Going de-CAF

Well, this has been an interesting exercise in some more active investing for me -- essentially trading in and out of the Morgan Stanley China A Shares closed end fund a couple times this year, which is much more active than I tend to be with most of my holdings.

If you've been following my transactions, you might have noted that I bought shares in CAF back in May at about $36, sold at about $55, then re-bought shares at about $61.

And this morning, as the news that PetroChina would be getting a Shanghai A share listing lifted the enthusiasm for US investors for all things China, I sold about two thirds of my position at $71.11.

Essentially, to recap a little, I like the medium term prospects of these shares -- I see many more reasons for the domestic Chinese market to outperform over the near term than to underperform. But I'm not entirely confident that they'll avoid a bursting bubble, or that the path up will be an even one.

Like many other investors, I can't help but notice that the A shares look very expensive compared to most other investments ... but then again, they dramatically UNDERperformed most of the world for several years, too, and there is so much money looking for a home in China that I think the bias of all investors should be for a rising market in everything domestic in China ... including publicly traded companies.

I have tried to be disciplined, however -- a significant part of my rationale for investing in this particular closed end fund has been the widely ranging discount to its net asset value, a discount that I think provides -- at its extreme, at least -- some downside protection.

Buying the shares at a 20% or 25% discount to net asset value was a significant bargain, I think. But when the discount tightens to less than 10%, as it did this morning, I think the risk increases. Even though I can make an argument that this closed end fund should trade at a premium, not a discount (largely because it's a fixed portfolio size investment in an otherwise closed and outperforming market), I can't make the rest of the market accept my argument in the short term.

Of course, the Net Asset Value is calculated after the close in China, so it doesn't include any news that might have moved the A share market since that close, like the PetroChina announcement.

But personally (and I'm going out on a limb here, I might be wrong), I don't see any reason why the A shares market in China should go up by 6% overnight tonight to close that discount gap -- I presume that for domestic investors in China the IPO of PetroChina will be an interesting opportunity to buy another big state-controlled company that was previously off limits, but I don't see any logical reason why it should lift the shares of any other unrelated company, or the holdings of CAF, immediately.

So I continue to hold some shares, but I'm taking profits with the majority of my CAF holdings here, at roughly a 16% return in one week. I am not a frequent trader, but trading around the discounts in an overall rising market seems to work pretty effectively for this holding, so I may revisit this again if the discount returns to appealing levels.

And as an aside related to this investment, I've also been thinking about my larger investment thesis regarding China, and about the conventional wisdom -- particularly as it pertains to domestic Chinese investors.

Most investing pundits, myself included, have speculated that domestic Chinese investors will eagerly invest overseas instead of in their domestic markets once they are given the freedom to do so, partly because the A shares market is "overvalued" and partly because many Chinese companies don't trade in Shanghai or Shenzen and they'll want to invest in them (this is part of my rationale for investing in Tencent in Hong Kong).

But consider the corollary of the late-90s US stock market -- all Americans had the freedom to invest overseas, and even to invest in ADRs of foreign companies quite easily, but the temptation to chase performance was much greater than the temptation to diversify internationally or to buy more "undervalued" companies. International investing for US investors has grown massively in popularity in recent years, but that's because overseas is where the recent performance has been. In 2000, everyone in the US wanted to invest in the Nasdaq, that's where the millions were being made. In 2007 and 2008, will the average Chinese investor want to invest outside China, presuming he's given that opportunity, and leave the hottest performing stock market in the world?

So, ignoring for a moment the argument about whether the A share market is indeed a bubble that will eventually burst, perhaps the real question is this: should we presume that most Chinese investors are more savvy and contrarian than US investors were during the inflation of the tech bubble, and that they'll voluntarily sell their Chinese holdings to invest in other stock markets that are doing less well? I'm just wondering.

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Clearing out More Positions

As we gird our loins for what appears to be an extremely unsteady market -- though whether it will go up or down, I have no idea -- I've taken the opportunity to simplify my investments a little bit.

What does that mean?

Well, in my case, it means selling some of the more vulnerable, long-shot, non-profitable or highly valued companies in my portfolio -- particularly the small positions that I never got the urge to fill out with more cash.

So I've sold a half dozen or so of my smaller holdings in the last few days, a few at more or less break even and most at significant gains (these are primarily stocks that I've held for more than a year, most cases significantly longer).

And as with some of my earlier sell decisions, many of these are more personal than stock-related. I do not have specific news or numbers that make me want to sell these, but they don't fit what I want with my portfolio right now.

So what have I sold?

Myriad Genetic (MYGN) -- I bought this one because of the high growth of the genetic testing business and the promise of their early-stage drugs, but the story has changed somewhat. This has more than doubled for me, almost entirely on the promise of their Alzheimer's drug, Flurizan, that I wasn't all that confident about. That makes me extremely nervous -- many nice news articles and analysts have touted Flurizan as the most promising Alzheimer's drug currently out there, which may be true, but that's kind of like being the best dressed guy at the tractor pull -- Alzheimer's drugs are extraordinarily costly to get through FDA approval, and so far almost none of them have worked at all. I'll take my profits here instead of bucking the odds -- I might be wrong, but this small position isn't worth chewing my fingernails over. If Flurizan takes a big hit and the shares fall hugely on the news, I might reconsider my initial investment thesis and get back in.

Blackboard (BBBB) -- It's lovely to have a monopoly, which is why these shares are up quite nicely for me ... but I wouldn't buy more here, and it's a small position. They have so far had some difficulty in turning their near-monopoly into real profits, though it hasn't been that long since they took out their competitor, and I'm a little bit worried about higher education budgets moving forward. Out they go.

Barrett Business Services (BBSI) -- This one has mostly treaded water for me. I bought it because they had an appealing regional-to-national story unfolding and because they had piles of cash on the books and had recently instituted a dividend. That story still holds, but the difficult undercurrent is that they are still primarily a California staffing business, and they are going to have some serious difficulty making up for all the construction business that's falling by the wayside out West. They may get through this fine, they may not, but I wasn't going to add more to this small position unless it got hit for no good reason ... and if it hits now, I'm afraid it will be for a good reason. I'll keep this one on the watchlist to maybe get back in if the economy really tumbles and puts them on sale.

Akamai (AKAM) -- Oh, how sad I was to see this one go. Again, mostly for personal reasons -- I'm not terribly comfortable holding any significant amount of margin in my accounts right now, and stocks that are richly valued are vulnerable. Akamai is the titan of their industry, but there are lots of little guys nipping at the heels and I'm not confident that their growth is guaranteeed ... or that they will be able to continue to charge relatively high prices. I could certainly be wrong, and I like the company very much, but I would prefer to book my 100%+ gains at this point (even though I missed the chance to sell it all at the top).

Universal Display (PANL) and Harris and Harris (TINY) -- these are both relatively small holdings that I've had in my portfolio for a long time. PANL gave me a nice profit, TINY I'm selling at about the same price I paid for it ages ago. Why? Neither one is going to show a profit for a very long time, so while they may be in an important business segment (Organic LED lighting and display, and nanotech venture capital, respectively) I have no particular confidence that they're going to weather a bad market or become profitable in the near future. Expensive and uncertain seem to me to be the wrong holdings to focus on right now, so I'll move along to shares that I'm more confident in.

So ... for the first time in a long time I'm using no margin and have some cash available. Hopefully, many of the companies I'm most interested in will go on sale soon, but at least I do feel more insulated from some of the shares in my portfolio that had been the most likely to falter on bad company or economic news. I remain significantly overweight foreign companies, now at more than 50%, and have also pared back my long options positions significantly.

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Closing some Asian positions

Just a quick note that I'm closing my positions in a couple of Asian funds -- I've liquidated my holdings in the Morgan Stanley China A Shares Fund (CAF), and in the South Korean iShares Index (EWY).

CAF I bought because the pessimism over the domestic China market was overwrought, and the discount was too steep. Since then, the shares have gone up about 45%, and the discount has closed to about 11-12% depending on the price you use. I'm willing to sell here, since this was intended to be a short term trade to take advantage of what seemed to me to be too much pessimism. I agree with most people who believe that the A shares market is bound to correct significantly at some point, though I expect it will be later than anyone thinks right now (I can't see the shares really correcting until Chinese residents get permission to invest elsewhere). Still, I wanted a short term gain and got it, so I've sold.

EWY I bought a long time ago, because at the time Korea was nearly on par with the developed world in terms of the sophistication of its best companies and the stability of its economy, but it was being priced at fire sale levels. It was an easy way to buy into Samsung, Posco, a few Korean banks and shipbuilders, and Hyundai, all companies I thought would do well.

Well, with the exception perhaps of Samsung in very recent times that has come true -- and Korea is not a bargain anymore. It's probably still a decent investment, especially as a way to play one of the stronger economies that's likely to benefit from Chinese consumption (I like Korea for that more than Japan), but I'm no longer quite as enamored of the huge Korean megacaps as I was a couple years ago. They've been recognized, they're not cheap anymore, and since this index is essentially a play on the top ten Korean companies I'm going to take my 100%+ gain on this one and go home.

I continue to have pretty heavy exposure to Asia in my portfolio -- Naspers, Swire Pacific, The China Fund, the India iShares ETN, and Keppel Corp., along with options on NetEase, Gigamedia, Huaneng Power, Home Inns, CDC, and Satyam. But in these two cases, I have seen returns that exceeded my expectations and I think the risk/reward ratio has shifted out of my favor. Time will tell if I'm right, but sometimes it's comforting to hold a little cash in hand.

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Taking Profits on one ... giving up on another

Just a quick note to post some changes in my portfolio -- after watching MEMC Electronic Materials grow into one of my larger holdings on the back of near-300% gains, I decided to give in to some of my misgivings about the company's valuation and take profits on about 40% of my holdings.

I'm still holding the balance of my WFR shares, and I do think that it's certainly possible that they will continue to climb -- but there is significantly more risk in the equation now that we're dealing with a trailing PE of 31.

The polysilicon shortage that helped to fuel WFR's rise, on the back of strong pricing, a huge ramping of demand from solar cell manufacturers, and continued strong demand from semiconductor companies, is now getting quite long in the tooth. It was part of my initial buy thesis in this stock when I bought it a little over two years ago. That means that MEMC and their competitors have had plenty of time to see the demand curve rising and put into place plans for dramatic increases in production -- which nearly all producers have done, with some increased production already online.

I'm not enough of an expert on this industry to know whether or not the "big four" polysilicon suppliers will overplay their hand and oversupply the market as their new supply continues to come online over the next year -- so given the boom and bust history of this sector, I'm hedging my bets, taking enough profit off the table to be comfortable holding the balance and watching the supply/demand dance play out. I sold 40% of my WFR position at $60.02, and will continue to hold the rest pending future developments.

And my other recent move, which was long overdue, was to clear the decks of my holdings in Cryo-Cell (CCEL.OB). I was impressed with this cord-blood banking operation when I first picked up shares back in November of 2005, and thought that they were on the cusp of a few good things: potential relisting on a major exchange, transition to a consistently profitable operation thanks to their ongoing relatively high-margin income from storage fees, and possibly increased public interest in their product as stem cell "miracles" come to light.

Well, how's 0 for 3? I should have listened to Yehuda Fruchter and sold my shares a while back when it began to be clear that management was either "competency challenged" or not aligned with common shareholders.

Instead of transitioning to a high-margin, solid growth company with good steady income from storage fees, Cryo-Cell has gone through a few different high risk product "near launches" that seem to have not gone well, notably for Plureon placental stem cells, an innovation that appears to still be in search of a market. They've also invested heavily in marketing, and in upgrading and/or fixing their facilities, which they had said before were already state of the art, and now appear to be trying to develop yet another higher margin (and higher risk) maternal stem cell product of some kind. Ballooning costs led to a bitter challenge for board seats that's still underway, but I don't see this ending well ... at least not in the near term ... so I'm clearing out my shares at about a 40% loss.

Thankfully this remained a relatively small investment for me (and a shrinking one, of course), but I'll take it as a lesson that what seem to be great business plans from microcap operators can quickly turn if management doesn't think the same way you do. I've had similar results so far from my other "microcap with a promising business plan," MMC Energy, but I'm willing to be a bit more patient with that one.

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Switching Commodity Plays (NTO, AMNZF.PK)

I'm taking advantage of the Yamana offer for Northern Orion that boosted prices by close to 10% at one point, and selling my NTO shares in order to open a position in a very different kind of commodity investment.

Northern Orion (NTO) has been good to me -- I bought shares a couple years ago at around $2.20, and sold them yesterday morning at $5.90. I do think that their reserves are worth more than that, but they will be also very expensive to produce and/or take a long time top come to market, so I'll take the short term payout here and not hold on to Yamana shares.

Instead, I've decided to open a position in an investment bank that largely focuses on commodities -- a relatively new firm, now called Ambrian Capital, that's listed in the UK (AMBR in London, AMNZF on the pink sheets). I first heard about this when I saw it teased as the "best investment of 2007" by a newsletter publisher in my work over at stockgumshoe.com, but of course that recommendation and some other heavy buying (by Rick Rule and others, particularly US investors) made the price spike up significantly in April. It has since fallen back to more reasonable levels, so I've picked up some shares here at an average cost of about US$1.36.

Ambrian is an investment bank, asset manager, and adviser that focuses primarily on resource industries -- including underwriting and advising of commodity companies and trading of actual commodities, among them metals, energy and carbon credits.

They also own large or controlling interest in several mining and energy companies, including Jubilee Platinum, Centamin Egypt, Uruguay Mineral Exploration, Inc, and Anglesey Mining among many others.

At today's price in London they're trading at a PE on last year's earnings of just about 8 (8.6 pence in earnings, 67p share price.) -- that's substantially below most investment banks, and I assume it reflects some general pessimism that we're at the peak of the commodities cycle. I don't personally believe that, but even if we are, for these prices I'm willing to take a small chance that this is the peak earnings in the near term. Their yield is about 2.5% and growing, not bad for a very new operation.

But I think what I find most compelling about this investment, aside from what looks to me like clear progress in building an effective and focused investment bank in this sector, with rapid earnings growth, is the valuation of the shares if you consider their outside holdings.

Their principal investments group, which invests the firm's own money, holds investments worth roughly 50 million pounds (including those mining companies noted above). It's certainly true that those investments could all fall precipitously if commodities collapse, and about 10% of that money is in unlisted companies so it's even more illiquid than the rest, but the current market cap of Ambrian Capital is only about 72 million pounds. That means, if you want to do the math, that the value of the bank itself today, aside from its outside investments, is 22 million pounds.

If you then take out the realized gains from the income numbers as a "what if" exercise (the income for last year was roughly 60% realized gains/40% investment banking), you get income on investment banking of about 8 million pounds from a valuation of 22 million pounds. So that means if we ignore their assets, and they sold them off today for roughly book value (which may not be possible), as I read the numbers you'd then be dealing with a fast-growing investment bank trading at a PE of under 3.

[belated note: sorry folks, just realized my error here. I still like the valuation, but it's not a 3 PE unless you screw up the exercise, as I did. This fails to assign the majority of the administrative expenses to the investment bank. Admin expenses for the group were about 8 million pounds, and investment banking operating profit was about 8 million pounds -- so I think we need to assign probably at least 75% of the admin costs to the bank, since merchant banking is much more people-intensive than investment management. Ambrian doesn't break them out, since they have no good way to do so as all overhead is shared across the group. I still like the shares as much, since the whole is more important than the parts at this point and I expect dramatic earnings growth to continue, but my error in the exercise made the valuation look sillier than it is -- sorry!]

The group's general intention appears to be to realize gains on many of their portfolio companies or to use them to seed investment funds for various sectors (they currently manage one investment fund, Golden Prospect Precious Metals), and they recognize the need to diversify as much as they can given the volatile nature of commodities. They're also planning to start a small private equity fund that they hope will both make profitable investments and help steer firms to the investment bank for advising and IPO underwriting in the future.

Like many folks, Ambrian is also looking to the East -- they recently sold a small stake in the bank (about 9%) to Sun Hung Kai of Hong Kong, and they intend for this to be a pathway into the Chinese markets, both to advise Far Eastern commodities companies, and to help invest the cash that is pouring through many of those markets.

So ... although this is certainly a risky investment and a tiny company, I like the risk-reward profile, and I think that this is the best play I can make on commodities right now -- if the commodity markets remain at all robust, Ambrian should be well positioned to continue rapid earnings growth, and they are not nearly as leveraged to any one commodity or one project as most other investments I would consider.

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Clearing out Small Positions (IMAX, LGF)

As time goes by I'm finding it harder to grasp -- and so I'm making a move to save a little bit of it. I've decided to clear some of the smaller positions out of my portfolio.

Essentially, any holding that makes up less than two percent of my portfolio has been put on notice -- if it's not something I'm actively looking to buy more shares of, I'm going to sell the few shares I do own.

To some extent this is a natural outcome of my hyper-diversified portfolio, and of my strategy of usually buying shares in fairly small clumps as I build a position. In most cases, I'll buy a few shares to open a position, then research the company more over the ensuing months and look for opportunities to fill out the position over time.

But sometimes, that first position I buy turns out to be either a mistake, or not as interesting as I thought it would be. In those cases, I'm usually very reluctant to sell these small positions because I want to wait for more information ... which means I get a huge number of small positions building up in my portfolio, all competing for my attention and demanding a certain amount of effort as I track the news and earnings information about these firms.

But life is growing more complicated and there are always interesting new purchase ideas in the back of my mind, so I'm going to focus on being a little quicker to make decisions about these companies that I've taken a small position in and then left to wither.

Two companies that I've actually bought and sold before meet this criteria today: They are small positions, each not much more than 1% of my portfolio, and I'm not interested in buying shares right now. So I'm selling Imax (IMAX) and Lionsgate (LGF).

I don't have strong negative feelings about either of these companies, but neither am I interested enough to buy more ... and there's no point in paying close attention to these in exchange for what is likely to be very limited upside (at least to me, since these are small positions).

Imax has been in a reasonably decent recovery over the last few months, though it has come down about 10% from the recent high near $5.50. I still think the shares are undervalued here, but I don't have enough conviction to buy more and make it worth my while. My primary concern is the company management, which has so far failed to meet reporting standards and mismanaged a "strategic partner" search process. It's quite possible that the big screen company will prosper -- they're certainly doing well with hit films so far this year -- but in order to really thrive they're going to have to expand their base significantly, which is likely to take quite a long time at this rate. They believed that they needed a partnership or a buyer who could push their growth, and I'm inclined to agree -- but with the lack of interest in theater companies right now, I don't know that they'll get it at a fair price. Even Cinemark (CNK), the big international cinema operator which came public just last month, has received a fairly tepid response in the market.

And Lionsgate is, though steadier and more profitable, also unlikely to make any big moves soon. While it's interesting to hold this one and watch to see which of their films are hits and which bomb, it's not interesting enough to make it worth my while. Carl Icahn is still holding shares in this one, though it doesn't appear that he has bought any in quite some time or made any activist overtures toward the company of late, so there's certainly ample reason to hold the shares here. My primary concern is that the shares are a little too expensive to buy, considering the growth rate they've shown over the past two years, and I simply no longer own enough shares to make it worth my while.

These decisions are very personal ones relating to my portfolio composition, so I wouldn't argue that anyone else should consider selling these companies -- I might look back and regret this, but for sanity's sake I need to focus my attention on my filling out positions that I feel more strongly positive about.

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Goodbye India Fund (IFN), Hello India Note (INP)

This morning I sold my shares of the India Fund (IFN) and purchased shares of the Barclay's India Index exchange traded note (INP).

I had bought shares of the India Fund, a closed-end fund run by Blackstone, early in 2005, largely because it seemed like the best way to track the Indian market (due to restrictions on foreign shareholders, there aren't any Index ETFs for India, and most Indian share ADRs are priced very differently from their domestic counterparts).

The shares were extraordinarily volatile, not only because the market itself has the tendency to move up and down rapidly, but because as a closed-end fund the shares usually trade at a widely variable premium or discount to the actual value of the shares (the value of the underlying stocks).

In many ways, the premium or discount (in recent years it's been a premium, though steep discounts have existed in the past) has been a good barometer for US investors feelings about the Indian market, which means the changes in that premium are likely to magnify dramatically the already wild swings of the underlying stocks.

I've lived with this because the fund seems to be more or less well managed, and has performed pretty well compared to their benchmarks -- but I didn't buy shares because I thought their stock picking would make them stand out from the pack of India mutual funds ... I bought shares because I wanted exposure to the Indian market.

And now there's a better way to get that exposure.

Barclay's, home of the ubiquitous iShare ETFs, has recently started a new product called iPath, a family of exchange-traded notes (ETNs). These in practice work much like ETFs, with daily trading volume on the NYSE and a close correlation to an underlying index. In reality, they're quite different -- they're not mutual funds as ETFs are, they are debt instruments that promise to return a value equal to the movement in the underlying index (including dividends, etc).

So while these products are new and this is the first equity-based one available from Barclays (the other three currently available are tied to commodity indexes), I'm buying in. I sold my India Fund shares at $44.08 (they had been purchased at $33.90) and bought INP shares at $51.32.

Here's how I see the difference between the IFN CEF and the INP ETN:

India Index Exchange Traded Note (INP):

• INP carries Barclays credit risk, since they're the ones promising the return.
• They do not carry any stock picking risk because they're mimicking the MSCI India Index, which tracks the biggest companies in India (though only 68 companies at this point, I'd compare this with the S&P 500 as a good representative of the country's market).
• INP will mimic the index nearly perfectly as it goes up or down, partly because Barclay's offers to redeem large blocks of shares at NAV.
• As a debt instrument, INP has a maturation date when the proceeds, whatever they are, will be automatically returned to you -- they're 30 year notes, so the date in this case is December 18, 2036. Of course, they can be bought or sold on the NYSE just like a stock, so there's no need to hold to "maturity" to get your money. There's no guaranteed return of principal at maturity.
• All return is capital return -- there are no dividends or distributions, the entire return is reflected in the share price when you sell.
• As essentially an unmanaged index product, the expense ratio is the lowest of any product that gives broad Indian market exposure: .89% right now (I'd like to see it a little lower since it's an index, but I'll take it).
  

The India Fund CEF (IFN):

• The India Fund carries stock picking risk, since they don't try to be an Index Fund (comparing the top ten holdings of IFN and of the Index shows you they have about five stocks in common).
• The India Fund will magnify the performance of the market, most likely (great performance of Indian stocks will likely bring in more investors, upping the premium ... a crash will likely send them to the exits, creating steep discounts).
• India Fund offers repurchase options to existing investors that you really must exercise if you don't want to lose money -- they're diluting your shares of the fund by selling existing investors shares at a discount to NAV, so if you don't buy in you're losing ground. While it's fun to exercise your rights and buy shares that immediately appreciate, it's no fun that you're essentially forced to do so (especially if you don't have the funds available).
• The India Fund has a dividend yield, so income investors are likely to be more interested in this one -- the dividend is highly variable, right now ETF Connect puts it at 7.5%.
  
• And finally, the IFN and one or two competitors have had this space essentially to themselves for years, which has led to some extremely high expense ratios. Right now the cost is not too bad at 1.5%, but that could change. And if the ETN product takes off and inspires competitors, the CEFs may suffer if they have to compete for investor dollars, possibly hurting current holders.

It might well be that the IFN will have higher returns -- but in my opinion, it also carries significantly more risk and comes at a higher cost. For what I want, index exposure to the broad Indian market, I think INP is a much stronger choice.

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Last Chance for a Tax Loss (CVTX)

At the end of every year, like many investors, I like to look through my portfolio to see if there are any losing positions that I want to sell in order to book a loss for tax reasons.

This year, unfortunately, fate has conspired against me to some degree -- I certainly have some losers in the portfolio, but they're generally in the wrong accounts or they're stocks I don't want to get rid of.

Almost all of my losing positions are in tax-advantaged accounts of one kind or another (401K or IRA), and while some of those may deserve to be sold there's no particular reason to sell them at the end of the calendar year. I have six stocks in the portfolio that are down more than 5% or so, including all three of my most speculative positions -- the bulletin board companies Cryo-Cell (CCEL), SpaceDev (SPDV), and MMC Energy (MMCN) -- as well as Chico's (CHS) and Imax (IMAX). Those five are all in IRAs.

But I do have one holding that I could sell for a tax loss this week -- CV Therapeutics (CVTX) is held in a taxable account, and it is certainly down (my position is in the red to the tune of about 34%). So should I sell it?

I haven't written much about CVTX lately, but I bought the shares on the promise of Ranexa (Ranolazine) as a potential new front-line angina treatment to compete with the sometimes ineffective beta blockers and such that have been in use for decades.

And here's where it gets interesting -- CVTX is down dramatically because they have not yet gotten approval for Ranexa as a front line treatment, and because sales of Ranexa for patients who have already tried other treatments started extremely slowly this year when the drug was approved for that much smaller market.

So that slow takeoff might mean that cardiologists just don't like the drug -- in which case, CVTX has a long slog ahead even if they do get an expanded label for the drug. Or it might mean that the doctors are waiting for the completion of CVTX's expanded MERLIN trial, which has been delayed a bit already, before they start prescribing Ranexa.

The MERLIN trial is underway now to examine the potential for Ranexa as a front-line treatment, and to use as an argument for the FDA for an expanded label to dramatically expand the sales potential for the drug. Essentially, an investment in CV Therapeutics is a bet that the MERLIN trial will back up CVTX's safety claims and give them a huge market to sell Ranexa into, because they don't have much in the way of other promising drugs intheir pipeline.

So I'm thinking that this one probably makes sense as a tax-loss sale, even though I do think Ranexa has some great potential (and is moving forward a little faster in Europe, which is promising). Why? Because it's going to be months before we hear important news from the MERLIN trial, so I have plenty of time to sell now and buy back after 30 days if I still have that inclination, with certainly no catalysts expected in the next month or so.

Of course, I could always be surprised -- news could leak, either good or bad, from the MERLIN trial, or a new drug could be discovered to have great potential in their very thin pipeline, or cardiologists could suddenly fall in love with Ranexa and spike prescriptions higher in the short term. Or someone big could buy the company. While those are certainly possibilities, I consider them all remote -- and especially remote in the next month, so I'll be taking a tax loss in CVTX and reconsidering at the end of January whether I want to re-open a position.

full disclosure: I sold my shares of CVTX at $14.01 this morning. As of this writing, I still hold all the other stocks mentioned here.

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Upside too Limited -- Selling Precision Drilling (PDS)

This afternoon I sold my shares in Precision Drilling (PDS), largely because of the changing dynamic for this company and its fellow income trusts following the Canadian government's decision to change the taxation status for trust distributions.

It wasn't long ago that I bought these shares -- a very poorly timed buy in mid-October, just a little while before the tax change was surprisingly announced -- and I hate to give up on the shares at this early stage.

But after spending some more time going over the company and my portfolio, and reconsidering how the tax changes would impact me in the future, my assessment has changed -- PDS may well still be a profitable company, but the reduced dividend potential is enough to make me want to sell.

I counseled patience (at least for myself) after the tax change was announced, and I'm glad I didn't sell immediately -- the shares have recovered somewhat from their initial shellacking. But now that I've taken my time to look it over, it doesn't make sense to wait for the ax to fall in a few years. I'll take my 15% loss now and move on.

PDS came with a fair amount of risk -- it's primarily an oil and gas driller after all, so faces commodity price risks that are not dissimilar to those of my largest holding, SeaDrill (even though the two companies are very different). Additional risk came from their concentration in a particular geographic area (even though that area, Western Canada, is one of the prime hydrocarbon-producing regions in the world), and in their exposure to natural gas.

That risk was nicely accounted for by the fact that the company was quite cheap, and by the fact that their trust structure provided a very strong dividend to prop up the price during any shorter term business slowdown that might occur.

But now, with the potential for that dividend to shrink over the next four years by roughly 30%, with all else being equal we might expect the share price to eventually fall by a similar amount (trusts are income-oriented investments, and I'd expect them to trade more on their dividend than anything else).

So far it has fallen by about 15%. I don't know how long it will take the market to discount the remainder, or if it will happen at all -- it might be that the cheapness of the company is enough to keep folks holding on, believing that oil services revenues are likely to grow enough to make this a worthwhile hold. It is, after all, even cheaper now, and nothing has changed in their operations or outlook.

For me, though, this was an add-on to my core energy holdings, and the one that I am least operationally comfortable with. As long as I have solid well-managed exposure to natural gas through my holdings in Chesapeake preferred shares, and heavy exposure to oil drilling in general through my investment in SeaDrill, which I think has a much higher return potential, my holdings in Precision Drilling became expendable as soon as the future dividend became questionable.

Full disclosure: My PDS shares were sold today at $24.97 (purchase price had been $28.90). I continue to hold shares in SeaDrill and Chesapeake Preferred (D series).

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UBS, I did it again (UBS)

As I mentioned a couple weeks ago I might do, I decided to sell my shares in global Swiss bank UBS (UBS) today.

I originally bought UBS for a few reasons -- I liked the global footprint, the lack of reliance on the US stock market compared to some other big banks and brokers, the exposure to the Swiss Franc, and their solid position in China. I also thought that they were coming out of a big period of investment in their expansion, and that they would be increasing their dividend in the near term.

So what has changed? Well, they had a slightly disappointing quarter last time around, missing analyst estimates by a bit on some poor trading results, which they blamed on the weak summer in the stock market. Perfectly reasonable, and though it didn't hit the big US brokers in the same way this same weakness was felt by nearly all the big European banks -- so that's more than forgiveable.

And I'm not necessarily crazy about them jumping on the exchange bandwagon by building a new one at a time when existing exchanges are all looking pretty expensive, but it may well turn out to be a good idea. After all, even if they cause price wars or an aggressive level of competition in European listings and trading that hurt the results of this new exchange, that would likely still help UBS in the aggregate by reducing their own trading costs. So that's at least a wash.

It's also not their outlook, which is also pretty positive -- they're shooting to become the third largest prime broker next year as they try to build their market share in services to hedge funds, and they continue to believe that their growth will be significant in global wealth management.

Really, the reason I'm selling is that it's becoming more and more clear that UBS is going to continue its acquisitions binge. The shares were undervalued last year, I'd argue, on the back of all the cost and hassle of integrating their myriad financial acquisitions -- but once that work was done, I think I and many other investors expected UBS to focus more on organic growth and returning cash to shareholders.

The CEO in August stated that they were likely to cut off their buyback early, and unlikely to raise the dividend as they focus on more acquisitions. At the time I let that roll off my back because I was so intrigued by the possibility that UBS might have a significant competitive advantage in building a Chinese brokerage business.

But with no more news on Chinese developments for UBS of any note, and with continuing developments from other companies (it looks like Citibank is going to be buying in to Guangdong Development Bank, among other moves by competitors), that's not enough of a reason to put aside my concerns.

So with the latest quarterly release and commentary not doing anything to reverse the likelihood that the company will continue burning through cash in their ambitious acquisition-fed growth, I think that UBS is faced with more acquisition and integration risk in the years to come than I originally figured.

Add that to the fact that within the wildly competitive world of financial services, I don't see UBS as having a particularly defensible niche or advantage -- it may be that all the companies will prosper, but with cutthroat competition in China, Japan and the US causing banks to throw tons of money at growth prospects, particularly in China, I'm no longer convinced that UBS is any better a choice than HSBC, or Credit Suiss, or Citibank ... or that the cutthroat competition among the big players will allow for great profitability for any of the major banks going forward.

And with that background, I don't see a reason to hold these shares when I have move conviction about other companies. I bought UBS for relatively slow long term growth and dividend growth, but with the increasing likelihood that they're not likely to return additional cash to shareholders I'll sell now and be satisfied with my 20% return in less than a year. UBS is not a bad company, and it may not be a bad investment at these levels, but it's not the company I thought I was buying.

I'll take those profits, which were more than I was expecting from UBS on an annual basis, and consider redeploying those funds in the near future in one of my better ideas -- perhaps something else in the financial sector, since I've been thinking a lot about insurance lately with my recent opining on the next Berkshire Hathaway.

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Selling NetEase (NTES)

Every time I sell a stock, it feels like a little bit of a failure. Today is no different, as I've offloaded my shares of Chinese gaming company NetEase (NTES) following their weak earnings outlook.

The catalyst for this sale was certainly the much-worse-than-expected outlook given by the company in their conference call last night (regrettably, I didn't see that coming or I would have sold in the pre-call 10% runup following the solid earnings report). From a broader perspective, however, I've come to the realization that it is simply time for me to give up trying to predict the volatile gaming market cycle in China, which is essentially what those who are investing in NTES and its competitors must do.

The market is certainly still a great one -- onling gaming remains very robust in China, but it is so extraordinarily competitive that the fall from hitmaker to has-been can be frighteningly rapid. I witnessed the decline of Shanda following the quick fall from grace of their most popular games, and after losing money on that company I've decided to take my gains in NetEase and move on.

I still think NTES is a better company than Shanda, certainly, and they do have the powerful Fantasy Westward Journey game franchise that remains very popular, even as it has clearly plateaued in user growth ... but I have absolutely no confidence that I'll be able to tell whether or not NetEase's game pipeline is any good before it's too late.

NTES was downgraded by Lehman and Citigroup today, with the Citi analyst essentially saying that NTES is no longer a growth company -- the business is too competitive, with lots of home-grown companies already actively pushing new games and a world of game developers trying to break into the marketplace. That could be overstating it -- and there may be plenty of money still to be made in Chinese online gaming, but I'm unlikely to be the person who can figure out how to make it.

It's quite possible that I'll put this money to work in Baidu (BIDU), which I wrote about recently as I was tempted to buy shares before the earnings release (I didn't, though the price is just about the same today). Though still very risky and highly valued compared with NetEase, I have a much better understanding of Baidu's industry and much more faith in the growth prospects of their business -- especially given the much less competitive and hit-driven environment they work in, and their ability to thrive against that competition (as evidenced by their continuing market share gains versus both Yahoo and Google).

NetEase may remain a good investment for some people, particularly those with their fingers on the pulse of the Chinese gaming market, but I'm taking my profits and admitting my inability to read these tea leaves.

I purchased NTES shares last year for $12.61 (split adjusted), and have now sold my full position at $15.55.

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What to do with Click Commerce shares? (CKCM, ITW)

I wrote in some detail last week that I found the Click Commerce (CKCM) takeover by Illinois Tool Works (ITW) to be both confusing and irritating, in that it seemed an odd fit and it valued the company at what I think is a significant discount.

But I didn't decide on the spur of the moment what to do with my shares. It was my inclination to sell some of them before the tender offer goes through, since the possibility, however slim, of the deal falling apart would likely depress the shares, and I can likely come up with something better to do with that money ... but I wanted to make sure there wasn't any solid likelihood of a better offer from another acquirer.

Well, I still haven't heard anything about another acquisition, and Michael Ferro has officially tendered his shares to ITW (see the SEC 13D), so if there was any doubt we know that the CEO and largest shareholder is going along willingly. The shares bumped up by a few cents today, though still under the tender offer price of $22.75, and they actually very briefly spiked over the tender offer in after hours trading to $22.80, which I assume was simply a trading error by someone and not a sign of a nefarious insider leak. The little bit of volatility that was reintroduced to the shares today, likely as a result of some sort of swirling rumour without any basis in fact, does give me a bit of pause (see the chart -- this is really the first time since the shares settled down following the announcement that the shares broke out of their 2-cent range) ...

... but just a bit.

So on Wednesday I'll plan to sell the half of my shares that are slightly leveraged and that are held in a low-commission account (I have a little bit of margin in this position), and hold the remainder ... just in case.

Here's my reasoning:

The tender offer is going to be at $22.75, but it will take some time before we reach that point. During that time, we're dealing with the time value of money and the deal risk, the playground of the arbitrageur (which I am not).

The tender offer is scheduled to begin next Monday, September 18, and to be open for a month (20 business days). During that time I could tender my shares and, most likely at some point immediately following the end of the tender period, receive my $22.75 per share payment.

If I elect not to tender my shares and the deal still gets a majority approval (which seems exceedingly likely, since I've heard no objections from the institutional owners and Ferro's 20%+ stake will go a long way toward deciding the matter), the shares would be taken from me in exchange for $22.75 when the deal closes, which is supposed to be "sometime in the fourth quarter." My guess is that it would be pretty quick, given the likely lack of regulatory complaint and the relatively smallness of the deal for Illinois Tool Works.

So the basic option is: something like $22.55 today cash in hand; $22.75 in late October assuming the tender offer remains uncountered by another bidder and isn't recalled by the acquirer; or $22.75, probably by December, if the deal goes through. Those numbers won't be changing with ITW's stock price, since it's an all cash deal.

And as I intimated earlier I might do, I'm hedging my bets. The return of less than 1% (the .20 cent difference between today's price and the tender offer) over the next five or six weeks isn't sufficient to make it worth it to take the chance that the deal could possibly collapse, or to pay even a small amount of margin interest on my holdings.

But I'm also entertaining the possibility that another bidder could always potentially materialize, however unlikely ... so for the shares that I hold without margin, and which will also be cheaper to transact if I accept the tender offer than if I sell them outright (again, this is a tiny consideration -- less than 1% impact), I'll wait for the tender offer unless I see an opportunity in the interim that requires me to free up that cash immediately.

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Shaving off some profits at Akamai (AKAM)

Well, I have to say that this wave of selling I've gone through has been exhausting. If you didn't read any of my earlier posts, I've decided to change tacks and reduce my margin exposure significantly in the wake of what have become usurious interest rates, takin profits in some companies, cementing losses in others, and selling both whole and partial positions along the way.

So far, this initiative has led to sales of all or part of my holdings in Formfactor (FORM), Imax (IMAX), Middleby (MIDD), Rofin Sinar (RSTI), and Lionsgate (LGF).

Essentially, what I've philosophically determined is that if I'm going to borrow money to buy shares, it needs to be something I'm absolutely committed to, something that I think has a short term chance of significant returns (less than a year), and something that I'm willing to pay extra attention to.

The flip side of that is that I need to focus a bit more on taking profits on stocks that I hold on margin and that have had significant (100%+ runups). I may prefer to hold many of these companies for the long term, and in non-margin accounts I often will, but in my margin account I need to focus on taking profit when I can do so and pay off the margin loan I've taken out.

Thus, I'm taking some profits in a company that I really like, but that has climbed about 170% for me in a year or so -- Akamai (AKAM).

I'm not willing to sell all of my AKAM shares as I was with Formfactor, another tech company that has had a remarkable run -- I still think there's good visibility for a strong future for Akamai, but there are also certainly some significant risks, largely due to increasing competition in their space (from bitTorrent, Limewire, and possibly, in the future, Google ... among others) but also due to Akamai's stock market run.

While it can be argued that the shares are priced fairly based on very high estimates for next year's earnings, this is a high PE company in a turbulent sector, so since I've borrowed money to buy this one I need to sell a few shares and pay off that loan before I can feel comfortable holding through the next couple years. I think delivering high bandwidth commercial content -- from software to multimedia files to services -- is a growth industry, and one that Akamai is poised to lead. I don't think that their competition will be a significant threat, as I believe the market is growing fast enough to let several growing companies fluorish, and no one has the customer base of Akamai ... but I'm not positive, and it's always possible that a better mousetrap will appear.

And I also fear that any hiccups in their operations -- a missed quarter -- will cause a marked selloff in the shares. I'd rather sell this small portion (about a third of my holdings) on my own terms, at a fair price, than be forced to sell at a discount in the future.

So my Akamai position has been reduced a bit, taking a profit of roughly 170% on the shares I've sold today. I will continue to hold the remainder of my position at an average cost of about $14.26.

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Dropping some Lionsgate (LGF)

As a continuation of my across-the-board selling to reduce margin exposure, I've sold the portion of my Lionsgate (LGF) holdings that were held in a margin account (roughly half of my overall LGF position).

I mentioned the criteria I considered for this broad selling when I posted earlier, and I've sold a fair number of stocks today. So why Lionsgate?

Well, I like LGF the company quite a lot -- I think it's very well run, and I like their strategy of producing lower cost niche films and developing a large and valuable film and tv library that should increase in value as distribution of the "long tail" grows for filmed content.

But I don't think there's any one thing in the next six months that's going to move LGF markedly -- this is a longer term play, which might possibly result in a takeover within the next several years. The company is not particularly hit driven, so while the Saw III release this fall should help their bottom line, it won't markedly impact earnings.

And as long as I'm whittling down positions to reduce my exposure to expensive margin loans, it's hard to justify holding on to a company that I believe will do well in the long term, but is at least as likely to dip on a bad film than to climb on a good one. Much as I did with IMAX, which is in a similar business, I'm holding on to my non-margined shares of Lionsgate and I continue to believe it's a good play for the very long term (3-5 years), but I don't feel confident enough in any near term catalysts to make it worthwhile to hold on to this smallish position with borrowed money.

So I sold about half of my LGF position today at $9.28, a small loss of about 7% from my purchase at an average cost of close to $10. I continue to hold on to the remainder of my LGF position at an average cost of about $10.47. Some of my other recent thinking about Lionsgate, and my rationale for buying the shares initially and holding them to this point, is available here.

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Goodbye to Middleby and Rofin Sinar (MIDD, RSTI)

In the course of making decisions about which shares to release in order to reduce my margin exposure, I found myself thinking carefully about clearing out two small positions that have perfomed well for me over the past year or so -- Middleby and Rofin Sinar.

These two companies don't have that much in common -- they both actually create things, but for very different markets. Middleby is a commercial oven maker, and Rofin-Sinar a small diversified laser company. And while I like both companies, I don't like them enough.

I had earlier sold some of my Middleby shares when they reached a 100% profit, since I thought the unfettered optimism about the company was unlikely to last forever, and I had planned on holding these remaining shares indefinitely.

But I don't intend to add more to my MIDD position, and while I think they have a chance for steady long term growth I think there is certainly some execution risk as they continue to seek out more takeover candidates (even though their offer for Enodis was pulled). So it hardly seems worth holding on to what is now a very small position for me, on margin, in a company that I think is solid but unlikely to again exhibit the extraordinary growth that allowed it to advance by more than 400% in the last few years.

So with some regrets, I'm taking profits in Middleby and clearing the slate -- selling the balance of my Middleby shares today at $79 for a gain of about 70%.

Rofin Sinar is a company I've held for quite some time and am selling today at a decent profit -- earlier this year when I pared back my portfolio because it was simply too diversified, RSTI was one of the candidates I thought about selling. It made the cut then, but not this time.

I can't come up with anything terribly negative to say about the company -- in this case, it's really a matter of selling a company that is fairly difficult for me to analyze, and locking in a profit. I bought these shares after reading a compelling argument in an investment newsletter, but never got a good understanding of how they compare to their competitors in the marketplace, and never was tempted to build this holding into a full position.

It may be a mistake, but I'm just not that interested in RSTI anymore and, while not overpriced, it doesn't seem to be a tiny undiscovered value anymore -- so I'm selling my margined shares and taking a nice profit of a bit over 50%.

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Selling some Imax (IMAX)

Everyone knows what's wrong with IMAX today -- they offered the company up for sale, they didn't get a buyer at the price they wanted ($12-14), their accounting is in some dispute with the SEC, and, as a result of those first two, the class action lawyers are circling like sharks.

Which just goes to show you how bad a company can perform even when their business is on track and their profits are growing. And why I'm selling some shares today as part of my overall margin reduction initiative.

I don't like selling IMAX -- I'm still holding the shares that I purchased for a retirement account at $6.20 following the disappointing no-buyout news. I thought those shares were a bargain then, and I still think that's well below a fair price for the company.

But given the confusion about their accounting and the risk that their accounting problem will actually develop into something signficant (at this point, it's just a question of recognizing revenue during construction of their theaters, which is a timing issue that I don't much care about), I can't justify borrowing money to hold the shares in my margin account any longer. The fact that the CFO resigned adds a little more urgency to the situation, and may explain why the shares remain in freefall, but I think it's as likely that he was a sacrificial lamb or that he made a simple mistake as that there was any real chicanery going on.

So I'm selling a bit less than half of my overall IMAX holdings, and clearing out all of the shares that I held on margin. This sale brings a loss, of course, so at least it will help me to write off some of the profits I'm taking in other positions.

The Imax shares I'm selling today were purchased at an average price of $7.30, and sold this morning at $4.99 for more than a 30% loss.

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Selling Formfactor on valuation (FORM)

As I posted earlier today, the primary motivation behind my doing some wholesale selling today is to reduce my margin exposure in a time of unpleasantly high margin rates.

But I needed to also determine which of my many holdings to clear out for this purpose. I generally just took a short term viewpoint on all of them, which is somewhat alien for me, and selected the few companies that met most of these criteria:

• Smaller holding (and therefore, a company I'm less confident in or interested in)
• Stock I'm not interested in buying more of right now
• Stocks that don't have a near term positive catalyst that I'm confident about
• Shares that are either depressed and unlikely to recover quickly, or...
• Shares that have gotten more richly valued and no longer represent bargains

Formfactor is a company that I think is very solid -- they have recovered from a terrible manufacturing problem (contamination in their old plant, problems opening their new plant) about two years ago, to the point where their industry-leading technology can now be produced more efficiently.

And while they are levered to the very volatile semiconductor industry, they are not particularly levered to any one company or type of chip -- they can produce the best probe test equipment for any of the myriad varieties of semiconductors in demand in the world. You can read my optimistic postings when I purchased shares last year, and when their new fab went online and started helping them earlier this year.

But ... it's a fairly small position for me, because I wasn't smart enough to add more to it last year at $20, and it has more than doubled, so I can't complain about taking that kind of profit.

And, perhaps mosts importantly, this has become a much riskier position at $48 then it was at $22. When I bought shares back then, pessimism reined and the PE ratio was in bargain territory. Today, the PE is 43 and the forward PE a still high 37, so I think that the turnaround and recovery story, which is really what sparked my initial investment, is pretty much complete -- it may continue to do well, but even as we tack on another 5% in gains this morning I think the easy money has been made and I don't want to borrow money to hold these shares -- I sold my position today at $48 for about a 110% gain.

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Reducing Margin Exposure

As short term interest rates have climbed over the past couple of years, brokerage margin rates have climbed with them -- in some cases, quite dramatically. This has presented me (and other investors, I'm sure) with a bit of a dilemma.

As a long term investor with some confidence that I should be able to average 10%+ annual returns, I found it reasonable to use a small amount of margin in one of my accounts to boost my compounding ability ... or at least, I found it reasonable when margin rates were around 6%.

But with rates now at 10%+ from many brokers -- I'm paying almost 11% in the account I'm worried about -- I can't justify using much margin anymore, except for extraordinary short term opportunities.

More information on various brokers, including their margin rates, is available in a Business Week article from last month (I looked at the print initially -- the online version doesn't have the helpful chart that lists everyone's margin rates). It seems the average margin rate for relatively small margin loans (as I use -- most of my account isn't on margin) is hovering around 10%.

So what to do if I can't justify borrowing money at 10 or 11%?

Although I generally don't like to sell unless I have strong concerns about an individual company, I'm letting go of several smaller positions in my margined account -- some at a loss, some at a gain, but on the whole I'm taking a profit to significantly reduce my margin exposure.

If the account were not on margin, I likely would have been content to hold these companies for a much longer term -- they all have positive things going for them, and I think most probably have bright futures regardless of their current price or valuation. But since it's borrowed money, I have to be a bit more impatient -- and these are the companies that I either wouldn't put new money into now or I think are getting a bit overvalued in the short term, or that are down and not likely to recover in the very near future.

I'll post a separate note on each of the stocks I've sold today to explain my reasoning in some detail, but I have sold all of my Rofin-Sinar (RSTI) and Formfactor (FORM) and Middleby (MIDD), and, (because these holdings are split across accounts,) roughly half of my Lionsgate (LGF) and Imax (IMAX) holdings.

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Lightening up on the India Fund (IFN)

I started to lighten up on my holdings in the India Fund (IFN) about a month ago, and today I sold off the remainder of my holdings (though I'll continue to own some ... more on that in a moment). I made my earlier sales at $47 in early July, and sold the balance at $40.75 today.

That makes for a nice profit in a bit over a year -- I originally bought in early July last year at $30.15.

So why did I sell? Well, there are a couple reasons.

I do still think India is a solid investing market, and I expect it will make some fortunes in the years to come ... that's why I'll still come out of this with a small IFN position. But after a huge run up, I'm quite cautious about the near term performance of the Indian stock market, even after their big selloff in the last month or two.

But primarily I sold because of the structure of the fund itself. If it were an index fund, none of which are available for India at the moment, I might have continued to hold. But the India Fund is a closed end fund, which means it's essentially a mutual fund with a fixed number of shares that can be traded on the market at either a discount or premium to its actual asset value.

And the India Fund now trades at a pretty dramatic premium. When I bought shares about a year ago, the shares were trading at a premium to the underlying value of the stocks they held of under 5% -- and that seemed a reasonable premium to pay for me.

But today, the premium has gotten entirely out of whack and stands, as of Friday, at 19%. That means of the 40% or so in gains I've gotten from this stock, more than a third of the gains have been from the increase in the premium. This is the largest the premium has ever been, the shares have, since inception, typically traded at a very small discount or premium in the range of 3-6%, and the only time it's gotten this out of whack was back during the late 90s stock market boom when it traded at a 10%+ discount.

The premium can be loosely interpreted as a measure of US retail investor enthusiasm for the Indian market, since it's a very difficult market to invest in for small outsiders (except for a few big ADRs like Tata and Infosys), and based on that I think holding a big chunk of this fund is taking a big near term risk. Even if the Indian market continues to perform relatively well, if it just stays more or less stagnant and investor enthusiasm wanes we could possibly see a 15-30% drop that has very little to do with the earnings or performance of the companies in the fund.

Add to that the fact that Blackstone charges a pretty high management fee for this fund, something in the range of 4%, and I think I'm taking too much of a chance in maintaining a full position.

But I said that I was going to keep some anyway -- how? Well, IFN is in the midst of a rights offering for current shareholders, which allows us to purchase shares at a 5% discount to the net asset value (making the discount compared to the actual market value very large indeed). I've sold all my holdings but am exercising my rights, which means I'll essentially end up with about a third of my original holdings at a new cost basis that is only slightly above the price I originally paid, and that is significantly lower than today's market price, while locking in some very good gains for my original purchase.

Exercising my rights offering was a no-brainer -- it will likely be possible to make a profit just by exercising the rights and then selling immediately, assuming the shares don't move too quickly in the next few weeks to close the premium gap (the price will be determined based on the NAV this Friday). But I'll hold, at least for now -- I'm willing to hold these new shares as a flier on the Indian economy, but I have great reservations about the fund's overhead and effective leverage (the premium) and would be delighted to see that market open up a big more to foreign investment so that a nice low cost, high correlation index fund could be opened.

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Not Entertaining Enough (DWA, MVL, IMAX, LGF)

I sold my small position in Dreamworks Animation (DWA) this morning, offloading the shares at $23.25 for a loss of about 35% (average purchase price was about $35, I unfortunately bought shares over a year ago, before and during the Shrek 2 DVD fiasco.

This represents a significant change of heart from my last note about DWA, back in December -- at that time I thought 2006 would be a buying opportunity as we await 2007's Shrek the Third and Jerry Seinfeld's Bee Story film, then Jack Black's Kung Fu Panda and maybe a Puss-in-Boots movie in 2008.

That's still entirely possible, and several analysts see it that way. But after taking a closer look at my portfolio I've decided that I'm uncomfortable with the size and scope of my basket of entertainment stocks. I also own shares in Imax (IMAX) , Lionsgate (LGF) , and Marvel Entertainment (MVL) and I've decided both that I've got too much hit-reliance and entertainment in my portfolio, and that I prefer the other three over Dreamworks. DWA was also the smallest position in this group, so this move also helps with my effort to consolidate and focus more of my time and energy on my larger holdings.

But the size of the position wasn't enough of a reason to sell it -- each of those three entertainment companies has a more compelling upside, I think, than does Dreamworks, though it's also possible that they are also higher risk.

I'm a little concerned about Imax given their very poor luck at choosing their first two films this year (V for Vendetta and Poseidon were tough on them), but I see potential catalysts in the Superman movie and, more importantly, in their possible acquisition or reinvigoration in partnership with someone. That's a large part of the reason I prefer holding IMAX to DWA -- I'm waiting to see what happens as the company "explores its options" with regard to a possible tighter partnership with a big studio or an outright sale of the operation.

Lionsgate, likewise, had a rough Spring -- its highest profile film was the Starbucks-partnered Akeelah and the Bee, which never was able to capitalize on the feel-good word-of-mouth marketing from Starbucks and break through into the public consciousness. Still, Lionsgate has a few things going for them that Dreamworks does not -- they have a huge film library that makes them a very enticing acquisition target if all else fails; they have several franchises that are very profitable (Saw, Tyler Perry); and they have a corporate commitment to profitability, not hitmaking -- they're willing to make or release anything for film or TV as long as they think they can make it profitable, they don't rely on "winning the weekend" for each of their releases (though their low-cost horror and "urban" films have occasionally done just that). This seems a safer bet, and more compelling opportunities for profit, than a hit-reliant animation studio that has so far had trouble even turning hits into profit (which makes me quite nervous about the impact a serious flop would have on DWA).

And finally Marvel ... as a kid who grew up reading Spiderman and X-Men comics I may be simply letting nostalgia firm up MVL's place in my portfolio -- but I don't think so. What I like about Marvel at this point is just the same thing that some, including Jim Cramer, don't like -- they're adding more risk and greater potential reward to their business plan.

Marvel, like Dreamworks, is hit-driven. It was Avi Arad's work to build Hollywood franchises for X-Men and Spiderman that allowed the company to recover and attain profitability over the past several years, and it will be successful films and similar entertainment properties that drive the bus forward. I very much like that Marvel has chosen to continue with their licensed film production -- which will build on the monster hit X-Men 3 to bring us Spiderman 3 next year, and a Wolverine film probably by 2008 -- but to also build a parallel production capacity to bring more Marvel heroes to the silver screen.

This will mean more risk, as Marvel has entered into a $500 million financing agreement to put these films together starting in 2008, but it will also mean much more reward if they can continue building hits based on more of their characters -- instead of a few percentage points of the gross like they get with their older deals for X-Men and Spidey, they'll be pocketing all the profit after paying off debt and covering Paramount's distribution fees. Of course, that means that if the films flop or fail to pay off the debt nut, they'll be in trouble -- but the company will survive, thanks to what I think is very clever non-recourse financing that puts up only the characters themselves as collateral. A flop of a film will mean, if Marvel can't pay the bank, that they lose the right to make any more movies with that character -- that seems fair to me.

The two things that make me a little nervous about Marvel are their penchant for adding debt right now for no good reason (they're borrowing money to buy back shares, which seems foolish to me -- much less sensible than borrowing money to make movies), and the changing nature of their relationship with Avi Arad. Avi was the one who brought Marvel to Hollywood and made it work, but now he's moved on to create his own independent production company that will subcontract to product Marvel's films. This is fine if it just means he has more time to focus on the films, but I'm not crazy about adding another middle man company that will siphon off a bit more profit from Marvel. Avi has done great things for Marvel, but he's also the one who put together the laughable Nick Fury film with David Hasselhof a number of years ago, so he's not infallible.

So four stocks, among which Marvel is the only one I'm holding at a paper profit right now, and I'm offloading one. It should be an interesting couple of years (or months, even) for some of these companies as hits emerge and recede, takeovers are rumored or offered for Imax and Lionsgate, the DVD format war heats up, and online and cable film offerings become more and more flexible and, hopefully, create new revenue streams for Marvel and Lionsgate.

Dreamworks Animation may well have a very good 2007 at the box office, but I'm not convinced that they'll profit from it or that they'll be able to stand out in an increasingly competitive animation landscape. I could very well be wrong, but right now I'm more confident in the prospects for my other entertainment holdings.

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Sell #4 -- Radyne Corporation (RADN)

This is the fourth of my promised four sells, though I have a couple more that I may take off the table or reduce my stake in in order to make some new purchases.

I sold Radyne Corporation (RADN) this morning at $15.78, locking in a roughly 100% gain in about 18 months (bought last January at $7.86). This is a bit of a turnaround for me, since I last wrote in the fall, when the shares were bumping up after great earnings and hitting $13 or so, that I was hoping to hold and ignore this very quick grower.

Turned out a little differently. So why did I sell today? Well, in looking through my sale candidates this was one of the very good performers whose growth I wasn't really clear about going forward. RADN had a huge bump up over the past year or so with the acquisition of a like-sized competitor in their space (satellite modems, etc.), and I think that initial growth was a big part of the reason for their extremely rapid ascent -- were it not for the Xicom acquisition, I expect I'd still be holding this company and expecting 20%+ growth annually.

But after 100% growth in one year, from a company that has gone from totally undiscovered and dirt cheap to a level where it's certainly priced for some significant growth expectations, I feel like this is a good time to take it off the table.

I don't expect dramatic growth from RADN in the near future, though it's possible that I'm wrong and I'll have to watch from the sidelines as it doubles again. In this case, though, I wouldn't buy it here at a 25 trailing PE -- I don't have a strong enough feeling about their competitive positioning in this very active and competitive business to assume that they'll be able to grow quickly enough to justify that pricing. And the forward PE of 20 is just about a wild guess, given the extremely limited analyst coverage.

In the end, though I did plenty of math and reviewed the company's financials carefully, it probably comes down to the fact that I wanted to take some profits to go along with the two losing positions I sold earlier (SNDA and TASR).

And Radyne was the fast grower that I was least sure of going forward, both because of the company and the industry/sector, so it gets thrown off the boat. The industry is one that's not terribly transparent to me. Satellite communications, especially for HD TV and military uses, which are areas that RADN works in, seem to be a growing industry -- but I don't have a real sense of the market size. We're dealing with the ground based modems, amplifiers, and uplink/downlink equipment that's used by tv producers to transmit sports events, for example, and I don't have a good handle on the upgrade cycle or the additional growth in this business once the basic infrastructure is built out and everyone has a basic level of equipment ... which is what I sense to be the situation today.

I think that we individual investors often have trouble in reassessing companies when they may be in periods of transition -- Radyne seems to me like it has significantly increased its market cap and capabilities, brought all those new sales under the tent, but perhaps might have trouble continuing to grow the market cap from this new larger base given their significant PE expansion -- from well under 15 to 20+.

Whether or not my instincts on this are to be trusted is a matter for another day -- this remains a teensy company that could easily move up or down in completely unpredicted ways. I'll try to remember to look back at this wave of selling in a few months and see what happened to my orphaned companies.

Until then, it's time to continue looking for bargains among the rubble of the last few days of trading -- I was happy to pick up Chico's and Click Commerce shares recently, and I'm carefully considering which of my other holdings might be a good place for a new injection of cash.

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Sell #3 -- National Healthcare (NHC)

I made my third of at least four sales on Friday afternoon, selling National Healthcare Corp (NHC) at $42.25.

This one became a sell target for a few reasons:

First, and most importantly, it was a small position and I've been deciding that I'll try to reevaluate most of my smaller holdings and sell those that I'm not interested in adding to.

Second, while I think this is a growth industry in the long term (nursing homes), and a decent company, I don't think that earnings should climb all that quickly, the shares are not particularly bargarin priced at this point, and the dividend, while growing, is still puny.

I'm satisfied with my 20% gain and don't think the shares should climb dramatically over the next few years. It's possible that I'll miss a big boost if this small company gets bought out by one of the larger players in the industry, but with large insider ownership and a tight relationship with the REIT that owns their properties that doesn't seem all that likely to me. This is a small and sleepy company, I don't see many negatives but nor do I want to up my investment here ... so I'll take my gain and get out so I can consolidate my funds into some companies that I feel are better opportunities.

I still plan to sell at least one more stock from my too-broad portfolio over the next short period, though it's a little more difficult with the market hemmorrhaging cash at the moment. Now that I've generated some cash with these sales I'll be looking to make follow on purchases in some of the companies I already hold if this downturn in the market brings some bargain prices to the surface.

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Sell #2 -- Shanda Interactive (SNDA)

This sale is a little bittersweet. I really had high hopes for Shanda (SNDA). I sold off some of my holdings in this Chinese Internet and gaming company about two months ago, but held on to a portion in hopes that the company would be able to right the ship.

It may still happen, and there hasn't been any big news since then, but I've lost confidence in management's ability and, more importantly, in their new business plan.

So I sold the balance of my Shanda holdings today at $13.27 -- not too far a cry from the price I got back in March, but certainly well below the purchases I made at roughly $28 and $32 over the past year or so to build this position.

Shanda is now banking not just on a few new games over the coming year or two -- and new games that will enter an incredibly competitive environment, it's much harder to sell games now than it was just two years ago when Shanda was the dominant player -- but on their new EZ hardware/software solution that will essentially bring an entertainment version of the internet to people's homes and hands.

And regardless of whether their new games, like Dungeons and Dragons, capture a big audience, I see management focusing largely on the EZ stuff and I no longer believe this is going to work.

EZ looks to me like a combination of an inferior console/handheld gaming system with a way to deliver a dumbed down, supposedly easier to use, version of the internet -- they'll have something like Napster or Itunes for music, something for video on demand and/or internet television, something for educational materials.

But really, the internet can provide all of those things, in an increasingly user-friendly way, without intermediaries. In someways, EZ seems like the America Online of 1995 ... and my guess is that China, with their tremendous growth of internet usage, will skip the "intermediated internet" that the US latched on to for several years in AOL and just go straight to the real thing, using home grown products and tools like Netease's games and email, Baidu's search, and some of the various IM systems being pushed in the middle kingdom. I don't think EZPod, EZStation, EZCenter or whatever else they're now calling this confusing mishmash of products will find much of a market.

I don't think that a set-top box a'la webtv, or a handheld PSP clone, or special computer software a'la AOL, will be needed to encourage Chinese users to go online or use the new generation of interactive media ... it's possible that they might succeed, especially if they dramatically cut prices (right now all the EZ stuff I've seen is only going to be affordable for China's truly wealthy families -- who can probably just as easily afford a Lenovo computer and figure out how to use it just fine) ... but I don't think this is going to be a growth industry in the long term. Shanda is only creating the online platform and the content for these devices, they're licensing the design to hardware manufacturers like HP ... and I'm imagining that these hardware companies will drop it like a hot potato if it sells as tepidly as initial reports indicate may be the case.

Shanda's CEO Shen Tiangtiao has basically implied that any critics of Shanda's business model don't understand the Chinese market -- that may be true, I certainly don't understand Chinese consumers very well ... but I think they're going to get up to speed on computer technology much faster than US consumers did in the 1990s, if only because the WWW and associated products that are now available to them are much more sophisticated than we saw ten or fifteen years ago, when many of us thought that AOL's content WAS the Internet.

I still hold Netease, and I think their gaming focus is continuing to work well and, as importantly, they still have a focus on maintaining web traffic on their sites and building audiences for their games, and introducing new games from a solid pipeline. That doesn't seem to be the case for Shanda anymore.

I wrote a few months ago,when I sold a portion of my Shanda shares, that I thought they might still make it work. That's still possible, but I'm no longer a believer. It may be that I'm selling at the bottom, that we're in a bout of pessimism over SNDA that will be overcome with spectacular success from their new games or from the EZ business ... but I'm not wiling to bet on that.

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Sell #1 -- Taser (TASR)

I've written over the past two days about deciding on a few stocks to sell. Today, one of them helped make the decision for me.

I had been close to ready to sell Taser anyway ... but today's notice that they have further accounting problems was enough to push me over the edge. It doesn't sound on its face as though the problems are nefarious or terribly serious, but Taser management doesn't have a huge well of trust built up that will allow me to take their word for it that the problems were minor clerical errors.

I sold Taser (TASR) this morning at $9.25 -- a bit lower than I might have sold them had I thought more quickly and put my sale through yesterday, but on the whole I'm happy to be rid of this one.

Taser was one of my smallest holdings, partly because I never put very much in and partly because it has fallen by roughly 50% from my purchase price (average cost was about $17). I wrote a few times about Taser last year when they were busy crashing and burning, and I did believe that the panic which sent shares to $6 was an overreaction.

But now shares have recovered somewhat and no longer seem like too much of a bargain to sell .. and while I think the product is valuable and I like that it's getting used instead of firearms in some situations, I don't think the growth will return to the heady days of 2004. I expect slow growth from the company as they recover from their scandals and from the bottom falling out of their market (that's if they ever recover their sales growth, who knows what will happen with this latest accounting restatement) -- but I don't think they're going to be catching lightning in a bottle again and selling hand over fist to every police department in the world.

I'm not selling this because of the nature of their product, or because I think the company is worthless ... but with a new scandal brewing (that's probably a premature thing to say, but this is definitely more evidence that management is having trouble keeping track of the business), and what I see as a period of slow growth ahead, I'm no longer willing to hold this company at a high PE that assumes dramatic future growth.

So one down, at least three to go. TASR is off the board, and I feel better for it.

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Need to do some selling (HELP)

Well it has finally happened -- my portfolio has gotten too diversified. Some of my holdings are getting less attention than they deserve, and my reluctance to sell has saddled me with some stocks I'm not all that excited about any more.

I still don't like selling -- but I'm now holding 37 individual stocks, one CEF and one ETF (not to mention a few mutual funds in some retirement accounts and elsewhere). That's too many.

So I'm setting a new goal for myself -- over the next month, I'm going to sell four of these holdings to clear some mental space for the future. I should probably pare back a bit more than that, but it's in my nature to like covering a large group of companies and, for the most part, I still think my portfolio is full of promising investments ... so I'm sticking with my general reluctance to sell.

So how should I do this?

Do I pick my smallest four holdings and just offload those? That would be BBBB, CVTX, SNDA and TASR.

Or the biggest? The top of that list is BRKB, GOOG, GOL, ISRG, WFR and RYN.

Or do I pick the worst performers? That would be SNDA, TASR, CCEL, and DWA.

Or the best performers, trying to sell on strength? GOOG, AKAM, IFN, NTO, RADN, VRTX and WFR are all up more than 100% over the past year or less.

Should I sell sectors that I'm getting worried about being overvalued? That might include timber and real estate for RYN, or gold and copper for NTO, telecom equipment in RADN, semiconductor equipment and supplies in WFR and FORM, or industrial and micro lasers in RSTI. I'm also getting a little worried about the speed of advance of the Korean ETF (EWY) and the Indian market (IFN) ... but boy, it hurts to sell winners.

Or maybe I should just get rid of the stocks that I'm getting sick of seeing in my portfolio for any variety of mushy reasons. That could mean the end of TASR, SNDA, RADN, NHC or a few others.

I really don't know, not yet -- I'm trying to impose a little discipline on myself in paring back the portfolio, and will probably do so a little further in the near future to make way for new investing ideas. But I don't know how I'll do it.

So here's a chance for you to tell someone what to do -- what do you think I should sell? I'm interested in hearing any perspective.

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I could have made you rich! (GOOG)

Really, all you need to do is look at my short-term decisions, then use as much margin as they'll give you to bet heavily the other way.

That's halfway a joke, of course. I've done fine over the past few years in beating the market handily thanks partly to some good dumb luck, and I don't usually get filled with regret when I make decisions that the market turns against for a short period of time.

But again, with Google earnings out today ... I could have made you some money.

All you had to do was notice when I sold about 30% of my Google holdings to diversify a couple weeks ago when it was just under $400.

And then, being a good contrarian, you would have made a huge bet on Google.

Today, you'd be up by more than 10% as Google released great, analyst-beating earnings once again.

And really, you'd have to figure the odds were in their favor. Google doesn't seem to care what analysts think, but they have clobbered the analyst estimates every time excepting one, it just so happens that that one was last quarter. And now they've more than made up for it.

As I type this and watch the after hours action, Google is trading at about $440.

This is an interesting experience in investor psychology for me, because I hemmed and hawed about selling part of my GOOG holdings for a long time (it was by far my largest holding) before finally selling a portion a few weeks after I passed the one-year holding period. And I still hold the vast majority of my GOOG holdings that I picked up at an average price of around $195, so this blowout earnings report from Google is really great news for me.

But I'm mostly I'm just mad that I did my diversifying a little too early. I've said this before, but sometimes being wrong is infuriating, even when you're making money.

So as I said, I'm a great contrarian indicator sometimes ... I have full confidence that most of the companies I invest in will go up in the many years that I intend to hold them. But I'm getting almost as confident that they'll drop in the few weeks after I buy them (or shoot up in the weeks after I sell).

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