Thursday, April 10, 2008

For Sale

As I said, shorting the retail sector still remains a good idea after several months. The store best positioned to gain traction from Linen & Things bankruptcy is BBB (Bed, Bath and Beyond). Instead, they came out with horrible earnings and lowered projections. Walmart and Costco had meager growth, but are still gaining customers as the low-price option will continue to win out over the next few years. Clothing retailers such as Cache and Limited, which also owns Victoria's Secret and Bath and Body Works, had terrible quarters and lowered projections. Circuit City is bankrupt. On-line retailers are slumping. This is no mystery. People fund most of their purchases with credit card debt. As rates increase and limits get lowered, there ain't much room left for discretionary purchases. COF was down 5% yesterday.

Lehman added a mere $1 billion of bad debt to their balance sheet today as 3 of their funds failed. Where was this news last week? Oh, they forgot to tell us. They're getting hammered in pre-market trading. Also, GS reported an increase in Level 3 assets to $96 billion yesterday. That's great. What the hell is a Level 3 asset? Here's the definition taken from a Bloomberg article yesterday. "Under accounting rules, Level 1 assets are those for which market prices are readily available. Level 2 holdings are valued based on ``observable inputs,'' or prices of similar assets traded in the market. Assets are placed into the Level 3 category when there are hardly any observable inputs, and the firm has to rely on in-house models to calculate potential gains or losses." So basically, GS, using their own models to evaluate whatever these securities are, said they rose 39%. Wow, I wonder what model BSC was using to evaluate their Level 3s? Obviously an accurate system to let the creator of securities with no discernible model to also let them create models for valuing those securities..

The Yahoo story is getting interesting. AOL might buy a 20% stake in the company and they'll experiment with Google advertising in an effort to thwart MSFT. MSFT in turn, may enlist the help of Rupert Murdoch to make an offer that can't be refused by shareholders.

Longer-term, let's get back to trying to get ahead of the curve. This is not easy to do and we operate from a disadvantaged information standpoint. My recommendations that have worked well were hardly crazy contrarian calls. I simply believed that much more bad news was yet to come and that Wall St. simply wanted things to get better more than they thought things were better. Had I made similar observations 2 years ago, I could make much greater claims. Overly optimistic expectations for a recovery led me to point a finger at COF, and the potential for gov't intervention makes me think owning a homebuilder index 20 months from now is not a bad idea. I've also thought about ferreting out the top 2 or 3 builders cashwise (either limited land holdings and/or no drawdowns on their credit/revolvers) and just going long with them instead of getting some of the riffraff that comes with the index.

What about commodities? We've seen gold correct about 20% from its high and now start to run up. Oil quickly bounced back to make a new high yesterday. Rice, corn, wheat all at new highs. Coal is back in vogue as an energy source. Grain and fertilizer companies are setting new highs every day. Too late? I'll leave food out of this for now, but oil has a long way to go before it's finished. I'll refer you to a John Markman article where he talks about incredible shale deposits full of oil right here in the US (and some in Canada). If you reference his oil/gas calls from his 2004 article, you'll see he hit a few homeruns and struck out a few times. But, as I've repeatedly pushed, a homerun at 4x your money far outweighs a strikeout, where you just lose 100%. I've done some research as well into these shale deposits and if we're going for the fences, the more stable of these companies are worth some dollars.

Our gov't clearly has a policy of deflating our dollar for the sake of inflating imports/value of goods. The Fed is pondering a plan where they print more money to buy our own treasuries since the gov't can't buy treasuries directly. Huh? Sounds like an inflationary move to me. If that's our goal, gold can only go up as the value of the dollar dries up. I would like to see a bigger correction first, back into the 800s, before jumping in. That time may have passed unfortunately.

Alt energy is the next possible bubble according to Eric Janzsen of Along with Ag stocks like Monsanto and Potash, solar and wind companies have had extraordinary runs in the last few months. Several decisions have to be made concerning these entities. One, are we running out of food? Demands from exploding populations in China and India certainly raise the possibility, but are we really going to run out rice? Does it matter? If the perception is there, companies that provide synthetic seed and fertilizer certainly stand to gain. Are we really heading to new sources of energy and will those sources be subsidized? Yes, and probably yes. However, is it too late to get in and too early to short? I think so. Had you ever even heard of First Solar before last year; now it's a $300 stock. Let's wait until things get outrageous and the checkout clerk is talking about the wind corridor. Then we'll get our shorts out.

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