When Do People Start Going to Jail?

Really. Didn't Merrill just report earnings last week? Suddenly, the need another $8.5 billion in capital and have another $6 billion in writedowns for next quarter. Kind of early to announce that isn't it? Makes me feel as if they had that info last week. Shouldn't the SEC be investigating them for this?

Home prices, ho-hum, another all-time drop on the Case-Schiller Index. IMF says no end in sight and along with Bill Gross, that credit losses will top $1 trillion. But consumer confidence soared .9% so we get a big rally today. It's unimaginable as these companies keep lying to us that investors don't think worse times are ahead. If Citi has to writedown their CDO exposure to the Merrill level of 22 cents, they are looking at another $8 billion quarterly loss.

Furthermore, the IMF says European banks are holding out. They've only written down about 15% of their US exposure. Australia took the plunge and wrote down 90%.

What about insurers? The WSJ says they're lying to us. I can only hope as they point out Genworth Financial as one of the biggest culprits. Losses held for over 6 months are supposed to be brought onto balance sheets and held against earnings. GNW has been holding $3.5 billion in losses for over a year. Of course, the hope is that these products will recover some value. Just ask AIG how that's turning out. Not so good. If just half of those losses were counted, GNW's profits would be cut by 80% for the year. I can only hope....

Calm before the storm. We get GDP and unemployment numbers later in the week. Oh, and by the way, that falling oil price is because the economy is dead. Anyone notice Santa Claus making guest appearances at the mall in the summer? Doesn't feel like holiday shopping season yet.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/21/ccview121.xml

http://online.wsj.com/article/SB121720829515588853.html?mod=MKTW

Why Not?

Two posts in a day, why not? But that's not what this title is referring to. I've been holding out on you, my readers, until I got some action or response. I am posting a letter I recently sent to about 50 financial companies and writers in an effort to spur/agitate/deride these decision makers. Read and I will follow with what I've heard back so far:

Dear Executive,

It has come to my attention that your company has gone off the tracks. Your stock price is down 80% over the last year. You have become involved in trades that even your own company does not understand or know how to value. The market has continued to pummel you for your lack of insight and direction. Clearly your own managers have no idea what they are doing. Now, you face the possibility of becoming the next Bear Stearns debacle.

Fortunately, I have a solution for you. I propose that you set me up as a proprietary trader with a small initial budget of $50 million to make trades however I see fit from my home office in Florida. In order to continue my market dominating performance, it is essential that these trades not be governed by specific guidelines, instructions, sector preference, or your “proprietary” formulas. I have listed below my track record of successful options and trades betting against the likes of your own company, and often the recommendations of your company:

COMPANY
PURCHASE DATE/PRICE
SALE DATE/PRICE
% GAIN
Citi (C)
6/24/08 / 1/09 $15 puts $1.33
7/01/08 / $2.04
+53% 1 week
Lehman (LEH)
6/04/08 / 1/09 $22.50 puts $2.95
6/11/08 / $4.00
+36% 1 week
East West Bancorp (EWBC)
5/28/08 / 1/09 $10 puts .40
6/27/08 / $3.60
+800%
Synovus Financial (SNV)
5/28/08 / 1/09 $7.50 puts .45
6/23/08 / $1.05
+133%
Capital One (COF)
4/25/08 / 1/09 $50 puts $8.80
6/27/08 / $15.00
+70%
Washington Mutual (WM)
1/07/08 / 1/09 $20 puts $8.30
3/17/08 / $11.80
+42%
Bank of America (BAC)
1/07/08 / 1/09 $47.50 puts $9.90
3/17/08 / $15.30
+55%
XLF (ETF)
11/27/07 / 1/09 $39 puts $10.85
3/17/08 / $16.45
+51%
ConocoPhillips (COP)
(+ dividends)
9/20/06 / $57.99
6/23/08 / $95.30
+68%
Nokia (NOK) (+ dividends)
1/04/05 / $15.75
7/16/07 / $30.01
+100%
Advance PCS (ADVP) (+buyout/split adjusted)
4/21/03 / $26.19
8/09/05 / $97.69
+273%

As you can see by my trades across a variety of sectors, there are no limits on my ability to find weakness or value throughout the market. I realize that anyone could write such a letter claiming such past success. Therefore, I would be happy to provide you with copies of my trading account statements to verify my claims. You may also refer to my blog, http://www.bigbigbet.blogspot.com/, for an archived history detailing my calls as further proof.

There is no reason that we cannot help each other through this difficult time. I am offering my services at a mere doubling of my current salary ($$$) plus 10% of profits. I suggest that we get started as soon as possible as your company is in dire straits and faces the future wrath of the weakened American consumer, weakened American dollar, and possible destruction of the entire banking community.

If you do not grant me this opportunity, I will be forced to work for one of your competitors and to participate in your own demise.

Sincerely,


Ax, Physician Assistant
Paramedic
Firefighter
No Previous Financial Experience Whatsoever

I have received email rejections from Citi and Etrade, written rejection from Wachovia and.....2 calls from Charles Schwab. They also logged into this blog but did not post. I finally spoke with a Schwabber this week but he said they were only calling to inform me that they wouldn't need my services. Ok. But why did they have 2 separate people call and log in only to tell me no? Seems like a lot of effort just to reject someone. Oh well. The game continues. Enjoy.

I'm Back

First of all, my apologies to my loyal readers who have been waiting for the next post. I don't really get true vacation days as a PA, so I had to work about 2 weeks straight so I could get 6 days off. I haven't posted because I've been out of town. Unfortunately, this coincided with a huge financial rally, one that cut into profits and was based on some of the worst numbers in banking history. We should've seen this coming as similar scenarios occurred during 4th quarter and Q1 results, with "the worst must be behind us" thinking carrying bear rallies.

But fear not. Two more banks failed on Friday. Fannie and Freddie will get downgraded by S&P, and turns out the bailout plan might dilute shareholder value down to zero, not something looked favorably upon. We will most likely get a bounce during Thursday's session as GDP numbers will be grossly inflated by rebate checks (thanks Simon Constable), which, as we've already seen has done zero for retailers. Just ask Costco and AmEx, who both said the consumer is dead in the last week. Ford lost $9 billion, GM reports this week. Chrysler has gotten killed and even Toyota can't make money.

And, if an Itulip thread is a sign of things to come, there will be no off-balance sheet lies big enough to hide behind. "The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world." 90%. Meaning, exposure to US mortgages will not be discounted, but actually worthless. And the NAB isn't the only one holding exposure.

June unemployment numbers should be interesting, and miserable. Back to school spending will be shaved down to nothing as teens can't find jobs and their parents have cut them off. "America's Research Group sees back-to-school spending falling as much as 2%. A mere 1.5% of consumers said they will buy products at full price. Last year, 11% said they would."

Jim Jubak likes our shorts. He lists Citi and Wachovia as 2 of 5 companies that will suffer long-term damage from this crisis, despite recent gains. A former short, WaMu, also makes the list.

With that said, greed did get the better of me. Just last Tuesday, I was sitting on 5 puts up triple digits. While all of them sit in the money still, I only cashed out on one, COF, for a 70% return. Disbelief over horrible numbers didn't coincide with short-selling rules and Paulson bailouts in my head, and the staggering gains mounted quickly. Guess I should've invested a few minutes in more stop-limits. But (fake) earnings season is over soon, and then there's just 3 months of bad news ahead with the economy withering every second. Nothing to hide behind except oil, which is only falling because people can't afford to drive, not due to supply issues.

Oh, and can we hang the MSM yet? Here are 2 titles of articles from the last 2 days, "Will Jobs Data Call a Bottom," and "Credit Crisis May Bottom in October: Lehman Analyst." Terribly optomistic titles wouldn't you say? The actual content is nothing but doom and gloom about the economy and how things can only get worse with no sign of improvement over years, let alone months. Be careful what you read.

http://itulip.com/forums/showthread.php?t=4636

http://articles.moneycentral.msn.com/Investing/JubaksJournal/5BigLosersInTheBankingCrisis.aspx?page=3

http://www.marketwatch.com/news/story/strain-household-budgets-crimp-back-to-school/story.aspx?guid=%7B2DC0A419%2DD1E2%2D4D6F%2DADB9%2D2DFCB66AD825%7D

http://www.marketwatch.com/news/story/strain-household-budgets-crimp-back-to-school/story.aspx?guid=%7B2DC0A419%2DD1E2%2D4D6F%2DADB9%2D2DFCB66AD825%7D

Is This What Motion Sickness Feels Like?

Yep, and we're all out of Dramamine. Fortunately, I have an iron constitution. Once while taking the ferry back from Martha's Vineyard, I read the newspaper while people were heaving over the railing. Volatility is good for us. It provides good entry points and then rapid swings downward. The market tumbled over 200 points, went positive, then finished down 100 yesterday.

Bad things are happening. IndyMac blew up. Fannie and Freddie are insolvent. Guru Bill Ackman has a plan for saving them at the cost of wiping out all shareholder value. People will scoff at this initially, but he had a similar plan for the bond insurers and he was right 6 months ago. Perhaps the government will quit screwing around and acknowledge this mess.

CPI was through the roof. Really? I hadn't noticed my $70 fill-ups, gas stations charging for refills, diminished container sizes at higher prices, bananas up 40%, 75% off signs in every retail window, and McDonald's selling burgers at 1960s prices.

Retail had an awful June despite the stimulus checks. Not good. ``The stimulus checks are providing a fairly potent environment for retail sales,'' said Joseph Brusuelas, chief economist at Merk Investments LLC in Palo Alto, California. ``That is masking the real condition of the consumer, who is flat on his or her back. Once the impact of the stimulus fades, we're going to have a massive payback.''

Just when I thought there wasn't enough room to short financials even more, I, uhh, found some. Doesn't take much to convince me these days. After Citi has had 9 hedge funds fail in the last year, turns out they have a mysterious $1.1 trillion dollars in assets that might make it onto their balance sheet. That would make them more bankrupt than they already are. So far, only $100 billion in assets have "reappeared," but this could change quickly.

Downey Financial, a $38 stock 6 months ago, is now trading for a dollar. I guess that's what happens when you're non-performing assets hit 15%.

And Wachovia. Financial hating Meredith Whitney says they're finished. When their mortgage-backed securities get written down, they'll lose every penny of their $40 billion. Stock is up
10 % today. Sounds like a good time to bet against them.

National City had a run against it this week, pushing my strangle into 25% profitability when the put was sold at 150% profit. It would take a miracle to ever squeeze 5 cents out of the call, so I consider this trade closed.

And thank you Barron's, for your stellar first-half recap. "Not surprisingly, our biggest losers this year were in the financial sector, the worst industry group in the stock market, with a 30% drop in the year's first half. Seemingly inexpensive stocks like First Horizon, East West Bancorp and American International Group got crunched after our articles, largely by credit problems." Yeah, I believe I've covered these winners extensively. Nice call pros.

IOD: WB 1/09 $5 puts, KMX 1/09 $10 puts, BAC 1/09$15 puts

http://www.bloomberg.com/apps/news?pid=20601109&sid=a1liVM3tG3aI&refer=home

http://www.marketwatch.com/news/story/downey-non-performing-assets-jump-1433/story.aspx?guid=%7B764132AD%2D6C6E%2D438D%2DA8BA%2D1A59DE86C66B%7D&dist=hplatest

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

Get Shorty

Hope Tuesday didn't give you any hope other than a great day to buy more shorts. Even yesterday's 80 point bump was strictly smoke and mirrors/Fed gobbledygoo. Our largest mortgage lenders are bankrupt, insolvent. Even I bought the too big to fail arguments on these guys 6 months and 90% ago. This is the Black Swan. This is the unforeseeable. How could these companies making money hand over fist lose so much? We didn't want to believe it in the $50s. Then, in the $20s, we were reassured. Now they are worthless and if they government takes over, shareholders will be left with nothing.

It's never too late to blow up in this market. Having talked a big game on silver the last few weeks, I failed to purchase at my buy point of under $175 on the SLV Tuesday. Today, $186. I should've just put in a limit order but I got caught up in trying to acquire and succeeding in getting GGP and GNW. GGP is a REIT essentially, a commercial real estate short, and GNW is a mortgage insurer with exposure in Florida, Texas, and California.

Auto Nation is imploding as I write this. But Carmax and Group 1 Automotive, Carmax's Southern competitor, is also on our blowup list. I debated on shorting Whole Foods this week, but thought there might be other worse off candidates. Nordstrom's and J. Crew are on my retail radar, and they have imploded since Tuesday as well. But it's a long way down for retail. If your name doesn't contain "dollar" or "Wal" in the title, the post-stimulus check pain is going to kick in hard and fast. Marketwatch detailed the future troubles. "Things in the department-store arena were even worse, however. Nordstrom said June same-store sales tumbled 18.6%, meeting Thomson Reuters-compiled analyst estimates, and the retailer warned that second-quarter earnings would fall either slightly below or at the lower range of its previous estimate of 65 cents to 70 cents a share. Total sales dropped 14.1% to $731 million. Nordstrom said it was hurts by a shifting of its half-yearly sale for women and kids into May. Nordstrom was down 8.7% at $28.52.

And J.C. Penney was more than 10% at $31.93 after reporting that June same-store sales fell 2.4%. Analysts had expected the same-store department-store sales to fall 1.1%, according to Thomson Financial. Total sales for the five weeks ended July 5 fell 0.4% to $1.6 billion. For July, the company said it expects a mid-single-digit percent decrease in same-store sales."

It wasn't too late to short the casinos apparently, as MGM dumped 21% yesterday and failed to rally on the Wynn news of Macao's huge profits. Well, MGM doesn't have a casino in Macao so the 50% loss Wynn experienced in Vegas applies. Ouch.

Which leads me back to the question of the year. Is it worth owning any long positions? A dilemma is posed by owning something such as Freeport. The stock is actually up 2% on a day the Dow is down 2% due to gold's $23 spike. But the miner is not correlated with the commodity directly. Will it get pounded while the commodity goes up. Itulip says yes. That scares me. We'll see.

IOD: GGP and GNW puts, of course

http://www.marketwatch.com/news/story/retail-stocks-retailers-fall-department/story.aspx?guid=%7B9E94E038%2D465E%2D413F%2D8E5F%2DB906437FA420%7D&dist=hplatest

When Strip Clubs Are Going Out Of Business....

That's right. When Vegas strip clubs are shutting down, so is the economy. Nobody can get to Vegas due to airline costs and expensive gas. Nobody can afford a hotel room. And nobody can afford to hand out $20 every 3 minutes. Las Vegas Sands, MGM, and Wynn, all down well over 50%. Recession proof?

Now I'm beginning to sound like a broken record. But SunTrust is a loser. 50% in 5 days says we're on the right track. Even when the market was up 100 points yesterday, nobody was piling into this pile. It's not too late. I'd go further out of the money now, maybe the 1/09 $25s.

Great news about Citi in an article by John Markman yesterday. "Citigroup had to pay 8% in annual interest rates for its first round of new capital but may have to pay 12% or more for the next round, a staggering burden." Estimated writedowns are all around $8-$9 billion in the next quarter for Citi. If they have to pay 12% to stay afloat, why bother? I'll be holding on for the ride under $10.

Got greedy with GNW yesterday. I've been lowballing offers on the 12/08 $15s for a week. Kept coming up 5 cents short while the stock plummeted yesterday, costing me a 20% single day return. Will look to get in today as I think this is going under $10 as well. Might switch my tune to the $12.50s now so I can load up on contracts.

Patience with retail has paid off. My once lagging XLY puts are now up 30% with 7 months to go. Plenty of time for kablooey. Office Depot said same store sales were down 10% last month. Ouch. Reuters reported last quarter as the worst for retail in 30 years. "For the first time since 1980, more space became available to rent at strip malls than was rented out -- about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter." I'm still convinced commercial real estate has a lot of bottoming left. I'm looking at the best options in GGP, DDR, and maybe adding to SRS, up another $5 yesterday.

http://www.independent.co.uk/news/world/americas/down-and-out-in-las-vegas-860513.html

http://www.cnbc.com/id/25563076

http://articles.moneycentral.msn.com/Investing/SuperModels/BadTimesForGoodCompanies.aspx?page=2

Halftime: Ax 1, Market 0

Happy 4th to all! To celebrate, I've done some reviewing of my first half performance. Take a look:

CNNMoney released the first half winners and losers so far this year. I have to admit, my recommendations are looking pretty good at this point, even if some of them came a little late. Of the S&P 500 biggest losers, I have recommended shorting 3 of the top 6, National City, Lehman, and WaMu. Of the top 3 Dow losers, I recod shorting Citi, the 3rd biggest loser. If you factor in my XLF short, we get even more losers. So I'd say the first half was a successful one. Add in my reco on PXJ, an oil services ETF, and you have additional gains around 15% (in a market down 15%). Gold is up over 10% since I recommended buying at $847. Even SRS, which had been a big first-half loser, is back up to $111, up almost 40% in the last 2 months and down only 8.5% since my first recommendation. We'll take it.

All juiced up this week to buy silver, it went on an unbelievable run the last few days. I will wait for the SLV to get back to $175 and get in there as I am becoming more of a firm believer that this metal is more undervalued than gold. A smart dude from Itulip points out that only 7% of silver is owned by investors, versus over 90% in gold, so if there is an increase in price, greedy sorts like us will rush to get their hands on it.

Having recently solicited opinions from my regular audience on what industries are on the precipice of disaster (not already there like financials and homebuilders), we came up with a few solid thoughts. Auto, as recod last time, remains frail. GM might go bankrupt. Chrysler was taken private (I forgot, although they might go bankrupt too!), so we can't short them. But Tiger Coach reminded me to look into Auto Nation, actually the country's largest retail car dealer. Great suggestion. This reminded me of Carmax, the one-time Circuit City spinoff that resells used cars. I shorted Auto Nation on Tuesday and it's down 10% since then. I have bids out on Carmax puts. Also, on a false 5% bounce, I shorted Sun Trust Bank near $38. It finished at $35 yesterday and was under $34 after-hours.

Restaurants of the middle-tier variety continue to be on the radar. Amusement/theme parks, hotels, and retail also made the list. ``There is absolutely a slowdown in teen spending,'' said Holly Guthrie, an analyst at Janney Montgomery Scott LLC in Philadelphia." When the kids stop spending, Abercrombie and the Gap are finished. Home Depot and Lowe's continue to get pounded and Disney is sinking. All solid suggestions.

PMI's demise brought me to look at the whole mortgage insurance industry, and Genworth Financial, recently having their credit downgraded by a 2nd agency, popped out as the biggest potential loser. Down 50% this year, I still think we have a ways to go. I've been in a bidding war with an opponent this week, unable to fill at the prices I want. Got a little greedy with my lowball offers and could've filled Tuesday for a better price than I asked Wed. Oh well, trying to stick with my lowball bids to make more return on the back end.

Consumer credit delinquencies continue to rise across the board according the American Banking Association. "Higher prices for food and energy, combined with weak growth in personal incomes and declining home-equity and stock values, are making it difficult for a greater number of consumers to meet their obligations, said James Chessen, ABA's chief economist."

By the way, don't forget times are tough out there. A simple call to Scottrade asking for a reduction in fees took about 5 minutes to get my trading costs lowered by 20%. Nobody wants to lose your business, so it can't hurt to ask.

Continue to look for the next big collapse. The thought of buying stocks on the cheap right now seems foolish. I'm contemplating getting rid of my long positions altogether, aside from possibly Google. Each time I make a bottom price for companies such as Microsoft, they plunge through them like they're tied to an anvil.

IOD: Genworth (GNW) 12/08 $15 puts, Carmax (KMX) 1/09 $10 puts, Sun Trust (STI) take your pick, can't lose

http://www.marketwatch.com/news/story/economic-report-consumer-delinquencies-increase/story.aspx?guid=%7B1A63E842%2D4E25%2D44B9%2DB53D%2DCA323471BD07%7D&dist=hplatest

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7WHUo_QBqkQ&refer=home

http://money.cnn.com/2008/07/01/markets/markets_firsthalf/index.htm?postversion=2008070113

Buy and Hold...Until You're Broke

Bananas. Not only this market, this economy, but actual bananas. 40% increase in the last 2 weeks. And yet, we're fighting off recession. Well, not everybody thinks so. CIBC World Markets thinks gas will be at $7 in the next 2 years, eliminating millions of cars from the road and wiping out the ability of Americans making under $25K to even own a car. But hey, that non-core stuff like food and energy doesn't affect us, does it?

That's why we continue to get stellar calls from our investment community. Remember, at $45, AIG was the buy of the decade. What is it now at $27, the buy of a millennium? "Sentiment is so negative right now that you can't help but make money in some of these companies if you take a three-year, buy-and-hold horizon," Brian Rogers, CIO of T. Rowe Price said last week. Sage advice from a fund manager whose primary fund is down 13% this year.

Tell me if you've heard this before. "Lehman shares rise on overweight rating." Do these clowns never learn. After hours yesterday Lehman took a big leap back over $20 (woo-hoo) on this upgrade from Morgan. Thanks guys, weren't you also overweight when the stock was at $80?

GS came out yesterday and recommended shorting Europe. That's right, the whole continent. Why? As crash protection. They recod shorting the DJ European Stock Index, when I figure out how to, I'll let you know.

Remember PMI insurance, when people could actually get loans and had to cover the rest of their mortgage? PMI, the company, is now trading under $2.

Continuing our theme of trying to get ahead of this disaster, we're still looking for the next fall-off-the-cliff play. Casinos have proven not to be recession proof. Restaurants like Cheesecake Factory and P.F. Chang's have blown up, but Darden owner of Red Lobster and Olive Garden, has survived. Will that last? GM and Ford are finished. But what about Chrysler? At $60, Daimler stock has been cut in half but there may be a long road down from here.

My faith in the future destruction of this market remains intact. I continue to think that I need more downside protection.

Getting back to my airline short/long suggestion of a few weeks ago, here's how a few of those options have done:

United (UAUA) 6/16 1/09 $2.50 .60-6/30 .80-+33%
Continental (CAL) " " $5.00-.65- " .90-+38%
Delta (DAL) " " $5.00-1.90-" 2.10-+11%

Granted, there is little activity on these options and getting good prices may be difficult.

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

http://www.marketwatch.com/news/story/nows-time-buy-hold-says/story.aspx?guid=%7BD096972D%2D7D53%2D4F59%2D8B7D%2DA275464B76A0%7D

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20080630&id=8846504

http://research.cibcwm.com/economic_public/download/sjun08.pdf