Rational Investors?

Shockingly, the Dow didn't go up 1,000 points yesterday when housing data revealed an 8% increase in housing starts. What that proved was 2 things. 1, that number applies to multi-family dwellings with a mere +/- 14.5% margin or error (single home starts down almost 2%) and 2, even the bulls realized that adding homes to a market with glut is a terrible idea. "At this point in the Housing cycle, only two metrics that report stronger than expected results—Sales and Pricing—should be rewarded in the market.”



"Department stores Kohl's Corp. (KSS) and Nordstrom Inc. (JWN) reported double-digit declines in fiscal first-quarter net income amid one of the worst consumer spending climates in almost two decades." While Kohl's isn't quite the benchmark that Walmart is, a 27% decline in sales does not bode well for the economy. Discounted discounters are getting killed and top-line numbers have been a joke across the board due to all-time discounting efforts.



Two shorts heading in the right direction. COF finished another down week briefly falling under $51 yesterday. Purchased at $50, the volatility in the puts may even provide profit as the stock returns to that level. NCC took another 5% hit as other small lenders such as KeyCorp were downgraded yesterday. However, I'm still stuck on the other side of the strangle so will hope for an even more precipitous decline and then hold on for any ride up to increase profit/reduce loss.



Will work on a diesel analysis the next few days....

http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20080515-001035-1649

http://www.cnbc.com/id/24666206

Wind Tunnel

TBP is not a WWF rasler' but T. Boone Pickens, he of oil billions and now wind energy fame. His company, Mesa Power, is buying 667 GE turbines to be delivered in 2010 for his Pampa Wind Project. I said about 3 weeks ago in my solar/ag posting that not everyone will be the winner in the Texas corridor project. Seems like the billionaire is getting the jump. Even if his project pushes full capacity, estimates are enough electricity for about 1.2 million homes. Let's not get too excited yet.

Here's something scary, but very close to home and a concern of mine even though it's about condo owners. A NYT article yesterday details the plight of foreclosed-on and partial capacity condos where owners who actually pay their bills are getting whacked. "Each of the remaining owners has had to chip in an extra $1,000 assessment and $50 more a month for cable and Internet. That is on top of Ms. Sanz’s $450 monthly maintenance fee." I fear an assessment in new-construction communities such as my own are imminent due to the deadbeat flippers who have failed to pay their HOAs and the deadbeat renters who have failed to pay them.

Retailers continue to beat estimates. That is, they continue to beat projected 7% sales declines by posting stellar 6% sales declines. Who wants to own this stuff? Strong work again by our analyst community who had 11% sales growth projections at the beginning of the year.....

GS came out with a $141 oil prediction for the 2nd half of the year. Anybody else notice gold is back up to $900? Strong dollar, huh?

TOD: Start thinking about diesel. My brother recod Cummins to me a few weeks ago at $48, now it's $73. Volkswagon is coming out with a diesel Jetta next year, 60mpg. My coworker's husband is attempting to make his own diesel, I'll let you know how it goes....

http://www.cnbc.com/id/24641425

10% Defaults Coming

Again, I'd like to distinguish the difference between Mastercard and Visa and the banks who carry the credit card loans on their books at revolving rates and make money on fee structures. V and MC simply charge the vendor a transaction fee. BAC, COF, WM and Chase (JPM) all have increased loan loss provisions on defaulting/delinquent cards and expect those numbers to increase as unemployment and foreclosures continue to rise. In her article, Laurie Kulikowski estimates that delinquencies on WM loans could go over 10%. Furthermore, remember that these are unsecured loans. You default on your credit card and it effects your score, but they can't remove a tangible asset from you. You default on your home loan, and they put a lien on your house!

"Moody's Investor Services on Tuesday issued a negative outlook for the next 12 months for the entire consumer finance industry, which includes credit cards, auto finance, education finance and other consumer lending areas, as recession fears ring true, according to a report." Also, as we well know, these banks haven't been exactly forthcoming with their balance sheet information and have forecast most inaccurately about consumer trending. Shame on you Karen Finerman who recommended shorting COF in the 40s then advised dumping the position when it went over $55. Does she manage her firm's money with the same kind of conviction less decision making?

Continuing with our glowing theme, April year-over-year foreclosures rose 65%, the highest number in the history of the world. Greenspan says we'll be done by 09', really? I keep thinking of contrarians Bill Fleckenstein and Nassim Taleb in attempting to put a date on this bottomless pit. How can we draw comparisons with this housing bust when the underlying credit mess beneath it is unprecedented? Another 6K jobs lost last month as well.

A side note on the Cavs for TC. James is easily the best player ever, they should've won last night aside from awful FT shooting. Jordan never played in "the zone" era...

Update: Mental math champion indeed. Except when I forget to read the fine print and don't include the transaction costs on selling and the .1o/contract expiry fee on winning contracts. Thus, throw out the 8% brother, here is the new math:

500 Obama/450 Mccain nets $338.50 O, -154 M
520 Obama/500M nets $231 O, $34 M or 4.6% O
350 O/400M nets -$82 O, $409.50 M or 11%
500 O/475 M nets $244 O, -$6 M or 5.1% O
375 O/400M nets $18 O, $260 M or 6.96%

Sorry, always a catch. Again, if Hillary wins you'd be screwed. Waiting to hear from intrade because if you cash in pre-election, you might be able to avoid expiry fee which would increase returns.

http://www.thestreet.com/story/10416811/2/banks-face-mountain-of-plastic.html

http://www.cnbc.com/id/24615625

Mental Math Champion

Sometimes, being a nerd is good. As a former 7th and 8th grade champ in the high art of doing simple math problems in my head, this skill has carried forward into my daily life as I daydream of ways to make money. As promised, I sketched out a hedge for the upcoming presidential election on intrade.com assuming percentages from yesterday of Obama 55.2% and McCain 37.8% to win (I assumed you'd have to pay full asking price, but this is an open market and negotiable). All percentage gains include the 5 cents/contract price.

Obama 520/McCain 500* yields $389 either way, or an 8% return

Pro M: Obama 350/McCain 400* yields $18 for Obama, $679 for McCain or in easier terms, a push on Obama and a 19% McCain return

Pro O: 400 Obama/350* McCain yields $431.50 for Obama, -$68.50 for McCain or 12% Obama and a mere 2% loss if McCain wins

*Note: Simply using these same ratios will produce the same percentage return, just different dollar amounts.

There are 2 catches. One, if Hillary wins the nomination, you're f'ed, but could still collect if you're pro M and he wins. Two, if it becomes apparent closer to election time that you're candidate will win, you can still trade your contracts like options and not take a complete loss on those contracts. For example, if McCain makes a huge run, Obama contracts might trade at 5, not 55. You could take the 10 point loss and still collect 150% on your M bets. Pretty interesting I think.

I'll talk more tomorrow about the current market. Nice to see COF take a $5.50 dive in the last week. Volatility rules.

I'll Bet You Anything

Since recommending SRS multiple times on this site, this double-inverse commercial real estate index has fallen on hard times. But this isn't an options play. It is sort of an option unto itself due to its 2-1 leveraging by nature. With that said, commercial real estate is doomed to take the next hit. Perhaps without quite the severity of its residential brother, commercial property drops tend to lag and its once contribution to GDP is already starting to drag. Bloomberg reports "First, commercial real estate tends to lag behind housing trends. The residents of new developments need stores to shop in and offices to work in, so commercial projects are planned after a town starts booming and are completed in the following quarters. So when times are good for housing, commercial property makes the real-estate investment news even better." Also, banks didn't limit their risky loans to homeowners. Construction projects got way ahead of themselves and will now suffer the unfulfilled promise of vacant stores. ``It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,'' Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote. ``We have little doubt, though, that it will. In spades.''

Following with another favorite, Jim Jubak of MSN Money says not to get too high on Visa and Mastercard results. Aside from increased usage, he notes that as AmEx said CC use is up almost 14%, they also set aside $800 million for new delinquencies/defaults and they expect those numbers to increase. Speaking of Mastercard, they said demand for motor fuel based on their purchasers slid 2.5% recently. With oil now over $126, "We're engaged in a painful experiment in discovering how high the price has to go before it really, really hurts, before it hurts enough to slow demand globally," said Adam Sieminski, chief energy economist for Deutsche Bank. Up to $4 officially in these parts, and I know that I must continue to drive. Anyone else thinking about driving less or happy to have a company car to run into the ground?

As far as my gamblers/ambitious readers, check out www.intrade.com. This site basically provides options on current events, including political and financial situations. Points are reflective of a mere 10 cents, so contracts can cost as little as 10 cents. One thing I'm looking at is the Obama option. Bid/ask is around 55/56 currently to win the whole thing, while McCain stands aroung 37/38. Thus, an Obama contract would cost you around $5.50. A win would produce about an 80% return. Also, these trade until "expiration of the event" like options, so if McCain makes a push, you could always dump for a limited loss. I will work on a hedge to post here in case someone thinks McCain has a chance.

http://www.bloomberg.com/apps/news?pid=email_en&refer=columnist_sperling&sid=a.X91SkgOd8g

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/09/AR2008050902702.html

Maybe They're Right?

I remember reading an article from a bullish analyst after the last set of lies/disappointments/writeoffs from AIG. The stock had dropped from about $60 to $45 first on the possibility of huge writeoffs and losses, then on the actual reporting of the same. He said at the time that AIG was the "buy of the decade." After losing another $8 billion and recognizing the need to raise an additional $12.5 billion, the stock hovered around $40 today. Given the company's complete refusal to tell the truth and obviously much greater exposure to MBS, shouldn't this company be hammered more? Maybe that analyst was right. If these type of armageddon-greater than some countries' GDP-type losses don't sink the ship, maybe nothing can.

Citi came out online with their restructuring plan, stressing the need to dump a mere $500 billion in non-core assets, roughly 22% of the company. As Robert Redford said to Cliff Robertson in 3 Days of the Condor, "You people are kind to yourselves." These MBS and CDO debacles were referred to as "hobby assets" by Citi, you know, like just $70 billion or so we could afford to lose causing us to slash our dividend and lose more than 50% of our stock price! Nice hobby, idiots.

The last 2 days have been a reminder that the recent rally has a complete disconnect to economic reality. Gold has risen, oil is through the roof, and the dollar is up to its old tricks of losing value against every currency basket. "Main Street has just entered the act. The peak of the pain is not visible yet," said Asha Bangalore, an economist with Northern Trust in Chicago. I ditto this sentiment. April retail numbers were a sham with an entire extra weekend of reporting. Furthermore, I think we can infer an inverse correlation with the success of Walmart and Costco and that of specialty retail. People are simply looking for bargains and can't afford to pay for anything else.

Credit card issuers are backlashing against potential legislation that might curtail some of their gray-area practices. They say stricter policies will raise rates for good-credit consumers, the bulk of their business. But the bulk of the profits come from sticking it to higher-risk debtors. They don't make any money on people like me who use their CCs as debit cards, essentially using the money as a free monthly loan. They make money from accruing monthly balances at high rates, penalizing with late-fees, and raising rates on accounts already running a tab. "The banks are trying to protect a franchise that is based on deception," said Ed Mierzwinski, consumer program director with U.S. Public Interest Research Group. "They saw an opportunity to make bad money on top of good, and they seized it."

Just to refute the notion that I am strictly short this market, I cashed my True Religion ticket today for the 2nd time when good earnings led to an almost 20% pop this morning. I have owned Jan 09' 10s since August, sold today for about a 40% profit. I'm thrilled to dump a retail holding and persist in my view that XLY will continue to plunge. I was sold on TRLG due to their successful expansion and the short-term theory that people who can afford $300 jeans won't be crimped by gas and food prices. Don't want to test that any further.....

http://www.cnbc.com/id/24506438/from/ET/

http://www.marketwatch.com/news/story/credit-card-industry-claims-tighter-rules/story.aspx?guid=%7B18FE55C0%2D8695%2D4A2F%2D878E%2DA06FD10C60E1%7D&siteid=nwhfriend

Death Blow

Sorry for the prolonged absence, but I had a very busy week with my birthday, my wife's birthday, and my little brother's wedding sandwiched in-between. Death blow is a reference not to the current state of the economy, but to the best man speech I delivered. Originally scheduled for 6 or 7 minutes, it took me about 10 minutes to complete because I couldn't talk over the laughter. I believe the best compliment I received was from a complete stranger who told me he could now never have his brother, or perhaps anyone who even knows him, give his best man speech after the brutal blow I delivered. Watch for the youtube feed in the near future and congrats to my brother and his new wife! My one failure of the weekend was not being able to shave my alma mater into my brother's back hair, but hey, you can't have it all.....

Back to the markets....bought gold last week when it went under $850, about a 25% correction from the top. This is a longer-term hold as I think the dollar bulls have it wrong, again.

Funny comment from an itulip interview where founder Eric Janszen says that his friends in Spain, a socialist country, think our economic policies are more socialistic than theirs.

Despite its recent success, the future of home equity and credit card loans remains like a scythe hanging over the American consumer. Eternal optimist and hider of writedowns John Thain, CEO of Merrill, said this today, "But banks that have a consumer exposure, like credit cards and home equity loans, are likely to experience greater delinquencies going forward than we've seen."

From the same itulip interview, interviewee Dr. Michael Hudson says he thinks the Bear Bailout will be viewed years from now as one of the greatest debacles in American economic history, on par with Depression policy and 70s recession policy. Great.

Home sales down from Feb. and down 20.1% year-over-year. This is going to get much worse. The joke continues as Fannie lost over $2 billion dollars but "assured" investors they have plenty of capital. As long as Bernanke keeps printing it for them...

Still trying to clear my brain from all the red bull and vodka, will get the posts rolling again. Despite my desperate pleas to my brother that not all guests would have 20-30 drinks, he still had plenty of liquor left over.

http://www.cnbc.com/id/24501705

http://www.itulip.com/forums/showthread.php?p=35173#post35173