Tuesday, January 27, 2009

We are Saved. Version 21,287

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I am always surprised when news I thought everyone knew moves stocks. Financial stocks are happy after hours as details of the government's plan to overpay for bad assets with your grandchildren's money.... err, I'm sorry - as details of the government's plan to make excellent long term investments emerge... i.e. "the bad bank". Everyone knew this was coming but apparently it is setting hearts racing.

Remember, it's not the first 21,286 solutions that matter. It's the 21, 287th.

"We're saved! The Fed is cutting rates"
"We're saved! They rescued Bear"
"We're saved! Some sucker (BAC) bought Countrywide"
"We're saved! Fannie and Freddie taken over"
"We're saved! AIG solved"
"We're saved! Lehman now gone"
"We're saved! Merrill sold to Bank of America"
"We're saved! The Fed is backstopping commercial paper"
"We're saved! The Fed is backstopping money markets"
"We're saved! Wachovia sold to Wells Fargo"
"We're saved! TARP is passed"
"We're saved! Citigroup backstopped and given new loans"
"We're saved! Bank of America backstopped and given new loans"

I left out about 15 other instances, but you get the point. We rally on each one as the lemmings clap and nod their head - time to buy stock. Just add this to the list.

"Suckered the tax payer again!" Sincerely, Wall Street

Goldman Sachs (GS) is enjoying a nice splurge in after hours so it looks like my stop on the short position will be triggered tomorrow morning as Kool Aid overflows in the streets. You just can't invest normally when the not so invisible hand of the government means more than capitalism. So we'll eat a quick loss as the invisible hand slaps us across the face for daring to meddle with it.

CNBC reports...
  • The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks, according to industy sources. The plan could be announced early next week.
  • The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism. The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.
  • On the other hand, if the government paid less than the value at which the asset is carried on the bank's books, the bank would issue common equity to the government.
  • The move toward a bad bank concept comes amid growing speculation that banks may need another government bailout. Goldman Sachs economist Jan Hatzius recently said global credit losses may approach $2.1 trillion. Of that total, banks worldwide have already absorbed about $975 billion in losses, he estimated in a research report, suggesting the worst is far from over.
  • FBR Capital Markets analysts said eight of the largest U.S. financial institutions need up to $1.2 trillion in new common equity and that "the government is the only entity that can provide bridge capital to get past the current credit crises."
Sure why not... it's only money. I don't think $1.2 Trillion will be enough myself. The hilarious thing is it's all a shell game - we're going to get equity from the banks? Banks that would be zero if not for the federal backstop? Meaning we are going to fund this with what would be worthless stock - if not for the government. See how circular it is? We just are too proud to use the word "nationalize" - that is anti American.

Anyhow, the "free marketers" that run Wall Street are absolutely joyful in glee, as they are each time the government has intervened. Remember, when we're drunk on Kool Aid, we don't want the government to bother us. They interfere, slow us down, and ruin our innovations. When we wake up the next morning to see what we did in our drunken stupor - then the government is welcome. As long as they make our doo doo go away. Then once they do that we will lobby them over the ensuing 5-7 years to make sure their regulations are slowly dismantled piece by piece. See ya in 2016 when we're back to "normal".

Bookkeeping: Short Brinker (EAT)

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For a long time I called out restaurant stocks as one of the consumer discretionary sectors to enjoy a very bad future. [Sep 19, 2007: Tough Times Ahead: Restaurants?] At the time commodity prices were ramping huge in the agriculture space (wheat, milk, corn, cheese et al) and the end of the house ATM was going to hurt the consumer. Unfortunately, I could only talk about it and not profit from it due to the previous tracking system we were using. For example the stock we're focused on below fell from the upper $20s to $4 at it's bottom... now that's a profit opportunity lost. (of course we would not of caught that entire move - but even a terrible trader could of made lots of money multiple times with a stock in such a downtrend) A lot of stocks in the sector have fallen 60-80% in the meantime....

Brinker (EAT) is actually one of the "better" names in the group but it's had a HUGE rally off "not as bad as expected earnings" nonsense that bulls love. $4 to $12.
  • Brinker International Inc., which operates the Chili's Grill & Bar restaurant chain, posted a loss in its fiscal second quarter Thursday due to the sale of a restaurant chain and other one-time items. The company also reported sliding sales during the quarter, as the holiday season did little to spur customer traffic in the restaurant sector.
  • But investors had already expected lower sales at the chain given the recessionary environment, and appeared to focus instead on the company's adjusted results, which widely beat Wall Street's expectations.
  • Same-store sales, or sales at locations open at least a year, fell 4.5 percent excluding results at Macaroni Grill.
Brinker International, Inc. owns, develops, operates, and franchises various restaurant brands primarily in the United States. It operates full service restaurants under the Chili�s Grill & Bar, On The Border Mexican Grill & Cantina, Maggiano's Little Italy, and Romano's Macaroni Grill brand names. As of June 25, 2008, the company owned, operated, or franchised 1,888 restaurants in 50 states.

Technically, we have the potential for a double top forming, so an easy in and out trade here and I actually don't like most of this sector so that's an additional bonus. Unlike the punditry I see no consumer recovery in "the 2nd half". They need minor things like... jobs.

That said, the stock has been on fire and we'll use the double top as our line in the sand. The stock is @ $11.80 (2.9% stake started) and has stalled around $12ish which was also the high in early January. Market maker could really snap you out of a position like this so I'll place the stop loss a bit higher, around $12.25 and we'll see if we can get something around $10.50 on the downside. The 50 day moving average is down in the $9s, so it could actually fall even farther than mid $10s if this trade works out. If I get stopped out I will probably try this trade again from a higher level.

So we're going with 3.8% on the downside; 11% on the upside. The logic here is a double top is forming and some back and filling is required. You can see volume is also stalling out this week at the bottom of the chart. Whomever bought @ $4 - congrats to you.

So this gives us 3 short positions, but still missing some REITs, some vegas casinos (no rally in those names despite market strength), some credit card companies, some retailers, and the like. Still searching for some better low risk set ups in those sectors - I'd like to get 8 to 12 shorts and get rid of these darned Ultrashort instruments of destruction. Once I get the short side built up properly I'll feel more comfortable owning more long exposure and be "in balance"; slowly moving in the right direction. Someone please push MGM Mirage up 20% ....

Short Brinker in fund and personal account

Bookkeeping: Short EZCORP (EZPW)

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I own a tiny splash of EZCORP (EZPW) long so this is not a true hedging play - it is basically an outright short on technical condition. The chart will tell the very obvious story - this is my favorite type of setup and the formation I was hoping to get on some of the stocks I want to short for the long term.

EZCORP is around $14.66 as I type this; I'm starting a 2.9% exposure. It's stalled at the 200 day moving average each of the past 3 sessions intraday. I'll set a quick stop loss just north of $15 and add to my long position if the stock is strong enough to break through. $15 is about 2.5% downside. I'll shoot for $13.50 on the downside or a 7.5% gain.

2.5% bad vs 7.5% good or 1:3 ratio.

note: I like this name fundamentally :)

note: tricky set up with Fed announcement tomorrow - the lemmings in the stock market will probably bid this market up when Ben announces how he will be buying every asset under the moon so that all risk is taken away from the market and onto the backs of taxpayers. Remember, it's not the first 87 government interventions that will "fix it"; it's the 88th.

Long/Short EZCORP in fund; short EZCORP in personal account

Bookkeeping: Cutting Emergent BioSolutions (EBS) Exposure in Half

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As I mentioned in this weekend's summary, I was noticing the leadership stocks stalling out even during our late week rallies. I opined we might get a similar act to what we saw in many parts of 2008; what I called the "rotational correction" - a place where the market would go sideways or indeed even up, but different groups would get trashed in rotational order. I said in fact with a very short term trading time frame I'd actually be leaning towards financials and "global growth" stocks to take advantage of this (I don't trade that time frame here for the fund but just threw it out there for those who daytrade or have 1-3 day type of time frames). Thus far this has happened - the interesting part is the "next step". While bulls are getting happy about the "action" I'm getting pensive. What I'm seeing is oversold conditions being worked off in the "worst of" groups while the leaders large (McDonalds/Walmart) and small (the things we own) stalling out. If you are a bull you have to hope this rally spreads from the "worst of" breed + "daytraders jumping in and out of commodities" and back to the leadership stocks. Or we're toast.

I'm watching all these names that are stalling very closely because a stalled momentum stock can turn into a falling star very quickly. One such name I highlighted this weekend was Emergent BioSolutions (EBS) - today's action has turned me extremely cautious.

I am going to cut back the position in half (I had already made the stake smaller as I was worried it would be hit when the market was hit) - going from a 1.3% stake to 0.65%. An aggressive trader would actually short here with a stop loss over the 50 day moving average. To get bullish on this name again I'd like to see a move back to $24... for now it's in a holding pattern for me with risk to the downside.

Again, I speak about Generals - the Generals have not been hit in this correction. They've run all January as if the market has been up 10%, not down 10%. When I start seeing the stuff that should be swirling at the bottom of the toilet rallying, and the generals starting to be handed cigarettes and blindfolds I get nervous. Even the Obama stocks are starting to look quite iffy and if you cannot believe in SuperObama what can you believe in? Too early to tell if the next step is the firing line for the Generals, but better safe than sorry.

Long Emergent BioSolutions in fund; no personal position

Bookkeeping: Short Government Sachs (GS)

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The market is doing a nice job of working off an oversold condition. As we mentioned this weekend and yesterday the "worst of" breed and/or "global growth" is leading the charge - perfect for those with 1-3 day type of time frames; which works in my personal account but not so much for a mutual fund perspective. So for this portfolio I'm just sort of sitting and waiting - hoping names I want to short put on some nice 10%+ moves.

I mentioned yesterday in a perfect world I'd like to see S&P 860 or so to begin getting more aggressive on the short side - we are now closing in on S&P 850. This market has a lot of resistance overhead at 860 to 880. Great things are emerging in our economy: countless more job losses, consumer confidence at historic lows, housing prices dropping nearly 20% year over year putting hundreds of thousands more under water by the month. All good things (to the stock market) because "it can't get worse" - the words the sirens have been singing for 15 months. And soon the sirens will talk about "stocks are not reacting to bad news" and we'll repeat the song and dance we do every 4-8 weeks.

Much of the "worst of" stocks have still not rebounded to a point I'd prefer to short but some of the financials have begun to get interesting again. We have an excellent set up in Goldman Sachs (GS) [I will post the chart later this afternoon] The stock is up a few % to $77.40s, and we have a nice resistance at $79ish (50 day moving average). I'm buying a 3.0% stake here & I'll place a stop loss at $81 or so if the Kool Aid overwhelms me. (this would be about a 4% loss)

The stock hit $60 a week ago so I don't know what my perfect exit target is but if I can get a 10% move ($70 or so) I'll probably take quite a bit off the table. The only concern here is peer Morgan Stanley (MS) has been *the* stock in the sector that traders are using ... so we'll see if the cheer spreads.

But it's the perfect low risk short set up for a technical scalp. p.s. Apple (AAPL) has an identical chart setup to GS. Exact mirrors the past few weeks in fact.

I'm hoping for more rally in names I want to have as "permanent shorts" so I can get more attractive entry points.

Short Goldman Sachs in fund and personal account

Allegiant Travel (ALGT) Continues to Execute; Buyback Announced

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I don't currently have a position in Allegiant Travel (ALGT) in the new portfolio but had one in the old one. I am hoping to get a limit order fill below $32... Delta Air (DAL) had a gosh awful report (-20%!) so it seems to be hurting the group, as does any uptick in oil which we've seen the past few days (ex today)
  • Demand for air travel continues to weaken as deep fare sales in recent weeks have not spurred customers to open up their wallets in droves, Delta Air Lines Inc. executives said Tuesday after the world's biggest carrier posted a $1.4 billion loss for the final three months of 2008 and signaled the revenue environment for 2009 will be challenging.
ALGT continues to trade in no man's land - good for daytrading I suppose but not for my time frame.

I saw nothing unworthy in this earnings report and please tell me what other airline is doing a buyback! (it's a small one, but at least they have the cash flow to do it - market cap is $700M so $25M is 4%) Their 88 cents beat analyst estimates by 21 cents, and unless oil gets back to $100+ next year's $3.70 seems achievable. Even at $3.00 this is just over 10x forward estimates.

  • Allegiant Travel (ALGT) the Las Vegas parent of Allegiant Air, reported that fourth-quarter earnings nearly quadrupled on 21% higher revenue. Earnings reached $18.2 million, or 88 cents a share, from $4.8 million, or 23 cents, in the year-earlier quarter. Revenue rose to $122.4 million from $101 million.
  • The company also said it would buy back as much as $25 million of its common stock.
  • Allegiant had "tuned the airline to handle high fuel prices in the fourth quarter, as evidenced by the year-over-year reduction in capacity, and substantial increases in passengers per departure, load factor and total average air fare," President and Chief Executive Maurice J. Gallagher Jr. said in a statement late on Monday. Load factor is the percentage of seats filled with passengers. Our December fuel cost per passenger was less than $30 compared to an average of $60 during the second and third quarters of 2008 and $55 per passenger in first quarter of 2008.
  • The airline was "well positioned to benefit from the dramatic collapse in oil prices during the second half of the year," Gallagher said. First-quarter average air fare should decline 4% to 6% from a year earlier but should be more than offset by lower fuel costs and higher aircraft utilization, the executive said. Our fourth quarter fuel price per gallon was down 21% year-over-year and a stunning 40% sequentially. The resulting reduction in fourth quarter operating cost helped pave the way to a record operating margin, with operating profit surging close to 400% year-over-year.

Balance Sheet

  • We ended the quarter with unrestricted cash and short-term investments of $174.8 million, up from $138.6 million at the end of the prior quarter. Excluding air traffic liability, cash increased from $60.8 million to $105.8 million sequentially. Year-end 2008 total debt was $64.7 million, down from $70.1 million at the end of the prior quarter. We expect 2009 year-end total debt to decline by $25.3 million.
  • "The rapid deterioration in the global aircraft market has put even more pressure on MD-80 prices and we are able to acquire high quality aircraft at even lower prices than before. Our strong liquidity position enables us to purchase MD-80 aircraft for cash without external financing, so the current credit crisis does not constrain our ability to grow."

This is exactly what we are looking for in all our companies - absolutely no need to deal with the dysfunctional credit markets. In this industry - the ability to say that is quite impressive.

No position but watching closely


Jacobs Engineering (JEC) - Solid Earnings Report

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Jacobs Engineering (JEC) with a solid report but some cutting back of the high end of 2009 estimates; no surprise there. The question will be when we get to 3rd and 4th quarter 2009 will "actual" be as high as 'the new high end' of estimates. It's all about backlog with these firms.

Technically the stock has broken below the 50 day moving average and the past few days has been stopped dead cold (intraday high) each time it touched it ($43ish) - might consider a short to hedge against my smallish long on this one.

Full report here
  • Construction services firm Jacobs Engineering Group Inc (JEC) posted a higher quarterly profit that beat analysts' estimates, helped by rise in field services revenue, but cut the upper end of its 2009 earnings outlook, citing market uncertainty. For the first quarter ended Dec. 31, 2008, the company reported earnings of $116.4 million, or 94 cents a share, compared with earnings of $98.4 million, or 79 cents a share in the year-ago period.
  • Revenue rose 24 percent to $3.23 billion. Field services revenue rose 33 percent to $1.7 billion. Analysts on average were expecting earnings of 89 cents a share, before items, on revenue of $3.12 billion, according to Reuters Estimates.

Guidance

  • For 2009, the company now expects to earn $3.55 to $3.90 a share, compared with its prior view of $3.55 to $4.05.

Backlog

  • At the end of the quarter, Jacobs Engineering's yet-to-be filled orders totaled $16 billion compared to $15 billion in the previous year. That includes the removal of about $840 million in revenue from its order backlog during the quarter after certain clients canceled projects.

Cash

  • Our balance sheet strengthened as our net cash reached $746 million.

So far cancellation still appear to be manageable... we'll see what Fluor (FLR) says on their report - these are the two bellweathers for infrastructure.

Long Jacobs Engineering Group in fund; no personal position


AP: Dividends Being Cut at Fastest Pace in 50 Years

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Somewhere, a senior throws his hand up in despair. First, Uncle Greenspan and now Uncle Bernanke slash interest rates to 0-1%, killing them in their savings/Certificates of Deposit. Now they cannot even get a bone from dividends. Savers must be eliminated in America; they are a scourge to our "earn and spend" service economy - Spenders Unite! Considering anywhere from 33-50%+ of gains over history in the stock market have been from dividends.... well... you can do the math.

  • Dividends are being cut at the fastest pace in at least 50 years, and many of the reductions are coming from U.S. companies investors have been relying on to provide income during the recession. Already this year, seven companies in the Standard & Poor's 500 index have decreased their dividends, removing some $12 billion from shareholders' pockets in the coming months. On Monday, Pfizer became the latest blue-chip company to do so. If the trend continues, this will be the worst year for dividend cuts since 1958, when annual payments fell by 8.4 percent, according to new research from S&P.
  • Of the seven S&P 500 companies that have said they will cut dividends in 2009, six are in the financial industry and all reduced their payouts by at least 50 percent, according to the S&P research. Companies in other industries haven't been able to escape the financial and economic malaise either. Their profitability and cash flows are under pressure, and they look to preserve cash by slashing their dividends.

  • These cuts serve up another hit to shareholders who have already been battered by the steep declines in the stock market. That is especially true of retirees, who tend to be attracted to so-called "widows and orphans" stocks that provide them with a steady cash flow. (i.e. banks)

  • Of the companies in the S&P 500 that pay dividends, some 16 percent of them are what Silverblatt deems as "under stress."


A Quick Look at McDonalds (MCD) and American Express (AXP)

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This is the heart of earnings season so I cannot go through in detail most of the pertinent reports but some of the names of interest yesterday were Caterpillar (CAT), Danaher (DHR), Eaton (ETN) on the industrial side.... SL Green (SLG) on the REIT side (surprisingly strong), VMWare (VMW) & Texas Instruments (TXN) in technology (nothing special), and Tyson Foods (TSN), Netflix (NFLX), Kimberly Clark (KMB) on the consumer side. Most of these I am reading as economic tells, not as potential investments - we can find so much more information by listening to the companies rather than listening to faulty government reports or pundits telling us to "look ahead to the bright future, just around the corner."

I'd like to reiterate that other than for commodity traders or daytraders, any increase in commodity prices will be destructive for just about every company ex-commodity types since the economy and global consumer is so weak. Lack of pricing power combined with higher input costs (commodities) would be a soul crusher. Hence, I find it amusing the cheerleading for higher oil prices as a "signal" of impending recovery. I'd see it as a signal of an even weaker future as market speculators serve to crush the global consumer. But that's just me as I view pictures of tankers full of oil sitting loaded in Signapore ports - yep, that rally in oil surely is telling us ... nothing - other than how poorly regulated our markets are. [60 Minutes: Speculators and Oil] Sort of amusing to watch the punditry so excited as institutional money trades in and out of oil at rapid fire pace, ready to pronounce every $2 uptick as a "sign" we're coming out of the recession.

One interesting note on KMB (Kleenex, Huggies, Depends etc) are more deflationary signs...
  • The company may cut prices on certain items, he said in a statement. "We are fine-tuning our pricing and promotional plans to ensure we remain competitive, particularly in diapers and training pants in North America," Falk said in a statement.
Further, he is repeating what was happening to the Walmart (WMT) customer about 6 months ago... it is now spreading in more widespread fashion. In a troubling sign, sales of toilet paper are down 7% - ahem. First goes women's makeup, now toilet paper? [Jan 16: Makeup is Not Recession Proof]
  • He said sales have suffered as consumers "de-stock" their pantries at home and buy only what they need right away in order to stretch every last dollar. "They're conserving cash and don't want to build household inventory," he said. "If you're out of paycheck, it may wait until the next paycheck cycle."
  • Its leading bathroom paper brands saw a 7 per cent fall in volumes, while Kleenex sales fell 3 per cent.
But I want to focus on two names we follow more closely in the blog - McDonald's (MCD) and American Express (AXP); the latter of which is now backed by the full faith of the U.S. government ("bank holding company") Obviously, the American economy could not exist without AMEX. This is a critical business... unlike say... autos.
  • AmEx received a $3.4 billion investment through the Troubled Asset Relief Program, or TARP, in the fourth quarter. AmEx received a $3.4 billion investment through the Troubled Asset Relief Program, or TARP, in the fourth quarter.
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McDonald's results
  • McDonald's Corp (MCD) reported a quarterly profit that handily topped Wall Street estimates, but said it saw growth in some overseas markets soften as a U.S.-led recession went global. McDonald's posted a 5.8 percent rise in worldwide December sales at restaurants open at least 13 months. The results are still ahead of most other restaurant operators, but mark a slowdown from the company's own November and October results, when McDonald's said same-store sales rose 7.7 percent and 8.2 percent, respectively.
  • Jack Russo, an analyst at Edward Jones, said the slowdown was most prominent in international markets and showed that the "rest of the world is catching up" to the U.S. recession.
  • McDonald's cited a "softening" in its business in Germany as diners reacted to price hikes. It also said fourth-quarter same-store sales decelerated in China, where growth was once red-hot.
  • Global same-store sales rose 7.2 percent in the quarter. Same-store sales rose 10 percent in the Asia/Pacific, Middle East and Africa markets, 7.6 percent in Europe and 5 percent in the United States.
  • In Europe, same-store sales rose 5.4 percent in December, compared with rates of 9.8 percent in October and 7.8 percent in November. The Asia segment had a December rise of 5.7 percent, versus 11.5 percent in October and 13.2 percent in November. (two very sharp decelerations in December, but already the traders are trying to anticipate the 'coming recovery' as this is backwards looking data and we have to start buying stocks in anticipation of 'the turn' - something "they" have been trying to do since spring 2008)
American Express results
  • American Express (AXP) posted a quarterly profit drop of nearly 80%, as the consumer credit environment, which dramatically worsened in the final three months of the year, continued to wreak havoc on the card company's business.
  • "Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," said Chairman and CEO Kenneth Chenault.
  • Chenault said that purchases by cardmembers declined by 10% when compared to the year-earlier period, but less so when adjusting for foreign exchange rates. On the other hand, loan delinquencies and charge-offs rose in the quarter. onsolidated revenue fell 11 percent to $6.5 billion.
  • American Express set aside $1.4 billion in the quarter to deal with loan losses, primarily in its U.S. card business. American Express wrote off 6.7% of its managed loans in the fourth quarter, compared to 5.9% in the third quarter and 3.4% a year earlier.
  • But the company cut expenses by 15 percent in its U.S. card business as part of a plan to save $1.8 billion in its biggest restructuring since 2001.
I'd love to see a rally here in AXP to about $20 - at some point in the next 4-10 weeks we should have another 'rally of hope' as we begin to price in the very apparent '2nd half 2009 recovery'.

[Jul 23: American Express Weakening]

No positions

Wall Street Journal: As Hotel Vacancies Rise, So Do Risks of Default

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We talked about the 'staycation' (due to $4 gas) in the summer; now we are facing the staycation due to economy (but not to worry, people in staycations will soon revive the auto and housing market with the cheap money Uncle Ben B is handing to them) Yes... many more future workers for the steel toed future of the infrastructure laden Obamaconomy as hotels go half empty. Keep bidding up those commercial real estate stocks; certainly all that future unoccupied land won't effect supply/demand or prices. Not in the peaceful bliss of the Obamaconomy.

I'd be worried about this but as the 2nd half recovery begins in 5 months, all our problems disappear into the ether.
  • The downturn in the U.S. hotel industry is becoming so acute that it has thrust the sector into crisis, leaving vacancies at a 20-year high and putting many properties in danger of missing payments to lenders. In the wake of cutbacks by business and leisure travelers alike, U.S. hotels this month are expected to post their 15th consecutive month of declining occupancy, longer even than their 12-month losing streak after the Sept. 11, 2001, terrorist attacks.
  • That occupancy drain, coupled with declining room rates as hotels compete for customers, is expected to result in the hotel industry's steepest decline in revenue per available room since 2001, according to market-research company PKF Consulting Inc.
  • If conditions are as weak as expected, PKF estimates that nearly 20% of a sample of 1,500 U.S. hotels that it studied won't generate enough cash flow this year to cover interest payments on their mortgages, up from nearly 16% last year.
  • U.S. hotels now carry roughly $250 billion in cumulative mortgage debt, according to Foresight Analytics LLC. Many hotel owners who can't generate enough cash to cover their debt service in this recession will avoid default and foreclosure by digging into their own or partners' resources to make up the shortfall or by negotiating a compromise with their lenders. ($250 Billion? PEANUTS! Just put it on the tab. To the printing presses Ben!)
  • Exacerbating the industry's troubles is a flood of new rooms hitting the market because of development projects started during the real-estate boom of recent years. .....estimated 125,000 net new rooms projected to debut in each of this year and 2010.
  • Among commercial real-estate categories, the hotel industry rises and falls the most dramatically in reaction to economic cycles. That's because, unlike office buildings and shopping malls with long-term leases, hotel occupancy and rates change on a nightly basis as customers come and go at will. In a downturn, the fallout is significant; PKF expects the average occupancy among U.S. hotels to drop to 57.6% this year, falling by 3.2 percentage points, to its lowest level in the 20 years that Smith Travel Research has tracked the figures.
  • "The only word that comes to mind is 'unprecedented,' " said Bjorn Hanson, a lodging and tourism professor at New York University, referring to the speed and depth of the industry's decline in recent months. (yes... yes... we've been using that word a lot of late)
The New York Times also chimes in on the high end
  • Hotel revenue is down sharply. Big new projects, planned in the boom days, are either sitting unfinished or left on the drawing boards. And some high-end hotel owners now face an unhappy situation — how much can they cut prices to fill their rooms before they damage their hotels’ luxury cachet?
  • I don’t think anybody realized the switch was going to be turned off so quickly,” said Lisa Grossberg, the general manager of the Buckingham Hotel in Midtown Manhattan. “We saw people being more rate-conscious; we saw the renegotiations of corporate contracts as companies tightened their belts in the fall. But then in the middle of December, everything just about stopped.
  • For the week of Jan. 11 to 17, the average revenue per available room — the standard measure of hotel performance — fell 16.4 percent over the comparable week in January 2008 in hotels in the United States. Average occupancy fell 12.9 percent, and average daily room rates declined 4 percent.
  • The figures for luxury hotels were even bleaker. Occupancy rates fell 24.4 percent in the week that ended Jan. 10 compared with the first week of January 2008, Smith Travel Research found. Average daily rates fell 8.9 percent. Luxury hotels are heavily dependent on high-end business travel, corporate meetings and international visitors — all of which have fallen.
  • Some business travelers who were formerly authorized to stay at five-star hotels are now restricted to four-stars (which include so-called big-box urban hotels like Sheraton or Hilton). And big-box hotels are also dropping prices, adding to their lure.
  • But she said: “This one is a really big downturn, a scary one that isn’t confined to one niche or one segment of the country. It’s different than anything before, and I don’t know where the bottom is. For now, it’s just survival of the fittest.”
Sometimes it "is different this time"

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A few of the more well known players in this industry below - OEH looks particularly "in trouble" going off chart alone.
  • A leading shareholder of Orient Express Hotels (OEH) said he would stick with the shares of the hotels and luxury leisure group for the long term, despite a near 90 percent fall in the stock price this year. "We are long time players. There is great value embedded in this company," said Francois Reyl, chief executive of Swiss finance firm Reyl & Cie. (ah, the good ole "if we hold it long enough, we'll lose 50% of our investment instead of 90%)
  • The company also announced it would suspend quarterly dividend payments in order to save cash. (hmmm, always an interesting sign)
Holiday Inn, Crowne Plaza

Marriott


Westin, Sheraton, Four Points - Sam Zell is involved in this one now


"deluxe hotels" worldwide

And look who is doing the best (it's all relative): the "Walmart" of hotels

Quality Inn, Comfort Inn, Econo Lodge


No position

Monday, January 26, 2009

Bloomberg: $16 Billion to Fannie Mae *Yawn* Just another Day in Cramerica

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Well, that didn't take long - at least they didn't sneak this one in on a Friday night [Jan 25: Freddie Mac Saddles Up for Another $35B] Fannie's on deck! So we have $49B Freddie, $18B Fannie and we're just getting this party started. $67B of the "no more than $200B" in taxpayer obligations we were promised as the "cost" for this cluster(mess) already spoken for.

Heck - that could pay for 4 auto bailouts with $7 B left over for new area rugs!
  • Fannie Mae, the largest source of home-loan money in the U.S., said it will need to tap as much as $16 billion in emergency funds from the U.S. Treasury Department to stay afloat as deterioration in the housing market persists.
  • Fannie’s planned request, announced today, follows Freddie Mac, which said Jan. 23 that it will need as much as $35 billion more in federal aid. Unprecedented mortgage losses drove the net worth of both companies below zero in the fourth quarter, they said in separate securities filings.
Again, just imagine what is going on in the "pristine" Federal Reserve balance sheet as it sucks up car loans, consumer loans, mortgage backed securities - of which they are fighting the press tooth and nail from divulging the details. Surely when these securities are on Fannie/Freddie's "safe" balance sheet they do damage, but when they go to the Federal Reserve balance sheet they are MAGIC! *POOF* No cost to taxpayers.

Meanwhile the beat goes on in the alternative universe called Wall Street - Citibank ready to go with a new private jet order (12 seater - nice!). The same Citigroup that is technically worth zilch without the US taxpayer. Zoom Zoom... just want you to know so you can show pictures to your grandkids what they are buying.
  • Beleaguered Citigroup is upgrading its mile-high club with a brand-new $50 million corporate jet - only this time, it's the taxpayers who are getting screwed.
  • The French-made luxury jet seats up to 12 in a plush interior with leather seats, sofas and a customizable entertainment center, according to Dassault's sales literature. It can cruise 5,950 miles before refueling and has a top speed of 559 mph. There are just nine of these top-of-the-line models in the United States, with Dassault's European factory churning out three to four 7Xs a month.
Seriously, I cannot make this stuff up. Reverse Robin Hood - alive and well; Cramerica: for the corporation, by the corporation. I wonder how far $50 million could go to save an untold amount of small businesses.

Late note: Texas Instruments adds 3,400 new future backhoe / bulldozer operators to the Obanaconomy
  • The chip maker also announced a plan to cut 3,400 jobs, or 12% of its work force.

Bookkeeping: Cutting Lennar (LEN); Adding to NCI (NCIT)

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Bulls are breathless today as something the government is trying to stop (home prices falling) is creating a crazy condition called "demand". Imagine that - the laws of Economics still hold. You can see from today's action that when the day comes that housing actually improves in any sustained way, there is an avalanche of money waiting to pile into housing stocks. But for now all it will take is "less bad than previous month even if at 2nd worst reading in history" type of action - the bar is just that low.
  • Sales of previously owned homes in the U.S. unexpectedly rose from a record low, propelled by the biggest slump in prices since the Great Depression as foreclosures surged.
  • Purchases rose 6.5 percent to an annual rate of 4.74 million from 4.45 million in November that was less than previously estimated, the National Association of Realtors said today in Washington. The median price dropped 15 percent from a year ago, the biggest decline since records began in 1968 and probably the biggest in seven decades, according to the group.
  • “You have to put it in the context of an even steeper decline for the previous month,” said David Sloan, a senior economist at 4Cast Inc. in New York, who had the highest projection in the Bloomberg News survey. “The net trend is still negative. It does seem that some cheap prices are attracting buyers. I don’t think it’s a clear sign of a revival in the housing market. The housing market is very weak.”
Here is the reality, foreclosed homes are going to dominate sales for quite a while going forward. That does little to help the guy who actually lives in a home and is trying to sell their home at a market rate - since the foreclosure prices are far below the "market". But when you get the aggregate numbers you will see "housing rebound" as homes priced 50% off are selling. Don't try telling that to people who are trying to sell their homes 35% over foreclosed prices in the area. But any shred of data point that can be twisted as a "rebound" in housing will be used as such.
  • 45% of the sales were distress sales, meaning foreclosure, pre-foreclosure, and short-sales.
I'm using the Kool Aid today to clear out of most of my Lennar (LEN) as it was up nearly 20% - not a major position due to the controversy [Jan 9: Fraud Charges Against Lennar?] surrounding the name but I've dropped it from a 1% stake to 0.2%. I am still deciding if I want to keep this name as my proxy on homebuilders or move to something with less drama. But this is exactly the "reversion to mean" trade we spoke about - stocks sandblasted to the ground; they simply do not go straight down and were due for an oversold bounce.


On a non related note NCI (NCIT) is one of our leaders that is stalling - and could go either way (break through support or simply resting). A limit order was placed at $30.05 which hit today so I've taken this back up to a 1.1% stake. I sold most of this position last week in the mid $31s so I am replacing that batch at a lower cost basis. But the stock is only down to its 20 day moving average, and if the Generals are shot (next) we should see downside to $28 (50 day moving average) where I have a larger limit order waiting. This sort of trade is not a "fast money" opportunity but rebuilding a stake as the name reverts to support. And I'm playing small - position size is far below normal levels.

A reader pointed out ManTech International (MANT) which has been showing up on my screens the past few weeks, which is very similarly positioned to NCI. The stock has exploded the past few sessions.


[Jan 14: Beginning Stake in NCI (NCIT)]

Long Lennar, NCI in fund; no personal positions

Nothing to Be Excited About Today

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This is almost an exact set up I opined about this weekend

The reason I think this *could* be a probability is many of the stocks I own at the top of the portfolio and have as "want to add" status are stalling. These have been the generals and when the market does throw in these intraday rallies the traders are jumping into beaten down financials and commodities.

In the short run I almost want to be leaning to the most beaten down "worst of" stocks, although my time frame (intermediate) does not position me in those type of stocks. But for 1-3 day "flipping" type of action I could see the potential for some snap back rallies in those groups instead of what we own.

And so today we have Barclay's (BCS) up 60%, Morgan Stanley (MS) continuing a great run, and HAL9000 and his friends are running into the dry ships = steel = fertilizer = oil = infrastructure = wheat = coffee = coal = it's all the same to HAL trade.

You also have some of the worst of groups i.e. casinos, some consumer discretionary and the like who have fallen so far away from any moving average rebounding. So far this is textbook - traders jumping into the beaten down stuff and most of the stronger names of late not doing much. Reversion to mean trades; hot money running from 1 group to the next. I'll keep repeating - any rally let by "worst of breed" is not one to get behind.

In a perfect world I'd like to see this market drift up to S&P 860 or so to throw in the next tranche of short exposure.

At Least 43,000 New Obamaconomy Workers Freed Up Today

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Just at a quick glance of the headlines I see 43,000 future bulldozer operators ready to go with Obama's stimulus plan. [Jan 18: 87,000 Big Company Job Losses Already Announced in 2009; Deflation Starts to Hit Wages] Toss on the 5000 from Microsoft announced late last week and let's call it an even 48,000. I'm sure I missed some other announcements because I could devote an entire blog just to job loss announcements and do 8-10 entries a day.

On the positive side at least some of the Caterpillar (CAT) workers will already know their way around a backhoe. Not so much for the IT guy or accountant let go at Caterpillar or the software designer at Microsoft, the scientist/researcher at Pfizer (PFE) / Wyeth (WYE), or retail associate at Sprint (S) but not to worry - 2 million... err, 2.5 million... errr, 3 million.... errr, 4 million to be put to work under SuperObama's plan. These jobs better come quick since so many states unemployment funds are going into the red.

I'd like to be long whatever company makes those bright orange vests that the construction guys wear ... going to be a huge bull market in that area.

As an aside 3 of the 4 companies announced today are quite excellent proxies for the 'real economy' spanning from industrial to retail. It is worthwhile to read these reports to see where the weakness is (basically everywhere not related to federal government spending) 5 months to go until the "2nd half 2009" recovery fixes the mess.

Caterpillar 20,000 gone
  • Caterpillar, seeing sales for its bulldozers and other heavy equipment sinking in a worldwide economic mire, said Monday that its business was “whipsawed” during the fourth quarter and that it would eliminate 20,000 jobs in the face of a “very tough” 2009.
  • The Peoria, Ill.-based company said the job reductions would affect every line of business and every geographical area where it has operations.
  • The company said 2009 would be one of its weakest years since World War II.
Sprint 8,000 gone
  • Sprint Nextel Corp. is eliminating about 8,000 positions in the first quarter as it seeks to cut annual costs by $1.2 billion. The nation's third-largest wireless provider said Monday it will complete the layoffs, which comprise about 14 percent of its 56,000 employees, largely by March 31.
  • The company said it is also suspending its 401(k) match for the year, extending a freeze on salary increases and is suspending a tuition reimbursement program.
  • The company's announcement comes a month after AT&T Inc. announced it was cutting its work force by 4 percent, or 12,000 jobs, to deal with the effects of the recession and the continued erosion of its traditional wireline business.
Home Depot 7,000 gone
  • Home Depot Inc. plans to eliminate 7,000 jobs while closing four dozen stores under its smaller home improvement brands as the recession continues to batter the nation's housing market. Its shares climbed more than 5 percent in morning trading.
  • Those stores will close in the next two months.
Pfizer 8,000 gone
  • As Pfizer confirmed Monday morning its plans to purchase Madison, N.J.-based Wyeth in an $86 billion cash-and-stock deal, it also announced a cost-cutting initiative that will include the elimination of more than 8,000 jobs.
  • Pfizer said it is cutting 10 percent of its worldwide workforce of 81,900, slashing its dividend, and reducing the number of manufacturing sites.
Meanwhile in Europe where there is no SuperObama to save them from market forces (USA! USA! USA) a quick glance shows about 16,500 today
  • The banking and insurance group ING said it would cut 7,000 jobs; the electronics company Philips, 6,000; and the steelmaker Corus, 3,500 worldwide.
For those of you newer to the stock market, one of the fascinating (sickening) situations is historically when companies make mass layoffs the stock increases quite substantially (cost savings baby!) Great for the "Wall Street economy", not so great for the "Main Street economy". Remember, these are 2 parallel universes that only seem to intersect when Main Street needs to bail out Wall Street.

Bookkeeping: Cover ITT Educational Service (ITT)

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I have to tell you it is very frustrating using these portfolio tracking services... today is the first time I've had any trouble with Investopedia.com's in the 3+ weeks of using it. Everything is frozen with Friday's data - no changes. None of the data is updating for the day but I am assuming my limit order on ITT Educational Service (ITT) has completed @ $117. The stock is actually down to $111 so it better be. (EDIT 2 PM: looks like my limit order did hit)

Last Thursday, I initiated this short [Jan 22: Bookkeeping: Short ITT Educational] on nothing other than "it went too far" (excessive optimism). This was a short term technical scalp if you will. It has worked out in under 48 hours.

Here is my strategy - I am going to short a 3% stake here just at $130. A gap was created in the chart this morning - I am going to cover at $117 to make sure I get inside that gap as it fills. It could go a lot lower than that, as the 20 day moving average is down at $103 (20% lower) but good enough for me. My stop loss is set at $135. So if I'm correct, 10% gain. If I'm wrong 3.7% loss. If the market starts to take off on "hope" again I expect to be stopped out very quickly.

So that worked out quite perfectly, and quickly. If I were sitting watching the screen all day I would of taken maybe only half the order at $117 and see if I could get an even better price (as I wrote the 20 day moving average was down at $103) but this is the price you pay for being a part time fake mutual fund manager. You leave a lot of partial profits on the table. But limit orders keep me able to do this. Obviously with the website I am trying to show the thinking behind the trades - the execution leaves a lot to be desired.

We made 10% in about a day and a quarter of market life so I won't complain too much. Even better the market has been up since I put the short on showing why it is far superior to short individual names then use these lousy Ultrashort ETFs that only work when the market is dropping like a rock.


Again, Investopedia.com is NOT updating today so I cannot tell if the trade executed - it better have. The stock is down 15% from where I put on the short Thursday afternoon. I am now out of the position (I assume)

@*()*#@)*@#(@#*(!@!!! stock tracking systems

p.s. a reader informs me Barron's might of helped me on this trade with a cautionary blurb
  • THIS IS THE KIND OF MARKET where if a trade seems too easy, it probably is, and where price/earnings multiples at or near 20, even for acknowledged growth stocks, represent a high hurdle for future outperformance.

    The excessively easy-seeming trade in pricey stocks applies to the private education sector, one of the very few strong groups of the past year and week, with members approaching or carving out new highs lately. The relevant names include ITT Educational Services (ESI), Apollo Group (APOL), Devry (DV) and Corinthian Colleges (COCO). They offer online and in-person courses, mostly vocational, and the Street loves them at the moment.

No position

New York Times: College Educated Chinese Feel Job Pinch

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I continue to believe China will surprise in 2009... to the downside. The consensus continues to be that the great stimulus plan unleashed will have some imminent effect as traders across the world stand ready for the "reflation trade". This is premature - the domestic Chinese economy is still dwarfed by the export economy. And with multiple Chinese customers going through the worst post World War II correction, in country demand will not offset the losses in the export part of the economy. One of our 13 Outlier 2009 Predictions

#11 China: As the government is desperate to cut social strife at the knees, the Chinese government will launch a series of pro-growth stimulus over and above what has already been announced. Despite government figures to the contrary, Chinese growth will be far weaker than the consensus today believes for the greater part of 2009; especially Jan-Jun. However, by late in the year - the knock on effects of new rounds of stimulus should light a fire under commodities. If lightly used roads to nowhere need to be built to calm down the 100M+ migrant workers, they will be. All things being relative, China will be in better shape than others, but it won't be a pretty year and "decoupling" that the consensus once again is preaching (as they did in early 2008) will be premature for most of 2009.

It's only about 6 weeks since I wrote that but when I re-read it, I might of been too bullish even in that bearish assessment... even latter 2009 should be quite the struggle. But we'll see.

The bulls will continue to cling to government reports of 8, 9% type of Chinese economic growth. Do you really think an economy that spread out ... with so many small businesses... can be accurately measured? It could be 0%, it could be 5%, it could be 10%, or it could be -5%. They're guessing. All the anecdotal reading I do is quite poor. I know, I know, that is in direct conflict with the Baltic Dry Index which by jumping up 4% after falling 90% is surely signaling the re-acceleration of China. Because when something drops 86% ... that's a sign of impending growth...

Another signal to the contrary below via the New York Times
  • Oakley Qiao had every reason to feel confident when he began his job hunt last September. He was a student at one of China’s top graduate business schools. He already had a few years of work experience. Students applying for jobs at the same time the previous year had gotten two or three offers by the winter, sometimes for a starting salary 20 times the average Chinese annual income. But on Tuesday, Mr. Qiao walked away empty-handed from the campus of Peking University to take a train northeast to his frigid hometown.
  • Most of his 100 classmates are in the same straits on the eve of the Lunar New Year holiday, which begins Monday, even though the school had invited recruiters to the campus every week since the fall. Mr. Qiao said he had handed out résumés to more than 50 companies.
  • So worrisome has the situation become that some students at Peking University, one of China’s most prestigious, are even talking about joining the army or becoming butchers. Last year, 10,000 college students joined the military, a much higher number than in previous years, according to the official newspaper of the People’s Liberation Army.
  • At the Beijing train station on Monday, a young man named Dong Shiwei who graduated last spring from a business college in Dalian waited in line to buy a ticket home for the holiday. Unable to find a white-collar job here, Mr. Dong has had to work at a fast-food restaurant for $220 a month, less than the average monthly income. “Finding a job at the moment is really hard,” he said. “I’m not very hopeful. The wages are really low, much lower than I expected.”
  • As this country lumbers into the Year of the Ox, a frisson of anxiety is rippling through a generation of Chinese who had grown up thinking that economic prosperity was guaranteed them. The great boom in urban middle-class wealth over the past decade and a half is slowing because of the global financial crisis, and the job market for college-educated Chinese, even those with degrees from top universities here and abroad, has tightened.
  • In China, the economic downturn hit the export industry first, and factories have been shutting down and putting migrant workers out on the street for months. Now, Chinese white-collar businesses are starting rounds of layoffs, slashing salaries and cutting the year-end bonuses that employees highly prize. (this should sound very familiar for Americans - just replace the word export with housing and factories with homebuilders)
  • Lenovo Group, the world’s fourth biggest computer maker, said this month it would lay off 11 percent of its global work force and sharply cut executives’ pay. China Eastern Airlines, a state-owned enterprise that is receiving $1 billion in government bailout money, said it would cut the monthly salary of some managers by up to 30 percent.
Once more - social strife is going to be a major issue in the next year or two across the globe - China's governing body fears that more than anything. The rise of protectionism is a very real threat as the next step in a global crisis.
  • Labor disputes and protests surged last year, as laid-off workers took to the streets of factory cities to demand back pay owed to them. Senior officials are predicting that unrest will continue in 2009, and that the economic situation could lead to a spike in the crime rate.
  • Under the current situation, new social conflicts will be created nonstop,” Chen Jiping, deputy secretary general of the Communist Party’s central political and legislative affairs committee, said this month in Outlook, a magazine published by Xinhua, the state news agency.
  • Arthur Kroeber, the managing director of Dragonomics, an economic research consultancy in Beijing, said companies looking to lower costs would probably resort to cutting wages rather than jobs. His prediction is consistent with a government order mandating state-owned companies not to lay off workers, presumably to maintain social stability.
  • Though they might not have begun laying off workers yet, many companies have put in place a hiring freeze, leaving many job seekers in limbo.
[Jan 13: AP - China Trade Slump Worsens; Exports Fall - So Do Imports]
[Jan 8: NYT - As Trade Slows, China Rethinks Its Growth Strategy]
[Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists]
[Dec 7, 2008: WSJ - China Fears Restive Migrants as Jobs Disappear in Cities]

Bullish Media Stories on McDonald's (MCD)

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We long ago identified Walmart (WMT) and McDonald's (MCD) as two havens to hide out in as the longer term "Pooring of America" intersected with "the recession" played out. [Dec 26, 2007: Target Shoppers Turning into Walmart Shoppers] [Apr 22, 2008: McDonalds, DuPont Continue the Trend - Overseas Strength Mitigate Weakness at Home] [Jul 23, 2008: McDonald's Continuing to be Dinner of Choice for Pooring Americans]

That was the play about 15-18 months ago - but what is interesting is these have become crowded trades as the "whistlers past graveyards" of fall 2007 - spring 2008 turn into converts once the recession became apparent. Even Ken Heebner of CGM Funds has become a convert in the back half of 2008 [Nov 14: Ken Heebner Moves into Financials Big Time] Both charts have turned negative here of late, especially Walmart's. I'm not sure what the price action actually means in terms of fundamentals for these two - but it is very interesting.


Anyhow, McDonald's is getting a lot of love in the press - which many times means "everyone knows the story" and it's time to move on to the next thing ;) We shall see if we are witnessing recent tops or just resting points in these names. I continue to believe this recession will be a long and dreary one so weakening stocks could either signal (a) I'm wrong and it's going to get better sooner or (b) things are so bad even these bastions of recession are suffering. Or it could simply be that everyone who wants to be in these stocks is finally in.... no new demand driver.

Speaking of.... the company will report earnings today...

New York Times: At McDonald's the Happiest Meal is Hot Profits (what struck me in this story is how Europe has passed the U.S. in revenue during the 2000s) [click to enlarge]


  • CHRIS WARD, 23, didn’t go to McDonald’s much because it wasn’t open late enough for after-hours snacks. Casey Fillian, 32, and her friend Carol Milano, 33, gave up their teenage McDonald’s habit when they became more health-conscious adults. And Russ Green, 47, wouldn’t go to McDonald’s because, among other things, he thought its food was unhealthy.
  • Yet here all four of them are, lined up at McDonald’s one recent morning, lured back by new menu items, longer hours and a sparkling new building that includes flat-screen televisions and video games for children. It replaced a 36-year-old restaurant — weighed down by a sterile, cafeteria-style décor — with a sleek new building that offers two drive-through lanes, trendy furnishings and lights, wide-screen televisions and Wi-Fi connections.
  • It wasn’t too long ago that McDonald’s, vilified as making people fat, was written off as irrelevant. Now, six years into a rebound spawned by more appealing food and a less aggressive expansion, McDonald’s seems to have won over some of its most hardened skeptics. Month after month, McDonald’s has surprised analysts by posting stronger-than-expected sales in the United States and abroad.
  • John Glass, an analyst at Morgan Stanley, was blunter. “They were just alienating people that wanted to go there, actively dissuading people,” he said, noting the changes to the menu and the fact that McDonald’s stopped grading restaurants on service and cleanliness.
  • At the same time, McDonald’s increasingly became a target for animal-rights activists, environmentalists and nutritionists, who accused the chain of contributing to the nation’s obesity epidemic with “super size” French fries and sodas as well as Happy Meals that offered the reward of free toys.
  • That tattered image was beaten down further by the 2001 best-seller “Fast Food Nation.” At the beginning of 2003, McDonald’s suffered its first quarterly loss in history, and its stock was tanking. Yet by the time a popular, and critical, documentary, “Super Size Me,” about McDonald’s came out in 2004, the company’s comeback was already under way.
  • IN the months and years after the Plan to Win was introduced, restaurants were redecorated and in some cases rebuilt. The drive-through, which accounts for 60 percent of the chain’s business in the United States, was reconfigured to become more efficient. Stores were opened earlier to extend breakfast hours and stayed open longer to capture late-night diners; 34 percent of McDonald’s restaurants in the United States are now open 24 hours a day. McDonald’s scrapped its super-size menu and added healthier options like salads and apple slices, which lured moms and got the critics off its back.
  • Beef consumption was flat, but people were eating more chicken, so McDonald’s “went at chicken hard,” said Ralph Alvarez, the company’s president and chief operating officer. Chicken sales at McDonald’s have doubled since 2002, and it now buys more chicken worldwide than beef, Mr. Alvarez said.
  • In the two years since McDonald’s introduced premium coffee, sales of drip coffee are up 70 percent, Mr. Alvarez said.
  • In foreign markets, McDonald’s largely turned over leadership to native-born employees who had a better feel for local nuances. Europe now accounts for 38 percent of the company’s profit.
******************
FT.com: McDonald's Defies Downturn
  • McDonald’s is planning to this year create 12,000 jobs and open 240 new restaurants across Europe, it emerged on Friday, as the fast-food chain shows signs of being one of the few global companies to benefit from the financial crisis. McDonald’s plans for expansion in Europe are its biggest in five years....plans to hire 50 people at each of the 240 new restaurants, mostly in Spain, France, Italy, Russia, and Poland.
  • McDonald’s has been one of a handful of leading US companies to thrive globally amid the prevailing consumer gloom – together with Wal-Mart it was the only member of the Dow Jones Industrial Average to see its share price go up last year, by 7 per cent.
  • Mr Hennequin claimed there were “no signs of weakening” in the group’s European business – where comparable store sales rose 7.8 per cent in November – but acknowledged consumers, particularly in Germany and Spain, were favouring the cheapest menu items.
No position

Sunday, January 25, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 25

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Year 2, Week 25 Major Position Changes

Please note - this is the first week I am using Investopedia.com as my tracking portfolio so I excluded the week over week comparisons since they do not make sense (apples to oranges). I will resume it next week.

I highlight weekly the larger position changes.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 76.3% (vs XX.X% last week)
26 long bias: 15.6% (vs XX.X% last week)
8 short bias: 8.1% (vs XX.X% last week)

34 positions (vs XX last week)
Additions: ITT Education (ESI) - short, iShares Barclays 20+ Year Treasury Bond (TLT) - short

Removals: Ultrashort Lehman 20+ Year Treasury (TBT)

Weekly thoughts
It is hard to measure the word "ever" as used by CNBC because sometimes it is used as a measure of "post World War II" and sometimes not, but as we theorized (and according to CNBC) January 2009 has been the worst January "ever" [Jan 23: January 2009 v January 2008 on the S&P 500] Which puts... even a bear... in a quandary. As I look at many individual charts I see many stocks nowhere near any moving average. I am a believer in reversion to the mean and "rubber band action" - when stocks fall so far away from the center they will "snap" back for a period, even if they are eventually to continue their direction...i.e. nothing in a straight line. At the peak of the carnage this past fall the S&P 500 was at an all time 37% away from its 200 day moving average. 25%+ would be considered "historically bad" in a normal era. Today, the 200 day is way up there at S&P 1140 or 27%, courtesy of the hammer the market has taken for the past 2.5 weeks. So unless we're going to have another "once in a lifetime" carnage events circa Sep-Nov 2008 you'd expect at least some rebound to at least work off part of this oversold condition. But on the other hand - these are not normal times.

Another possibility as I rethink 2008 conditions was what we experienced a few times which I called the "rotational" correction. That is, the market would churn but different groups would take the pain on a rotational basis - first would fall would be financials, retailers, housing - then a few weeks later would be industrial and technology and then finally at the tail end of a correction would be the "Generals" (which at the time were commodities). And while the Generals were hit; ironically financials and retailers and housing would rebound smartly - causing one who counts on fundamentals to bang their head against the wall. The reason I think this *could* be a probability is many of the stocks I own at the top of the portfolio and have as "want to add" status are stalling. These have been the generals and when the market does throw in these intraday rallies the traders are jumping into beaten down financials and commodities.

Here are a handful of stocks with very similar condition - pulling back from recent highs and now trading in a narrower, sideways range. The bull could say these are consolidating recent moves waiting for the next breakout; the bear could say these are weakening. Whatever the "bias", I am seeing this same look in many charts of "leaders". And these are turning more into 50/50 setups - they could turn bad very quickly or just be 'resting' before the next run up. We won't know until we come back and look in a few weeks. If the market were anywhere near stable I'd be buying these charts as I love strong charts that are pulling back to support - but in this type of market you can get your fingers chopped off in short order as the vast majority of stocks are moving 'en masse' with the indexes.


Contrast this to a chart like this, which is probably the only name we own which I'm seeing a chart who is acting relentless in strength - I want to be adding to stocks acting like this.


So it is hard to have much conviction right now - I like the cadre of stocks we own but the worry is a "melt down" effect where even the best merchandise is trashed. So far we've had a most orderly correction where the worst stocks have been beaten, and the best stocks so far unscathed. Therefore we have benefited since we're weighted in the leadership stocks. But there were times in 2008 when leadership was pummeled and we suffered with the rest. In the short run I almost want to be leaning to the most beaten down "worst of" stocks, although my time frame (intermediate) does not position me in those type of stocks. But for 1-3 day "flipping" type of action I could see the potential for some snap back rallies in those groups instead of what we own.

Let's take a look at the S&P 500 as a whole

We turned bearish at the right time [Jan 6: Back to the Future - Commodites Rule Again] and we've effectively hedged away this entire latest downturn. I've called S&P 820 to 850 range 1. Range 2 was the very immense S&P 850 to 920 that we hung out in from late November to early January. What has been surprising to me, and what I've gotten wrong this week is how strong a psychological level (big round number) has been - S&P 800. Effectively we've bounced off that level 3 times this past week. There is no "technical" reason for it to happen - it's just the human condition that round numbers mean something - so it's caught us off guard that it's been as strong as it has. Each rebound has taken the general index away from "danger Will Robinson" area back into range 1. S&P 820 has been an amazing magnet [Jan 22: Like a Moth to a Flame - S&P 820]

So now we look to risk/reward - the 50 day moving average has now fallen to S&P 880... ironically that is halfway in between the top and bottom (850 to 920) of the area we hung out in late Nov-early Jan. I'd assume, unless "Super Bad Bank" gets the "bottom is in" talk going again - this would be a near term ceiling. That's about 6% up. Downside we have the S&P 750 level or just under 10%. No great bull market shall emerge without a retest of the old lows so even the most ardent bulls must await 750 to hit at some point. So frankly in a roundabout way, I have very little conviction either way here - I assumed once S&P 800 was breached people would give up - instead an underlying bid (PPT?) was sitting there buying all day. The index is not terribly oversold but some of the worst stocks are completely pulverized... so I could envision a scenario where they rise, adding to animal spirits blah blah blah. The way we are positioned the only way we are going to take a lot of pain is a huge rally of 10%+ which we will miss out on; but I consider that a low probability event... and by "hurt" I mean we give up profit opportunity - not lose money.

Two charts of interest this week have been Research in Motion (RIMM) and Morgan Stanley (MS) - the former has been strong for a while now; not sure what "changed" from the fear and pestilence that followed the stock the past few months... while the latter has been leading the market. When Morgan strengthens or adds on 2-3% intraday it seems the market follows in tow.

Why all this talk of technicals? We are focusing on them because (a) the fundamentals are a complete disaster and shall remain so for a long time and (b) the past 8-10 weeks have been the most technical driven market I can remember seeing. With the fundamentals so poor and useless as a guidepost I do believe institutional money is simply relying on technicals as well - hence its self reinforcing. I do like the fundamentals of what we own, by and large (although we have a few positions that we own for nothing more than "thesis") - but the worry is simply the "throw kitchen sink away" selling as we saw multiple times in 2008. This correction, as ugly it has been in a short period of time - has not been hitting the kitchen sink (the Generals). It doesn't "have to", but to ignore the probability is a bad thought process.

Let's talk about fundamentals for a bit. Washington D.C. will continue to dominate NYC. A "super bad bank" shall be thrown upon the American people as the "solution" and the "free marketers" of Wall Street will cheer in jubilation as they have done for every government interference for the past 15 months - of course the other 83 government interventions have not done squat (other than drive the market up, and squeeze shorts for a few hours, days, or weeks)... but dear reader *THIS NEXT* solution, of course - is the one that will work! In government we trust.

On the economic front, a lot of home sales data will emerge early in the week. Bulls will tell you "that's backwards looking! Look ahead to the future of 4% mortgage rates - ignore the data." We have a Fed meeting but hey, nowhere to go on rates - maybe they'll update us on what banks they are supporting or what garbage they have put on the balance sheet. Nah. Gross Domestic Product (GDP) comes out Friday - another government report which is woefully inaccurate and subject to countless revisions. It will be horrific but see the housing numbers above - we'll be told "it's backwards looking, ignore it - we have a bad 1st quarter 2009 and then we can look forward to the government stimulus pushing us to a 2nd half recovery". So why they even bother to put the report on CNBC is beyond me, since it's nothing we have to "worry" about with the era of cute leprechauns, unicorns, butterflies, four leaf clovers, and 2nd half recoveries commencing on July 1, 2009.

This is a huge week for earnings and specific to fund test results for Sequenom (SQNM) will be out this week which should push this stock one way or the other in large magnitude. Being a cynic, and seeing how strong the stock has been I'd assume the numbers are good, but we shall see. We only have a 1.4% stake - my hope was sometime during this correction if would of weakened materially and I could of bought it and then sold it right ahead of the news (since I don't want to take the "news risk") but the darn thing never weakened to allow me to employ my strategy. So the position is small enough that I'm just going to sit in it, and if something goes awry with the test results, we'll take some hit. It's not a 4-6% position so its a manageable risk.

Technology was relatively strong last week, gold might be breaking out [Could Be the Real Breakout in Gold], and oil looks to have formed a double bottom - supply/demand? Nah oil is about speculation baby. Supply/demand is for your daddy's commodities market. As for everything else - I really am hoping to see some of the "worst of breed" stocks rebound so I can (keep repeating myself) start to build up the short side of the book with positions I dislike for fundamental reasons rather than short term technical trades.

The larger weekly changes to the fund below:

  1. It was a quiet week in terms of transactions; after Jacobs Engineering (JEC) fell through support (5o day moving average = $43) early this week, I cut it back to a 0.6% stake. The name took a hit Wednesday on news Suncor (SU) was culling back capital plans. And then really was hammered Thursday to the tune of -15%. Until the stock regains $43 the chart actually signals a short set up, not a long one. (stop out north of $43 of course) This should be an important week for infrastructure because many names have lost the Obama glow the past 7-12 days.
  2. Thursday, I cut back Potash (POT) to a holding position of 0.1% after earnings/guidance the market shrugged off. Frankly, this is part of the "commodities" complex and as goes oil/Baltic Dry index - so goes everything within 6 degrees of global growth. I said I'd rebuy the stock if it either fell to $66 or regained a level above its resistance $73/$74). It looks like it might be the latter as the stock finished the week with a flourish because as you know oil = potash. I might get this position size back Monday since I have so little "global growth" exposure and if oil strengthens next week, this whole group will be a daytraders delight.
  3. I shorted ITT Education (ESI) post earnings as the stock is nowhere near any support level - so far the trade is working but if the market enjoys a happy time I will be stopped out with a manageable loss. This is a purely sentiment/technical trade as I await stocks I really am bearish on for fundamental reasons to rise to a level I feel risk/reward is more in my favor to initiate shorts. ESI is a purely contrarian trade as re-education stocks are the current market darling.
  4. I added a tiny starter position in iShares Barclays 20+ Year Treasury Bond (TLT) SHORT - I would like to see this name pop some before adding more as it's fallen quite quickly in a short amount of time.


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