Wednesday, March 18, 2009

Right and Wrong

It's good to be right even when you're wrong. The opposite is not true. Let me give you some examples from our recent trading past. Not long after a bear-market rally of the time, we shorted 3 stocks, Darden, Cheesecake, and Williams-Sonoma. All 3 produced 200% returns in a matter of weeks as we got out near the Nov. bottom. Darden was shorted at around $25 as it had been on our list since trading near $33 over the summer. It plunged to $13 shortly thereafter. Today it is back up to $34 on reports that it's not doing as well, but still selling plenty of breadsticks and unlimited pasta at the Olive Garden. I was wrong in my assessment versus the other 2 losers, just the beneficiary of good market timing.

The opposite has been true with Ryland. Shorted near $20, this stock has plunged below $10 once and to $12 2 weeks ago. However, despite this massive drop and correct call, our puts were still out of the money the 2nd time around. And with Bernanke changing his tune from just 3 days ago on 60 minutes and now buying over a trillion in new debt (including $750 billion in MBS), there is optimism that homebuilders will rise again. We can only take solace in that our hedge against such idiocy, gold, has gone up $40 in the last 30 minutes, improving our calls by 35% over that time.

So, in this brief time frame of ever changing rules, including the potential for the return of the dreaded "uptick rule," I'm suspending my search for shorts ver temporarily (unless Toyota hits $70). Despite Steven Sears of Barron's asserting puts are getting cheap again, I think this bear-rally might persist long enough to leave you naked if you short now.

But has anything changed for the better? Oh no. As John Markman points out "Let's get the facts straight: The bear market has not been about panic or psychology; it's been about plunging demand and the death of credit securitization. Neither shows any signs of improving in the next six months. Retail sales for 2008 were off 10.4%, a plunge equaled in the past 60 years only by July 1951, according to analyst Philippa Dunne. In February, just 6% of respondents in Dunne's monthly survey of state officials hit their targets for sales-tax collections, down from 21% in January. Said one official: "I have been doing this 25 years, and I never thought I would see broadly and consistently declining sales-tax receipts."

And the recent rally in REITs? "More than 200,000 store closures are projected for this year by Howard Davidowitz, chairman of New York-based retail consulting and investment banking firm Davidowitz & Associates Inc. “Thousands of shopping centers will close,” Davidowitz said in an interview. “It’s a debacle.”

I have to run now to check on my gold calls, I mean, you can't keep pushing the dollar to zero without some consequences, right Ben?


DCNorth said...

200,000 stores? Wow. That will only further erode the tax base since a lot of communities rely of the funds those super-mega-hyper-gigantic malls bring in.


Anonymous said...

This is me officially reading your blog and writing back!! Keep me on the list love the info you know who this is...

AX said...

Good timing gents, with gold up $70today! Who could've seen that coming, I mean, with us printing $3 trillion and all....

Yeah, DC, I suspect retail closings are going to escalate at a shocking pace and with it drag local tax bases to zero. This will put even more pressure on the fed. govt. to bail out states and cities, keeping those presses rolling. Bernanke thinks you can just hit a switch and reverse inflation. Uhh uhh. Who the hell are we going to sell all of those treasureis and MBS assets to?