Saturday, November 29, 2008

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!

Saturday, November 22, 2008

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 As we've crashed through every level this year and headlines are outdated by the time they're printed, you realize that not even most, but simply all of the people advising you about the market have been dead wrong (we'll make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.....

Wednesday, November 19, 2008

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 "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.

Friday, November 14, 2008


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 out.

Sunday, November 9, 2008

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?

Thursday, November 6, 2008

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.