Tuesday, February 3, 2009

Freddie Mac to Outsource Delinquent Collections - Ocwen Financial (OCN) Chosen to Start

Ocwen Financial (OCN) is one of our sleepy stocks that generally moves slowly but today it took off - well in relative terms; this is no commodity stock or bank (who woulda thunk 5 years ago that banks would be considered the "volatile daytrader" stocks).

As we wrote late last year we should expect anything as Obama & Co try everything to keep delinquent homeowners in their homes. Their conduit will be Fannie/Freddie - many of these programs will be ill fated and lead to another round of defaults (kick the can policies) which will cost us more in the end. But that's a worry for another day.

Just remember, to get all the goodies the government is going to unleash on America you must be at least 60 days late. That's not going to cause a rush of now "on time" borrowers to go delinquent. Nope. No unintended consequences here.

Today's policy as outlined below... which is moving Ocwen
  • Freddie Mac (NYSE: FRE - News) said today it is piloting a new Workout Strategy For High Risk Loans designed to keep more at-risk borrowers in their homes by employing third party servicers that specialize in servicing Alt A and other types of higher risk mortgages.
  • "A workout strategy is only as successful as the number of knowledgeable counselors available to answer the phone. Our strategy for high risk loans is designed to help servicers cope with today's unprecedented call volume by directing calls to a specialist with the specific staff and technical resources for handling a high volume of borrowers with these types of mortgages," said Ingrid Beckles, Freddie Mac's senior vice president of default asset management.
  • Under the new pilot, a selected portfolio of higher risk mortgages that are at least 60 days delinquent will be given to a specialty servicer for intensive attention using the full range of Freddie Mac workout opportunities, including the Streamlined Modification Program developed with the Federal Housing Finance Agency, Fannie Mae and the HOPE Now Alliance.
  • Ocwen Financial Corporation (NYSE: OCN - News) is one of the servicers Freddie Mac has selected for the pilot. Ocwen will deploy teams of specially trained counselors to handle Freddie Mac's delinquent high risk mortgages in order to minimize telephone wait times, put borrowers in touch with live counselors faster, and implement the latest Freddie Mac foreclosure reduction policies more quickly.
  • Initially, the pilot will target an estimated 5000 reduced documentation loans from California, Nevada and other states with high delinquent rates. Although Alt-A loans were made to borrowers with strong profiles and represent a fraction of Freddie Mac's single family portfolio, they account for half of its seriously delinquent mortgages.
The stock is making a double top here in the $9.20 range - we'd like to see it burst through to start a new leg up.

The gubberment is here (again). We're saved (again)! Groundhog Day at the Casino.

[Jan 9: Bookkeeping - Starter Position in Ocwen Financial]

Long Ocwen Financial in fund; no personal position

AP: Recession Resistant Coal Feels the Squeeze

Coal was one of our biggest winners in late 2007 thru mid 2008. Until HAL9000 (the quant fund computer who treats all commodity stocks the same) took over, I used to have a thesis that on a RELATIVE basis fertilizer and coal would outperform commodities as a whole - because after all, heat and food are relatively inelastic demands a human would prefer to have. HAL blew my thesis up.

I'm gobsmacked (love those English terms) at the charts in this group - worst of breed, best of breed, metallurgical, thermal - doesn't matter. Weapons of mass capital destruction. We own one that has held up well but only on a RELATIVE basis... i.e. instead of losing all 4 limbs, it's only lost 3. Nine months ago you wanted companies who had unsigned contracts so that you could benefit from those who would benefit from ever rising prices (that should be familiar to our DryShips fans in the crowd); now you want the exact opposite - you prefer companies who locked up as much capacity as possible at 2008 prices. How quickly the worm turns ....

A quick take via AP:
  • Anemic spending has begun spreading to the usually recession-resistant coal industry. Producers have slashed production, idled mines and cut jobs less than a year after soaring coal prices left the industry struggling to find enough workers. Two more big U.S. producers -- Arch Coal Inc. and Foundation Coal Holdings -- announced cutbacks Friday. Already, major producers such as Peabody Energy, Consol Energy, Alpha Natural Resources, Alliance Resource Partners and Patriot Coal have begun to retrench.
  • At least 1,310 jobs have been trimmed at various Appalachian mines. Arch says it does not expect any layoffs, though it has trimmed up to 14 million tons of planned production in 2009.
  • Plummeting demand for steel from automakers, the construction industry and others have slashed demand and prices for metallurgical grade coal used to fire blast furnaces. (not surprising) Now mine operators have begun scaling back steam coal production in response to ebbing demand from electric utilities. (more surprising; this means serious recessionary tendencies) "It's not necessarily recession-proof, but it is recession-resistant," said Leer. "People still heat their homes."
  • "From Arch and other companies, we get the view that the market will be flat this year," National Mining Association spokesman Luke Popovich said. "Pricing power for companies without contracts will clearly be weaker -- but nobody sees a big drop similar to the metals side of our industry." Metals mine operators have slashed tens of thousands of jobs across the world, postponed and canceled projects and shuttered mines as consumers have cut spending on cars, jewelry and housing.
  • Still, contracts signed before prices fell will certainly provide some cushion for producers and major U.S. coal operators have largely predicted stronger profits this year.
Long James River Coal in fund; no personal position

Bring Me Your Generals

We've been discussing the past few weeks how this correction has missed "The Generals" (the leadership stocks). While the market went through a horrid January many of our stocks were unscathed. Which had me worrying - it's hard to get behind a shorter term bottom until the Generals are taken out back to the barn, blindfolded, given a cigarette, and then shot. In a bull market, I want to be buying stocks that are holding up during a downturn because there is no pattern that they indeed need to be shot. In a bear market, I take the opposite tact - I assume they are going to be shot. So this is why we have not built up any 3-4-5-6% type of stakes the past month in stocks that had "held up the best". Indeed, I've had one measly position over 2% on the long side. (which is being sand blasted today of course) :)

I am listing below names I consider either the market's leaders of the past 6 months (large cap) - or our personal leaders (small & mid cap). You can see them in various stages of true or potential duress... while the traders run into ... dry bulk shippers and homebuilders. Very reminiscent to what we saw many times in 2008... a "rotational" correction where sector after sector took their turn getting hit. Eventually I would like to make many of these major positions (4%+) but I'd prefer to see them take multiple bullets first ... as they fall we'll begin throwing in layers of positions realizing we won't catch the bottom. These are among the best fundamentals, and with charts that held up the best through the carnage of late ... but I'd expect some/many to take some hits on the next leg down.

That said, this market just seems on hold until Friday's labor report. Hint to market: it is going to be bad - why are we waiting around as if some magic number will change the economy. And then when we are done with Friday we have to wait until the magic bailouts that will be announced next week from D.C. Hint to market - we are on "savior announcement" number 47... the first 47 failed, are we really going to play this song and dance on #48, 49, and 50? Getting very old.

And then maybe someday in the future we can get back to a normal market.

Taking the first bullet(s)


Being walked to the barn?

Buffet Provides Financing to Harley Davidson (HOG)

Harley Davidson (HOG) is up 20% today showing why, in a bear market, even shorts can easily get slaughtered. Much like the cheering when Buffet came in with "financing" for Goldman Sachs (GS) [Sep 23: Warren Buffet Finally Decides to Start Buying Distressed Assets] and General Electric (GE) the shorts have to scramble to get out of the way (both those stocks have fallen roughly 50% since Buffet got involved) and you get a short squeeze. Berkshire is back extracting very onerous terms on Harley but the peanut gallery cheers....15%!!! So to "make money" on this I guess they will charging Harley buyers 20%? Great deal for Berkshire...
  • Harley-Davidson Inc. said Tuesday it priced $600 million in new debt to fund motorcycle lending at its troubled financing unit. Berkshire Hathaway Inc., the company owned by billionaire investor Warren Buffet, and Davis Selected Advisers LP, the company's biggest shareholder, both agreed to purchase equal portions of the principal amount of the new debt.
  • The new senior unsecured notes will be due in 2014 and will carry an annual interest rate of 15 percent.
HOG is up from $12 to $14 on this news; I'd love to see it nearer to $16 to get my grubby hands on some short exposure.

No position

Bookkeeping: Stopped Out of Half of Insituform Technologies (INSU)

I started a 2% stake in Insituform Technologies (INSU) yesterday after the stock fell 8% on news of multiple acquisitions. The 200 day moving average is in the $16.70s so I said I'd monitor it closely since it was at a place it could go either way on the chart. This morning the stock has faltered another quick 6% and my stop loss at $16.00 was hit. So I am out of half the position, and down to a 1% stake suffering a quick loss.

Any press release with the word "debt" is going to be a calling card for shorts, so the fact they are acquiring the debt of the companies they are buying can be used as a "reason to short". Plus they have to issue 9M shares - frankly I was shocked with 1/3rd dilution the stock had not taken a larger hit yesterday. Whatever the reason, I am going to respect the price action and limit exposure. Once I see the stock regain the 200 day moving average I will move back into on the long side in a more material way. Better safe than sorry - even if costs some sheckles today and the market maker possibly shook me out. The stock was in the $11-$15 range most of October and November ....

Long Insituform Technologies in fund; no personal position

Bookkeeping: Closing Brinker (EAT) Short

I am closing the 2nd half of the Brinker (EAT) short [Jan 27: Bookkeeping: Short Brinker] at roughly $11.22. The stock fell to its 20 day moving average yesterday and has bounced off it this morning. Since that time I've added other short positions to offset the long exposure so I can take this half off now and keep fully hedged. This was a thesis that a double top was forming and the stock would pull back; this came to fruition at least in the time frame I care about.

Both halves of the trade worked out, but this 2nd portion not quite as profitable as the first half - however in this market, every profit is a good one.

Brinker was shorted in the $11.70s - half was covered in the $10.80s (+7.8%) late last week, and this half today in the lower $11.20s. (+4.5%) - just over 6% gain in a week on a combined basis on just over a 3% stake.

p.s. I am still very interested in that Amazon short... need to see this market give up the ghost since tech stocks are the flavor of the week.

No position

Myriad Genetics (MYGN) - Monster Results

Myriad Genetics (MYGN) has been a name I had been hoping to buy on a pullback closer to mid $60s [Jan 20: Myriad Genetics - Another Diagnostic Heavy Hitter] - but it refused to fall during this multi week correction in the general market. Now we see why - just a homerun earnings report - the stock is up 12% in early action and it looks like this opportunity has run away from us. The stock was only up a few percent in premarket but with this tracking system I am not able to do things in premarket or afterhours - bugger.
  • Myriad Genetics Inc (MYGN) posted a better-than-expected quarterly profit, fueled by a strong growth in its molecular diagnostics business that offset a sharp drop in its research-related revenue. The company, which plans to spin off its drug development business from its molecular diagnostics business, posted a net income of $21.2 million, or 43 cents a share, compared with a net loss of $5.1 million, or 11 cents a share, a year ago.
  • Revenue for the second quarter rose to $84.4 million from $56.7 million in the prior-year quarter, boosted by the jump in its molecular diagnostic revenue to about $84.0 million. Research and other revenue, however, fell 88 percent. Analysts on average expected the company to earn 32 cents a share, before items, on revenue of $79.0 million for the quarter ended Dec. 31, 2008, according to Reuters Estimates.

  • Myriad said the revenue growth resulted from a rise in its sales and marketing efforts, including expansion of the women's health sales force and continuation of the direct-to-consumer marketing campaign. The company's research and development expense fell 27 percent due to the discontinuation of the Alzheimer's disease program in June 2008, the company said.

  • The Company continues to maintain a strong balance sheet, with $497 million in cash, cash equivalents and marketable investment securities and no debt or convertible securities. During the quarter, we experienced an improvement in our accounts receivable collection period to an average of 45 days with a modest 5% allowance for doubtful accounts.

Full report here

No position; unfortunately

WSJ: Going Old School - Shoe Cobbling is Hot Again

The one good thing about this epic reversion to mean in the debt laden society is "what's old" is new again. If things really degrade we might be going back to nation of self sufficient farmers - talk about full circle. ;) Ok, that's alarmist.

For now, we're going to be replacing a nation of nail technicians, realtors, and mortgage backed security used car salesmen.... err consultants with old school professions - like sewer fixers, steamroller operators and... shoe cobblers! I love it.

I said a long while back that Americans will return to a nation of savers - not out of choice, but necessity. The signs are emerging everywhere.
  • American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases as varied as sweaters, new homes and office towers. The personal saving rate in the last three months of 2008 rose to its highest level in six years.
Let the Pooring of America wash over us. Embrace it! Coupon clippers unite!
  • "I haven't seen shoes like this in 25 years," marvels Jim McFarland. The narrow hall of his small shoe-repair shop is piled high with reheeled stilettos, resoled boots and polished oxfords. Mr. McFarland, a third-generation cobbler, is riding a shoe-repair boom. Since mid-November, he has been juggling roughly 275 repair jobs a week -- about 50% more than usual. "I'm so busy right now it's unbelievable," he says. Mr. McFarland says he now sees new customers arriving regularly, including young folks who have never visited a cobbler.
  • Nationwide, cobblers and their suppliers report markedly higher revenues than a year ago, as newly frugal Americans opt to repair their shoes rather than replace them. "Our business is very, very strong in an industry that has been depressed and declining for many years," says Lee Efronson, owner of Miami Leather Co., a wholesaler of shoe-care products to cobblers since 1959.
  • It appears that the good news for cobblers means bad news for shoe retailers. Retail sales of adult footwear declined 3.2% in the 12 months that ended in November, from the year-earlier period, according to NPD Group Inc., a market-research firm.
  • Lawrence Sutton hadn't set foot in a shoe-repair shop in years. In November, the 36-year-old insurance-company owner walked into Mr. McFarland's storefront in a strip mall in this town east of Tampa to drop off his wife's black Prada pumps, which had a broken strap and worn heels. "It's better to pay $40 to fix them than $500 for a new pair," he explained. His job is secure, he said, but he's concerned about the economy and is watching his wallet.
  • There are just 7,000 shoe-repair shops left in the U.S., down from more than 120,000 during the Great Depression, according to the Shoe Service Institute of America, a trade group. Today's cobblers lament that young people are less inclined to learn the trade from their fathers or take it up on their own.
  • One reason the ranks of cobblers have thinned is that it can take up to four years to learn the trade. Another barrier to entry is pricey equipment. Finishing machines, for example, come with trimmers, sanding belts, and buffers, and can cost more than $20,000.
  • "They come in here with their tails between their legs," says Mr. Lipson. A distraught first-time customer, he says, recently dropped off a pair of black leather Manolo Blahniks that her dog had mauled. Mr. Lipson says he made them look like new. "She hugged me," he says.
  • Inexpensive shoes sold by discount stores have also been a bane to the craft, Mr. Lipson says. Shoppers get into the habit of tossing them after six months and buying new ones.
  • Last week, Jessica Maugeri, 24, paid her first visit to a cobbler -- Mr. Johnson. She needed a fastener for a $60 pair of chocolate-brown Steve Madden wedges. She says she never paid attention to his small shop during past trips to the mall. But she is tightening her purse strings, she says, so she decided to give shoe repair a try. "I'm glad there are places like this," she says.
This is a cultural shift that we are embarking on. Thrift is in.

Fairholme Funds (FAIRX) 2008 Report

Courtesy of Todd Sullivan, below is Bruce Berkowitz's Fairholme Fund Annual Report. FAIRX had a tough year but this is one of the better large cap "value" funds who generally runs a very conservative policy; but does have very concentrated positions. And unlike (sadly) the majority of fund managers he has a large stake of his own money in the fund. Frankly at $7B+ in assets I don't know how one could manage in this type of environment.

His top position, Pfizer (PFE) makes up 18% of the portfolio.

Making up the rest of the top 10 are: Sears Holdings (SHLD), Forest Labs (FRX), Canadian Natural Resources (CNQ),Wellpoint (WLP), Boeing (BA), Northrop Grumman (NOC), United Health (UNH), The St Joe (JOE), and Humana (HUM)

Recent removals from top 10 include: Leucadia (LUK), Berkshire Hathaway (BRK.A), DISH Network (DISH), Mohawk Industries (MHK),

Mr. Berkowitz is hiding out in the same 2 themes we've identified for 2009: defense and healthcare.... safest bets in a relative sense; although he lives in large cap value world, and I'm more of a small to medium growth player.

Web Pages 4 through 9 of the document below are of most interest to peruse.


Monday, February 2, 2009

New York Times: Our Love Affair with Malls is On the Rocks

I love it when the mainstream media catches up [Stuff I've Been Negative on Since Fall 2007] .... thankfully, we'll be using a few generation's money to bail out mall developers sometime in 2009. Another God given right for Americans - a mall must be located with 10 miles of each non rural human. Never mind that we have 6x more retail space per capita than every other country - send the taxpayers dollars in! [Jan 13: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"] [Dec 22: Wall Street Journal - Property Developers Ask for Government Bailouts]

An inspired web citizen has started http://deadmalls.com/
With this handy feature you can see the dead mall watch list in your own state.... lovely. http://deadmalls.com/features.html

New York Times: Our Love Affair with Malls is On the Rocks
  • .... convenient starting point for rethinking the 50-year marriage between the American shopper and the American mall.
  • Here, ladies and gentlemen, is the crux of the problem: We are reliably informed that whatever part of the economic crisis can’t be pinned on Wall Street — or on mortgage-related financial insanity — can be pinned on consumers who overspent. But personal consumption amounts to some 70 percent of the American economy. So if we don’t spend, we don’t recover. Fiscal health isn’t possible until money is again sloshing into cash registers, including those at this mall and every other retailer.
  • In other words, shopping was part of the problem and now it’s part of the cure. And once we’re cured, economists report, we really need to learn how to save, which suggests that we will need to quit shopping again. So the mall we married has become the toxic spouse we can’t quit, though we really must quit, but just not any time soon.
  • I feel a need to get out there and do the mall thing, because I don’t want the mall to disappear,” says Cookie Tomlinson, who is visiting from Maryland and sits on a bench next to her son near Lego Park. (how... generous) “It’s a social experience, being with the grandkids, watching them interact,” she says. (hmm... wonder how grandparents interacted pre-mall...hmm.... certainly there must of been no interaction)
  • THERE are roughly 1,500 malls in the United States, according to the International Council of Shopping Centers, many of them ailing, some of them being converted into office buildings, and others closing their doors for good. (yes, because we need more empty office buildings... )
  • IF we were actually in couples therapy with the mall, we’d have to confess to something: We have changed, not the mall. The economic crisis has caused shoppers to go into an essentials-only mode. But the mall has never trafficked in essentials.
  • You’d be amazed at how many people are returning things now,” Mr. Classen adds. “I’m going to have to start enforcing my return policy because — well, look at this.”
Much of the rest of the story is how Mall of America in Minneapolis is able to buck the trend (they claim 2% growth while individual retailers inside the mall doubt that) ... but after all it's a tourist attraction ;)

Only 5 more months until the "2nd half 2009" recovery commences.

[Jan 23: Forbes.com - Where You Won't Shop in 2009]
[Jan 12: Wall Street Journal - Wake of Bankruptcy Filings Expected from Retailers in Wake of Holidays]
[Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]
[Dec 18, 2008: CNNMoney: The Dead Mall Problem]
[Nov 27, 2008: AP - Malls, Hotels Next Victims in New Mortgage Crisis]
[Oct 18, 2008: CNNMoney: Mall's Demise Could Doom Communities]
[Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?]
[Jul 21, 2008: Add Mervyn's to our Growing Litany of Retailers Headed to the Great Sunset]
[Jul 5, 2008: Bloomberg: Teenagers Skip $50 Jeans in Squeeze of Gas, Job Shortage])
[Apr 11, 2008: This Day in Bankruptcies - Another Airline and our First Major Retailer]

Bookkeeping: Short Netflix (NFLX)

I am employing the same strategy I did for ITT Educational (ESI) [Jan 22: Bookkeeping: Short ITT Educational] with Netflix (NFLX); in that case a stock gapped strongly after earnings, created a "gap" in the chart and came back to fill it. If I could keep track of so many positions I'd actually want to go long at the gap... these chart set ups are perfect for that (once the gap is filled, go long young man!) as ESI has flown higher since it filled the gap. The day we covered was the red line on the 26th. I am lamenting I did not go long once that gap was pulled... I'd already be up a cool $15.

Now, Netflix has a chart similar set up - I am going to attempt a short here at $37 and cover at the gap - $31.50. And this time, unlike with ESI, I am going to use that as a pivot point and go long @ $31.50 so I have a limit buy order waiting there. This sort of set up is actually quite dangerous on the short side in bull markets where gaps don't fill many times for months or indeed quarters... the stock can run away from you and your short position gets toasted. But in a bear I will take the chance.

I am also eyeing the same set up in Amazon (AMZN) but right now the stock is too strong to mess with. Maybe in a day or two. Netflix (NFLX) is a few days further along in its run so appears to be petering out. (unless the market takes off upward in which case people will pile back in)

I have to say I've been a doubter of the long term business model with Netflix (NFLX) but the move away from mailing DVDs and getting direct streams online is one I agree with. My only "scratch my head" thesis with this, is why are the cable companies, satellite companies and the like not providing the same "library" to viewers? It seems they can replace Netflix in a moment if they do so. But for now, it seems Netflix has the niche to itself and its last earnings were impressive. Theoretically if they can just keep revenue flat, and stream instead of mail - their profits should jump immensily due to lower costs. And this is a great stock for the Pooring of America movement I've been on for a year and a half... cheap entertainment.
  • Netflix is predicting that as the economy continues its downward spiral, more Americans are going to retreat to their couches, meaning more money for the online DVD rental service.
  • On Tuesday shares soared 15.5%, or $4.67, to close at $34.82 in the wake of the company's announcement after the bell on Monday of earnings that beat analysts' estimates. It also added more than twice the number of customers management expected.
  • "It's very clear streaming is energizing our growth," Hastings told analysts during Netflix's conference call. Although Netflix doesn't earn any additional revenue from its streaming service, it hopes streaming will help it lure new customers and save money on reduced mailing costs.
  • Netflix’s fourth-quarter profit, for the three months ended Dec. 31, jumped 45.0% to $22.7 million, or 38 cents a share, up from $15.7 million, or 23 cents a share, in the prior year. Excluding stock-based compensation costs, Netflix reported it would have earned $24.6 million, or 41 cents a share. Analysts expected a profit of 34 cents a share.
  • The company’s revenue shot up to $359.6 million, from $302.4 million in the prior year
  • Netflix said it added 718,000 customers from the third quarter to the fourth quarter, more than double management’s growth expectations. The company ended the year with just under 9.4 million customers through December, 26.0% more than in 2007. On top of that, the amount the company paid to acquire each customer dropped to $26.67 per subscriber, down from $34.58 in the prior year.
  • The company also said its board has approved a stock buyback program for 2009 of up to $175.0 million.
I am short with a 3.3% stake @ $37.00. My target is $31.50 (15% return). I will go long if/when $31.50 hits with a 3% stake. I will stop out if the stock breaches the recent high ($38) @ $38.25 (-3.3%)

p.s. I don't know what it is with S&P 820, but this is a magnet like no other.

Short Netflix in fund and personal account

Macy's (M) Cuts Another 7000

It has been nearly a year since Macy's (M) made their first cut of 2300 (white collar) at the time [Feb 6, 2008: Macy's Cutting 2300 Jobs - White Collar; Out You Go] - I wrote then (boy it sounds familiar expect back then all the pundits were in denial about what was coming; now at least some of the "converted" pundits sound a lot like me - others remain in dream land)

Well here we're now seeing more of the large scale layoffs in the "service economy" courtesy of Macy's (M). We had already seen it in retail in Ann Taylor (ANN) and Home Depot (HD) but on smaller scale. This is what economic contraction is all about... I am sure the unemployment rate will somehow fall to 4.7% of you listen to government reports but the reality is the reality. We have too many stores - our retail culture was built on overspending credit induced over indulgence. The Fed is trying to push us back into that bad habit with their easy money. But it's going to be tough with home prices falling and people feeling unease about their jobs... along with inflation that the government denies exists affecting their real day to day purchases.

Remember the evil in a service economy where you produce very little of value outside the country is each 100 people gone from Macy's white collar means less money to go to the entire service web - dog groomer, nail technician, grocer, hair stylist, lawn cutter, snow shoveler, etc etc. It's the vicious opposite of a virtuous cycle you have when the service economy expands.

I wrote that comment about "4.7% unemployment" tongue in cheek because 'the brighest minds on Wall Street' and their pundits told us "the government data is not showing there is a recession so stop listening to the gloom and doom types". So many herd behavior types on Wall Street only look at backwards data and don't create an actual forecast by looking forward. You know- actually thinking for yourself and looking around - but when you live in the Ivory Towers of NYC I guess it's a different universe... hard to figure out how the "average Joe" is living when you are worried about which $2 million apartment you will bid on after work. Oh well - they are learning now.

Now the Macy's pain is reaching into the stores as we offer another 7000 people the chance to be part of the new Obamaconomy.
  • Macy's Inc. announced Monday that it will cut 7,000 jobs, or 4 percent of its work force, and slash its dividend as the department store chain looks to lower expenses and preserve cash amid a severe pullback in consumer spending.
  • Macy's had already announced last month that it would close 11 stores, affecting 960 employees, after retailers suffered through the worst holiday season in decades.
  • Macy's said it expects the latest job cuts and other actions to lower its selling, general and administrative expenses by about $400 million annually starting in 2010.
Unfortunately only 3.5% of our stimulus actually creates infrastructure jobs so these folks are going to be have to stand in line with the 100K+ newly unemployed last week (and the 2 + millions others unemployed in 2008) & compete for these steel toed bulldozer operator jobs. But not to worry, if Friday's job report is "better than expected" all these "facts" from the company's will be thrown out the window and we'll talk about how "it's not really that bad, the government says so". "All upside from here" & "can't get worse than this". Blah blah. Lemming logic.

I don't know what dream world this stock market lives in, but it appears to be one where armies of people without jobs are ok as long as it's not "as bad as consensus". We are headed for 15% true unemployment and 20% unemployed/underemployed. My prediction last year that even the lousy understated government reports will show 10% unemployment rate is looking more and more likely by the day. It's going to be the worse economy since the 1930s, but "buy stocks because the charts are holding up @ S&P 800". Who the heck is going to be buying stuff or demanding credit from our lousy banks when so many are jobless. This is truly sad; I have never seen so many large scale job losses from big companies in such a concentrated manner and the market lemmings remain in denial - still! It will be fine in the "2nd half of 2009" as the Fed/Obama save us.


Consumer discretionary is to be shorted on all rebounds - I have been saying this for 1.5 years [Apr 14, 2008: Stuff I've Been Negative on Since Fall 2007] and I will keep saying it. There is no "rebound" imminent and when it "comes" (not anytime soon) it will be flaccid. [Dec 15, 2008: The "Recovery"] The same Pollyannas who got this all wrong are still giving out the same bad advice - and people still listen to them. Pathetic. The absence of critical thought even among our highest paid Wall Street minds is quite sad. If a McDonald's worker had the same sort of job performance as the punditry / Wall Street forecasters - they'd have been fired and not be given the green light to spout Kool aid every 10 days on CNBC.

No position

Bookkeeping: Beginning Insituform Technologies (INSU)

I have a target list of about 5 stocks I've been waiting to fall to my target areas- these are small/mid cap generals who have been oblivious to the market's downfall the past month. One such name is Insituform Technologies (INSU) which I've had a limit order that finally hit this morning; it's been sitting there the entire month of January. I will update this piece with more information later but in a nutshell this company is a play on "Obama infrastructure" - unfortunately, the Nero's running Rome as it burns only made 3.5% of the "stimulus" infrastructure; that is sad but typical of our feckless leaders.

Main Entry:
feck·less           Listen to the pronunciation of feckless

I expect the Senate to "bump it up" - hey we might even get 5% of our grandkids's money to go where it should go. Lucky us! 50% pork, 10% social programs, 35% tax cuts, and 5% infrastructure... for an "infrastructure bill".

Either way, as Rome burns civil engineers say we need $1.6 trillion of upgrades to our splintering infrastructure... I read that over the past 2 years; and read something last week seeing that has been upped to $2.2 trillion. What the exact correct number is not the point - in America we won't deal with it until a full blown emergency happens (see Minnesota bridges). If you do the research, our major city sewers - many built 80+ years ago.... are also old and decrepit.

Main Entry:
de·crep·it           Listen to the pronunciation of decrepit
1: wasted and weakened by or as if by the infirmities of old age

Water is going to be the oil of the next 50 years and in the West we are already seeing emergencies every summer. Yet we "leak out" so much water in our sewers because we cannot afford to deal with it. Well now we have money flowing out of our ears so we can deal with every problem.

Here is a company description (company website here, and product list here)

As the leading provider of and a pioneer in trenchless technology, Insituform® is able to respond to worldwide sewer, water and industrial pipeline rehabilitation needs with a long-term, less disruptive solution that’s very affordable.

They key here is the company's trenchless replacement technology; that is instead of busting up streets across America to put new pipes in; a hole is dug at either end and this new pipe is pulled through - creating a pipe within a pipe if you will.

This company is small enough (about half a billion in annual revenues) that Obama spending could actually boost the top line in a material way unlike 90% of the stocks the daytraders run up on hype in infrastructure. I'll add more detail to this piece later but for a quick summary you can go to this Seeking Alpha piece by Ted Allrich here.

The company has an investor presentation from spring 2008 here.

The chart is (well was) excellent as this was a small general who was not letting up. Still in decent shape despite today's action.

It has been hit today on news of multiple acquisitions. These are quite hefty acquisitions for a $500M market cap.... an aggressive stroke although a broadening of the product line. Since these are privately held companies it is hard to tell if these are "good" prices or not since I can only see revenues and not "profits".
  • Insituform Technologies Inc., a contractor that rehabilitates sewers and underground piping systems, said Monday that it will buy Bayou Cos. and Corrpro Cos. in two separate deals that the company values at $216 million combined. Insituform will pay $125 million for Bayou and about $91 million for Corrpro. Both deals include the assumption of debt.
  • Privately held Bayou, based in New Iberia, La., provides products and services to the onshore and offshore oil and natural gas industries. Corrpro offers corrosion protection and pipeline maintenance services.
  • Insituform said the transactions will give it cross-selling opportunities and diversify its business.
  • The company plans to fund the deals with debt and a public offering of up to 9 million shares of its common stock.
  • Bayou had $125.7 million in sales for the 12 months ended Sept. 30, 2008. Medina, Ohio-based Corrpro had $186.1 million in revenue for the same period.
The stock is down 8% today, and the 9 million shares would equal dilution of 32% (current shares outstanding are 28M) Therefore, it would appear on the surface - the market likes the deal and/or the deal is quite accreditive (sp?). Together these two companies add $300M in sales to INSU's $550M so at least on the top line the company grew 55% for 32% dilution. That "sounds" good as long as operating & profit margins in the new businesses are similar to INSU's business. But the market seems to be giving a thumbs up or else the stock would be far lower.

Another strategy that interests me is to play the infrastructure theme is a paired trade - long a small domestic company like this (benefits from Obama) vs short a global infrastructure player that is levered to oil/energy (in which I expect to see some projects being cancelled in the year ahead) - or long the good (domestic) chart versus short the bad (global) chart.

I will say, this deal adds more complexity to my thesis for buying - I wanted the sewer business and had set my limit order to buy when the stock fell near the 200 day moving average ($16.80s). If the market starts to break down I'll cut back on this position because instead of being a pure play there are more layers of complexity to the company; now I have a sewer business and an oil pipeline service business on my hands.

I've started this position with a 2.0% stake around $17.25.

Long Insituform Technologies in fund; no personal position

Bookkeeping: Short Gmarket (GMKT)

A limit order to short Gmarket (GMKT) hit this morning @ $14.80 - this will be a 3.1% stake. I was sorting through my watch lists last week looking for stocks that would make good shorts if they hit a certain level and this was one of them. It is actually a name I've been long many times in my personal account and even in the early days of this website. [Nov 8, 2007: Earnings Today - Gmarket]

These guys are basically Amazon.com/Ebay of South Korea. Except South Korea broadband/internet penetration far exceeds the U.S. so it's a more mature company. (lower growth rates) The market seems pleased with their latest earnings report Friday morning and hence the move the past 2 session.

Gmarket, Inc. operates a retail e-commerce marketplace in Korea. Its e-commerce marketplace offers buyers a selection of products, and sellers various sales solutions. The products listed for sale on its Web site include apparel and fashion accessories, computers and electronics, furniture and products for the home, food and child care products, and travel and leisure services.

This is a technical short - nothing else; I will target $13.25 to cover (+10.5%) and will be stopped out at $15.35 (-3.5%) Obviously a greedy trade would shoot for $12.00 but in this market when a CNBC announcement can destroy you on the short side (free markets!) I'm just putting in trades and happy with quick and meaningful gains if I can find them.

As an aside the chart below shows $15.50 as resistance but my normal charting says $15.00 so I'm going with $15.00 (hence why my limit order was $14.80)

Short Gmarket in fund and personal account

Bookkeeping: Covering EZCORP (EZPW) Short, Adding to Sequenom (SQNM)

I was not online this morning, but had a handful of limit orders go off.

First, the second half of my EZCORP (EZPW) short executed.

Here is how the trade played out - I originally went short on Jan 27th (Tuesday before "bad bank " sent the market screaming higher) as a hedge to my long position [Jan 27: Bookeeping: Short EZCORP]- one of my favorite chart formations. Despite the CNBC heroics to drive the market up, we had an excellent trade in a short amount of time. I wrote

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.

I covered half Friday the 30th [Jan 30: Bookkeeping- Taking Half Off Shorts in EZCORP (EZPW) and Brinker (EAT)] I wrote

By doing this, I am playing with the house's money if I get stopped out. If the stocks go back to my original short points, I will rebuy this "half" of each trade. If they fall another 4 percent or so I'll close out either / or. EZCORP was shorted in $14.60s and now half is going out at $13.80

I was originally shooting for $13.50 for downside but moved my limit order down to $13.30 Friday when I covered half the short since I could be more aggressive. That hit this morning.

So with half the order (in 3 sessions) we went from $14.66 to $13.80 (+5.9%)
And with half the order (in 4 sessions) we went from $14.66 to $13.30 (+9.3%)

Overall, I got my $13.50s target ($13.55) - just broken into 2 pieces. 7.6% gain in 4 sessions overall - a nice quick scalp.

If I had been around this morning I would of gone long in the low $13s to ride this back to mid/upper $14s - where I'd reshort it. EZCORP is much like this market, range bound and you play the range until it breaks (everyone piles in long on S&P in low 800s the past 3 weeks etc)

I'll be shorting again around $14.50. Again, I wish I had been around to throw in a long order this morning since I love playing range bound names like this long and short.

Another limit order for Sequenom (SQNM) hit this morning so I'm increasing my stake from 2.0% to 2.8% with purchases in the $20.60s. I don't see any specific driver for today's fall (-7%) but I am incrementally building the positions as it falls. The stock is near the 50 day moving average - my goal is to average down if/when the stock falls to $17 and make this a top flight position in the portfolio at that level.

In my old Marketocracy.com portfolio I had a substantial gain in this name since I started buying in the teens, but in the new portfolio that was started early in January I am now down on the position. Looking to the long term I hope to be "down" more in the short term so I can get my average cost much lower.

Long EZCORP, Sequenom in fund; long Sequenom in personal account

Sunday, February 1, 2009

Largest U.S. Trucker in Complete Freefall

.... but not to worry... GDP "only fell 3.8%" (ahem)

It is amazing what a different story you hear when you compare government reports to company reports. Whatever alternative universe the bulls live in, is one I'd love to languish in - must be a nice place. One area that has been leading this market down of late is transports. They've been horrid. While the dry bulk shippers have been bad for a long time, railroads held up much of 2008. They have been terrible of late; Paul Kedrosky has a chart showing the year over year crash in shipments by category.

So have been the Fedex (FDX), UPS (UPS) cohort. I'm not that familiar with the trucking industry since its not really an area I play in on the long side but I am familiar with YRC Worldwide (YRCW) which is the #1 trucker in the U.S. (if anyone follows this sector closely feel free to shoot me an email on some other major players - going to do some homework this weekend)...

Let's see what YRC is saying
  • Struggling No. 1 U.S. trucking company YRC Worldwide Inc (YRCW) on Thursday reported a fourth-quarter net loss, citing the impact of the slowing U.S. economy and impairment charges.
  • The U.S. trucking sector has suffered from weak volumes since the third quarter of 2006, a slowdown that has been made worse by sliding retail and auto sales, the U.S. housing sector meltdown and the slowing of the overall economy.
  • The company reported revenue for the quarter of $1.93 billion, down from $2.35 billion a year earlier.
  • The Overland Park, Kansas-based company reported a fourth-quarter net loss of $244.4 million, or $4.14 a share, compared with a net loss of $735.8 million, or $12.99 a share, a year earlier. Excluding impairment charges related to a write-down of goodwill related to the integration last year of two trucking units under a single brand and a write-down of goodwill at its YRC Logistics unit, the company posted a loss of $2.51 a share.
  • "Our results reflect the significance of the economic recession that has been longer and deeper than anyone anticipated," (anyone? hmm... someone is not reading certain blogs) Chief Executive Bill Zollars said in a statement "Although we were not pleased with this level of performance, it was consistent with our internal expectations and those of our banking group."
  • YRC is in discussions with its lenders on its debt covenants and Zollars said "discussions with the banks are progressing well, and we are on track to finalize an amendment by mid-February."
Those darn debt covenants keep popping up.
  • YRC National Transportation total tonnage per day down 14.6%
  • YRC Regional Transportation total tonnage per day down about 14%,

No position

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 26

Year 2, Week 26 Major Position Changes

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

Cash: 68.2% (vs 76.3% last week)
24 long bias: 15.3% (vs 15.6% last week)
13 short bias: 16.5% (vs 8.1% last week)

37 positions (vs 34 last week)


Weekly thoughts
First, a quick bookkeeping issue - I made an error this week when I said I was only 10% invested. It appears on the Investopedia.com page "cash" is net of short positions. Meaning short positions are added back to your "cash" ... i.e. I show some $916K worth of cash (making me think I was somehow less than 10% invested) - but that is because my short exposure ($121K) is being netted against my long. Anyhow I figured it out now, it is misleading on the web link but I'll have it accurate on these weekly summaries. (even more confusing some of my "long" positions are actually "short" since they are Ultrashort ETFs)

Just a quick update because pressed for time. I don't like what happened last week; I wrote in last week's update that if I had a very short term horizon (1-3 days) I'd be pressing towards the most beaten down sectors (financials/commodities) since they had fallen so far from their mean; especially the financial complex. That was the correct call, in spades (although we did not benefit much since we have little in that area of the market). Of course the CNBC news alert about "bad bank" helped the cause. But, what this did in my opinion is work off an "oversold" condition in the most beaten down areas. So this very easily could now allow for a setup where the entire market can fall as one. It would of been hard a week ago to ask some of these sectors (esp. financial) to fall even further in a straight line... now they were given a reprieve. Further, the "generals" for the most part remain stalled - on the big up day Wednesday, many of them just sat around and were up 1-2% --- nothing impressive.

As we look at the S&P 500 this is not a good situation either - this looks like an index that is just rolling over.

The bulls best hope is for (a) S&P 820 to hold or (b) S&P 800 to hold like it did two weeks ago or (c) the market lemmings to run this market up on "government interference" or "CNBC news alerts". It's going to be very tough to guage the market because it feels like we have a government sniper ready to push the next "miracle" to "save the economy/housing/financial system". I don't know why the rats keep going for this cheese - there is no miracle coming from the government - even these "4% mortgage loans for everyone!" or "generations of taxpayers get socked with bad loans". But humans are a hopeful lot and they keep reacting to "the higher power" that will save us from reality.

I don't know exactly why S&P 800 was such a strong support level other than it's a "big round number" (notice the Dow closed just at 8000 as well on Friday) - just human psychology. What traders are doing now is "playing the range" - they are conditioned to buy at the low end, sell at the high end - and keep doing it, until it no longer works. So once it does not work at S&P 800 you will have these traders leave en masse, triggering a serious selloff. Again, we are focused on the technicals so much because the fundamentals are so putrid - both economically and company wise. Hey, look at that Macy's (M) is going to let go another round of workers... what did we lose last week? 125K+ workers? Somewhere around there.

Bulls keep grasping for straws - they have been using the wrong playbook the past 15 months (recession of early 90s and early 00s) and still seem to be in denial about an epic consumer led recession. They want to buy "6 months" ahead of a recovery... a recovery that is never there when we actually get "there" 6 months later. Eventually they WILL be right guessing things will turn around 6 months. But will they have any money left? Not if they are investing based on what they are spewing in the punditry-sphere.

So what's on deck this week? The last week of "big company" earnings reports and lo and behold we're already back to our monthly jobs report this Friday. What will be funny is if its "better than expected" the bulls will say "see, not so bad!". Just because the government spews out an inaccurate report, we are then to ignore all the horrendous data points we are hearing each and every week about job losses in the real economy. And let me remind you again, you only hear about the mass layoffs - all the 18 people there, 24 people there in small business America never makes a headline. But if the government says its not as bad as "reality" - then we'll listen to the Fairy Godmother rather than facts. I have no idea what the report will say Friday, and the only raeson we have to care is because the lemmings in the market will move the market based on this number. Watch for the "backwards revisions" as well, the pattern has been to say "oops the number we gave you a month or two ago - well just add another 100-150K more losses to it"

For the fund we are nicely hedged now, with high cash. I only have 1 major (>2%) long position - Sequenom (SQNM) based on the dip that happened last week when I was able to pick up some cheaper shares. My game plan is to take some of this cash horde & get more aggressively short against indexes and sectors if we break S&P 800... the retest of S&P 750 does await us. Unfortunately I am not that confidant that this will be our ultimate bottom. The market is very much "not cheap" based on how bad 2009 earnings will be once we reach Dec 31, 2009. Last, the Generals have yet to be shot - watch the generals both large (McDonald's, Exxon) and small (what we own). When they begin to get hammered for a 4-6 day period I'll be more interested in getting heavier on the long side.

54 Stocks Returning 15%+ in January

As we exit the worst January ever, I thought it would be interesting to take a look at the best performers of the past month. Before we do, courtesy of Dshort.com this is a chart that has been passed around a lot in the investing community so I thought I'd share it. Two ways to read this - of the 4 great bear markets the past 100 years, 3 "ended" roughly where we are now... about a 50% loss in value from peak. That's the bullish view i.e. "can't get worse than this" and if we fall to S&P 750 (November lows) but never break through they will be correct.

The bearish view is - the 4th bear market ended in a 90% drop, and if you plot the velocity of the decline, what happened to us in Sep - Nov caused us to be in lockstep with the worst of the 4. I'm not calling for a 90% drop from top to bottom but I believe we'll have a great chance of hitting something closer to 60% then 50% from peak to trough.

Remember what the pundits told you at the end of 2008 (30 days ago) ... time to buy, the calendar is changing and hence its a new start; change is coming, optimism is in the air, stimulus... after a 40% drop in 2008 we cannot just continue to fall. Blah blah & blah. Then January happened. Once again, the punditry just serves to act as sirens and have been destroying people's capital left & right. When we return to a bull market it won't be 45 days or 90 days in duration... there will be plenty of time to partake. While it would be beautiful to catch "the turn" when it really happens, so many people have lost so much money trying to catch it that they won't have the capital to enjoy the actual rebound. Until then, it is best to have much tigher leashes, much shorter time frames and focus on small wins.


Before the era when the stock market fluctuated +/-8% every month or indeed week, we used to post the best performers of the week to get an idea where the relative strength in the market was. Nowadays, the data is useless as one week every financial will be down 30% and the next week, they'll all be up 20% - which tells us nothing for our time frame.

For the screen, I've had to bring the market capitalization criteria down substantially - before we used to use $1.75-$2 Billion as a minimum. But so many stocks have cratered, I've dropped it down to $500 Million for this pass. 54 Stocks made the cut of making at least 15% in January so while the winning ranks were thin; there were some. Keep in mind, many of these stocks were obliterated late in 2008 so instead of showing "strength" many are just reverting to a mean.

  1. Market capitalization $500M+
  2. Average trading volume 100K+
  3. Stock price $10+
  4. Return this month 15%+
Green names we own, blue names we have owned in the past or discussed in the blog. Quite a few at the top are takeovers. The main trend I see were refiners were, after a year of disarray, finally rebounding a bit. A handful of our old energy stocks (HK, FTI) also made a re-emergence but I think this is more oversold action than a new trend so it doesn't fit our time frame. Also, adult "re-education" stocks as we've highlighted have been all the rage - although we successfully booked a profit shorting ITT Educational (ESI) [Jan 22: Bookkeeping: Short ITT Educational] Overall, I am not sure there is much to glean here other than "congrats" if you happened to own some entering the year. I am surprised at the lack of silver/gold stocks on the list...

Symbol Company Name % Price Change Last Month
EYE Advanced Medical Optics Inc 219.8
CVTX CV Therapeutics Inc 70.1
NTCT NetScout Systems Inc 54.7
WNR Western Refining Inc 43.1
SYNA Synaptics Inc 38.7
SEPR Sepracor Inc 34.3
RIMM Research In Motion Ltd 33.0
MWE MarkWest Energy Partners L P 31.0
ESI ITT Educational Services Inc 29.9
SNX SYNNEX Corp 29.9
HNT Health Net Inc 28.0
IWOV Interwoven Inc 27.7
SLM SLM Corp 26.2
CYH Community Health Systems Inc 26.2
MDVN Medivation Inc 26.0
SPR Spirit Aerosystems Holdings Inc 25.8
HOC Holly Corp 25.1
TSO Tesoro Corp 25.0
NRGY Inergy LP 24.9
NAV Navistar International Ord Shs 24.3
CREE Cree Inc 23.7
ALJ Alon USA Energy Inc 23.2
IOC InterOil Corp 22.9
STAR Starent Networks Corp 22.6
NJ NIDEC Corp Depository Receipt 22.2
WPZ Williams Partners LP 21.9
SGR Shaw Group Inc 21.8
CECO Career Education Corp 21.8
NFLX Netflix Inc 21.0
KCI Kinetic Concepts Inc 20.4
SVR Syniverse Hldg Inc 20.4
ACOR Acorda Therapeutics Inc 20.0
IVC Invacare Corp 19.9
NRP Natural Resource Partners Units 19.8
AMMD American Medical Systems 19.7
VPRT VistaPrint Ltd 19.5
MS Morgan Stanley 19.1
WDC Western Digital Corp 19.1
SSRI Silver Standard Resources Inc 19.1
HK Petrohawk Energy Corp 19.0
IHS Information Handling Services Inc 19.0
IMA Inverness Medical Innovations Inc 18.7
CPNO Copano Energy LLC 18.0
TPP TEPPCO Partners LP 17.7
FTI FMC Technologies Inc 16.9
ARO Aeropostale Inc 16.6
IDCC InterDigital Inc 16.3
OTEX Open Text Corp 16.0
SIRO Sirona Dental Systems Inc 15.9
NTY NBTY Inc 15.8
COCO Corinthian Colleges Inc 15.7
CSTR Coinstar Inc 15.5
TRA Terra Industries Inc 15.2

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