Thursday, June 26, 2008

So Much Bad News, So Little Time

There's barely enough time to keep up with all of the bad news these days. Just in the 3 days since we last spoke, The Fed has done nothing while inflation (as per Buffett) soars out of this world. OPEC says oil will hit $170. Gold spiked $30. RIM, Oracle, and Nike have all gotten hammered, and oh, by the way, Citi was put on GS' sell list (with conviction!).

As I've lamented before, I don't have enough money to follow through will all of the trades I'd like to. Yesterday on the post-Fed bounce when Regionals had a brief moment in the sun, Sun Trust was trading near $40 and BAC headed towards $28. I had to take my pick of losers this week and settled on Citi as the biggest threat to go bust of them all. I bought 1/09 15s, and thought that the Fed might make an announcement that would crash the market. Well, that didn't happen yesterday, but today is looking pretty good. I would've preferred to pay yesterday's 25% discount prices, but still cheaper than if I bought last week. We're going to sit on this like our COF puts, like we should've with our LEH puts.

Hate analysts as you know. But I did see that one of my longs (yes, I have a few), FCX, was mentioned as a cash generating machine that broken up would be worth about $250 (now trading at $119). If that happens before Jan of 2010, I'm in very good shape. Furthermore, she thought the company would be bought out at over $200 in the next few years....

Let's cover some more alarming news:

Bloomberg reported a survey yesterday that revealed the continued slow death of the American consumer. "Seven in 10 of those surveyed say higher gas prices have caused them ``financial hardship.'' More than 1 in 3 respondents say they have cut back on their spending over the last six months as oil and food prices surged and unemployment rose."

Just another long reminder, my PXJ bet has paid off and would be even better had I added a little in the low $20s. Here's another refreshing reco from an analyst, 2/21. "Sonya Morris, editor of the Morningstar ETF Investor newsletter, said that exchange-traded funds and notes that track specific niches are highly volatile investments that aren't worth buying unless they are "compellingly cheap." With that in mind, Morris issued sell recommendations on five energy plays (including PXJ)." During that time, PXJ is up over 20%, market down over 5%.

"Shares of American Express Co. fell 1.6% after the firm's chief executive said credit indicators for the U.S. economy were weakening." When things are bad for Am Ex, don't think Capital One will do well.

Continuing, let's pound our favorite financial, Citi. "We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales." Sounds promising. Also, Citi said this week that they may return to raising credit card fees for "no reason." I guess we know what the reason is now, but after promising not to do this, makes them look awfully bad.

A return to bashing of analysts please. There has been so much bottom calling and flip-flopping on financial calls just within the past month, how can anyone take these guys seriously. "Merrill's Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, on June 11 changed his rating on Lehman to ``neutral'' from ``buy'' and cut his target price to $28 from $36. It was Moszkowski's fourth call on Lehman this month. He shifted to ``underperform'' from ``neutral'' on June 2 and recommended investors buy the stock twice, on June 4 and then on June 10, the day before he moved back to ``neutral.''

That's helpful, right up there with Dick Bove's sage advice. I think Bove is a French word meaning pimple. He recently lowered his price target on Sun Trust Bank by 33%. Thanks. On Tuesday you're worth $60, today $40. I was just kidding when I said $60, hope you didn't buy, ouch....

IOD: Citi 1/09 $15s

Monday, June 23, 2008

Feeling Exposed?

After another brutal week, we are heading past March, January lows again. Not much has changed. Financials are getting slaughtered and oil is booming. The question is, will we keep falling or are we headed towards our third cycle of bouncing over 13,000?

I don't know. I don't think that we should, but then again, I think there are hundreds of companies that should be bankrupt that keep bouncing back. What concerns me is, do I have enough downside exposure? If we do head towards 10K, where and how will I be making money? Gold will make me money. Oil may or may not, depending on how those stocks perform. Capital One and Retail shorts will be homeruns, but my general portfolio will take a beating. So, time to get back into the game and increase downside puts? Probably.

Some thoughts. Continue to look for banks that will implode. Citi, BAC, and Lehman continue to head the list, but let's not count out UBS and many others. Increase gold exposure or perhaps silver significantly. Short the Dow. Short the S&P. Easy to do, may not have much homerun potential but certainly offers protection.

Went to Walmart yesterday and drew some conclusions from this visit. As you may recall, I routinely drive right past it to go to Super Target for the bulk of our family shopping. But I got a hot tip on a set of plastic golf clubs for $5 for my daughter, so we took the morning to scoop them up and perhaps get some ice cream. I was pretty much shocked by how cheap stuff was. Target is significantly cheaper than the grocery store, but for some daily items, Walmart was definitely cheaper than Target (although, wipes and Frappacinos were more expensive!). Now, there is no comparison in the shopping experience (cleanliness, nicer stuff, no warehouse effect, employees not just released from rehab) between the 2, which is why I'm willing to drive the extra mile. But, Tiger Coach recently asked me what I thought about shorting Target. I almost fell over.

Target is a winner. This will continue to be a tough environment while Walmart slashes prices and brings in customers. But Ackman owns 10% of Target and has a way of working magic. With the stock down almost 30%, if it approaches $45, I would do the opposite. Go long out to 2010. Give a chance for recovery and see if we're not near the bottom.

Just a few blurbs from the weekend:

"More than 80 percent of the fund managers, investors and hedge fund service providers at the event said they expect the credit crisis will continue, a survey found. Almost a quarter said they expect the situation ``will deteriorate significantly.'' This was taken from a Bloomberg article of a fund manager meeting over the weekend.

"MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings." Another Bloomberg headline. Another winning call for Ackman and Tilson. Ugly stuff. Wish we had shorted on a bounce back over $15 in January.

And finally, something that would make me very happy. "Gold May Rise to $5,000 on Inflation, Schroder Says (Update1)." This would be quite a scenario. This would also get me a 500% return!

Gold May Rise to $5,000 on Inflation, Schroder Says (Update1)June 19 (Bei Hu - Bloomberg)

Friday, June 20, 2008

Please Stop Ruining My News With Tiger Woods

Enough already. It's been awhile since I talked a little sports, so let me get back to it. I don't mind Steve Carrell or Mike Myers showing up on a sports show. As a matter of fact, it breaks up the monotony of repeated scores and mini-stories that have to be told over and over again until the next night's games. But when golf news spills over into financial and world news, I'm sickened a lotta bit. Tiger Woods, best golfer ever. But enough about his limping, and knee, and stress fractures, which he may have gotten from being so nuts about his rehab that he actually ruined the rest of his year. His "mental game" is his strongest asset. BS! Being able to hit every shot 50 yards farther than his competitor is his strongest asset. Lest we get carried away, can we remember that he is a golfer, a game you can play while smoking and drinking beer. Here is a brief list of people tougher than Tiger Woods.

1. Jack Youngblood, DE, LA Rams. Once played an entire football game with a broken leg which he just "wrapped up."
2. Ronnie Lott (may also be the toughest human being ever). Once crushed his finger in between helmets, went to the locker room, had the trainer cut the tip off, and returned to finish the game.
3. Every football player every week (not including punters and kickers, but including the longsnapper Neal!) during the season.
4. Bull/Bronco riders every time out of the shoot.

More proof that I'm not alone in thinking "The Captain" is the most overrated player of all-time. Recent SI survey of 495 major leaguers said: DJ most overrated. No kidding. Again, never the best player on his own team, never the best SS in his own league, plays next to a guy who is literally twice as good as him.

Back to making money. Capital One has continued a nice trend of falling about 4% a day. I like it. But we're sitting on this winner for awhile. Options are about 50% up. I know the Tiger Coach got an itchy trigger finger when his options went above 60%, but patience will pay off here. I'm looking for a drop into the $30s. Earnings are only a month away. A lot can happen between now and then.

Meanwhile, Lehman has turned the ship around and started heading towards zero again. Looks like getting over $27 was its last push. I was hoping it would hit $30 to short it again.

Gold is getting hot. As banks continue to tank and oil becomes even more volatile, perhaps there will be a return to bullion. Retail continues to trend lower. Pier 1 and Circuit City made shareholders vomit with their results yesterday. XLY has dropped about 10% over the last few weeks.

Monday, June 16, 2008

Is This Thing On?

Perhaps you weren't listening the first 10 times when Lehman told you the worst was behind them. When the stock dropped from 80 to 60 to 50 to 40 to 20, back to 40, back to 20, then up to $27 today. As I said, better to be too early than too late as there's been a near 30% bounce over the last 2 sessions. Fuld is fuld of you know what. We've decreased our leverage and bad loans across the board, we have strong capital and liquidity. We know. That's why you have to keep raising capital and taking writedowns. That's why you just fired your entire senior staff. Trot out Dick Bove to tell us this is very good for the company. Never mind how he just told us last week that this deleveraging will impair Lehman's ability to make any money for years to come. Thanks. Boring.

But Lehman's not alone. 50% of the prior 4 years' profits, gone. And that's if we take writedowns at face value. Probably not the best thing to do, right AIG?

Wachovia released their report on the impending doom of the commercial real estate market. Vacancy rates increasing at malls, apartment building, and corporate offices. While construction is winding down, there just isn't any money to fill all those empty rooms with. Stay strong SRS, maybe time to add.

Several of you have expressed concern that oil prices might plummet sometime soon. Ok. Good luck with that theory. It bumped up against $140 today and gas is getting closer to $5 than $4/gallon. In whose interest is it to have oil prices this high other than the lords of oil? As one iTuliper pointed out, you don't see CNBC pushing for a boom in this commodity as it has perilous effects on the economy and consumer. Exxon is selling their gas stations in N. America. The price of finding a new barrel of oil has tripled over the last few years and may increase dramatically if we have to continue to wash it out of shale and dig 10 miles under the ocean.

With that said, the oil dilemma has shattered the airline business. Why my brain didn't correlate that 2 years ago, I'll never know. But, while better too early than too late, better late than never. I see 5 scenarios for the airline industry, all of which can be parlayed into a profitable hedge I think. I'm working on it. For now, here are the scenarios:

1. Complete decimation, most carriers go kablooey. A few stay afloat, but business never makes real money again.
2. All continue to operate in red except for Southwest, who continues to steal low fare customers from the deaths of Jet Blue, Frontier, etc.
3. Some carriers make it, some don't, more consolidation. Business still generally stinks.
4. We've hit a bottom. Oil has peaked and cuts in capacity and routes turn some profit in the near future.
5. Govt. steps in (hey, why not!) and bails out most majors to keep business travel alive. Stocks go up.,,4325,00.pdf

Friday, June 13, 2008

I Hate Smugness

"Smugness is a terrible quality."-cab driver, Seinfeld

Indeed, yet I was feeling awfully smug Wednesday as I sold my LEH puts for a 40%, 6-day gain. While I was busy emailing my loyal readers and family touting my genius, LEH management was taken out to the woodshed and beaten along with the stock. While I'm thrilled I was able to parlay a one-week trade into payment for a year's worth of Propecia and razors, I settled for a double instead of a long homerun.

Mistakes I made on this trade:
1. Buying too high
2. Selling too early
3. Thinking I knew something about the next bounce up
4. Not putting enough balls (money) into it
5. Thinking volatility would remain low (went from 12 cents/dollar to 40 cents/dollar)

Mistakes I didn't make on this trade:
1. Buying the right put
2. Getting out before the next big bounce (today)

Live and learn.

Rolling those profits into a purchase that doubled my Cummins stake also seems fortuitous. Cummins had been hammered recently down to $63. Not long after I bought, Caterpillar said they'd be pulling out of the N.A. truck market, leaving really only Cummins as the major player. A nice 14% run ensued.

A recheck of my recent "Don't Mess with Texas" shorts reveals some staggering results. If you've read the comments from that post, you'll know we had a little run-in with a bank analyst who criticized lumping EWBC with the other losers. I've since corresponded with him personally and he was very thorough in his defense of the stock, even computing the Texas Ratio for us as requested. Even more fairly, he admitted the stock might not be a good trade in the next 6 months. Here are how those recommended puts have played out, then and now pricing:

Synovus SNV 1/09 7.50s .2-.45 last 0.95 111-375% gain
Corus CORS 1/09 2.50s .25-.5 last 0.45 80% gain-10% loss
East West Bancorp EWBC 1/09 10s .4-.6 last $1.80 200-350% gain
Colonial CNB 12/08 5s .8-1 last $1.20 20-50% gain

Yikes. As I pointed out with Lehman, some of these out of the money options have significantly different returns with just a few dimes difference. Had I bought the next day when Lehman briefly jumped to $34, my cost would've been about 15% cheaper and gains exponentially higher. Don't be afraid to stick to your lowball bid.

Foreclosures up 48% year-over-year, yewwww. And by the way, in case you didn't know before, you know now that the NBA is fixed. Referees receiving instructions on who to call fouls on right before and during games? C'mon! Why? Because, if you don't remember, not long ago NBA games were getting ratings lower than women's pool....

Tuesday, June 10, 2008

I Love This Guy

Finkle is Einhorn, Einhorn is.....oh wait, that's another master of his domain. This Einhorn is founder of Greenlight Capital, a hedge fund that has been taunting the elite of Lehman for a year now. Even after raising $6 billion yesterday, he was resolute in his assessment that their books smell like home cookin'. "Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," Einhorn said. "Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters." A "preliminary" analysis of the firm's pre-announced results and conference call suggests there are still unrecognized losses on Lehman's balance sheet, Einhorn explained." Exactly. Sounds suspiciously like Bear, doesn't it? We're well capitalized and have no liquidity problems. However, we're going to give away $4 billion in shares at a 12% discount to raise money. Yeah, that's consistent.

What's driving me nuts is the pricing on the LEH puts. Had I bought the 1/09' 30s, I'd be up about 20-25% in less than a week. My way out of the money puts have showed dead volatility this week, fluctuating less than the day I bought them and the stock merely went down $1, not $5. But we're holding out for a crash and burn scenario. More Lehman bashing below, including Dick "after the fact" Bove, who said that LEH has had to sell their best assets to raise cash, and deleverage out of those. This only leaves illiquid assets and less leverage. How are they going to make money going forward? LEH got downgraded by every other major yesterday. They all still have price targets well above current levels. One analyst even changed his tune from sell to outperform in a matter of 3 days.

My other financial shorts are making quite a run these days. COF briefly dipped into the $43s today, and I'm holding on for bigger profits. We'll talk again when it finds the mid $30s.

NCC has been all over the news today. After plummeting into the low $4s yesterday, it is back near $5 on the admission that they've had to sign supersecret govt. agreements to stop acting like idiots. My strangle was in the money yesterday, but I'm again holding on for bigger returns. I've already proved to myself and hopefully to you that my theory was correct on my first strangle play, now we're going for a decent return. Homerun is unlikely with the call probably being finished.

Let's not forget diesel. While Cummins has been treading water, Eaton has been soaring. More importantly, Bloomberg ran an article yesterday that said diesel futures were at a 15 year high. Furthermore, Conoco (homerun) has said that it will make more from diesel in North America than gas for the first time ever this year. Ditto Valero.

Don't forget my other recent reco, FCX. Up $7 (6%) since I mentioned it, calls up quite a bit more....

Monday, June 9, 2008

That Didn't Take Long...

After a weekend of reading, I usually come to you on a Monday prepared to talk about a variety of things. But, having just recommended shorting Lehman less than a week ago on a day it was busy rising 7%, feel the smugness. A mere month ago, estimates on 2nd quarter earnings were above $1/share. About 2 weeks ago, they were lowered to about 3o cents/share. Today, they pre-announced "earnings," a $3 billion loss that translates into a $5.14/share hit. They have dutifully lowered their leverage to a mere 25X from 31X. They will dilute shareholder value by raising $6 billion more. It's down 11% premarket. Going to get ugly.

"We do not think the brokerage stocks are out of the woods concerning their current exposures to CDOs, mortgages and commercial real estate," Bernstein analyst Brad Hintz said. "As long as the brokers have significant portions of their balance sheets frozen and face risk ... on their hedges, we can expect continuing earnings uncertainty." Make this guy president of all I-banks. Dick Bove, who actually made his clients money last year according to a previously listed article on analyst incompetence, was getting hammered this morning for his continued support of companies like Lehman. He'll be right down to the very bottom I guess.

Will oil tank? I don't think so. As you know by now, I'm drinking some of the iTulip cool aid and the master of that domain, Eric Janszen, lists a 10-pronged argument as to why oil cannot be an asset bubble. Fortune countered with an editorial this weekend on how $4 gas cannot last, and we'll be back to $50/barrel before too long. I don't think so, but both articles are listed below.

Daniel Gross of Newsweek had an interesting article over the weekend, rehashing the futility of the Bernanke driven Fed argument of "wait until the 2nd half of the year" when the economy really gets rolling. As I've said, consumer issues will only continue to deteriorate with credit/auto/home defaults soaring, not abating.

Oh, and for those of you who stil think that your house is the best on the block and are just unlucky in trying to sell against the millions of foreclosures out there, read this please:

Five signs that it is time to trim the asking price on your house (should be free to view by week's end)

Saturday, June 7, 2008

The Broken Record and $8 Gas

As we closed yesterday with another 800 point downswing over the last 2 weeks and oil made another all-time high, the rhetoric seems to be playing over and over on this broken record. Lehman blaming rumors and short-sellers, dollar bulls blaming oil speculators and gold bugs, and bond insurers blaming ratings agencies. $4.34 for premium gas yesterday is what I paid, and I don't live in Cali....

As you now know, I'm short Lehman. Let's look at two articles that put it's current panic state in perspective. "Deutsche Bank AG analyst Michael Mayo's counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent (over the last year)." Mayo was recently quoted as saying "Lehman is a steal" at current prices. No kidding? After leading your clients to slaughter, you still have the gall to pitch LEH as a great idea to cover your arse? Beware analyst ratings....

Another article details how some banks have decided to pick up their marbles and go home, rather than risk playing with LEH. Einhorn made another stellar appearance on CNBC as LEH continued to plunge. Furthermore, LEH has been discussing "pre-announcing" earnings and yet another capital infusion just to get the carnage over with.

Scarier than the LEH story was Citi's revealing of possible accounting changes that would force $5,000 billion of bad debt back onto balance sheets. That's no typo. This would force banks to raise billions more in additional capital to support balance sheets and dilute shareholders down to nil'.

Unemployment jarred the markets yesterday as we are now at 5.5%, if you believe that number. Let's not include all the people who have given up or were forced to take paycuts, lose hours, or lose benefits in this market at financial and homebuilding firms. That would add a few workers would be my guess.

My NCC strangle is back in play. Along with the crash yesterday, NCC is being probed. As a medical practitioner, I can tell you it's never good to be probed. I'm waiting for the stock to drop another dollar or two before cashing my puts and then I'll hold onto my calls for dear life hoping to make a nickel or dime back.

Correction from last column. Mortgage delinquencies rose above 6%, not foreclosures. Those were about 2%. By the way, bond insurers officially got downgraded Thursday. Wasn't that supposed to be the end-all? Guess we have a few more problems than the monolines.

Interesting intro and battle about "Black Swans" on iTulip this week...,Authorised=false.html?

Thursday, June 5, 2008

Recession Proof?

Been a strange week so far in the markets. If you read the eternally bullish media over the weekend, you would've believed we would just start to coast on an upward trend this week as limited data came out. But then the Lehman rumors kicked in, foreclosures rose, airlines continued to fight bankruptcy, Bernanke actually acknowledged concern over the dollar's worthlessness and inflation, and Obama locked up the race. Let's address a few of these things.

Lehman has been rumored to be the next Bear for quite some time as it is now the smallest remaining Ibank left. David Einhorn, master short-seller and disciple of Bill Ackman, grand-master short-seller and the guy who called the bond insurer fiasco, has been saying for awhile now that Lehman's books lie. The stock plummeted from $36 to $28, now back to $33. I've debated on shorting this stock for months, while also contemplating getting long when it hit $20 after the Bear crash. Late both times, I bought out-of-the-money puts til' 09' for pennies, thinking that if a pseudocrash occurs, I'll make out quite well. If not, then we played for the homerun.

Freddie came out today and told us that foreclosures are now in the 6% range and that we can expect the highest rates over the next 12 months, something I've been saying all along as peak ARM resets hit this July.

The airlines are broke. Only Southwest, who hedged oil contracts at $55/barrel, did it right. With jet fuel now at $155, airlines took away even the free peanuts this week. Book your flights now because you may not see discount prices for years to come and your preferred airline may be out of business in 6 months.

"Recession proof" businesses are not so much these days. Casino bonds have been behaving like junk. After establishing themselves as solid investment vehicles during the last market bubble, they've lost 4.4% this year. On the flip side, discount retailer WalMart continues to vacuum up every low price consumer in this country at the expense of Target and others to increase same-store sales dramatically.

Obama is in. My employer just asked me yesterday what I think this will mean for the markets if he wins the whole enchilada. I don't think much. Perhaps a short rally, but the economy is going to continue to stink no matter who wins, and a Democrat in office will exacerbate that pain.

The dollar is getting hammered today, despite Bernanke's acknowledgement that we've driven it into the ground. Europe's refusal to lower rates is buoying their currency at our expense, and they're laughing about it.....

IOD: LEH puts 1/09 22.50s

Monday, June 2, 2008

Capital Punishment

Yes, a double entendre as Capital One is getting whacked along with its banking brethren. The CEO at Wachovia, out. CEO at WaMu, well, let's say he's been demoted. I guess presiding over the worst decisions in American banking history don't bode well for your tenure....

Retail beating next. A good article from AOL listing 36 retailers who have been forced to close some or all of their stores, including Disney, was recently published. I'm rooting against the mouse as it makes up a portion of XLY, of which I'm short. Some of their movies have produced poor returns lately finding themselves sandwiched between Iron Man and Indiana.

Scary article that hits close to home literally, from Joe Mysak of Bloomberg. "Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11." Muni bonds are starting to go under. My community issued similar bonds for which we pay an annual assessment. I can only imagine what the assessment will become if my builder taps out the bond proceeds.

And then there are homeowner articles like this one that drive me insane. "Housing Woes Hit Affluent Middle-Class Homeowners." The article from CNBC details how a poor family is stuck with their $1.2 million home while trying to pay for their new place. Their current asking price is all the way down to $850K! Wow, you poor bastards! The article also details how they had flipped 4 houses prior and that they thought they would just keep rolling over the profits to infinity. Now they might only get what they initially paid. That's too bad.

Fascinating article from the NBER about credit booms in both emerging and industrial nations. I posted some thoughts on iTulip, which some real economists read. I'll let you know about their thoughts if any, but in the meantime, here are some conclusions from the article....

"A credit boom is defined as an episode in which credit to the private sector grows by more than during a typical business cycle expansion."

"At the peak of booms, the average expansion in real credit per capita reached almost 30% above trend in emerging economies, twice what is observed in industrial nations."

"Our thresholds are defined as multiples of the country-specific standard deviaton of credit over the business cycle, which changes the threshold level of credit needed to define a boom..with each country's cyclical variability of credit. This ensures that a credit boom is a situation in which the deviation from trend in credit is 'unusually large'."

"EMs and ICs show booms with similar duration of about 6-7 years and upswings that last longer than downswings."

"Industrial countries show negligible changes in inflation, and rising (falling) equity and housing prices in the build up (declining) phase of credit booms. In emerging economies, inflation tends to spike after the credit booms peak..." Sounds a lot like us.

"Credit booms in emerging economies are often associated with currency crises, banking crises, and Sudden booms in industrial countries are only occasionally associated with banking and currency crises....moreover, industrial countries in a credit boom are more likely to experience currency crises than banking crises." We have both.

"Not all credit booms end in crisis, but many of the recent emerging market crises were associated with credit booms...the frequency of credit booms in emerging markets is higher when preceded by periods of large capital inflows but not when preceded by domestic financial reforms or gains in total factor productivity while industrial countries show the opposite pattern."