked me about the SEC's new shorting rules, set to commence Monday. He's not in the investing business but with a family, a house, a business and a portfolio you might say he's at least tangentially interested in American free market capitalism and was curious if this was a sign that the world is actually ending or if it only looks that way (readers already know my opinion).

The SEC is taking the stocks of 19 firms and putting a wall around them, allowing short sales only when the shares are confirmed to have been borrowed. I can say without reservation that in all the years I traded equities and options as a market maker, the number of times I could short a stock when my clearing firm was unable to borrow it was exactly zero. None. Never. Maybe some other traders had a different experience, and if any did I'd love to hear about it.

Well here's an interesting story* that'll make the Congressional witch hunt for the culprit in rising gas prices a tad more difficult. Over the last 10 months those nasty, greedy hedge funds have reduced their positions in oil futures by about 80%. What's the fun of being in Congress if you can't blame the wrong guy?

Speculation (whatever that is) and its dastardly cousin, manipulation, are silly but politically useful targets to blame. Futures require a long for every short, so if Trader X "speculates" long, Trader Y has to be "speculating" short. On balance, the "speculation" has to cancel itself out.

I went to the Berkshire Hathaway (BRK.A) annual meeting two weeks ago (I've owned some B shares in a non-Vestopia linked account for a couple of years) and found it one of the most fascinating educational experiences of my life.Other than the time in college when I saw a live debate between G. Gordon Liddy and Timothy Leary, I've never learned so much from just listening to two people talk for a few hours.

The annual meeting is a little slice of Americana that will in all likelihood disappear after Buffett and Munger are gone. Whomever takes the reins at Berkshire will be someone who, to paraphrase Buffett, can competently manage a business that requires more effort to screw up than improve. But the celebrity status will pass with Buffett and Munger, and while the annual meeting may continue to be of great interest to shareholders, I imagine it will lose its cache, at least after a couple of transitional years.

How's this for a trading strategy? Go long on the close of any Monday prior to a Tuesday on which Ben Bernanke is scheduled to speak. The past two Tuesdays, the trade worked like a charm. Admittedly last Tuesday's announcement was unscheduled (every strategy has its flaws). Hard to backtest, but it could be a huge winner.

Over the last week the Fed has started swapping roughly a quarter trillion dollars of cash and good paper for the most toxic paper on the planet, orchestrated an "Under New Management" sign for Bear Stearns (tagline: Same Great Prices, Same Great Service!!), and probably saved democratic capitalism as we know it (or at least knew it).

Readers have had quite a bit to say to me about my post on public employee pensions. I have a few thoughts now that readers have weighed in, and then I'll drop the subject.

It seems to me that private defined benefit pensions are going the way of the Model T, soon to be extinct if they aren't already. Defined benefits were easy to offer when global demand outstripped global supply and U.S. companies were the preferred provider of just about everything. A reliable earnings stream plus a market return on the principal were a nice combination. But as more of the globe seeks Western living standards (how did Gandhi respond when asked about his opinion of Western Civilization: "I think it would be a good idea."), there's always someone somewhere who'll sell for less. 

Fortunately for me I haven't had positions in REITs and home builders. Moreover, I almost certainly won't be in any when the inevitable recovery happens. Since I already have an extraordinarily concentrated real estate investment (my house) I choose not to have more exposure. This isn't to gloat, as I've had plenty of pain from small value plays in capital goods, commercial and municipal construction and trucking.

There's another reason I intend not to invest in real estate. I try to invest in good businesses with cheap stocks (or at least cheap relative to prospects) and as expectations change, the stock follows the business. Not always, but usually. What's more since I don't have any clients to please I can deviate from this approach now and again as I see fit. Thanks to Vestopia, readers can decide for themselves if I'm a genius, a moron or somewhere in between.

Earlier this week I sold MSM and PTEN and replaced them with Hardinge (HDNG) and Team, Inc. (TISI). I'll go into some detail here about HDNG and my rationale. I had written that I felt like I was getting the steal of a lifetime with HDNG and, the Investing Gods read that and promptly smashed it into the ground. Such is life.

Hardinge, founded in 1890, makes a variety of material cutting tools (lathes, chucks, grinders, millers) for industrial use. It's customer base is diverse (aerospace, consumer goods, construction, defense, energy, pharmaceutical). Sales are roughly 75% from Europe and North America, the balance in Asia and elsewhere.

Last week I posted about Citadel's investment in E*Trade (ETFC). Subsequent to the investment, ETFC has been rated a sell by BofA and the stock is currently trading below Citadel's buy price. Sort of.

Something unmentioned in the news reports of the deal, but available here (Item 1.01, paragraph 7) is that 40% of ETFC's equity order flow and "substantially all" of its customer option order flow will go through Citadel's execution business (tip of the hat to hedgeworld.com). Now, Citadel is a very well known hedge fund, but less well known is its execution and market making business. Citadel's derivatives trading group is one of the largest option market making groups in the whole business, right up there with Goldman Sachs (naturally). Citadel will profit in at least three ways from the equity and option order flow:

Citadel Investment Group ("CIG") is taking a big chunk of E*Trade (ETFC). CIG is taking ETFC's ABS portfolio for about 25 cents on the mark-to-market dollar (I'm assuming the ETFC's ABS portfolio is marked-to-market, admittedly a big assumption). CIG is also getting 10-year notes at 12.5% and a board seat. Including CIG's current EFTC holdings, they'll end up with about 20% of the company.

WSJ has a thorough synopsis of the deal, which WSJ.com subscribers can read here.

Here's a stock I'm watching: Team, Inc. (TISI). Imagine some tank cars you own (or rather, that you operate after completing a sale-leaseback with the Stanley Goldman Super Ultra Mega Securitized Hybrid Total Enhanced Global Leveraged to Teeth ABS Fund II) overturned. Your Chief Risk Intern promptly does a Google search about the contents and found that a spill would be, in his words, "unfortunate."

So, realizing that the portion of the 9% pre-fee return your lessor is offering her investors for which you are responsible is in jeopardy, you ask your intern to find someone who can help. The intern comes across Team, Inc. and calls them, quickly.

My core investing thesis is that as half the world's population migrates to Western living standards they're going to need a lot of stuff. I want to own companies that build or sell the stuff that helps build other stuff. One such company, or at least I thought, is Gehl Company (GEHL).

I've owned GEHL for over a year and taken a beating (-25%). I think I know the problem: it's too tethered to developed markets (U.S. and Europe) and not enough to emerging markets (pretty much everything else). Ooh, that's a big insight. Snaps to me, right?

Take a look at this investor presentation from Gardner Denver (GDI), one of my core industrial holdings. What I admire about this company is how its operating cash flow is up almost 10x since 1994 while the company has diversified its product line and its geographic source of revenue. In fact, operating cash flow has better than tripled in the four years ending 12/31/06.

Here's a company supplying really dull stuff (compressors, pumps, vacuums, blowers, fluid transfer equipment, lift arms) to a wide swath of industries (health care, aviation, printing, F&B, energy). Ten years ago roughly 75% of GDI's revenue came from the U.S. Revenue is up 8x in that time and the U.S. supplies about 42%. The international growth has come largely from Europe, as Asia is still about 10% of revenue.

I previously owned Overseas Shipholding Group (OSG) and sold it for a small loss, only to watch it run up about 50% in my face. It's showing up on a screen of mine that looks for multiples of book, cash flow and estimated earnings in the bottom 50% of all stocks that have underperformed the S&P over the last 52 weeks (i.e., names with low multiples appear on the screen).

While I took profit too soon, I did learn a valuable lesson about the shipping business and economy-watching generally: keep your eye on the Baltic Dry Index. This index measures raw materials delivered via ship. It's a pretty tough index to game given that ships take a couple of years to build and the disincentives are huge for owners to hit the pause button once they're built.

HEICO Corporation (HEI) manufactures and sells aerospace and related products through its Flight Support Group and its Electronic Technologies Group.

First, a bit of history: I first took a position just about three years ago and have added a little bit along the way through reinvested dividends, adding once again a couple of weeks ago. Since originally buying price to book is up 100%, price to cashflow is up roughly 20% and price to sales is up roughly 10%.

Buying individual stocks vs. the SPY had a better outcome, but the real benefit came from selling a long time holding that had become a short favorite of hedge funds. It had a big pop, almost certainly on short covering, and I sold. Lucky me, it's down 15% since then. Not including taxes and commissions, I've made about $600 on the names I bought, saved about $4,000 on the names I sold and would have made about $90 had I bought the SPY instead of individual names.