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....