Tuesday, May 5, 2009

Bookkeeping: Closing Macerich (MAC) Short

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Almost everyone I know or read is cowering in fear on having any short positions... generally this type of attitude is near intermediate tops or bottoms. Just like everyone was cowering having long positions 2 months ago... the problem is if you try to time these things you can lose a few fingers very quickly. I had been trying to get aggressively long a week too early late February/early March and promptly lost 3%+ in 1 session alone (even with a 50% cash horde) - and then a week later the market began this epic journey upward. Of course in retrospect that 3%+ loss was a pittance compared to the gain to come, but who knew it would be this strong and this fast of a rally. I am not calling for any imminent reversal downward; and as I said in the weekly summary so many people are looking for a dip to "get in" that the market would most likely continue up. That theory worked like a charm yesterday.

Now as I scan the internets, my thoughts are many people want a nice simple 5-6% pullback that they would be comfortable with - so they can load up on positions and ride this train up. I just don't think that it will be that easy. The most likely scenario is the market evades people on the way up and then when it reverses course it will be harsher than people expect and those who buy the dip will have second thoughts once we get back down below their comfort level... i.e. they will buy, smug that they finally got the chance to buy the dip, and then the market will continue down in much sharper fashion making them bail out of newly formed positions.

With that said, even if I am 100% correct on both assertions, figuring out when it plays out is impossible. If you were two weeks early on the bottom call from early March you were down 10%+ if you pushed all your chips in. So the first 10% of gains on the rebound would of just gotten you back to flat. Same situation now if indeed my thoughts of a sharper than expected reversal happens... we certainly could keep going to S&P 950ish+ from here for all I know. A dip to S&P 870 would mean nothing in terms of the current trend up. Until dip buyers stop buying every 35 second correction it is just difficult to be short, just as it was difficult to be long when shorts pressed the market down on every 35 second jump in the market 2 months ago.

Macerich (MAC) has been one of our commercial real estate shorts. All is now well in the world of CRE, and in fact those with the most debt have been rewarded the best in terms of stock price. Let it be known, I don't think the consumer is back no matter what the government feeds us - we are going to get our 1x benefit from the new house ATM as those not underwater push their rates from mid 5%s to low 6%s to upper 4%s (unless the government wants to take mortgage rates to the 3%s range and then we can have another 1x benefit), and tax refunds always swell pockets for a few months every spring. Sometime later in the year this will be obvious but if its in 2 weeks, 2 months or 2 quarters I don't know... perception is reality so the mob says green shoots for now.

All that said, it's been over a year now where everything is dominated by the greater market direction - guessing the direction of the market is far more important than picking stocks. Either (almost) everything goes up, or (almost) everything goes down in alternating 2-3 months increments. This makes stock picking a quite useless tool in my opinion as when the market is imploding, fundamentals mean little, and when the market is melting up, fundamentals mean little. Notice a theme? This is the only reason I am focused so much more on the market direction than individual stocks - usually I don't really care; listless markets are fine by me. But we are so hostage to the overall market trying to guess direction is now 90% of the work.

The one issue with shorting is your losses are in theory unlimited, unlike being long when you can't go lower than $0. Macerich, a mall operating REIT, has tripled off the lows - we are technically down 100% but obviously as this name ramped I cut back the position severely. It still was a stinging loss and since debt is a good thing in America (again) the billions of debt Macerich has to roll over the next 3 years now is "no problemo". Equity investors are happy to be diluted by massive amounts in this space and Macerich (MAC) has thus far not even done that step unlike a multitude of peers. The company reported earnings yesterday but in this space FFO is the more important measuring stick. I was interested in some of the metrics - i.e. average rents, occupancy, et al but the one that struck me is somehow they got new tenants (the few that were) to pay 21% over expiring leases. That is actually quite a feat in this environment.
  • Macerich Co (MAC) reported first-quarter funds from operations that beat Wall Street's forecast, chiefly on a gain from the buy-back of its debt, but sales and occupancy at its malls declined, and its shares sank nearly 10 percent.
  • Macerich, which owns malls chiefly in U.S. western regions, on Tuesday posted FFO, a performance measure of a real estate investment trust, that rose to $102.8 million, or $1.16 per share. The results include a $22.5 million gain from the early extinguishment of debt. A year earlier the company posted FFO of $92.5 million, or $1.05 per share. (so about 20% of the gain came from extinguisment of debt rather than operations)
  • The U.S. recession has hindered consumer spending and hurt retailers. For Macerich, that translated into a 6 percent fall in sales per square foot to $440 at centers the company has operated for at least a year. Bankruptcy at big-box stores helped cut occupancy during the quarter to 90.2 percent from 92.3 a year earlier.
  • But 21 percent higher rent for new leases than for the older ones that expired helped net operating income stay essentially flat. (this one boggled me)
As for debt?
  • The company will have $143 million of remaining loan maturities for 2009 and over a billion dollars due each year in 2011 through 2013.
  • "The balance sheet is stretched, and we believe the company should issue equity," said RBC Capital Markets analyst Rich Moore, one of several calling for the company to issue shares to raise cash.
I guess with the V shaped recovery coming in "4-6 months" it won't be an issue.
  • Earlier this month, Macerich cut its quarterly dividend from 80 cents per share all cash to 60 cents per share comprised of 10 percent cash and the rest stock. The company said the mixture would allow it to retain $65 million a share per quarter.
With that said, I still have 4 other REITs (currently in very small portions) on the short side of the ledger but I am struggling to figure out any sector to short right now as everything is blessed - even these gosh awful newspaper stocks have slaughtered the shorts. If you can't short newspapers, what can you short?

I am closing out the Macerich short since debt is now our friend (again) and we look forward to a debt laden prosperity circa 2006. And the chart is scary to be short. Obviously if the market weakens, it can fall to $15 in a jiffy but as stated above; that is not saying anything about Macerich's fundamentals; that is all about guessing the direction of the market the next 1-8 sessions. Magic 8 ball says?

No position



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