Bookkeeping: Cutting Illumina (ILMN) to be Safe

I only have one long position over 2% exposure in the portfolio, as I've been cutting long exposure left and right into this "ignore all news because Obama will save us" rally. As I said the past few days we are seeing speculative junk being run up instead of quality companies, and when that happens you are nearer to the end of the rally than the beginning as people have run out of good ideas and are now speculating on the most beaten down merchandise.

My only position over 2% is one I just added to this week, Illumina (ILMN) on a breakout. The stock is right at the support level we pointed out and I'm going to play this cautious and cut it back from a 3.2% stake to 1.1% in the $25.40s. The stock has held up relatively well all day but has now weakened and could break below support and close there. With a market that has run up on nothing but "hope" I don't want to take the risk here and wish to protect capital. If I'm wrong, I'll be happy to buy it back at a higher price if the market/chart strengthens.

I am sitting on a massive load of cash here and have been begun adding to short exposure - I wrote Monday I was looking to do this once the S&P closes below 920. Since these short ETFs are useless except when the market is in free fall - I am now only adding to them when a break of support is imminent - otherwise they are capital destruction machines. Short of a nonsense 3 PM rally that "break" of support (920) should happen today. I don't want to make big "allocation bets" either way heading into the knee jerk reaction day Friday so we're going to be wallowing in cash until we see where the market takes us. Any sense would say downward, but hope seems to dominate sense of late. I will however, begin to redeploy some of this cash into my favorite names once they falter - the ones the market has abandoned the past 3-4 days to run up daytrader favorites with no fundamental basis outside of 'thesis'.

Again, a break back below S&P 920 takes us to the S&P 850 to S&P 920 range. I'd expect some defense at S&P 900 but I don't see any catalyst to be pressing long here - the only thing bulls have had is "hey stocks ignore all bad news - whee!" We hung around for much of the ride (but we underperformed last week as the market partied and we began building cash stockpiles in earnest) but as we noted yesterday with the plain silly moves in commodity stocks, the cops were soon going to be called to the party. I expect a horrific earnings season ahead and unlike the bulls who see unicorns, butterflies, and fairies by summer, I don't think corporate America will agree - we'll start hearing many doses of reality in the coming weeks from the companies themselves. The unemployment ranks rising, strip malls emptying, and state budgets faltering should also be a reminder to those who believe things are turning around by Independence Day.

I believe this market has discounted a poor first quarter of 2009. What is has not discounted is the severity and duration of this slowdown, and the limpness of the coming "recovery". [Dec 15: The "Recovery"]

Long Illumina in fund; no personal position

Update on Axsys Technology (AXYS) Short Idea

Last Friday as I outlined a series of potential short ideas if you were interested; I said Axsys Technology (AXYS) has the best set up of the list I presented

I like AXYS the best simply because you have 2 resistance levels (sort of like insurance) right next to each other that must be broken to turn from bear to bull.

The stock was at $54 with a day high of $55 with two resistance lines right above it (I'll post a chart later in the day). (I said stop out at $58) In never breached $55 and today it is the $48s.

I'd target the recent lows of $45 and put a trailing stop of about 5% as you are "in the money" here even if the stop triggers.

******
On another note, I've only been really able to run half my strategy in Marketocracy.com (which is where I began my mock portfolio) in the past year and a half - just the long ideas with hedging in short ETFs that have proven to be useless except in extreme downtrend days. Hence my performance figures which I have since abandoned (some people have asked me of late about them) are showing half my strategy. Even with that half I've far outperformed the market, but many opportunities that long time readers have seen me "call out" (short restaurants, retailers fall 2007, calling Washington Mutual and Freddie Mac "going to zero" this summer, short REITs winter 2007-2008, short China and emerging markets fall 2007) have only been on the web pages and nowhere to be found in any performance metric.

Frankly I am frustrated by that since I believe my performance has beaten 95%+ of equity mutual funds the past year and a half. And that's with just half a strategy employed (no individual shorting benefit). I do believe, but cannot prove, I'd actually be up since August 2007 if my full strategy was employed. In "year 1" (August 2007 to July 2008) we beat the market by 24% and posted a positive return (+10%) despite the handicaps I've outlined above - we discussed that here. We had some minor gains from our short ETFs but nothing major to talk of; that was almost all long side exposure in a quite bad market.

But as a newer reader, if I came to this site my first question would be "yeh but how has he done with performance?" A very fair question and one I wish I could have an accurate representation over the past 18 months. Readers who follow the blog day in and day closely for months see the opportunities that have gone to the wayside that I laid out on the short side, but I don't expect a newer reader to know or care about that - the bottom line is performance. That was the whole genesis of the website - build track record anyone can follow, explain thesis and theories in detail, attract money... one day, do it for real.

In lieu of the performance page what I've tried to do the past 6-7 weeks is be far more explicit in explaining my trades - this is why I went in, this is where I'd buy more, this is where I'd stop out, this is where I'd exit for a gain. I put that all out ahead of time so people can see the strategy - it is not as good as having a performance page up and running but the thought process is completely explained. Probably that is helping individual traders who are "do it yourself" traders, but not helping me attract investors. So the website is sort of going in the wrong direction in a way - more of a " trading newsletter" audience.

A reader has sent me a new website that allows "mock portfolios" that DOES allow shorting individual equities and DOES allow stop losses - two things that are simply critical to my strategy but I've been without in Marketocracy.com the past year and a half. I am going to be testing it in the next week or so and see how it works - the main problem is, unlike Marketocracy.com, where there was a page an "outsider" could look at performance without having a login, I don't see that option on this service. So showing readers the performance without a login is the roadblock. I'm hoping I can find a way around this - frankly the past 6-7 weeks the success rate of trades has been approaching 90%+ but I sit here without a way to show it unless you sit and backtrack every entry on a daily basis. I am hoping to find a 3rd party source to show this and "rebuild" a performance track record that actually dovetails with my style of investing.

I will also be writing a more detailed explanation of my investing process in the next week or so; I've talked about it in pieces here or there across the past year and a half but not all in 1 entry. If you follow along daily for a few months you can probably figure out much of it, but it will be helpful to have all of it in 1 place.

Onward.

CBO Projects $1.2 Trillion Deficit for 2009

I think it's gotten to the point that people are getting immune to the large numbers thrown around. The Federal Reserve is backstopping or supporting $8.5 Trillion of markets. We hand the banks $700 Billion. We have another stimulus coming of $800 Billion. We gave out $160 Billion last spring as "stimulus".

At some points these numbers matter - this grand experiment of pumping up a debt laden society by.... more debt.... is frankly scary. The largest federal deficit we ever ran was $400 Billion-ish. The punditry has been saying this year we will hit $1 Trillion in fiscal 2009. Today the Congressional Budget Office said we are heading for $1.2 Trillion. One of my 2009 Outlier Predictions was the economy will be so weak, and the government so desperate that we will hit a $2 Trillion Deficit in fiscal 2009 (October 2008 to September 2009). So I am saying double what the punditry says, and 5x what our largest ever deficit has been in our history. Only $800 Billion more to go and with (a) far lower tax revenue in 2009 since this "2nd half recovery" is complete hogwash and "Main Street America" in free fall, and (b) what I believe our government will do to "save" the housing market as it does not respond as they "wish" in early 2009, I believe my prediction has a fair chance of happening.

*note: the "wars" are not even counted as part of our deficits since they are not "expenditures" in the government eyes - what a farce. Either is the AIG bailout or Citi or all those - so it's even worse than the CBO is showing you. Far worse. This is the problem in America right now - our government has been changing reports to hide things for the better part of 2 decades. How do you address the problem when you don't even admit there is one?

Folks, someone has to pay for this at some point - these are not just imaginery numbers on a spreadsheet somewhere. When global economies recover the long term interest rates on our debt (Treasuries) are going to race higher, making this debt ever more expensive. At some point our dollar will burn for this, and our living standards will follow. In return you get a stock market that temporarily is higher than it should be. Great trade off. Your grandchildren and children eagerly await this burden....

• The federal budget deficit will hit an unprecedented $1.2 trillion for the 2009 budget year, according to grim new Congressional Budget Office figures. The eye-popping estimates reflect plummeting tax revenues because of the recession and about $400 billion to bail out the financial industry and take over Fannie Mae and Freddie Mac. Last year's deficit was $455 billion.
• "The recession -- which began about a year ago -- will last well into 2009," the CBO report says. The agency said "the ongoing turmoil in the housing and financial markets has taken a major toll on the federal budget."
• The dismal figures come a day after President-elect Barack Obama warned of "trillion-dollar deficits for years to come."
• Exposure to the taxpayer stemming from the Federal Reserve Board's extensive interventions in the financial markets -- such as acquiring 80 percent control of insurance and financial giant American International Group Inc. -- are not reflected in the estimates.
• The CBO report also said the federal takeover of Fannie Mae and Freddie Mac last year added $218 billion to this year's deficit. (it's going to be a lot more than that when all is said and done - remember Paulson promised us the total cost would be "at most up to $200 Billion")

*****

• The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s.

Again this is ONE Year - we throw that amount on TOP of our already massive deficit and then look ahead to President Elect Midas' "trillion dollar deficits for years to come". Obama wants to create 600K new government jobs - and you know a government job once created, never leaves.

This is why, after we "recover" from this fiscal emergency, the United States of Borrowing is going to lurch from emergency to emergency for many years to come (Medicare funding emergency here we come! See ya in 2015)... interspersed with bubbles to make you all feel better about it for a few years at a time. I don't know when the sheeple of America get engaged and throw their own version of a Boston Tea Party - we're still too busy obsessed about Britney and Angelina/Pitt/Anniston. Ugh.

Our long term futures include much much much higher taxes for all of us. The irony in America in about 2015-2025 is that we will have as high taxes as the "socialist" Europeans we scoff openly at.... (USA! USA! USA!) but without half the safety nets or benefits. At least for their 55%+ taxes they have 6 weeks of vacation, paid preschool and nursery, university, healthcare, and the like. Here (if you include the costs of saving for retirement, university, daycare for kids, healthcare et al on top of nominal tax rates) the effective rate for many is already 50%+ (and headed much higher - watch what your states will do to taxes in the next 2 years) - and in return you get a broken Social Security, expensive universities, 40% uninsured. A country where you get sick you can lose 30 years of savings in 1 hospital stay and head to bankruptcy. Cramerica - for the corporation, by the corporation.

The dogma in the country has simply brainwashed people... sorry to say it. As if we cannot balance people's interests with capitalism. Our costs (when you really break it down) are as high as the "socialists" and in return we receive far less.... with far less security. It's going to be a fun decade or two ahead as we face reality. But for now, let's begin to prepare for the government induced bubble of 2011-2014 that will make us all forget any ills. Onward!

Performance / Portfolio

There is currently a retail fund in registration with the SEC.  I am unable to offer any further details until process is complete, so please consider this a "quiet period" on the topic. Thank you.

Monsanto (MON) Earnings - Quite Awesome

Mosaic (MOS) which we sold yesterday is riding the Monsanto (MON) earnings report today - different businesses; but both in the agriculture space. Monsanto has confused me from a stock perspective - despite having one of the highest "moats" in the business (barriers to entry) it simply has not reacted with the rest of the commodity complex. Further confusing is its revenue stream should be a lot more secure than a fertilizer company... hence the weakness has been strange.

Until this morning, the stock has been stuck below the 50 day moving average, and basically "asleep". I've always wanted to own this stock, but the valuation has always been immense and of late I've been waiting for the chart to improve. The 50 day moving average is about $76, and the stock gapped up over it - from $74 yesterday to low $80s today. My expectation is at some point, the stock will come back and "fill the gap" at $76 or so and then we'll see how it reacts. If it "bounces" we'll want to jump in... if it breaks down, then obviously the market is not ready to give this stock a longer run.

Earnings were stellar...and guidance was raised (again) - this company has a history of raising guidance continuously.

• Monsanto Co., the world's biggest seed maker, said Wednesday its fiscal first-quarter profit more than doubled on higher sales to Latin America, and raised its expectations for the year.
• The St. Louis-based company said it earned $556 million, or $1 per share, in the three months ended Nov. 30. That compares with $256 million, or 46 cents per share, a year ago. Monsanto said it earned 98 cents per share excluding gains from discontinued operations.
• Monsanto said revenue jumped 29 percent to $2.65 billion from $2.05 billion, as sales of Roundup and other herbicides and corn seeds and traits climbed more than 30 percent each. Monsanto reported strong demand for its weed killers in Brazil, and total herbicide sales rose 35 percent to $1.36 billion. Revenue from the company's agricultural productivity unit increased 28 percent to $1.55 billion.
• It also made gains in sales of genetically modified seeds. Monsanto said total seeds and genomics sales were up 31 percent, to $1.1 billion. That includes a 34 percent surge in corn seed and trait sales. Growing demand from Brazil and the U.S. pushed those sales to $628 million, Monsanto said.
• Latin American sales make up the bulk of Monsanto's first-quarter revenue. Most of the company's revenue come from its U.S. business, where sales pick up in the second and third quarters. Soybean seed and trait sales grew 31 percent to $212 million, which Monsanto credit to demand from early growers in the U.S.

Cash flow

• Monsanto also now expects its free cash to be slightly above $1.8 billion for fiscal 2009, underscoring the company's ability to grow yet maintain its financial discipline.

Guidance

• Monsanto now forecasts an adjusted profit of $4.40 to $4.50 per share in fiscal 2009, up from $4.20 to $4.40 per share. The new outlook includes only results from ongoing operations, and does not include the effects of its purchase of a Brazilian sugar cane business.

Full report here

[Sep 16: Monsanto Raises Guidance Again]
[Jun 25: Monsanto - Good Results, Expectations Very High]
[Jun 5: Monsanto Plans to Double Grain Yields by 2030; Some Have Doubts]
[Apr 2: Monsanto Hilarious Reaction to Guidance]
[Feb 12: Monsanto Raises Guidance Yet Again]
[Jan 3: Monsanto - Very Good Earnings and Raised Guidance]
[Oct 9, 2007: Looking Ahead to Monsanto]

No position

Pawn Shops - Something is Up

We sold off some of our EZCORP (EZPW) yesterday and the stock has taken a big hit today - down 12%.

It is right at support but there is something that is affecting the entire sector - the "big 3"

Cash America (CSH): -10%
EZCORP (EZPW): -12%
First Cash Financial Services (FCFS): -12%

I would assume something is happening in Washington D.C. in terms of payday loan legislation but I don't know. The problem with these stocks is they all have payday operations so you are stuck with that business, along with the pawn shop business you actually want to own. If any reader happens to see something cross a wire or an analyst report feel free to email me or add a comment.

I added a small touch back here ($14.90s) from what I sold yesterday (I targeted $15 as a nice place to buy back my position - just didn't expect it to happen within half a day) since the drop has been so severe, but will hold off further until I see what the "news" is ... someone knows something. And that someone is not me.

EDIT 12:10 PM - my crack staff of analysts (err, readers) already responded - the apparent reason can be found here in the comments section.

EDIT 1:50 PM - more info from AP (Mark's note: time to see how influential payday lenders lobbyists are)

• Shares of payday lending companies EZCorp Inc., Cash America International Inc. and First Cash Financial Services Inc. slid Wednesday amid growing expectations that President-elect Barack Obama will tighten regulations on the industry.
• In an investor note Wednesday, Sterne Agee analyst Henry Coffey Jr. highlighted a written statement from Obama about the incoming administration's economic plans, including a pledge to "cap outlandish interest rates on payday loans and improve disclosure."
• The statement also says Obama plans "to extend a 36 percent interest cap to all Americans" and "require lenders to provide clear and simplified information about loan fees, payments and penalties."

I'd like to add that with the default rate of many people who visit payday lenders, there will be no business at 36%. I've investigated this business very in depth in a "real world" (non investing) angle - the default rates are immense. While 400% is egregious, 36% is not a rate that will be profitable considering default rates many times in the 30-70%+ range. These are people with FICOs in the 450-550 range much of the time i.e. they don't pay you back for long.

Long EZCORP in fund; no personal position

Bookkeeping: Starting HDFC Bank (HDB) on Satyam (SAY) Scandal

This market remains treacherous and as I said yesterday I was standing near the door with one foot out of the party as things were just getting silly... commodities were flying for no reason other than it was their turn to be run up by hedge funds on "global growth is back" and technology was flying for... well no reason. In case you missed it Intel (INTC) was out with another pre-announcement. They warned not too long ago, so this is a warning on top of another warning - but never fear, the economy will be rebounding in "6 months".

• The company slashed its fourth quarter revenue forecast to $8.2bn, less than two months after it cut its outlook to $9bn, plus or minus $300m, from $10.1bn to $10.9bn.

I found this blurb below interesting and aside from all the warnings and "pulled guidance" for 2009 I expect to see in the next 5 weeks (earnings season) I am going to be curious how many large cap companies announce large losses on investments - after all a dirty secret is the difference in "operational earnings" and "total earnings" in corporate America. Just as we saw in China in 2007 many companies have been making "investment gains" that have nothing at all to do with their core earnings....(although the situation was far greater in China where many companies were making half their earnings from stock speculation)

• Intel also said it expected a net loss in equity investments of up to $1.2bn, up from an earlier expectation of a $50m loss.

Time Warner (TWX) also warned... (don't forget Alcoa from last night)

I said yesterday let's start the countdown for when the first CNBC anchor says "well I guess it's not all priced in after all" - looks like it took less than 24 hours.

And most fun of all is the info out of India - we have an Enron situation with Satyam (SAY) which is one of their outsource companies.

• The chairman of India's Satyam Computer Services Ltd. quit Wednesday after admitting the company's profits had been doctored for several years, shaking faith in the country's corporate giants as shares of the software services provider plunged nearly 80 percent.
• The company's balance sheet -- riddled with "fictitious" assets and "non existent" cash -- contained a $1 billion hole that could no longer be concealed after a deal intended to save the struggling company was scuppered, Chairman B. Ramalinga Raju said in a letter to the board.
• "It is one of the biggest frauds the Indian capital market has seen. People have been taken by surprise by the gravity of the event," he said. "After overstating profit and understating debt, the company's net worth is zero."

What is amazing is this company tried to do an "insider deal" by buying two construction firms partly owned by the founders... this has NOTHING to do with their core business so it was a strange deal. Shareholders had a revolt at this and the company relented. In retrospect this was a front - they were just trying to think of a way to hide this fraud.

See, it is awesome when America exports its innovations to the world - the world is learning from us! American capitalism exported is "working!" Thankfully, unlike American shareholders who like to be rolled over as we kneel in worship at our CEO superstars - Indian shareholders puked on this deal with the 2 construction firms.

That said, I've been highlighting the Indian banks - I am going to use this opportunity to begin a starter position in HDFC Bank (HDB) - it is down 11% on the news which is completely unrelated, other than its a mark against India governance. Of the two banks I've been highlighting I like the business model of HDB better and both stocks (IBN being the other) have fallen exactly to their 50 day moving averages.

I'm starting with a 1.5% stake in the $67.10s... if the market falters I don't expect this name to hold this average but I won't be cutting back too much since I have a huge cash horde and have sold a lot of names, and exposure into this rally the past two weeks. I closed both Indian banks out of the portfolio in mid July - so a half year later, we are getting one of them back.'

Another way to play this is Cognizant Technology (CTSH) or Infosys (INFY) - among a number of other Indian outsource firms. Satyam's business has to go somewhere and both these stocks are up today, and the charts are looking positive as they break above resistance.

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As for the market, S&P 920 is the key level which we are currently below. But the bulls are persistent and already trying to ignore the Intel news, along with the ADP jobs report and whatever else they can ignore. Obama will be on CNBC @ 3 PM with an interview so that should be worth at least 4000 points on the Dow so we could be up 40% by 3 PM as Obama weaves his magical words. (ok not really) I don't think President Elect Midas can plug every hole in a quickly faltering world economy - but let's respect the price action.

I don't like to buy stocks or have a lot of exposure going into earnings reports because it's such a gambling situation - you can lose (or gain) 10, 20, 30% overnight. That's not for me - although it appears a lot of retail investors love that game. I guess it's easier than visiting Vegas. The monthly jobs report is akin to an earnings report on the entire market - we'll have a knee jerk reaction to a number that will revised in 30 days and is inaccurate as heck in the first place. But that's the way the casino works. We know the news will be bad - it's just a matter of seeing how the market digests the news. I will keep repeating this earnings season is going to be putrid so I just cannot see the market ignoring the bad earnings reports coming for 5 weeks in a row. But let's see what the market does with the Friday report first... the close at 4 PM on Friday will be very important to me (S&P 920 will have to be held for me to remain "bullish" - ahem) - after that the earnings season mine field will begin in earnest.

Long HDFC Bank in fund, no personal position

Allegiant Travel (ALGT) December Traffic

Allegiant Travel (ALGT) posted its December metrics yesterday. The occupancy figures are especially excellent - as the market shifts, they have cut back a bit on capacity and flights are much more full (read: profitable) Obviously as oil rises the stock will get hit, but a weak global economy (ex speculators) should keep the price contained for much of 2009 in what will probably be a wide range.

We started this position Monday, and I expect the chart to improve once the love for all things commodities subsides. So far it is holding the 50 day moving average (close enough) - once it rebounds (if it rebounds) we'll add more to what we started. Until then we're remaining patient unless it breaks below $38 (which is our cut losses area)...

• Allegiant Air, which ferries vacationers from small towns to resort areas such as Las Vegas and Florida, reported Tuesday that December traffic rose 9.6 percent from a year ago, bucking an industry trend.
• Allegiant said paying passengers flew nearly 343 million miles in December, up from 313 million miles a year ago.
• The Las Vegas-based airline said it carried 379,907 passengers in December, up 12.6 percent from the 337,289 it hauled a year earlier.
• Capacity measured in available seats times miles flown fell 2.6 percent.
• Higher traffic on less capacity boosted plane occupancy to an average 88.7 percent from 78.9 percent a year earlier, the company said.
• For the year, traffic jumped 22.9 percent and capacity grew 13.5 percent. The airline carried 3.9 million passengers in 2008.

Long Allegiant Travel in fund and personal account

Yesterday's Economic Reports - Nothing to See Here; Move Along

Thankfully facts mean nothing or else I'd be worried. Instead I think of pandas (and Obama) and all my ills go away. Before I get to the meat of this entry let me pass on some words from Alcoa (AA) - a commodity stock if there ever was one. As we watch commodity stocks fly upward on the coming global recovery (thesis) - it is very obvious that company executives (those who live, breathe the industry) simply are not bright enough to see what the stock market is seeing.

• Alcoa Inc (AA) said on Tuesday it would slash more than 15,000 jobs, halve capital spending and sell four businesses as it reduces aluminum production in the face of the global economic downturn.
• The largest U.S. aluminum producer said it imposed a global salary and hiring freeze as it seeks to cope with what Chief Executive Officer Klaus Kleinfeld called "extraordinary times."

Extraordinary times - as you dear reader know, lead to quick recoveries... led by government. Generally multi decade bubbles are fixed very easily (with cheap money)- ask Japan. As company after company fires people, and freezes wages/401k contributions on the remaining souls it generally leads to consumers who flock to malls, along with cars and homes flying off lots. "In 6 months". So say the punditry and hedge fund computers. The stock market is telling us this and telling Mr. Kleinfeld - you have no idea what you are talking about - we know better. (I remember the punditry and computers "saying" the exact same thing 9-12 months ago) You just have to look through the valley....

Back to our normally schedule post...

We said aside from the retail figures Thursday and employment report Friday the one other interesting economic report would be ISM Service.

Can Pandas whistle past graveyards? I know, I know - it's all priced in, the market is looking forward and 3M jobs will be created imminently. Stop looking backwards at... at... "data"! Facts are for backwards looking losers. We look ahead - to hope! If you were here one year ago I was typing the exact same things and the pundits were saying the exact same things. See, you never lose when you drink Kool Aid. Since the data is historical ... as you exit good times but before things get bad, you say "look at the data - it is not signaling bad things". Then when the data catches up to you... you say, "look ahead, that data is backwards looking". Then you can have your bamboo and eat it too.

ISM Service it came in at a whopping 40.6 (anything below 50 is considered recessionary; 40 normally would be considered horrific) but (all together now) it was "better than expected"

• In a better-than-expected reading, the Institute for Supply Management, a trade group of purchasing executives, said Tuesday that its services sector index rose to 40.6 in December from 37.3 in November. Wall Street economists surveyed by Thomson Reuters had expected the index to slip slightly to 37.0.
• A reading below 50 signals contraction, while a reading above 50 indicates growth.
• Improvements in the index's employment reading from November's "catastrophically weak level" are still consistent with massive job losses, said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a private research firm in Valhalla, N.Y. "This is not an indicator of recovery," Shepherdson said. (shhh, better than expected - who cares if its massively contractionary - look ahead Ian!)
• The report is based on a survey of the institute's members in industries including hotels, retail, health care and mining. (i.e. the greater part of our "service" economy)

Government will fix this "in 6 months" - no problem

Onto two less followed reports from yesterday - factory orders first... this is part of the "old economy" we are trying to extinguish since solid wages for blue collar labor is something we cannot have in this country - where everyone should be in an office or working in a retail outlet. Ummm... wait, except when we need stimulus and then we need that "old economy" - but just for a while until hordes of financial, retail, and restaurant jobs bubble anew! Then: out with the steel toed shoes!

• ...orders to U.S. factories fell for a record fourth straight month in November, and analysts believe manufacturing will continue to suffer in coming months as the country slogs through a recession entering its second year. (not to worry, we don't need no stinkin' manufacturing - we are an elite society of intellectual workers)
• The back-to-back decline was the biggest since records began in 1992.
• The Commerce Department said orders declined by 4.6 percent in November, nearly double the 2.5 percent drop economists expected. (backwards looking, all upside from here) Orders have been falling since August, including a 6 percent plunge in October, the biggest setback in eight years.
• The weakness in November reflected a big drop in demand for commercial aircraft. Weakness also was seen in autos, primary metals such as steel, and defense communications equipment. (infrastructure spending by government will take care of the steel, and 0% 5 year loans to 621 FICO scores - provided by government - will take care of the car part - yep. Until they default. When the stock market gains 40% this year - provided by government - the rich will once again be buying aircraft - so all our problems will be solved in 6 months)
• Demand for heating and air conditioning products fell by 11.6 percent in November, reflecting in part the hard times the nation's homebuilders are enduring. (4% mortgages, or no appraisal refinancing - by government - will take care of this)
• The jump in the inventory-to-sales ratio “indicates excess inventories that will need to be worked off,” Steven Wood, president of Insight Economics LLC in Danville, California, wrote in a note to clients. “The manufacturing sector is mired in a deep recession that is unlikely to be quickly resolved.” (by "deep" I assume you mean, finished in 6 months - after all the stock market is a forward looking instrument and the rally on all bad news means it is forecasting the '2nd half recovery' we've been breathlessly waiting for)
  

Last, pending home sales

• Pending U.S. home sales fell to the lowest level on record in November, as the plummeting stock market and faltering economy gave more buyers cold feet (strange - I thought the "tax rebate" of $1.60 gas versus $4.00 in the summer would fix this? I mean when you save $22 a week on gas you usually think to yourself "time to buy a house". I know I do. I've bought 480 houses just in the past 5 months alone. This data does not match up with the pundits commentary - hmmmm - I can only assume the data is wrong)
• Typically there is a one- to two-month lag between a contract and a done deal. So November's decline foreshadows bleak results for December's existing home sales numbers, set to be release Jan. 26. (ummm... well let's recycle the backwards looking rationale for this one - I'm running out of excuses for this data set)
• "A real estate-focused stimulus plan is urgently needed," Lawrence Yun, the trade group's chief economist, said in a statement. (read: government)

In my 2009 Predictions I said rallies in 2009 would be based on data that was not as bad as the previous month - that is the crutch. They won't be good numbers - but simply "less bad than the previous month" will be enough to get bulls salivating. Other than ISM Service we are not even getting "less bad than the previous month" at this point - we are getting worse numbers. So not only are people peering around the corner for a recovery - they are peering over the hill, under the bridge, across the river... and then around the corner for the recovery. "In 6 months". And just about every rationale for recovery is "government, government, government, and government." Sounds like a winning plan.

If you are still reading me this summer, just remember these posts when we sit around and ask "umm.. that 2nd half recovery that was imminently starting?" Or feel free to stop by and tell me I was wrong on July 4th as unicorns, butterflies, and songbirds fill the sky across America. I did the same thing last year at this point in the calender when the punditry was screaming the EXACT same words "The Federal Reserve is pulling out all the stops - don't fight the Fed, Bush is working on a stimulus plan, and you have to look through the valley to the second half recovery". Sadly, they cannot even come up with original rationale - it's all the same except we trade the word Bush for Obama. I used Independence Day as a good marker for a reality check last year. We'll use it again this year. One of these years these pundits are going to nail it.

As always the stock market is not the economy - just as in 2008 people are jumping on the backs of each other to front run a "recovery" that no one sees, but everyone hopes for. And one hedge fund has to buy ahead of the next hedge fund - after all we have some huge high water marks to make up this year to stay in business. It let to tramping last year, and I'm afraid it's not coming "in 6 months" this time around either. People keep forgetting this is a consumer led recession - not a corporate led. We kept saying that in 2008 as well, but already the lesson appears forgotten. Can we at least get back to a 5% savings rate before the government insists we layer on more debt so the consumption bubble can reinflate? But for now, one can trade the whistling past graveyard rally. When stocks don't go down on bad news, you are best to let the Kool Aid play out and ride the train of hope. So when the retail and employment data comes out Thu/Fri just repeat whichever is the more appropriate pundit line (a) "better than expected" (b) "the market has already discounted it" or (c) "it can't get worse than this" - or feel free to use any 3 in combination. Most importantly, buy stocks - Uncle Sam will protect you.

New "Pledge" Sheet - Obama Era v 2.0

Ok folks, almost a year to the day due to popular demand (I was asked often when I'd actually get started) I created a post I called a pledge sheet for readers interested in future investment when a true mutual fund was born [Jan 7: Reader "Pledges" Toward Mutual Fund Launch] Ah, we were an innocent bunch then - not realizing that in fact Ben Bernanke/Paulson/Bush and crew would not save us from facing the lions in the Coliseum (Collesium). But never fear, it is now a year later and we are trading Paulson for Geithner and Bush for Obama, and this time around we will be saved. And if not, Bobby Jindal/Phil Gramm/Ben Bernanke will save us in 2012! One of these times, someone is going to get us back on track ;)

But I digress... we've just gone through the worst year since the 1930s and many a portfolio is battered. The good news is based on that historical precedent we should not have to deal with such a year again until around 2060. (I wish) And thus far we are on pace for a +300% year for 2009 ;) We were actually doing quite good on our pledges until August 2008 and were up to just under $4M. Then the bear market within a bear market arrived i.e. September/October/November (3 months that shall live in infamy) and hit us. Judging by what all these mutual funds in my 401k and others I look at have done the past year, I assume many readers took serious hits. So, we're going to start from "scratch" since I assume some readers probably gave up on the market completely, others took serious hits to their portfolios, and new readers have arrived.

Obviously I am still bearish on the economy in 2009, but the economy is not the stock market. Further, if the market falls to a level I think it could in 2009, and GeithObananke pull the rabbit out of the hat, we might have a most excellent opportunity in the market by latter 2009. And certainly this era's actions will lead to the investing bubbles of 2010-2013. Probably when people are most disgusted with the stock market, will be the best time to start a fund in fact. But the reality is we don't really need an "up" market or "down" market - except in times of extreme duress this is a market of STOCKS not a STOCK market - there are always opportunities. The past 6-7 weeks have proven that - there have been many excellent money making opportunities in a market that mostly just went sideways. I will also say after the colossal failure of "long only" funds of the past decade 0ur "hedge fund" (without the leverage!) type of strategy would be a more attractive option than ever; not just in the past 10 years but also in the coming 10 as the country faces many challenges. There will always be good stocks to short and go long, and this niche of working both angles is simply tiny in the mutual fund world. So along with the transparency you are getting a taste of (some of which will have to be ratcheted back due to SEC rules), we'll have a unique role that is very underfilled in the mutual fund universe.

So with that said, I am going to make very specific requests on pledges this time around

1. Assume a 2nd half 2009 launch, maybe Jun 1, maybe Dec 31st
2. Assume at any point in 2009 the market may be down 30% from here
3. Make your pledge based on liquid assets that are not currently in some high octane mutual fund that loses 40% when the market falls 30%, nor gains 50% when the market gains 40%. That money is not something that can be counted on with the volatility in this market.
   

Further, I've sent some emails out in the past few weeks so if you received an email in the past 14 days and have communicated with me, you don't need to send me a new email; I've already included you in this new pledge sheet. Also if you have made a pledge since Dec 1st, 2008 I am going to consider that pledge still valid. But anything before December 1st, I am going to wipe the slate clean.

Same format as before: first name, last initial, pledged amount, and state you live in. Once more, to be clear, you are not sending me money that I'm going to hold until launch when you 'pledge' - you are simply making a verbal commitment "when you are up and running, I want to invest this amount". You can attach a comment to this post or as most people do, send me an email (my address is found on the upper left of the blog) with the above information. I'd prefer an email if possible.

Here are the pertinent posts if you have not read through them

1. The overall goal and why I'm aiming for $7 approx million [Jan 7: Reader "Pledges" Toward Mutual Fund Launch]
2. Frequently Asked Questions [May 26: Frequently Asked Questions] Very important to read
3. Why I need your state [May 23: Investment Pledges by State] I'm also starting this list over

This is a 2 sided street; people always email me "When can you start?". Easy answer: I can begin at "any time" the capital is there - obviously I can just bring the thought process and experience - the readers will bring the funds. Worst case scenario - I am no better than the 8000 funds out there but you get a halfway entertaining monologue along the way. Best case scenario is all upside from there ;) So we'll see how this time around goes and hopefully we're at least halfway ($2M) to where we were before said lions visited portfolios worldwide. As always, thanks for continued readership.

p.s. One more thing to finish this post in this new day and age; due to Bernie Madoff let me reiterate one of the Q&As from my FAQ which seems most appropriate in these times of scandal. The irony is the SEC seems to watch the Martha Stewarts or little fish of the mutual fund world very closely while missing the big scandals - ah, American regulation. Priceless. On a serious note, I cannot recall in the past 20 years ever hearing of any mutual fund running off and stealing clients money or running Ponzi schemes - that appears to be the jurisdiction of the "smart money" (ahem)

Q: How do I know you won't run off with my money?
A: Well, that would defeat the purpose of this endeavor, but over and above that I won't ever see your money. I will be paying a 3rd party source to handle just about everything outside of making buy and sell decisions. So as with any fund, you're going to be sending money, receiving paperwork, etc from someone I outsource to - not named Rising Tide Growth Fund.

Bookkeeping: Limit Order on EZCORP (EZPW) Hit

Hmm, maybe I need to whine about positions more often.... I whined this weekend how I was not getting any pawn shop love and lo and behold, EZCORP (EZPW) takes off.

My limit order at $17 hit so I am exiting 400 of 1300 shares. This reduces the position from 2.8% of fund to 1.9% - the stock is up from $14 to $17 in just a few days, I added quite a bit on Dec 23rd in the $14.80s [Dec 23: Bookkeeping: Adding to EZCORP] - so on that batch a tidy two week return of 15%. Trading opportunities in this market continue to be exquisite for swing traders. If we can get $18 I'd probably drop another 1% stake, and hopefully rebuy near $15.

For this one I cannot thank Obama, but instead his predecessor ;)

As you can probably notice in times like this I like to rotate money out of things running hot and heavy and buy merchandise with good charts but falling/correcting/consolidating.

What a busy day!

Disclaimer: for newer readers, I am apolitical - both parties are doing an excellent job of ruining the country with equal measure. Hence I make facetious and or satirical comments about both sides.

Long EZCORP in fund; no personal position

Bookkeeping: Closing Mosaic (MOS)

I never thought this day would come - long time readers know that I once considered naming my first unborn child Mosaic (MOS) in honor of all the dollars she made us from summer 2007 to summer 2008. Many times Mosaic was a 6-8% position for us as she ran, ran, ran.



But then she turned evil. When we got rid of just about all our commodity exposure by early fall 2008 I only kept 3 names for trading purposes and MOS was one.

As you can clearly see by recent action, if I want to play fertilizer as a theme I can buy an oil stock. Or a dry bulk shipper. Or an iron stock. Or a steel stock. Or a company located in Brazil. There is no reason to literally own a fertilizer stock in the 2007-2009 casino if you want to be long fertilizer. Therefore I do not need two names in the space. I wrote this morning Mosaic's earnings or guidance really does not matter - it's all about how hot commodities are. And they are hot today... but it is starting to get silly out there. So this is as good of time as any to bid farewell.

I am going to sell the last 0.7% stake in Mosaic in the mid $38s. This is one of our last remaining original purchases from August 6, 2007. This was once our largest winner by dollar amount but after the carnage of 2nd half 2008 we are leaving with "only" a $20,000 gain. I wish I could say that about every stock :)

Normally to keep my exposure in the sector, I'd roll the position from one of the two names into the remaining but with the drunken stupor that has now overtaken commodity stocks I'm just going to keep it in cash. My thesis is government is not bigger than the market and the real "Main Street" economy is going to suffer much longer than people currently believe. Demand is not going to "come back" so easily as people now theorize. It helps to have a job which is going to be a "small wrinkle" as we go further into 2009. And emerging markets won't be jumping back to old build rates in 6 months either.

The market currently disagrees - but that's ok - the "thesis mongers" have been wrong on just about every point the past 18 months ("it's not a recession - the data does not support that", "it's only a subprime issue", "it's time to buy financials because sovereign wealth funds are", "we got our first interest rate cut - don't fight the Fed", "technology is a safe place to hide", "emerging markets will decouple and be unaffected by the US slowdown", "housing will rebound in spring 2008", "financials have bottomed, it can't get worse than Bear Stearns", "the economy will rebound in 2nd half 2008"); but only after they run stocks up for no good reason first. All these thesis made me look anti social for a few weeks or months. Until reality hit. See, hope is not new - it's with us constantly... only the face of hope changes..... (and the thesis)

For now farewall Mosaic - we'll meet again down the road. Call me about 4-5 months before a real global economic recovery begins. Until then I'll probably go date Cleveland Cliffs or someone new... just a fling...

No position

Back to the Future - Commodities Rule Again

I feel like I've fallen asleep and someone transported me back to about 9 months... the whole gang is back!

HAL9000 is on a buying spree of epic proportion.

Breakout... breakout... breakout... breakout... global growth is back. Obama says so. (well actually he said yesterday the economy is bad and getting worse - details, details) Everything he touches, turns to gold. Best. President. Ever. And he hasn't even started. At this pace the market might get back to all time highs by Inauguration day. Surely Dow 40,000 will be in reach by end of term 1 in 2012.

I'm having flashbacks as all my old positions are being taken back to the future by HAL. The charts above are why I say it makes zero sense for you to spend even 1 minute of research in commodity stocks. In the new hedge fund era of the past few years - you just buy 1, and they all go together - they are all the SAME stock in their eyes. If it's coal, if it's natural gas, if it's wheat, coffee, oil service, infrastructure, steel, fertilizer, iron, dry bulk shipping, oil service - it all is 7 degrees of Kevin Bacon and the hedgies will move en masse into ALL of it. And vice versa. That is the casino we've built... so don't need to waste a precious moment doing research or fundamental analysis on any of the companies - just buy 1 or 2 and you own them all. You can even buy 8th derivatives like Gafisa or Mercadolibre - as long as the stock is located in a country with commodities to sell - it gets run up as if it has an oil field under its headquarters.

"Student body left". "Student body right" - it's been like this for well over a year now. It's nonsense - but this is the 'efficient market' in action. Horde trading. Computers at their best.

When I start seeing action like this - stocks no one wanted two weeks ago there are now fist fights on the casino floor over who can buy it first - and reading the bullishness that has now overtaken everyone.... time to get my jacket on, and begin slinking to the door with the Exit sign over it... keep one foot in the party with my Vodka & Kool Aid tonic in hand... but be ready to be the first to the door when the cops come.

p.s. personally I'm hoping for a return to $140 oil so we can hear talk about how $4 gas is a great thing for the American economic recovery. But that's just me.

Bookkeeping: Cutting back on Jacobs Engineering (JEC)

Remember, this is an Obama thesis stock (infrastructure) - it certainly is breaking out so I am going to keep about half the position. We doubled down our position on Dec 31st in the $47s and just a few days later we have $54.60s. That's 15% right quick (this was our 2nd largest long position coming into the week)

I'm cutting this from a 2.9% stake to 1.4% - if I could place a trailing stop of about 4-5% I'd probably do that instead, but I don't have that available to me in the Marketocracy.com tracking account I use, so I'm just going to take some off the table and lock in my 15% gain. With a clear of $54 there is no real resistance until mid $60s (200 day moving average) so as long as hope is in the air, this stock can chug chug chug. The chart is a beauty the past week but there is no great intelligence on my part here with JEC - just throw a dart, hit an infrastructure stock, and high five your friend as the stock goes up, up, up ...since hope is on the way.

Thanks Obama! You just have to love a stock market where Washington D.C. is 50x more important than New York City. Capitalism!

Long Jacobs Engineering Group in fund; no personal position

Bookkeeping: Cutting LDK Solar (LDK)

Gotta love this market; you just can't lose on the long side anymore. Despite the warning from LDK Solar (LDK) last night, Obama hope > facts. The stock is now back up to the low $15s and my limit sell triggered. I am exiting 800 of 900 shares and taking this down from a 1.6% stake to 0.2% - these shares were bought at $13.40 one week ago. [Dec 30: Bookkeeping - Cutting ReneSola (SOL); Adding to LDK Solar]

This is far and away my favorite President so far (and he hasn't even started!) Everything he touches, turns to gold. Up 13% in a week - despite a warning. Thanks Obama!

I'll rebuy LDK north of $16 (when it clears its 50 day moving average) because we risk the danger of Obama saying "solar" out loud and every stock in this sector doubling overnight. For now I have very little exposure in the solar space. I feel very fortunate to have executed this trade and leaving with a quick and dirty profit ;)

Long LDK Solar in fund; no personal position

Bookkeeping: Restarting Thoratec (THOR)

It is interesting that 4 of the 6 names I outlined in Saturday's 'Potential Portfolio Candidates' in our "waiting for a pullback" category have pulled back to support in the first day and a half of this week. This goes with the broader view I am seeing in this market - people are now moving from the leaders of the past month and moving into far more speculative fare. I see a lot of small cap stuff (today the sexy choice outside commodities is technology) running hard for no good reason other than speculators want new playthings.

I am going to restart an initial position in Thoratec (THOR) as it pulls back to its 20 day moving average of $29.75 or so. It is currently in the $29.50s so I'm re-starting with a 1.5% stake. This is not a market I will be chasing all this speculative junk running up 30% in a week on "thesis" - even the quality stocks I don't want to chase. Because when they reverse a lot of people are going to get smacked... and abruptly.

As I wrote this weekend, I had a group of 6 stocks (QSII which we just talked about was one of them) I was interested in on a pullback. We added 1 yesterday and the second today. Thoratec is down from $33 on Friday, so we're getting it about 11% lower - that said, I am hoping to see it down in the upper $27s which is its 50 day moving average to make a larger purchase.

So the strategy from here (so you see in advance) will be to add more either (a) on a bounce off the current level - that would signify serious strength or (b) as it falls to the 50 day moving average - near $28. Conversely, if the stock falls below $27 or so on a closing basis I'll cut back, and take a small loss since the stock would of broken support and be weaker than I anticipated and could have much lower to go... ($23s or $24s in fact)

I identified Thoratec [Aug 4: One for the Radar - Thoratec] quite a while back but exited [Oct 26: Closing Thoratec First Thing Tomorrow] after a product scare which appears to be less scary than the original headlines (when the news hit, the stock was down 50% after hours before recovering in pre market the next session to "only" be down about 12%)

On a fundamental basis I really like this name [Oct 30: Thoratec Smashes Earnings; Somehow Guides Up] - I was just thrown for a major loop with the product issue. Since that time in late October the stock has rip roared higher without me.

We lost $2k the first time around so hopefully we have a better experience this time. The stock has a rich valuation but is a unique niche growth story in healthcare. And it is not a thesis stock; it is standing on it's own two feet.

[Dec 5: Thoratec with Positive Data]

Long Thoratec in fund and personal account

Analyst Throws Water on "Hope" in Medical IT

One area I've identified as yet another "Obama hope" sector is medical IT - the two stocks I've been looking at are Cerner (CERN) and Quality Systems (QSII).

Two other names of interest are athenahealth (ATHN) and AllScripts Healthcare (MDRX).

This is really just like the solar and infrastructure areas - buy because Obama promises to shovel money down the throat of a sector or "likes" the sector. Even if very little money will show up anytime soon - that doesn't matter to HAL9000 and crowd. They buy thesis, not reality. An analyst tried to warn about this in infrastructure a few weeks ago [Dec 19: Citi Analyst Frowns on Obamamania; ABB Gives Reality Check] - the stocks fell for a day or two before hope returned.

So we have a quandry very similar to solar or infrastructure - buy on reality? or buy on Obama hope and hedge fund thesis? I've been targeting Quality Systems which is up about 80% since early December on 'thesis', and waiting for it to pullback to a major support area - it is doing a textbook move today to the 50 day moving average (upper $38s).

Tough call this one... I am going to watch it closely here and I'd like to see a bounce before getting in, even if I have to pay up a bit... it is now in the low $39s; it could bounce here or fall further to the 200 day moving average near $36, or simply fall more on "reality". But IF this follows the infrastructure call from mid December, after today's reality check the lemmings will run right back into the name ... on hope. I'd much rather buy stocks on fundamentals rather than "HOPE" but almost all the big movers of late are hope stocks - the entire commodity space is flying on hopes of the global recovery that is "coming soon".

So in the next 2 sessions or so we should see if hope (thesis) once again overpowers reality.

I'll have to look closer at ATHN as it has a quite good chart as well.

Here is the "reality"

• Health care information technology stocks slid Tuesday after a Leerink Swann analyst said the electronic medical records portion of President-elect Barack Obama's economic stimulus package will not help the sector right away.
• "Our best guess as to the time line for federal money to work through state grant and loan programs in any material way is at least 12-18 months," Bret Jones said in a client note. The climate for health care IT companies is still very difficult, Jones wrote, and investors may be disappointed as they wait for the stimulus package to take effect.
• In his presidential campaign, Obama proposed greater funding for electronic medical records as part of a plan to save money for patients and reduce health care premiums. That funding is expected to be tied to an impending economic stimulus plan.
• Jones downgraded shares of Cerner Corp., AthenaHealth Inc., Allscripts-Misys Healthcare Solutions Inc. and Quality Systems Inc. to "Market Perform" from "Outperform." Each of those stocks has climbed at least 20 percent since Dec. 1, with shares of Allscripts and Quality Systems rising more than 50 percent. (hope! thesis!)
• He said the stocks may decline when the companies begin to report their fourth quarter results. As the reports come in, Jones said, investors will see the results of cutbacks in hospital spending as the hospitals work through the damaged credit market, lower admissions at hospitals and increased bad debt. (no, not facts! stop the facts! the market is about thesis!)
• He added that Watertown, Mass.-based AthenaHealth may not benefit very much from the stimulus plan because its AthenaClinics is not a leading emergency medical records product yet.
• During the expected sector retreat, Jones recommended shares of companies that do business with ambulatory clinics like AthenaHealth, Quality Systems and Allscripts. His secondary recommendation was inpatient vendors like Cerner and Eclipsys Corp.

This is my favorite part of the report

• Based on contact with a lobbyist, Jones said Obama's health care staff plans to direct $5 billion to $10 billion to health care IT funding. However, not all of that funding will be used for electronic medical records, he said: Some will be used on infrastructure and setting up a national health information network.

Why is that my favorite? Because when you want to know how a pork barrel ladden $800 Billion stimulus will be allocated, you go to the best source - a lobbyist. And that kids, sums up our system better than I ever could.

No positions; just shaking my head at what the market has become

Normal Bears in Hibernation - Panda Bears (and Bulls) Winning

We said yesterday we'd look to get more aggressively short on a break below S&P 920... in the last hour we fell to 921 but bounced so bears remain in hibernation other than Panda (Obama) bear. (remember, 2009 is the year of the panda - ignore all bad economic news; that only matters on Main Street; it's panda time on Wall Street)

As we showed in the weekend summary the next range "up" is S&P 920 to 950, which will take us to mid November highs. If we "clear and hold" 950, than the next range is 950 to 1000. From a purely hope standpoint, it would seem like a rally into S&P 1000 on Jan 20th could be in the air.

Like we said, we are not chasing here - and I'd like to see how the market handles the retail reports Thursday and jobs report Friday. If they start buying retail stocks on "it was atrocious but it can't get worse than this" logic, and "hey 600,000 people lost jobs but it can't get worst than that" logic on Friday than we probably rally right into inauguration. When all the facts on the ground mean nothing and people continue to relentlessly buy on hope and/or "the coming recovery in 6 months" you just have to go with the flow. We've had similar moves in late 2007 and multiple times in the first half of 2008 - the facts on the ground were degrading but the market was whistling past the graveyard. The problem with this is one needs to jump ship quickly when things turn; the market takes away much quicker than it gives. Somehow in the stock market there are long periods where bad news is ignored and then suddenly in a 2 week span everyone wakes up and accepts the bad news and the market corrects rapidly.

But for now drink your Kool Aid, look wistfully out the door as gas rises to $2.00+ (awesome for the consumer), and celebrate panda time.

• But if the price of gasoline continues rising, it may become another headache for consumers worried about their jobs and the dropping value of their homes and investments.
• Rising oil prices have helped push the wholesale price of gasoline up by 40 percent since Dec. 24, leading to predictions by energy experts that retail gasoline prices will spike by as much as 25 percent in coming weeks.

But not to worry - even as gasoline prices have fallen from $4 to $1.60s with no real pickup in demand, a country full of consumers who are not increasing consumption of a commodity that costs $1.60 a gallon, will soon be purchasing $20K cars and $250K homes. Thesis vs reality. The "hope mongers" simply do not wrap their hands around the fact this is a consumer led recession; they are STILL stuck in their "corporate led recession" thinking of the early 90s and early 00s. You can lead a horse (consumer) to water (the mall/an empty housing lot/a car dealership) - but you can't make her drink.

New York Times: As Vacant Office Space Grows, So Does Lenders' Crisis

Normally I'd be worried about this type of story and offer dire warnings that I've been repeating for a long time. I'd fill you with holiday cheer about how retail outlets you know will go bankrupt, one off mom and pop shops you never heard of would go under, and strip malls across Americana will be sitting 30-70% empty in about 12-15 months. How shrinking small businesses who once sat in office building suites will go under and leave half empty floors in building across building. However, President Elect Midas shall magically fill 80% of all empty office space by transforming a nation of service workers into shovel diggers and Caterpillar machine workers. (and solar panel installers and school retrofitters - whatever that is) How that fills office space, I don't know - but work with me here. It's a thesis. (need I remind you this all shall happen "in 6 months" when the US economy returns to "good times") The other 20% of office space that Obama does not fix with his healing hand? That's what the next bailouts are for [Dec 22: Wall Street Journal - Property Developers Ask for Government Bailouts]

Again, I'd like to reiterate I like this Obama guy - I just think by this summer or fall, when people who expect the man to part the seas with his magic wand get disappointed, he is going to unfairly lose his honeymoon. But until then, let's clap in glee - shall we?

• Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.
• With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.” (is that the worst year pre or post bailout?)
• Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion. (strange for an economy that should be recovering "by the 2nd half of 2009")
• There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say. (welcome to the morass Tampa! Good to see you hear - Obama should be stopping by any day now, just remain patient)
• In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.
  
• What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said.
• Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent. Houston....the vacancy rate is 11 percent and rising.
• ....But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year. The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.
• The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.
• Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties. (not to worry, we can bail out both the commercial property developers AND banks, and everything is covered by Uncle Sam and Uncle Ben - stop all this fussing about nothing - the nanny state will fix it. We need more commercial mortgage loans on our Federal Reserve balance sheet as we build out a more "balanced" portfolio)
• Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data. (not to worry, this will be taken care of by TARP 4.0) Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities. (heading to the Federal Reserve balance sheet near you)
• Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts. (so supply and demand still works? Need to stop that right quick! Someone call Geithner and Summers - this must be stopped!) That is making it all the more difficult for owners, who projected ever-rising rents (sort of like projecting ever rising home values - whomever creates these models really needs to be exposed to "the real world") when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.
• Among commercial properties, the most troubled have been hotels and shopping centers, [Nov 27: AP - Malls, Hotels Next Victims in New Mortgage Crisis] where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.
• The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. (bailout! bailout! bailout!) Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure
• Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said. (wow sounds vaguely familiar - what other market did we see this in... hmmm... anyhow, I believe we should bailout those who engage in risky behavior and immense leverage- it's the right thing to do and my unborn grandchildren are sending me messages that they are cool with it.)
  

So along with too many restaurants, retail outlets, homes, strip malls... we can add office buildings. Perhaps with every 4% mortgage we hand out we can throw in 1500 square feet of prime office space to sweeten the deal. If you're subprime - even better - along with your 0% GMAC 5 year auto loan - you get 2500 sq feet... please... just BORROW! Uncle Sam demands it.

Look folks, I don't have any fancy schmancy models and I'm sure the 28 year old guy straight out of one of our best business schools - who made this "model" that apparently every Wall Street firm and commercial property developer used - was incredibly smart (but he was hit with a Black Swan event). Yet somehow I could see this quite a few moons ago - I have a super secret model I call "thinking" (no Excel sheet required)... but then again, unlike most parts of our government I still believe in the business cycle. The 28 year old guy's "model" (and Greenspan's Federal Reserve) apparently does not.

[Mar 4, 2008: WSJ - Building Slowdown Goes Commercial]