The Big Big Review

Happy Holidays to all and thanks to our most frequent readers (DC, TC, Samir, Drs. T and Mike, Anon, and my family) for your continued support throughout our first. Thanks as well to our international readers and all of the hedge and mutual funds who have logged in if not on (Schwab, Lehman, Annaly....).

Well, I think by any measure, The BBB has had a great year in what was otherwise a horrible year for investors. As the market descends towards 40% from it's late 2007 highs, we should finish the year post-fees, pre-tax, about 65%-70% ahead of that market. Our willingness to stand fast in the face of constant analyst optimism and sanguine projections has allowed us to take chances on out-of-the-money positions with great reward. Ironically, it was the pre-Lehman collapse flinch (I chickened out), that cost me (but hopefully not you) even much greater gains. But all in all, not bad for a PA who does research in his spare time and avoids "market wisdom" like the plague.

Let's review the mostly good and some of the bad from our 1st year. Hope it was a profitable one for all and I hope to do as well if not better next year.

Winners:

1. These were the big ones. Just based on these, had you held them to melting point and put enough cash in, you were looking at maybe a lifetime's worth of good returns. The following were shorted and went to $1 or less.

a. Lehman (recommended puts at $32, and again at $27 after bouncing back from $20)
b. GNW (recommended puts at $17)
c. GGP (recommended puts at $30)

2. Almost as good, these stocks crapped out below $5 after I recommended shorting them.

a. WaMu (recommended at $20)
b. Wachovia (recommended at $10)
c. Citi (recommended at $18)
d. National City (recommended at $9 for a strangle, could've made money on both ends)

3. Homebuilders. Like banks at the beginning of the year, I refused to believe that there wasn't a lot more downside. These puts all did well.

a. Centex
b. Lennar
c. MDC (had to be more patient with this one)
d. Ryland (still holding this one, but could've sold for 50% profit from reco point on 4/10s and 4/15s)

4. Retail! We were waiting, perhaps too long, for these opportunities but they turned out to be some of the best picks of the year.

a. Williams-Sonoma (200%)
b. Cheesecake-great food, crappy stock (200%)
c. Darden-looking good on this one, shorted at $25, got out at $15, now up to $28

5. Jumbalaya. An assortment of other recos, while not going to zero, would've done very well had you followed my short points.

a. East West Bancorp (800%)
b. Sovereign (almost 300%)
c. Saks (300%)
d. SRS-What looked like our biggest loser in July turned out to be a homerun at $295 a few weeks ago. It has since plunged to $56 and I recommend playing this game again. I am.
e. XLF (reco short at 38, down under $10 several times)
f. XLY (reco short at $30, around $20 now)
g. Capital One-I really hated this stock all year. I recommended shorting it the 4 times it went over $50 and this trade would've worked each time. Now at $28.

Now for some humble pie....

Losers:

1. As I watched the no-short rule, bailouts, and printing presses all conspire to knock down my shorts, I felt that a Lehman bailout was inevitable. I underestimated the pure hatred Dick Fuld inspired and that his company alone would be that last to fail. What I thought we be a huge bear-market rally turned out to be the jump off point for the real bear market that I had been waiting for all year. I folded a week early, and turned winning positions into losers on AN, KMX, BAC, and WB. Had you shown more manhood than me, you would've been sitting on real gains in all of these positions.

2. Long positions. Why? As I look back, I don't know. The thought that even strong-earning, dividend boasting stock could perform in this environment was silly. While PXJ and Cummins were both up 25% from reco dates at one point, they are a long way from there now.

3. Perhaps the ugliest of all, Freeport (FCX) calls to 2010. With the stock dropping from about $130 to under $20 at one point, I am reminded of that strange term, "stop-loss."

While I'm sure neither of these lists are complete (the beauty of archived blogs, and feel free to remind me of even more losers), I think you get the picture. Pretty good. Going forward, I expect a shift to even more of a black swan portfolio, conserving cash and retaining a portion of our investments for out-of-the money homeruns/gambles. Currently, we are sitting on the following:

1. Gold 2010 calls. If we continue to print fiat money at record pace, gold must go up. With demand destruction of world commodities though, will 13 months be enough time for a small deflation cycle followed by rampant hyperinflation? I think so.

2. Ryland puts. Homebuilders and owners are bankrupt. Will a bailout save these guys too? Don't think April is enough time, especially if one of the big 3 blows through all of their loan before then.

3. Citi. Won't be allowed to fail, that we've seen. Bought it at $8. Check back in a couple of years.

4. Build-a-Bear. C'mon, if this company survives next year I'll be shocked.


2009 Insight? Probably save that for 1st blog of the new year. The only things I have a close eye on are BAC and USO. If BAC gets down to $10 or $11, think we're going long for all of the same reasons we did with Citi, plus the already in-place insurance of the Merrill purchase. Oil gets more interesting by the day. USO closed at $29 today. The question is whether or not to just buy the ETF or go long to 2011. Can oil get stuck in the $25-$40 range for 2 years? Yep. Might it go to $70-$80 though? Place your bets.

Happy New Year everyone and I hope you will continue to enjoy The BBB!

Back to Betting

Let's ignore the bailout and move on, as we knew that was coming. A few observations:

1. The Madoff scandal will cost an estimated $50 billion in losses. In January, on news of a French banker blowing $6 billion, the market opened down 700 points. This market threw the Madoff news onto page 2 behind the bailout.

2. The Fed is finished as a competent/respected institution. In his article on why the Fed has become obsolete, Jim Jubak points out:

"The Fed is supposed to care more about the soundness of the system as a whole than about picking winners and losers. But court papers in the Lehman Bros. bankruptcy case show that on Sept. 15 and 16, after declining to rescue Lehman, the Fed lent a Lehman subsidiary $138 billion so that the subsidiary, Lehman's broker-dealer business, could wind down tens of thousands of trades with other Wall Street companies in an orderly fashion. It appears that the Fed found it could move when the profits of other Wall Street companies were at stake. The Fed is supposed to be an impartial regulator of the financial markets, not a covert protector of strong institutions at the expense of weak ones. By compromising its impartiality, the Fed is also compromising its ability to lead an effort to build a new global financial system. "

3. The market gave back all of its rate cut rally within 3 days. As John Markman pointed out this week, the future earnings of S&P companies will be so bleak, the market will be forced to capitulate. He estimates new lows for the S&P between 550-700 next year. Ouch.

4. Gold cracked a 2-month high. Oil fell to a 5-year low. You know that I'm very bullish on gold. Do I think oil will go down to $25? Certainly possible. But will it stay below $40-$50 for a few years is the question. I don't think so. I'm actually waiting for the USO to break into the $20s before I go long however. I might hedge with both LEAPS out to 2011 and just straight purchase of the ETF in case demand destruction means a 3-5 year window before oil races back up.

5. Christmas comes early this year. Retail sales have been so sluggish that post-holiday clearance sales are happening today. Itulip recommends saving your money now as the next leg down is large retailers rapidly going out of business and forced liquidation sales with prices of 80% off.

Taking a break from our cheery analysis, I'd like to post my bowl confidence picks for the season. This year's games seem particularly difficult because so many mediocre teams are eligible. However, getting the big ones right is all that matters. I will post in order of confidence, not by bowl. My loyalty will be to my wallet as I'm picking against my alma mater.

34. (highest) Texas
33. Central Michigan
32. USC
31. Texas Tech
30. Georgia
29. E. Carolina
28. Alabama
27. Florida
26. Kansas
25. Florida St.
24. Boston College
23. Oregon St.
22. Iowa
21. Cal
20. Georgia Tech
19. Tulsa
18. Rutgers
17. Missouri
16. Nebraska
15. Boise St.
14. Rice
13. Air Force
12. BYU
11. La. Tech
10. Cincinnati
9. Troy
8. Memphis
7. Hawaii
6. Oklahoma St.
5. navy
4. Colorado St.
3. Buffalo
2. North Carolina
1. Nevada

http://articles.moneycentral.msn.com/Investing/JubaksJournal/5-reasons-the-fed-is-obsolete.aspx

http://articles.moneycentral.msn.com/Investing/SuperModels/financial-forecast-11-bets-for-09.aspx

Let's Go to Zero

Each rate point cut has correlated with about a 1K point loss in the Dow, so cutting rates to zero makes a lot of sense. Following on our Chanos kick, when interviewed by Bloomberg today about what he thinks of all these analysts saying now is the time to buy, he responded by saying, "Are those the same analysts who told us all to sell a year ago?"

Irwin Kellner, Marketwatch's chief economist, pointed out what we already know. Low interest rates only matter if people are lending, and this additional cut is really meaningless. The only thing it helps solidify is the impending hyperinflation that will be created by the flooding and diluting of the dollar. Jim Rogers pointed out that the pound fell 90% from its high when it got replaced as the world's currency, and with the yen falling to 88 cents today, we're well on our way.

Chanos did point out that he is done shorting homebuilders in the single digits. But we shorted Ryland closer to twenty, and after their bonds were cut to junk and they were forced to cut their dividend 75% to 3 cents, we're going to hang on. Hovnanian lost almost $6/share today. "With the U.S. economy in a severe recession and housing likely to deteriorate more sharply in 2009, U.S. home builders are facing even more operational and financial pressures," Fitch Ratings said in a statement this week." S&P also gave a gloomy outlook for the industry. "While we expect that the severity of the recession will be moderate by historical standards, we don't believe the economy will begin to turn around until the middle of 2009, and this view influences our bearish stance on the creditworthiness of U.S. home builders."

Creditworthiness? Are you kidding? Two REITs, DDR and GGP, almost went under this week when unable to restructure their debt and may still go down. MGM gave away a casino yesterday. Real estate just isn't a very good business right now. Yet the SRS managed to go down 25% today! Ridiculous. For those with strong stomachs, this is a good trade if nothing else in the low 60s.

While I do think that the market will conspire against us this week with the impending bailout (again) looming to aid today's rally, the market ignoring Goldman's $5/share loss, and GE just deciding they won't give guidance anymore, take a look at where gold finished. Over $850, it's highest point in 2 months. Watch out. When the dollar fails and inflation kicks in (again), the shiny stuff is going to 4 digits.

http://www.marketwatch.com/news/story/Hovnanian-reports-loss-housing-starts/story.aspx?guid=%7BE0FC5E09%2D27DA%2D429C%2D8206%2D7BA684224CA9%7D&dist=hplatest

http://www.marketwatch.com/tvradio/player.asp?guid={ee0599de-3a35-429a-811b-62d765a6f61d}

The Low Hanging Fruit Will Be Driving Cabs

Can't take credit for this one either. It's actually a combination of two of my favorite quotes from short-sellers recently. The first part is in reference to Ivy-Leaguers who bought the other side of CDS contracts taken by a hedge fund manager who made 800% last year. The 2nd part comes from Jim Chanos, short-seller, whose fund is up 50% this year. “The marginal people on the trading desks, there’s no skill set,” he says. “If they don’t trade derivatives, I don’t know what they can do. The next stop is driving a cab.”

And yet, optimism remains in this market. Obama has conceded that while we shouldn't borrow from China to pay the Saudis, we will print ourselves into hyperinflationary oblivion as we "can't worry about the debt right now." The Dow has rallied several times, ostensibly based on the potential auto bailout which we knew was inevitable anyway.

But where is the hope coming from? Companies like Dupont, Electonic Arts, and Sony are announcing huge misses and layoffs. And these companies are actually making money. What about banks and retailers? Itulip predicts 10 million job losses. We lost 500K just last month and if you look at the separate stat of discouraged workers and those forced to leave full-time for part-time positions, the unemployment rate is closer to 12.5%!

I guess there is some pessimism when $32 billion in zero-yield bonds are sold. This doesn't wreak of a lot of faith in the market or our government. As a matter of fact, it's probably only a matter of time before money markets are back to negative yields.

I'd like to finish with a comment about spending. Stop it. Americans have gotten used to the idea that they're entitled to spend heavily at least once a year. When you can't pay for the stuff you've got, you're not entitled to anything. I was glancing through a magazine my wife receives called Real Simple the other day. It's not bad actually, frequently offering tips on how to save money or use what you already have in a better way. But at its core is the constant push to sell, particularly women, shiny new products. In the article entitled "50 gifts under $50," most of the items were $48 trinkets that would never be used beyond a single holiday season and were purely throw away spending. If this is our idea of conservation, we've got a long way to go.....

How long before the Big 3 are back and begging? I give them 4 months.

http://nymag.com/news/business/52754/index1.html

http://www.cnbc.com/id/28083497

When $4 Billion Isn't Enough, Try $600 Billion

Alright, this isn't an apples-to-apples comparison. The first number is in reference to the GM time bomb that will explode in a mere 3 weeks if the government doesn't cough up $4 billion now, and $18 billion within 3 months. The second number refers to the amount of money we've pumped into banks so far with zero effect. Let's explore both.

The automakers showed up this week with a plan it seems. Ask for even more money and give a definite time frame for demise. Congress will inevitably give them their money and prolong the slow death of the worst companies in a horrible business. Even Toyota and Honda sales are down 30% and their products are vastly superior. More taxpayer money will circle the drain until these guys make another guest appearance, probably in mid-March, and ask for even more cash ala an SNL skit redux.

Itulip posed the questions yesterday of why all of the cash we've pumped into the system hasn't worked to get loans going again, and what kind of disaster is impending when we attempt to reduce the money supply to pre-October levels. Their anonymous interviewee pointed to one reason as the source of destruction, CDS. "Federal Reserve Bank of New York Staff Report no. 276 "Credit Derivatives and Bank Credit Supply" by Beverly Hirtle, February 2007 concluded that all of the nation’s largest banks used credit default swaps not to protect existing assets but to expand their balance sheets between 1997 and 2006." (Itulip) "So all of the largest banks relied on CDS to make new loans since 1997." (interviewee) "Correct, and that means that central banks cannot wave a magic wand and declare all CDS contracts null and void because if they do loans that were made in the US by the largest banks only because they were insured by CDS will have to be declared null and void, too. No one knows exactly the total loan value is of these CDS-dependent loans but it must be high enough to call their solvency into question because these banks refuse to lend to each other no matter how much the Fed increases reserves." He concludes by saying the banks are dead and the inability to declare these products void will cost us $10 trillion. You see my skepticism in calling a bottom.

ADP spun their lottery wheel and picked 250K out as their November job loss number. This will be dwarfed by the government numbers on Friday, which will then by revised in January to a bigger number. Meanwhile, mortgage rates coninue to fall along with gas prices, providing a "tax cut" to the American consumer. Will this stimulate growth and spending? Well, with real wages falling, and predictions for a 15% decrease in available credit next year to go along with rising unemployment and the potential for sudden inflation, I'm not too excited. I'm as happy as anyone else to pay $30 for a fill up instead of $70, but my family, like most, looks for ways to cut spending every day, not to spend more.

This volatility is good and bad. We love being in early, but it's making options pricing very expensive. I have failed multiple times in the last week on bids for ETH and MLHR, along with KBH. Just too expensive and not going to chase. I managed to fill 1/5 of my order on Monarch Casinos on 3/09 $7.50s, and the stock has bounced up and down 20% this week. Should be fun to watch.

A few things we're watching going forward. Oil is plummeting. It may hit $40. I like the USO as its tracking ETF, which generally runs about $10 below the current price/barrel. It's about $38 now. If it gets into the mid-to-low $30s, we're going long. Too many oil producing countries despise these prices and literally can't afford oil to be this low. We can get contracts out to 2011.

The other one to watch is a favorite, WSM. Up almost 30% yesterday on great news of an analyst upgrade, who still thinks the stock stinks, could go bankrupt or breach its covenant, and continues to lose market share to Crate and Barrel and discount stores. Ringing endorsement. I would put a shorter time frame on this and look to buy the $5 puts.

http://www.itulip.com/forums/showthread.php?p=63569#post63569

Did We Miss the Bottom, Again?

You would think so judging by the giddiness of our market reporters, who assure us this time, we've reached a bottom. Reasons such as Obama has picked his cabinet, the government has taken on 8 trillion in debt, the Citi bailout, the automotive bailout......have all been given. And we've just seen the biggest one week rally since 1932! Does that fill you with optimism? It sure does with me. I'm very optimistic that this fally will die shortly and give us ample opportunity to short and possibly re-short retailers and companies relying on consumer dollars to stay afloat through the dismal holiday season.

In case you missed a few figures from the last week while mesmerized by the triple-digit daily Dow gains, let me refresh for you. New housing starts were 430K, even lower than the NAR projected total of 450K, which is impossible by the way. These are the lowest figures since 1991. Durable goods orders fell by over 6% in one month. That's unbelievable and surely no sign of a bottom. The markets still finished down 5%-8% for the month, despite last week's unbelievable run. Gold had it's best month since 1999.

Our Citi theory managed to play itself out over a single week. I bought, it crashed, government steps in to bailout, and voila, right back where we started plus a gold run. I'm going to hang on for now as I think the bailout has placed a bottom on the stock. We'll still be watching for an oil collapse through hedge fund redemption season and almost root for another 1K point gain prior to the real hedge fund dumping. I mean, some of the homebuilders doubled in price this week. Doubled. Does anybody really think KB Homes is twice as valuable as it was a week ago? I don't, and I'll root for it to triple this week and enjoy the ride down.

So happy Thanksgiving everyone, and enjoy the show the next couple of weeks!

Everything You've Ever Learned About Investing

Has gone for naught. Why you say? Let's review.

Every day there are multiple headlines detailing reasons for stocks up/stocks down and "technical" analysis of market bottoms. As we've crashed through every level this year and headlines are outdated by the time they're printed, you realize that not even most, but simply all of the people advising you about the market have been dead wrong (we'll make allowances for
J. Paulson and Taleb).

Diversify. Yep, that's worked out well this year. Just ask Harvard about their diversified endowment portfolio with 8 or 9 sectors each losing over 30% this year. Aside from inverse ETFs, tell me where the "smart" money has been this year?

Dollar-Cost-Averaging. Solid advice. Right up there with the progressive betting strategy in blackjack. Imagine you throw $500 at a stock that started at $100 in January that now trades at $26. You've bought that stock at higher prices 11 times this year. How long will it take to get your money back?

Blue Chips that pay dividends. Ahhh, excellent reco. With Microsoft 50% off its highs and banks 60%-90% off of theirs with dividends slashed to pennies, wouldn't have worked out too well for you this year.

My point? Remember this game, the market, is gambling. Mutual Funds and CNBC have tried to convince you otherwise, but don't be fooled any longer. Take my Citi purchase the other day. Low risk? No way. I've recommended shorting the stock dating back to January. With the stock cut in half already, I am looking at either a breakup and win scenario, a merger and win scenario (longterm), or bailout and complete failure scenario. The other end of that bet was a rush to gold if Citi goes under, and with the price rising over $100 in 2 weeks and my GLD 1/10 calls gaining 60% yesterday, think that was a good call.

We will continue to look for armageddon insurance and yesterday's 500-point uptick shouldn't scare you. Notice Ryland and the homebuilders still managed to get hammered yesterday.....

Moe, Larry, and Nardelli

The Big 3. Center stage for all to see today and these clowns failed miserably. Grilled by Congress today as to what in the world $25 billion in loans will do other than rob the American taxpayer, Wagoner of GM was flustered to a stutter and Ford's chief, Mulally, came off as a smug bastard, even taking the time to plug his fuel efficient and highest quality autos. Jackass, your stock is trading at $1, the same as your IPO 50 years ago. You want to wipe the smirk off your face? The only guy who seemed mildly troubled on the panel was Nardelli, Chrysler's chief, who seemed to be willing to take whatever medicine Congress had to offer. Although he too had no answers when asked if he managed to fly by private jet to and from the hearings in an effort to "cut costs." Didn't look very good for these guys.

We've been talking about homeruns all year and now we have a couple more. Trying to walk the line between good greed and belief in armageddon, I cashed out on WSM, CAKE, and DRI for 200% gains over the last 2 days. Unfortunately, this was done before the end of day today, where I believe an additional 25% could've been added to that total. Throw SKS in for an additional 300% gain along with SRS's rise of $50 today, and we're having a pretty good week.
Some of our readers like Tiger Coach have shown even more courage in holding our recos such as Vornado and are sitting on huge gains.

We are holding out on BBW because I not only believe it will go to zero, but I was only able to fill enough contracts to make that a worthwhile exit point. It's down to $3 today. We are also holding on to RYL 4/09 $10s and $15s, because unless there's a homebuilder bailout, not being able to rollover debt is going to make for some bankruptcies.

I bought Citi yesterday without options believe it or not and was promptly rewarded with its largest price drop in history. This concerns me only a little for as I've privately written to several of you, if Citi is allowed to collapse, then gold might be worth $2,500/ounce at which point I don't care about any of my other holdings. Speaking of gold, I've now read several articles arguing that physical gold is going for close to $1K/ounce despite its paper price. "Funds who would like to keep their asset of last resort are being forced to sell," said Peter Spina, an analyst at GoldSeek.com. "This is causing weakness in the paper gold market price, but it is not a true reflection of the physical market."

This market isn't done yet. We might benefit from another run up to 9K to short again. I've had an itchy trigger finger on Ethan Allen for months but have not found pricing I've liked in this volatile market. Any armageddon/out-of-the-money suggestions are welcome.

http://www.marketwatch.com/news/story/Demand-gold-hits-a-record/story.aspx?guid=%7B215A671B%2D98AE%2D4094%2DA87C%2DA782BB2B3F49%7D

F(orget)A(bout)R(eceiving)C(ompensation)E(ver)

Or FARCE as the TARP plan was to be originally called. Congress thought that TARP sounded a little better, even though it never had any intention of following through with buying out the troubled assets. At least it only took a few months more for Paulson to be exposed as a total fraud and to lose all credibility in a single afternoon.

Speaking of farces, let's talk about dying industries and the money we should not spend to keep them afloat. I recently wrote that I was torn about the Big 3 bailout that will inevitably be approved next week at a great cost to us all. The American car industry is dead. GM is losing an estimated $52k every minute. We have not been competitive on price or quality in 2 decades. There is no demand for these products and trucks are literally selling for half of what they did 4 years ago. Who is going to buy?

And I make the same argument for the homebuilding industry. If I hear one more analyst say "we need to fix the root cause, housing," I might go insane. How can we put a floor on prices when nobody has the money to buy a home, mortgages are getting more expensive, and inventory increases daily while prices go down daily? Let's look at homebuilders. All, yes all, have negative earnings. They all have a product that costs more to produce than millions of competitive products on the market that have a decreasing daily price. If the only way they can make money is to sell new homes, why are their stocks trading above pennies? And don't give me land as an asset. That should be valued right up there with MBS at present time.

Retailers have it only a little better. While they may still have some products people want, they have to slash prices on inventory they paid loads for 6 months ago to entice buyers, and now nobody has the credit to pay. Not being able to finance a 42" TV means no sale, and as we've seen from dire reports this week from Best Buy, J.C. Penney, and Nordstrom, it's only going to get much worse.

A final note about hedge funds. These over-leveraged beasts are dying a quick death, maybe never to return. One fund company admitted this week that its 2 primary funds had lost 77% and 83 % respectively this year. Traditionally, this company had boasted 38% annual returns. So in one year, they wiped out 5 years of gains. That's the kind of fire they played with, but not with their money, yours. George Soros appeared before Congress this week and warned of a possible Depression, not recession. And John Pauslon (not Hanky), the guy who made billions betting against MBS the last 2 years, presented a simple strategy that his firm has employed without risking all of his shareholders' money. He notes that most of the time, his funds are not leveraged at all, and at most his firm has held 33% borrowed equity. Furthermore, there are agreements with his clients that he makes no money in a down year and even clawback clauses to give money back for poor performance.

Anybody on the hill listening? Or can we count you to quack the market to 7K before Obama takes over? I hope so. This weekend is the last chance for the 45 day redemption period....watch out.

http://msnbcmedia.msn.com/i/CNBC/Sections/News_And_Analysis/_News/__EDIT%20Englewood%20Cliffs/Paulson.pdf

http://finance.comcast.net/www/news.html?x=http://76.96.38.13/data/news/2008/11/14/1115054.xml

Forward Looking

Often a term used to describe the market, as if it somehow looks into the future 6 months down the road and tells us where we'll be. I find this hard to believe given the pressure on public companies to produce quarterly results and even now, in the worst of times, improving monthly figures.

I remember the excitement over companies like Disney, living high off of recent movie successes and thriving theme park revenue, pushing guidance higher for the year in April. How they could not have seen then that the failure of a movie or two and impending recession wouldn't hurt Disney World bookings I have no idea, but that's what they told us on Friday.

Along with Disney, retailers look to make some history this week. If October reveals another decline in sales, it would make 4 consecutive months, the first time since 1974. "'October will prove to be a disaster for retail sales, with only the discounters having anything to cheer about,'wrote Avery Shenfeld, an economist for CIBC World Markets."

At least some of the denial plaguing our financial industry has come to an end. Hedge fund managers turned in some all-time bad performances in October. "Steve Galbraith, a partner at Lee Ainslie's Maverick Capital, read about 25 letters other hedge funds sent to their investors in October. 'The tone of the discourse was funereal.'"

The same Marketwatch article takes a poke at Mr. Buffett, advising us to buy stocks from his throne up above. "Be careful buying ANYTHING today," Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors. "There will be a time to buy stocks," he added. "That time is a few years into the future when the strong have separated themselves from the week ... a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more)." "Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed," Bass wrote. "Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don't." I don't either.

Barron's has also fessed up, admitting that their recos on both GM stock and bonds have been bad ones. With the price now under $5, admitting that "our enthusiasm for GM was clearly wrong, as was a suggestion that its bonds, like the senior note maturing July 15, 2041, would be more valuable" seems a bit late.

If the market does continue to "look forward," perhaps keep President Elect Obama's words this past week in mind. "There will be many false starts and missteps." I see no reason for stocks to go up at this point. Two more banks failed on Friday and I think that we are a hundred away from the total count. Trying to find a silver lining in Friday's rally is useless. Look no further than the 10% decline the previous two days to find an explanation.

I am curious to see what my readers think of a potential Big 3 bailout. Personally, I'm torn about it. The pension and job losses would be disastrous. But how much more money can we put towards dead companies in dying industries before we let things hit bottom? How soon before Obama signs off on a homeowner bailout, and at what cost to the dollar and our long term economic health?

http://www.marketwatch.com/news/story/Top-hedge-fund-managers-funereal/story.aspx?guid=%7B8C0A785F%2DF1E5%2D4E84%2DB020%2DB4E6AA1C6496%7D

http://www.marketwatch.com/news/story/Worst-retail-sales-trend-since/story.aspx?guid=%7B3D36EF95%2D90C0%2D44B6%2DB72E%2DB82EE404D685%7D

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20081109&id=9361643

Teddy Bears Hate Obama

Maybe that's not true, but BBW stock has plunged 25% over the last few days. It may actually have more to do with them firing their COO on Monday without giving a reason, only to say that he won't be receiving a parting package.

Williams-Sonoma continued their press tour this week by revealing that they may not be able to pay back their revolver if the 4th quarter is worse than projected. Now, this may not put them out of business immediately, but their cost of borrowing will certainly grow, reducing margins which at last check were already negative. Ugly.

One company that may not be as fortunate is Las Vegas Sands, who just flat out admitted today that they may default on their covenants by December, effectively putting them out of business. Recession proof? This was a $150 stock last year.

The retail numbers continue to look like Bush's ratings over the last year. Saks sales down 16%, Nordstrom's down the same, Abercrombie (who insisted on not reducing prices) down 20% in October. And yet, forecasts for the holiday season remain positive albeit reduced by the day. Aside from gas and food at Wal-Mart, I don't see anything selling.

Our friend, John Markman, poses an eerily simple scenario for the Dow falling to 4K by simply reducing P/Es from 25 to 10 under the influence of global recession (and I think we're there). This would reset us to 1995 levels.

Homebuilder D.R. Horton announced an almost $1 billion loss last quarter with cancellation rates hitting 47%. "Market conditions in the home-building industry deteriorated during our fourth fiscal quarter and October, characterized by rising foreclosures, high inventory levels of both new and existing homes and reduced liquidity in the mortgage markets," said Chairman Donald Horton in a prepared statement. "

As I write this, we witness an end of the latest "fally" with the market down 900 points in 2 days, erasing the Obama effect and returning us to reality. Please be on hold still with the temptation to just "buy and hold" for the long term. Markman may not be proven right, but with the ADP report putting jobs losses at 157K (and they've grossly underestimated for 11 straight months now), I would at least wait to see what tomorrow brings.

http://www.marketwatch.com/news/story/home-builders-announce-more-weak/story.aspx?guid=%7BEA79B18F%2DA8F6%2D42AB%2D874D%2D11EF0863B23D%7D&dist=TQP_Mod_mktwN

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.znUFOQFG44&refer=home

http://www.reuters.com/article/marketsNews/idINN0335401620081103?rpc=44

http://articles.moneycentral.msn.com/Investing/SuperModels/a-credit-crater-too-big-to-fill.aspx

http://biz.yahoo.com/ap/081104/williams_sonoma_analyst_note.html?.v=1

Celebrating Negative Growth

"Our ideas held no water but we used them like a dam."

-We Missed the Boat
-Modest Mouse



Seems to apply to a lot of people these days, Bernanke, Paulson, Bush....perhaps even the CEO of Hartford who, when questioned by analysts said "we're comfortable with our capital position although I don't know what that position is." The stock went on to fall 50% yesterday.



You may remember a recent short recommendation on Williams-Sonoma, also the owner of Pottery Barn. That's working out pretty well as they announced an unexpected 3rd quarter loss and decreased projections for 4th quarter from 86 cents to 30 cents. Owweee, but good for us.



3rd quarter GDP came in at 0.3%. It's Halloween, not April 1st. Nobody believes this farce of a number as we all know it will get revised down sharply. Consumer spending was the worst in 28 years and it will only continue to get worse. How long can the already dead consumer support this economy with job layoffs announced by the tens of thousands recently? AmEx, Motorola, Merrill, the proposed merger of GM and Chrysler would eliminate at least 24K jobs, and everyday disappointing earnings from companies like Avon, EA, Sun...not only is there no discretionary income, there's no income period. And we still await massive hedge fund dumping.

As more anecdotal evidence of consumer demise, I ate with Anon and a few others at a pharmaceutical-sponsored dinner in downtown West Palm at Forte di Asprinio.last night. Forte has the cache of its owner having been featured on Bravo's Top Chef, and is located on the busiest downtown street. I am sad to report that through our two-and-a-half hour dinner, we were the only guests. In case you missed it, even Cheesecake reported a 5% decline in same-store comps, while Darden had a more than 1% decline (we're still short both).



I was amused yesterday not only by the nature of the article, but by some of the interviewees in a piece by Bloomberg about the shock over banks using recent capital injections from the treasury to fund bonuses. It seems that, not unlike Scholes who reappeared after the LTCM fiasco, former CEOs associated with their own disasters like John Gutfreund (Salomon) and Fred Joseph (Drexel Burnham) were dug up. These guys were featured prominently in Liar's Poker and Den of Thieves, CEOs of companies that were involved in small scandals like junk bonds and the S&L debacle. "Odds that Wall Street will forgo the payouts are slim to none,'' according to Gutfreund. Thanks, John, because we know you sure as hell never missed a bonus. Even Barney Frank is upset over this development, coming from a man who should handcuff himself along with Fuld and Mozilo.



Be ready to act in the next couple of weeks to the short-side. We're still seeing the euphoria from our 900-point day based on nothing discernible. If horrible unemployment and slashed earnings make for a huge rally, then I guess I'm lost.



http://www.bloomberg.com/apps/news?pid=20601109&sid=aX6xQJdexEEo&refer=home



http://www.marketwatch.com/news/story/hartford-financial-loses-half-its/story.aspx?guid=%7B5BD8629F%2D48D6%2D4372%2DB592%2D00C9DFDFE724%7D&dist=TQP_Mod_mktwN

Phew, That Was Close

We almost had a bad day yesterday, but with the market down a mere 300 points, we escaped disaster. So what if gains from Monday's 400-point open were eliminated and then stomped on, so what if the NASDAQ plunged below 2003 levels? It could've been worse right?



S&P's chief economist, Sam Stovall, doesn't think things can get much worse. He puts a floor on the S&P at 700, just 175 points below yesterday's close. That's only another 20%! Thanks, Sam. So on top of the 40% we just lost, it can only get 20% worse from here. I'm going to load up on calls immediately.



Retail numbers continue to be horrible, and projections for Christmas remain way too optimistic. Where the year-over-year gain of 2.2% is supposed to come from, I have no idea. This is a "safe" number, a 50% decrease from normal holiday season but not reflective of true economic conditions. "In fact, consumers spent less in every category than they did a year earlier, according to September data from MasterCard Advisors. Shoppers spent 5.5% less on apparel, 13.3% less on furniture and 13.8% less on electronics and appliances." "Consumers are bracing for recession," Ken Perkins, the president of Retail Metrics, said in a report Oct. 9. "Credit will continue to be very difficult to come by through the holiday shopping season, and the jobs market is likely to further deteriorate."



Homebuilders imploded this week. Finally, the market seems reluctant to accept decreasing sales, huge losses, and diminishing revolvers that could get margin calls at any time. This is why we loaded up on Ryland 4/09 puts this week. After their $65 million loss, their revolver is left with less than $200 million dollars. Now competing with huge foreclosure rates (the only reason sales increased last month was the abysmally low prices for distressed homes), where are the new sales going to come from? Vicki Bryan, senior high-yield analyst at bond research firm Gimme Credit said, "Global financial market mayhem and grim economic and housing market data painted the prospect that housing markets may not recover for years. Actually, the housing market will be hard-pressed to recover over the next couple of years even if the economy is stable," the analyst wrote in a client note Friday. "Lending standards for mortgages continue to tighten and mortgage foreclosures are at record levels," Bryan added." Ugly.



So, I continue to stress that things can always get worse. I have no belief in testing lows or market bottoms. I just think things can get bad in a hurry, especially if unemployment jumps. Argentina, Hungary, and Iceland almost went bankrupt this week. Be patient if you're thingking about going long over the next few weeks.



http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/retailers-face-not-so-happy-holidays.aspx#pageTopAnchor



http://www.marketwatch.com/news/story/housing-market-hard-pressed-recover-credit/story.aspx?guid=%7B9B45375F%2D5C4E%2D4C2F%2D90C7%2DA782456AD58C%7D&dist=TQP_Mod_mktwN



http://www.marketwatch.com/news/story/valuations-low-only-if-you/story.aspx?guid=%7B6071ABC4%2D8568%2D4529%2D8A87%2DE182268CE13E%7D

The Game Doesn't Start Until the 4th Quarter

Don't be confused by these not quite as bad as expected earnings. I mean, Wachovia just lost $24 billion in one quarter, but this should've been expected, right? We've seen this ugly pattern over the last year now where earnings have been horrible, but on occasion, slightly better than the lowest possible projections, so they've been viewed in a positive light. Remember when earnings were supposed to grow? Now we're getting excited by $3 billion quarterly losses. Step back and think for a moment if that makes any sense.



Keep in mind, the peak of the credit crunch occurred as most companies were winding down their 3rd quarter, not throughout. Ditto the Lehman collapse. Ditto the impending layoffs at Best Buy, GM, Merrill, Yahoo, on and on. So don't think all of the dire news is "baked in" to stock prices already as the MSM would have you believe. As a matter of fact, it's going to get much worse....



Let's review. 30-year mortgages went up to 6.75% last week, the highest in years despite all of our government's interference. Wal-Mart announced yesterday that the "paycheck cycle" has become even more pronounced in the twice-monthly buying cycle. "In a "disturbing" trend, Castro-Wright (president and chief executive of the Wal-Mart's U.S. operations) said Wal-Mart for the first time is seeing a paycheck-related spike in sales of baby formula, suggesting consumers are rushing to buy such necessities as soon as they have the cash." Furthermore, "he said credit used as a form of payment at Wal-Mart is falling and that the decline is expected to reach into the double digits this year." If people don't have credit to use at Wal-Mart, do you think they'll have any to use elsewhere? How does that bode for retailers and holiday shopping? Ouch.



Even companies such as Colgate have had price-increase strategies backfire on them as consumers have rapidly shifted to generic brands. This trend will only continue on a grander scale.



As credit diminishes and consumers save (imagine that, Americans saving), this will only increase the recessionary effect. ``If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we've seen in the postwar period,'' says Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co. in New York. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next."



Those hedge fund redemptions we talked about? You haven't seen the full power yet, but it's coming. "Hedge funds saw a record $210 billion drop in assets under management during the third quarter as investors redeemed an unprecedented amount of money from the industry after poor performance." So before you rush into those long-term plays, wait for the next leg down. Todd Harrison of Minyanville, who also reserves the right to change his mind frequently, did note, "Of the 36 times the S&P has rallied 6% in a single session over the last eighty years, 32 occurred between 1929 and 1933. History doesn't always repeat but we would be wise to remember the prevailing trend during those daunting years." Keep that in mind when trying to decide if an 11% upday was "capitulation" and if that's something that even matters.....



http://www.marketwatch.com/news/story/hedge-funds-assets-off-210/story.aspx?guid=%7BB179F492%2D7C5E%2D429C%2D8C5B%2DC589DE5DCA60%7D



http://www.bloomberg.com/apps/news?pid=20601109&sid=axsUMrc.liiE&refer=home



http://www.reuters.com/article/ousiv/idUSTRE49K94K20081021



http://www.marketwatch.com/news/story/bear-trap-other-side-trade/story.aspx?guid=%7B325F9E10%2D8FA2%2D4367%2D8841%2DDA9E7BD9ABAB%7D

Dow 5K, Our Gap-Toothed Smile, and Paulson's Wheel of Fortune

Slow down, Ax! No way.

Dow 5K is where Eric Janszen of Itulip said he thinks the market should be right now based on actual earnings relative to inflation. So wake up those of you who have been chomping at the bit all week to dive into "once in a lifetime" opportunities, because this dude has been right about everything from the gold to the housing bubble to the market peak last year. Be careful. Take Corning for example. I tried to find the number of buy recos on this stock over the past year, but after the number godzillion came up, I stopped. Now trading below a 3-year low of $12, glad we didn't listen. You need to look no further than the NASDAQ as well, which peaked at 5K 8 years ago. How are we doing now?

Patrick McGurn, special counsel at corporate governance specialist RiskMetrics Group, referring to the actual bailout provisions this week said, ""Under the rules, you can still pay out up to three times annual salary and bonus. The legislation looked like it had real teeth, but the interim final rule is just a gap-toothed smile." Are any of us surprised that, not unlike the possibility that banks will simply avoid governance by using lower level tranches, that nationalized bank CEOs will still earn their bonuses and parachutes? C'mon, look at the leader....

Paulson. A fascinating interactive wheel linking Paulson to the major Wall St. Cretans/Titans was published in MSN Money yesterday: http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/four-degrees-of-hank-paulson.aspx
Notice the outer layer with players like Countrywide and IndyMac didn't seem to fare as well as the inner circle with people like Franklin Raines, Dick Fuld, and John Thain. Also little surprise there. Fuld has been subpoenaed; I wonder when Paulson's is coming?

Despite this week's mild resurgence after the worst week in market history, real economy data was even worse than expected. Home sales were a meager 817,000, the Philly and Michigan surveys were both abysmal, and monthly jobless claims continue to rise. Retail continued to get hammered this week, as inventories actually rose despite a larger than expected 1.2% decline in sales. And it's not just Wall St. that's suffering. Even Best Buy is planning to reduce it's holiday staff by 10K employees. Add this to major layoffs at Pepsi, GM, Danaher, and Borg Warner, and these numbers will only continue to compound, creating a vicious cycle. "Wages grow more slowly when there's higher unemployment, so the downturn will be affecting most working families through reduced hours of work," said Lawrence Mishel, president of the partly labor-funded Economic Policy Institute think tank.

So hang onto your shorts, as retail will continue to fail and we are still awaiting a massive hedge fund redemption. And speaking of hedge funds, thanks to Alexandra at Greenlight Capital, Einhorn's company. It appears as if I'm not an SEC accredited investor (http://www.sec.gov/answers/accred.htm), and therefore, do not qualify to contribute to Mr. Einhorn's funds. I stated my case that I've actually outperformed Mr. Einhorn this year, but still have full faith in his abilities to manage money. Alexandra thanked me for my interest and support, and noted that most of the people working for him also do not qualify to invest in his company. Oh well. We wish you luck anyway.

http://www.marketwatch.com/news/story/corporate-governance-takes-back-seat/story.aspx?guid=%7B8750F6ED%2D3F7F%2D4E80%2DB39A%2DC8D03E13234A%7D

http://www.cnbc.com/id/27242943

http://www.harpers.org/archive/2008/10/hbc-90003696

Sales Down, Costs Up, Uh Oh....

What turned what would've normally been simply a dreadful day into one of the worst days in stock market history, among other things, were the horrible retail sales numbers to go along with an unexpected rise in inflation. But since the Fed has stopped worrying about inflation, that shouldn't be a problem. We need to focus on growth, not the fact that pumping trillions of world dollars into the system will have massive inflationary effects and prolong this mess.

I was amused this morning listening to former Secretary of Labor Robert Reich excusing the excesses of the middle class over the last 8 years by blaming increased credit use on the declining wages of the middle class. He said it's not like these people were buying yachts and expensive cars, they just needed more money to support the same standard of living. Uh, as a matter of fact, it was exactly like that. Expensive cars, multiple homes, nothing is too good for me. I've been impressed a few times with Reich as he has set Kudlow straight from his permabull path, but this statement was ridiculous.

Scary article from the Washinton Post detailing how Robert Rubin and Greenspan repeatedly fought derivatives reform during the late 1990s. Brooksley Born, head of the Commodity Futures Trading Commission, had pushed to regulate in some way these obscure contracts only months before LTCM imploded in 1998. Even after this vindication, she was silenced and "deregulation" remained in vogue much to the joy of now defunct investment banks and hedge funds everywhere.

So many bad things are happening it's hard to spell them all out. Barack Obama has proposed a foreclosure moratorium for 90 days. As I've written here and to his campaign, maybe I would self impose a moratorium on my own mortgage payment. It would take a real ding to my credit score to even get noticed. Try missing at least 2 payments to put yourself on the map. Jack Guttentag of Yahoo Finance writes, "If I were a borrower with reduced income but with good prospects of recovery, I would make the payment out of savings, avoiding the hit to my credit. If I considered the prospects of recovery to be poor, however, I would stop paying and husband my savings. This would move me up on the servicer's priority list for special treatment. While it also moves up the hit to my credit, that is something that would happen anyway as soon as my savings were exhausted."

Anybody know where gold has been during this upheaval? Market down 700 and not even a small flight to gold? We'll see. I'm not naive enough to say the markets have nothing left as they change the rules daily, but these tactics can't go on forever without seriously damaging currency value. "Commodities will benefit the most from the coordinated bailouts because the plans are sowing the seeds of future poverty, fuelling an already raging inflationary fire, analyst Puru Saxena, CEO at Puru Saxena told CNBC on Tuesday." I agree.

With companies like Pepsi laying 3,300 people off, what comes next? Let's ask our government officials. California has gone broke and had to issue bonds this week after being denied funds from the U.S. government. Phoenix now has an unexpected $200 million shortfall because sales receipts are much lower than expected. Programs will get cut first, then jobs will follow. Once the grossly overinflated job creation numbers of local governments stop negating job losses and add to them, unemployment will go through the roof without wages to follow.

I attempted to add Daimler and Ryland to our shorts the last 2 days, but failed to chase higher prices. The opportunity on Daimler may be lost as it hit $40 briefly again yesterday. VNO has taken a $9 hit each of the last 2 days. But I'm not giving up on Ryland, would love to see it go near $20 again so we can watch its last breaths....

http://www.cnbc.com/id/27176315

http://finance.yahoo.com/expert/article/mortgage/114933

http://www.azcentral.com/news/articles/2008/10/15/20081015phxbudget1015.html

http://www.thenation.com/blogs/edcut/370925/the_woman_greenspan_rubin_summers_silenced?rel=hpbox

Put Your Money Somewhere Safe, Like Namibia

You know, Namibia, the African country with 40% unemployment and no child labor laws. While listening to NPR this week, they pointed out that Namibia's banking system was rated as safer than our own in a recent survey. Don't forget to set up offshore accounts in Malta, Estonia and Barbados as well, all with safer banks than ours.We finished 40th, Canada came in at #1. Great.



Nice week for the S&P, down 18%, the worst ever. I love the analyst community and our MSM. They're acting like this is a blip in the never ending market that must go up. A pinch here, a dash there, and presto, back up to 14K! Stocks have been grossly overvalued for a long time and earnings projections remain too high as well. There are no rules for this bottomless pit. The noise is overwhelming.



Why, just this week, CNBC's court jester Dennis Kneale remarked "I know I've been wrong all the way down, but I promise you, I'm gonna start buying and the market will go up!" Thanks Dennis. I can almost hear the monkey turning the handle on the music box in the background while you speak, doo-doo do-da-doo, doo-doo do-da-doo......



And our friend, Dick Bove, breathed a big sigh of relief as he "discovered" that Morgan's exposure to Lehman wasn't as bad as he expected. So his buy recommendation from $41 down to $6 is looking good ("In a note dated June 29, Bove said the first month of the fiscal quarter ending in august was "not a good one," adding that the underwriting sector and activity in the fixed income markets was relatively quiet. Bove maintained his "neutral" rating and has a price target of $41 on the stock.").

When will we stop treating this mess like there's a quick fix and not follow a Jim Rodgers solution of letting over leveraged banks and businesses fail? Instead of allowing for private solutions, we are rushing towards nationalization and thus, socialization of our economy. All Paulson is concerned with is how can we get the slot machines on-line again? How can we get the roulette wheel to land on something other than zero or double zero?

If you liked my recos on Monday, you certainly liked them yesterday. Saks 5/09 had more than doubled in price, WSM 5/09 up 33%, DRI 4/09 up 90%, and Cake 4/09 up 20%. I also added GLD calls, yes, calls to my bag of tricks this week, buying the 1/10 100s. Interestingly, GLD took some lumps yesterday (why, I have no idea), but the calls went up in value. Hmmmm. Also, we're in on BBW 1/10 5s.

http://www.reuters.com/article/rbssHealthcareFacilities/idUSBNG23037220080630

http://www.npr.org/blogs/money/2008/10/namibias_bank_are_stonger_than.html

It's A Great Time To Go Broke

Isn't it though? I mean, AIG is partying it up with their $85 billion dollar payday/bailout...oh wait, let's make that $123 billion as of today as we dropped another $38 billion into their coffers. In the great tradition of Fuld, O'Neal, and Cayne, let's burn this money while we've got it! Even supercriminal/orange face Mozilo had the decency to cancel a lavish ski trip for Countrywide employees after word got out that they were bankrupt.

Can't pay your mortgage? Never could? No problem. Banks can't foreclose on you anyway and the courts are so backlogged that it will take at least a year or two to get to your case. So enjoy the free abode and kick back while you stick families like mine working 3 jobs between the two of us while raising 2 kids with your share of the HOA fees.

Are things bad out there? Yeah, real bad. One of my patients commented yesterday that she was rooting for a small hurricane to hit South Florida to give a short-term boost to her construction business. After being rammed in the daycare parking lot today, I drove my now dented and continuously beeping car over to the body shop. I was told that there were several people waiting to service my car and that I might have it back in 3 days. Oh my god.

How's the bailout going? Didn't take long for that rate cut either. And yet the market continues to drop to levels that we haven't seen in years. Like a witchdoctor whose usual gesticulations have failed, Paulson feverishly plots new tricks to stop the decline instead of letting markets sink where they need to be. You've wowed us, Hank. Maybe I'll try a rabbit's foot next.

Speaking of the bailout, here's some scary stuff you might have missed. John Markman of MSN Money points out Section 113 of the bailout bill, titled "Minimization of long-term costs and maximization of benefits for taxpayers." Seems there's a small exception that states "any debt instruments worth less than $100 million won't trigger the payback provision." Hey, do you think banks will then proceed to issue tranches of $99 million? Markman certainly thinks it's possible.

http://articles.moneycentral.msn.com/Investing/SuperModels/its-a-great-time-to-be-afraid.aspx

Naked Without Shorts On

Wooo, I was feeling a little naked there for awhile without any short positions aside from SRS, which suddenly doesn't look so bad does it after gaining $55 in the last 2 weeks? This is a direct result of the impending CRE collapse which I've warned of for most of the year, hidden neatly behind residential mortgages. GGP almost hit 0 today, another stellar reco. With the help of Vornado, SRS may have plenty of room left to run and we'll look to exploit REITs further as empty mall space and a broke consumer spell doom for the industry.

What did I dress up in? Well, I started with Williams-Sonoma, maker of high-end cooking and kitchen tchotchkes that are overpriced and under-functional. But wait, if you short now, I'll throw in their other brand, Pottery Barn, at no extra cost! Maker of high-price tchotchkes that cost 3 or 4 times what you'd pay at Target, Pottery Barn is Ghost Town, USA. There's just too much dependence on discretionary income to make these brands go, and if you take out the sale of the company airplane (probably a 1-time item), the company made 7 cents last quarter. Gross.

Who else smells stinky? I think Darden Restaurants does. Sellers of red lobsters and bottomless bowls of pasta, dining out will simply be too expensive for most of us over the next year. We are broke. The tip alone at the end of dinner could cover the cost of a fast food delight and middle-end dining will be next in line for empty booths and price cuts. I mentioned this before they released dismal earnings three weeks ago and now the fall will continue.

These companies fit into the middle of what I now think will be 3 tiers of investment opportunities for us over the next 18 months:

1. Companies that are already crappy on paper, have been punished, and could go to 0 (BBW is a prime example, add KKD and Saks as well).

2. Companies that are trading in the teens and higher that have suffered, but will struggle even further as the economy collapses.

3. Good companies that are along for the ride and may provide us with the best buying opportunity for years to come. WE ARE IN NO HURRY HERE! If we had a dollar for every "technical" low that had been breached or every pundit who showed us a chart flooring the bottom, we'd be wealthier than Fuld and his minions. But let's keep some cash available for Apple hitting the $70s, Google falling below $300 (really?), or GE hitting $15. Why not?

I'll note that Cramer now thinks the Dow might crater below 8K and that Tobias Levkovich, Citi's world class analyst, has shifted from the most bullish to the most bearish analyst on Wall St. He's now realizing that his 1475 S&P prediction as recently as last month may not come to fruition. Thanks for the heads up guys....

IOD: WSM 5/09 $12.50 puts
DRI 4/09 $20 puts

http://www.bloomberg.com/apps/news?pid=20601213&sid=ahfa4j8J5uRg&refer=home

I'm Shorting Teddy Bears, Just Don't Tell My Daughters

That's right. The economy and America we now live in (Nanny State indeed, Anon, privatized gains and socialized losses, no income for NYC for the next 6 years due to tax writeoffs...) is so bad that I plan on making money shorting teddy bears. Fad and short-lived once have item build-a-bear is high on my list of companies that won't make it in this economy. My wife reports that on a recent trip to the mall that she was the only one in the stuff your own bear store, and was promised heavy discounts by the manager if she could round up a birthday party. I think (again, don't tell my daughters) that instead of throwing a party there, we'll put that money towards shorting its stock. One of many retailers that count on 2 things that will sink their ship, 1. heavy mall traffic and 2. discretionary income. Eewwww.

Mark-to-market accounting, we hardly knew ye. One not so subtle change of the inevitable bailout was the repeal of this type of accounting just passed into law in November. Instead of having to value assets at current market value from their purchase price (MBS, CDOs for example), we can now return to fantasy land accounting principles where banks can hold these assets at the full value paid for them or at least, at Level 3 status, valued by their shrewd internal formulas. This will save 100s of billions in immediate writedowns and yes, may even allow for the unheard of writeup. Ridiculous. As Peter Wharburton points out in his interview with Itulip, as ridiculous as the government claiming taxpayers may actually make money off of this package as it's never happened in all of history.

What I expected to happen in 2 days happened in one. A 300 point rally followed by a 450 point slide. This was a good reminder of sticking with your principles. I put in several lowball bids on Build-a-Bear and Saks, neither getting filled. But I felt good about the commitment despite the market's rise after I placed orders. If you're not a daytrader, and I'm certainly not, we have to come to a price for options that we think will make money for us no matter what, and that includes the given time frame. I will pursue retailers who I think will get bashed in the head this retail season, and will have to live with the omnipresent threat of Paulson and Bernanke changing the game as we go. But now the bailout has passed. The no-shorting ban gets lifted Thursday and all hell may break loose as Congress will do nothing more until Obama or looking-less-likely McCain take over. For Christ's sake, name a book, the Bible, or perhaps The Wall Street Journal, Palin! I'm still waiting for her to answer a question after that debate....

The Fix Is In

In case you didn't know....


Let's review some of the events from the past week:

WaMu and Wachovia went under. "A Durham, North Carolina native, (new CEO) Steel told analysts on Sept. 9 that Wachovia had cash to meet more than three and a half years of maturing debt. During his mid-September meeting with Woodard in Charlotte, Steel expressed optimism that Wachovia could battle through investor unease caused by its option ARMs. ``I have absolutely no idea how Bob Steel defined liquidity,'' said Gary Austin, a former Wachovia bond trader who now heads PDR Advisors LLC in Charlotte. ``When you run out of assets to pledge at the window, you've got nothing left.'' But statements like this, combined with no-shorting rules, had catapulted Wachovia to $24/share just last month.


Freddie Mac gained almost 200% in one day. Why?


Citi and JPM were awarded banks with little risk attached. Unless all of the MBS blow up, in which case the whole country goes bankrupt anyway.


Bush prodded not only Congress, but all Americans today that failure to push through a bailout cost us a trillion dollars yesterday, more than the cost of the bailout. As if the 2 were apples to apples. Never mind the over $4 trillion that had been lost by the markets since its highs in October due to the criminality of the banks.


Buffett was given the best terms of all-time by GS on a $5 billion investment.


That's why, as tempting as the last 2 days were in a day-trading kinda way, I stepped back and just added to my list of terrible companies and those that might gain from this dictatorship-like intervention. We've glossed over the slowing economy and yet another disappointing home sales figure because we were too busy celebrating this no-short bounce.


Not everyone drank the kool-aid. "Rick Dillon, fund manager and chief executive of Diamond Hill Investment Group, demanded that his firm be removed from the SEC's "no-short" list. "It's better for shareholders to have [shorts] as participants," said Dillon. "Short sellers provide a valuable service in two ways: price discovery—their information content is valuable; and they provide liquidity." Really, it's true Congress. Prices can also go down. Which brings us to our next point, redemptions.


See, when hedge funds can't short stocks, they can't go long either. Why? Because you've taken away their hedge, Mr. Cox. So, in the short-term you managed to pump up a few bank stocks and started a chain of events that will lead to massive selling by the $2 trillion dollar industry. As their returns have suffered, they've been asked for redemptions by their clients. How will they pay for those redemptions? By selling stock. "Many hedge fund investors can withdraw money on Dec. 31. Some funds require that redemption requests be submitted 90 days ahead of time. That means requests have to be in by Tuesday. Other funds require 45 days notice, so there may be another round of withdrawal requests toward the middle of November.
Some managers have already been selling positions to raise cash to return money to investors. However, if redemption requests come in higher than expected, there could be another wave of selling and market disruption during the fourth quarter."




Aha! You thought that I forgot. No way.

Where to begin? With his infamous rant a mere month after he said cutting rates would be disastrous? Good start. Let's go back to some of his predictions for this year first.

Goldman Sachs (GS) makes more money than every other brokerage firm in New York combined and finishes the year at $300 a share. Not a prediction—an inevitability. In fact, it’s only January, and I think it’s already come true.

Google stock reaches $1,000. The company becomes one of the top three companies in the U.S. in market capitalization... and successfully challenges Microsoft (MSFT) for operating-system dominance.

Apple (AAPL), he predicts, will reach $300.

9/30/08-"Jim Cramer Admits: "I Screwed Up" In Recommending Wachovia Stock Two Weeks Ago Because I Liked The CEO"

8/1/08-""I am indeed sticking my neck out right here, right now, declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15. and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside."

6/5/08-"At an investment symposium I attended last night, someone asked me whether I thought Lehman Brothers (NYSE: LEH) (Cramer's Take) was going under. I said, no, no I didn't think so. It's got a great franchise with a good cash position, reduced leverage, much better management than Bear and a buyback that's kicking in that wouldn't if things were as bad as the bears make it out to be."

3/21/08-"I call it a bottom."

3/11/01-"Bear Stearns is fine!"

10/1/07-"I'm now confident that what would've been a given in 2008, a brutal recession..will now be avoided and prosperity assured."

1/21/01: "This is the lowest-risk, highest-reward environment possible." And from 3/24/03: "...the risks of owning stocks are as high as I have ever seen them, and the rewards the least certain." Right before the Nasdaq crash and 4-year bull run respectively.

Another example of the fix being in. Cramer effectively influences 2 of the top financials shows and websites (CNBC and TheStreet.com) that Americans turn to (unfortunately) for their picks and info. After touting the overblown selling of this market and twice calling a bottom, he now has instructed America not to buy stocks until the Dow hits 8,200. This is the noise that Taleb talks about. Hopefully, you'll find my writing a note of truth amongst that noise. I recommended shorting Lehman, Wachovia, and WaMu this year, not to mention Synovus and GNW, both of which went under $4 in the last week. Keep alert over the next few days. Continue being skeptical of this market and our government. And we'll look for the advantages that our leaders thought they could keep just for themselves.

http://www.cnbc.com/id/26958231

http://www.bloomberg.com/apps/news?pid=20601109&sid=aJicDM1cwuZY&refer=home



http://www.marketwatch.com/news/story/year-end-redemption-requests-loom-over/story.aspx?guid=%7BC1F1DF32%2D7B00%2D4C8B%2DBA30%2D82A37D243614%7D