Its just a perfect day in Vero Beach, a gentle breeze and uncharacteristically low humidity. Linda and I are kicking back on the pool deck, sipping pomegranate-tinis and contemplating our tropical garden swaying in the breeze. The swimming pool is ice-blue and totally algae-free. Just wear your goggles so that the chlorine doesn’t turn your eyeballs to jelly. (Who put me in charge of that anyway… heh heh).

Oh, and we are tag-team blogging, of course. Linda is on her Sony Vaio powerhouse. While I am tranquilly typing on my itsy bitsy pipsqueak G-Meso netbook.

Linda has a wonderful entry about a local house on the beach that, for a mere pittance of US$ 6.7 mil, will bring you a wonderful, additional gigantic tax bill every year. Oh, and its probably totally uninsurable. But never mind, it is totally to die (or go bankrupt) for. Check it out…

I, on the other hand, yes this is my blog entry. And its all about the economy, dammit.

First let me say that I am deeply thankful that my talents, such as they are, are deployed to the benefit of the Energy sector. There are a lot of things being devalued significantly at the moment, but Energy isn’t really one of them. Sure oil has declined from $140 to $50. But the $140 price was just lunacy and everybody knew that (or at least knows it now). Historically, $50 oil is about where is should be, possibly a wee bit higher. I’m glad I am not in banking or discretionary consumer retail. I talked to a few bankers today while negotiating at Sears for a new refrigerator. Total bureaucrats, all of them. If you are in banking presently, I suggest getting out of it pronto. Its no place for a thinking, feeling human being. And my consumer-retail salesman looked extremely anxious and hungry (and resentful of the bankers). I guess I see his point.

So the point of all this is, I am not a believer of the axiom that the recession/depression is all behind us. We still have plenty more to work through. And the so-called stimulus is nothing more than political payouts to the supporters of the current administration. There is precious little that is stimulative about it, unless you are a member of the parasitic class in the USA.

The current apparent recovery in the stock market is a head fake… there are more legs down to this stock market. For the unabashed truth about the state of our economy and the market you should definitely sign up for John Mauldin’s Frontline Thoughts weekly newsletter. He is the author of that warned long ago that future stock market returns were going to be (ahem) a bit below normal. After listening to all the rest, he is the only one I am listening to now. I expect that this rally will become weaker and weaker over the next few weeks and during that time I will be moving my current 50% cash position to about 75%. The remaining 25% will be invested in anticipation of a weakening dollar vis-a-vis real goods (i.e.inflation). Investing in inflation while the country is grappling with deflation seems stupid. But I expect these massive sums of money currently being created by the government will actually work as designed. They will inflate at full throttle until deflation is no longer a concern. Our national debt will balloon to gigantic proportions and our currency will suffer big time for it. Social Security surpluses will be a thing of the past this year or next, about a decade sooner than forecast. This is going to get ugly, folks – especially for debtors. Pay down what you can. Save, hedge… be smart.

I like Palladium, Natural Gas and Silver… in that order. I hate teen-focused retail, the banks and the autos.

But then again, I hear a couple of egret’s playing in the canal that runs next to our house. The sun is shining, the banana tree’s are swaying, and I can’t imagine life being any better. We will endure… we will endure…

But let’s soldier on anyway if we can. I came across an interesting video the other day that made me take a step back and consider the larger picture. This great little TED presentation is definitely worth a watch. Its important to remember that this too will pass and that a glorious future awaits us as long as we don’t screw things up too badly.

Ok, after watching that we should be able to shift our focus to the hapless BitLizard model portfolio with some perspective. This month we underperformed the S&P 500 by slightly less than 1 percentage point and our relative all-time performance against that index went oh so slightly negative. Given the carnage in the S&P it was a horrible month indeed. But tomorrow is the monthly trade day according to our rules. So its time to cart the dead bodies off to the morgue and search for new victims.

This month it will be easier to talk about the survivors instead of the laggards as there will only be 2 holdings that will survive the culling this month. AMPH is a liability insurer for physicians and has turned in a fabulous performance of -7.3% <sigh>. Good enough for this savage market. Our other survivor is TJX – yes, TJ Maxx – the retailer which is within spitting distance of actually showing us a profit. Its down just -0.9%.

Every other holding in the portfolio is toast with losses ranging from -21% to -31%. So these tickers join last month’s RHI and EIG in the year-long exile: ASML, BP, DECK, EMR, FRX, UTX, VLCCF and XOM. So are we going to find enough stocks in our screen to replace these 8 turkeys?

Well, yes. It appears that the stock screen is the eternal optimist. Our 8 replacements are as follows:

TOT – Total the French oil company

TS – Tenaris a steel company in Luxembourg

CMI – Cummins Engine

OLN – Olin a chemical and ammunition company (ok, I like this one)

NBL -  Noble, another oil & gas firm

NUE – Nucor the big steel company

WDC – Western Digital a maker of computer disk drives and perpetual value stock

MUR – Murphy Oil – more oil & gas

It looks like this month’s theme is oil and steel. We are certainly going to have a contrarian portfolio this month! So we will buy sell our losers, divide the proceeds into 8 equal pieces, and then invest equally in these 8 issues at halfway between the day’s high and low. Hopefully our luck will turn with the start of spring.

I got to thinking about this today after seeing this blog posting from Zoho. Yes, I agree with this completely. That college degree that may have cost you $120,000 in real money and untold amounts in “lost opportunity” costs, will almost certainly prove to be a losing investment in the long run. You might have been better off investing the money in penny stocks.

Having said that, if your goal when going to college was to party down nightly (and daily?), rock out and meet the love of your life — ok, now that might be worth the money. But don’t pretend its any sort of investment in the classic sense. 

Suffice it to say is if you give me a resume to look at I don’t pay any attention to the education section. I, like the Zoho folks, want to see what you have done in life; what products you have made; how other businesses valued your participation.

As you might expect from the worst January in stock market history, the portfolio did not fare so well this month. The portfolio fell 9% for the month. However, this was 1 percent better performance than the S&P 500 over the same period. So its hard to complain. Is this just beginner’s luck? Well perhaps, though this outperformance was fairly common during the heady days of the bull market. As they say, “we shall see” — which is the whole point of this exercise.

According to the portfolio rules, we must dump stocks that fall 15% or more from our purchase price. Emerson Electric (EMR) just barely stays in the game this month rallying back today to close with a 14.9% loss for the month. However, our property and casualty insurance company Employers Holdings (EIG) is a goner with a dismal -18.3% return last month. So the rules say we must turn our back on this guy and never look back — at least for a year. We will sell EIG tomorrow at halfway between the daily low and high, paying a commision of 1%. Likewise with employment agency Robert Half International (RFI) which fell 15.4%. Same pricing and commision rules will apply. The other selling rule — a stock who’s timeliness rank falls below 7 — didn’t take anyone out this month.

Replacing EIG will be Deckers Outdoor (DECK) which is an outdoor footwear company. The stock screener now returns 15 possibilities out of 7000-odd stocks of which DECK is rated highest for timeliness. We will buy it on the same basis as we sell EIG — a price halfway between the daily high and low with transaction costs will be 1% per trade. Replacing RFI will be Knightsbridge Tankers (VLCCF) a crude oil shipper. I swear that this stock screen has a masochistic tendency. Oh well, ours is not to reason why….

So that’s it until next month. Hopefully it will be warmer in Vero Beach at that point. Its freezing (almost literally) in Vero currently. Hasta la vista!

You can run the screen yourself using the free “deluxe” stock screener at http://moneycentral.msn.com/investor/finder/customstocks.asp. You will need to use a browser that support ActiveX controls. Although I have all the major browsers I use Internet Explorer for this purpose. Here are the rules for the screen along with the current results:

The reasoning behind this screen is fairly simple. First, I want a high return on equity as my primary objective; a company making great use of its shareholder’s investment. Second, I don’t want to pay through the teeth for it. The PEG ratio (PE ratio divided by anticipated growth rate) is used to insure good value. I also want to look at how much cash flow my share price is buying. Too little cash flow or too dear a price are to be avoided. I want to avoid companies that are over leveraged. So I’ve set the maximum at half of the equity. I’m also leary of flash-in-the-pan business. I want a 5 year history of ROE at or above 20% – a lofty benchmark. Lastly I want my purchase to be timely — ha, don’t we all! For this I simply use MSN Money’s black box – its Rating system — which is a rank from 1 to 10, 10 being best. I don’t know how (or even if) it works. But I really don’t have any better ideas on how to measure this, so…. So I’ll limit my consideration to stocks rated 9 or 10 by MSN Money.

I am just a clueless investor just like you, blindly stumbling around in the dark. I am most definately not a certified investment advisor. So if you want to use some of these ideas you are welcome to them. And I’m sure it will be worth at least as much as you paid for it. Enjoy!

Happily this screen currently returns 10 selections. I’ll fictionally invest $1000 in each of these issues which gives us a nice $10,000 portfolio to start out with. The portfolio will adjust itself at the close of the first trading day on or after the 6th day of each month. The portfolio will always hold 10 stocks unless no additional stocks are available to be bought. Stocks that decline by 15% from our purchase price will be sold and shunned for 1 year, replaced by a new selection from the screen if available. When a stock’s MSN rating falls below 7 we will also sell. If a company reports a loss on its quarterly report we will sell. We will assume a commission of $10 per trade. Dividends will be retained in cash and will be added to the next purchase in the portfolio. Interest on cash balances will be ignored. So let’s see how we do…

Who knows… if I can get some good vibes from this over the next few months I might decide to start steering my tattered portfolio back to this system from its current defensive stance. Wish me luck!

Anthracite Capital, Amphenol Corp, Community Bank System, Ciena Corp, Canadian Solar, Gerdau SA, Golar LNG, Jet Blue, Legacy Reserves LP, Linn Energy, Netease, Nutrisystem, North American Palladium, Syngenta

Keep ‘em coming, boys!