Simon Johnson Comments on Stress Test; The Return of Eliot Spitzer

A few videos from CNBC this morning

First we have Simon Johnson [Apr 21: Simon Johnson on Yahoo Tech Ticker] of Baseline Scenario blog and more importantly former IMF chief economist. For newer readers I will continue to pimp this article as a must read (and must pass along to your non financial neighbors and friends)

The Atlantic: The Quiet Coup (link here)

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Here is a 6 minute video with his take of the "stress" tests, and the continued comparisons of the U.S. elite with 3rd world country power grabs. I do love his comment "I pretty much consider Goldman Sachs another branch of government" - it is GREAT to see well respected folks speak the truth. Not that it will change a darn thing...



Second, lo and behold - look who has stayed in shadows for a year and is makin' a comeback; none other than Eliot Spitzer. I actually loved what Mr. Spitzer did to unearth some of the dirty laundry on The Street back in the day but indeed he did make it personal at times which rubbed some people very much the wrong way. It is too bad he did not just stay in that role and continue digging but his ambition was too high... he has some interesting comments in these videos which actually mimic things we've been saying on the website for nearly 2 years now. Unfortunately you have to put up with the insufferable Arianna Huffington from time to time.

10 minutes



8 minutes

Bookkeeping: Closing Macy's (M) Short

With the mutual fund horde moving into consumer discretionary it is difficult to fight this theme for now. Restaurants which started turning up before the market at large, weakened a few days ago so maybe they begin to lead this sector back down - too early to tell. Macy's (M) thankfully performed poorly once facts came out today - but "thesis" buying (the consumer is back) drove it up and gave us some not so happy returns.

This stock pretty much sums up the difficulty of the market at all times... you can be correct (Macy's is struggling) but as long as the herd believes differently, it does not matter. That works for both longs and shorts. In between data points, the herd can move the stock wherever it wants on "thesis" and take you way past your stop loss limits. Then a data point comes out that reinforces your viewpoint as an investor, but it does not matter because all it does is retrace the movement the horde created. You can see that in the stock chart.

Thesis!

Fact!

• Macy's Inc. said Thursday that same-store sales fell 9.1 percent in April, a bigger drop than analysts forecast. Analysts surveyed by Thomson Reuters, on average, expected same-store sales to fall 7.5 percent. (considering the amount of discounting going on in department stores this is still quite a sad performance)
  
• Total sales for the four weeks ended May 2 fell 9 percent to $1.69 billion.
• Department stores have struggled as consumers cut back and hunt for bargains amid the recession.

So like Gretzky says, you should not be where the puck is, but where it is going. In stocks you should not be where the reality is, but where the horde thinks the reality is. Then make sure you are sitting on your chair when the music stops (like today in Macy's). Perfect example of logic versus thesis.

I am covering the last of my Macy's today - this batch was at a profit but earlier batches I had to cover at losses as I chose not to "average up"; and will have to see how consumer discretionary does from here - still watching in awe as stocks like Whole Food Markets (WFMI) continue their "thesis" runs. Well over 30x forward earnings for a GROCERY store and people still want in... any short of this stock is laughed at as longs "buy buy buy". Just have to wait for the steam to run out or maybe at 50x forward earnings valuation matters.


I do contend sometime in the summer or early fall this group will once again be an excellent short - but knowing when sentiment changes back is unknowable.

No positions

Bookkeeping: Restarting Atwood Oceanics (ATW)

I am going to restart a former position in deep sea (mostly) driller Atwood Oceanics (ATW)... this is a very small version of Transocean (RIG) or Diamond Offshore (DO). One can throw a dart at this group, as the student body buys them all or sells them all in concert. Deep sea drilling is sort of the chicken's way to play any commodity resurgence; although it doesn't matter to the market, it still matters to me to buy good value. Atwood, despite a large run trades at 6x 2009 estimates (their year ends in September not December) but again - valuation and things like this don't matter in our current era. It's just buy the big secular theme. I could go and buy a small cap natural gas stock driller, or copper stock and they will perform similarly.

Diamond Offshore had nice earnings a week or two back, Transocean and Atwood reported in the past 24 hours... the stock is down 11% but nothing to do with earnings. The entire oil service space is getting hit as it is their turn to "rotate out" as student body moves over to healthcare. Flavor of the day changes often in these parts. I am going to use these dips to begin to broaden the portfolio into different spaces because it is now impossible to tell what the thesis of the day will be; one day it's consumer, one day it's reflation, one day (rarely of late) it's fear.

We last sold out of Atwood in early September 2008 [Sep 9, 2008: Bookkeeping- Closing Atwood Oceanics] - it imploded further along with the entire commodity space, and has since made a huge rebound with the rest of the market.


The stock opened up north of $28 post earnings but has since retrenched to $23s where I'm starting about a 1.5% stake.

If I'm correct we get a more sizeable correction I'll begin buying or adding to some names I've been waiting to pull the trigger on. But if I am wrong and this is "it" for the correction, I'll have some coverage on the long side. Today's drop, puts ATW below the 200 day moving average but this herd has moved so strongly, moving averages have meant nothing. If the "oil trade" is back on in the next few weeks, the horde will move all the stocks without regard for squiggly lines on charts. That said, I still am leaning to more downside - just providing "insurance" in case we reverse right back up.

6:30 PM EDIT
Atwood is notorious for the shortest earnings report I have in my watch list universe; along with a tiny P&L and that's all the fun without heading to the SEC website

• Atwood Oceanics, Inc., (NYSE: ATW - News) Houston-based International Drilling Contractor, announced today that the Company earned net income of $56,427,000 or $0.88 per diluted share, on revenues of $140,652,000 for the quarter ended March 31, 2009 compared to net income of $41,755,000 or $0.65 per diluted share, on revenues of $113,530,000 for the quarter ended March 31, 2008.
  
• For the six months ended March 31, 2009, the Company earned net income of $134,790,000 or $2.10 per diluted share, on revenues of $306,156,000 compared to net income of $80,304,000 or $1.25 per diluted share, on revenues of $224,578,000 for the six months ended March 31, 2008.

Here is a look at the much larger (and much broader portfolio) that are the earnings of Transocean (RIG)

• Offshore drilling contractor Transocean Ltd. on Wednesday said its first-quarter profit slid 18 percent, driven by one-time charges, including a $221 write-down on rigs held for sale. Quarterly earnings fell to $942 million, or $2.93 per share, from $1.15 billion, or $3.58 per share, during the same period last year. The charges hurt earnings by 82 cents per share.
• Revenue inched up to $3.12 billion from $3.11 billion in the prior-year period. Analysts forecast an average revenue of $3.10 billion.
• Utilization during the first quarter remained flat at 91 percent, the Switzerland-based company said, while average day rates rose 12 percent from last year.

This comment is why I prefer deep sea - even though all these commodity names move together in one huge horde

• Chief Executive Bob Long said the company is well positioned with nearly $36 billion of contracts in hand and a firm stake in the still-healthy deepwater market, though he forecast more weakness for shallow-water rigs.
  
• "It would be very difficult to build a compelling case for recovery in jackups as early as 2010," Long told analysts on a conference call. "There is just too much new capacity coming on without contract."

[Aug 8, 2008: Atwood Oceanics - Steady as She Goes]
[Jun 25, 2008: Atwood Oceanics Announces a New Contract for Atwood Hunter]
[May 8, 2008: Atwood Oceanics Short and Sweet Beat]
[Feb 7, 2008: Earnings Update on Our 2 Drillers: Atwood Oceanics and Diamond Offshore Drilling]
[Nov 29, 2007: Deep Sea Driller Atwood Oceanics Earnings Surge]

Long Atwood Oceanics in fund; no personal position

Where Homes Prices Crashed Early, Signs of Rebound & More Homes Get Multiple Bids

Don't classify me as a permabear; I just play one on the web. I just prefer to deal in facts rather than wild eyed, arm flailing punditry. As we have been predicting, and part of our investment themes have swayed to - we expected an increase in house "transactions" as prices plummet. [Mar 28, 2009: Some Real Estate Markets Warming Up] This is very different than a recovery, but the stock market does not discern. Ironically people are bidding up new home builders (who will benefit far into the future from what is happening now) and abandoning title insurers (who would benefit now and in the nearer future) - aye carumba. Somehow an smallish uptick in mortgage rates is devastating for title insurers but good for new homebuilders. Only in the horde trading of the stock market.

Two articles to reflect the NUMBER of transactions INCREASING (again, very different than prices rebounding) and after reading through what the FHA is allowing [May 6: WSJ - FHA Loans: The Next Housing Bust] - this is even less surprising. My contention - even as a "kinda sort bull" on housing is after this initial wave of first time buyers takes advantage of low home prices, and easy government terms we'll have a new stall. Because for all non renters you must sell a home to buy a home... and competing with home foreclosures on price is a massive issue for natural sellers, many of which are now underwater. You will see the shadow inventory (many of which are sellers who wish to sell once prices "rebound") provide a constant overhang for extended periods of time. But that is a very granular look and the stock market is not elegant and precise like that - it likes big flashly simple jock type themes spoken in caveman tongue: Homes Good, Buy Stock!

NYT: Where Home Prices Crashed Early; Signs of Life

• SACRAMENTO — Is this what a bottom looks like? This city was among the first in the nation to fall victim to the real estate collapse. Now it seems to be in the earliest stages of a recovery, a hopeful sign for an economy mired in trouble and anxiety.
• Investors and first-time buyers, the traditional harbingers of a housing rebound, are out in force here, competing for bargain-price foreclosures. With sales up 45 percent from last year, the vast backlog of inventory has diminished. Even prices, which have plummeted to levels not seen since the beginning of the decade, show evidence of stabilizing.
• Indications of progress are visible in other hard-hit areas, including Las Vegas, parts of Florida and the Inland Empire in southeastern California. Sales in Las Vegas in March, for example, rose 35 percent from last year.
• No one in Sacramento is predicting that local housing prices, which have been cut in half from their mid-2005 peak, are going to reclaim much of that ground anytime soon. “A period of price stagnation would boost a lot of spirits,” Mr. LePage said. (how far we've fallen - can you imagine the HGTV show? We've gone from "Flip That House!" to "Sit in That House!")
• (Nationally) The supply of unsold homes was about 10 months, a number that has changed little over the last year and is abnormally high. But first-time buyers were an impressive 53 percent of the market — and that was largely before a first-time buyer’s tax credit of $8,000 became available.
• Sales volume tends to recover long before prices. In fact, some analysts think price declines in many markets are accelerating. (key points; although again these are granular thoughts for a simplistic equity market) Sellers, meanwhile, are reluctant to lower their prices, preferring to bide their time. New construction is nearly nonexistent.
• (Sacramento) What drives the market here, then, are all those foreclosures. Two-thirds of the 2,092 existing single-family houses and condominiums sold here in March were bank repossessions, up from 8.5 percent two years ago, according to MDA DataQuick, a real estate research firm. (nationally it's about 50% of home sales that are foreclosures of late)
• When buying is cheaper than renting, markets begin to turn. At the current rate of sales, there is less than three months of inventory in the Sacramento market. In normal times, that would indicate a seller’s market. Except these are not normal times. The unemployment rate in the county is 11.3 percent, the highest in decades. That will prompt more foreclosures all by itself. Furthermore, banks have lifted various processing moratoriums that lowered foreclosures last fall.
  

This last point highlights what I've stated many times, we've had a backwards real estate market - usually real estate is the lagging indicator; it falls mid to late in a recession and into the recovery as people who lose jobs eventually lose their houses. What we've had so far is simply the "bad mortgage" housing bust; the traditional housing bust still is to come - although of course mitigated by a return to easy credit, low down payment loans offered by FHA, along with historical low mortgages offered by Banana Republic Ben Bernanke)

• These two factors yielded a rise in the number of default notices filed in Sacramento County in March to 2,819, a record. Thousands more bank-owned houses are likely to come to market this summer and fall.
• “That will stall any progress toward stability,” said Michael Lyon, chief executive of Lyon Real Estate. “The prospects for a recovery are fool’s gold.”

So essentially as first time buyers (and investors) come in to snap the first wave of foreclosures and drive inventories down - on comes the next wave. The coming waves will have a lot more to do with the recession than simply bad mortgages.

Via USA Today: More Houses Get Multiple Offers

• More homes for sale are attracting multiple offers as buyers pursue lower-price homes and banks low-ball asking prices to attract competing bids on foreclosures. Multiple bids have picked up in recent months in California and other states hit hard by foreclosures and steep price drops, real estate executives say.

Again it is so funny how sign posts that once meant one thing don't signal the same things today - just as in the story above we have almost the exact same phrasing "usually signify ABC, but not true now"

• Multiple bids usually signify a market in which prices are rising and buyers outnumber sellers. That's not true now, given rampant foreclosures, still-falling prices in many regions and low demand for higher-price homes.
• The competition is driven by prices — California's are down 39% from a year ago, CAR says — low mortgage rates and a new federal tax credit of up to $8,000 for some first-time buyers.

Hey, Mr. Lyon has been quoted in this story too!

• He says banks have lured multiple bids by setting below-market prices. Lyon cautions that government steps to curb foreclosures have delayed some. "People are perceiving that they are running out. But there will be more," he says.

We are in year 3 of this disaster of epic magnitude - it won't be as bad as the past 2 years, but we have a long way to go (even with the historic steps of handouts by each branch of government ex judicial) before things get back to any semblance of normal. Even better, with what the FHA is doing now, we'll have a new wave of foreclosures down the road to supplement the current generation.

[Apr 23, 2009: As More Homes Fall Underwater Trapped Americans Cannot Migrate]
Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
[Mar 25, 2008: WSJ - Wave of Foreclosures Drives Prices Lower, Lures Buyers]
[Dec 8, 2007: Analysis - What Should Housing Prices Be Today?]

Bookkeeping: Continuing to Build Allegiant Travel (ALGT) Position

As is the typical situation as oil goes up, airlines go down - we said this would happen even though Allegiant Travel (ALGT) managed to make money last year at $140+ oil. This is just how the program trades work, so I continue to build a position here, essentially every $2-3 down I am adding to this stake. I hope to be able to buy down there at $38, but thus far I've pushed the position up to a 4% stake with a series of buys yesterday and today. The stock is dirt cheap but people continue to pile into forward 30, 35 PE stocks because thats where the "hot money" is.


There was the large PAR investment divestiture which led to the volume surge yesterday, but essentially you can plot these two charts in inverse. The market appears to be going with my stagflation... err, return to growth with inflation rather than Hugh Hendry's deflation scenario as judged by the spike in all commodities. Doesn't mean it is correct in the long run, but the market is always "right" in the near term.... inflation it is.

I wrote a piece on greenfaucet this week about bursting inventory of crude [Rising Reserve of Unused Oil Puts Strain on Storage] - and we still have bursting inventory of natural gas

• Natural gas in storage was 23.3 percent above the five-year average of about 1.56 trillion cubic feet, and 34 percent above last year's storage level of about 1.43 trillion cubic feet, according to the government data.

but it does not matter; the market is "forward looking" and not full of speculators. Or when you throw fiat paper onto the world, all assets get inflated over their correct prices.

Now again this market is now under the Goldilocks scenario - we can have just enough inflation to signal everything is fine and a return of growth is coming, but not enough to hurt the consumer. Larry Kudlow must be smiling somewhere. As I drive around and already see $2.39 gas, I can tell you local residents are not smiling as much. I continue to cross my fingers for a return of $3.50 gas while the world is in recession - I'd just love to see Ben on Capital Hill answering that line of questions.

I'm shooting for at least S&P 890 on the downside for S&P with further progress to 870 highly probable if Goldman / Treasury humors me; at which point I'll be rather ambivalent about the market in either direction but assuming up, up, and away we go based on the market influencing mood and "confirming" that all the things government is doing is "right" (dogma). I find the market very pricey and many individual stocks rich, but valuation has simply not mattered in this current situation so I am going to throw it to the side as well... I've left a ton of profit opportunities on the table thinking "wow, should I really buy that at 37x earnings?" only to see said stock rocket up another 40%.

We are now pricing in the "we can't have -6% GDP forever or else we'd have no economy by 2013" and "we can't lose (government statistics) 650K jobs a month or we'd be at 15%+ unemployment by mid 2010" and "retail sales will recover from -8% to -15% Year over Year" (comparisons versus last year will start to get very easy soon). However on retail sales, as with the hotels and all these other guys showing "higher sales" or "higher occupancy" remember in the end it comes down to profit. Anyone can goose occupancy or "sales" with huge discounts. Many hotels (REVPAR) are dropping prices 30%+ to drive occupancy, and stores have been slashing prices to draw in sales. That's different from earnings. We say this all the time, but all people worry at this moment about is seeing the %s "improve" no matter what it means on the bottom line. For now that's good enough. And the ability to chop so many heads has allowed for profits (or losses) to stink, but be "better than expected". The bar is very low now, but at some point the bar will change. Knowing when is impossible - it's all about sentiment. The conversation shall now shift from "will there be a recovery" (of course there always will be) to "what shape will it be?" I see nothing to change my stance even with an avalanche of sickening policies to urge consumers with debilitated balance sheets to continue to "spend like the good ole days". After this bounce from unsustainable -6% GDPs I expect a lot of blah as we move to the new normal. This should supress PE multiples but indeed the exact opposite is happening at this moment.

My trusty DSTI, ASTI barometer worked again - they explode upward and always within 1-3 days solar stocks and the market overall falters. But we still have 4 hours so we'll see where Goldman Sachs / Treasury believe is an appropriate level to put the S&P 500 today.

Long Allegiant Travel in fund and personal account

Ocwen Financial (OCN) With Large Beat

Ocwen Financial (OCN) is my largest long holding and they beat estimates smartly this morning. This is a stock on no one's radar and as people pile into unprofitable, debt laden companies - Ocwen just sat there doing nothing for us of late. One day when fundamentals mean something, I suppose we'll do ok again - we have a nice pop today but really what is +9%. That's 4 minutes of trading in a casino, dry bulk shipper, REIT, or financial. Oh well, solid results.

Via Reuters

• Ocwen Financial Corp (OCN), said first-quarter net income nearly tripled on lower interest expenses and a narrower loss on trading securities. The company earned $15.1 million, or 24 cents a share, compared with $5.3 million, or 8 cents a share, a year earlier.
• Interest expenses for the quarter was $16.7 million, down from $26.1 million in the year-ago period. Loss on trading securities was $380,000 compared with a loss of $12 million a year earlier.
• Ocwen has recently turned its focus away from Wall Street, where it used to benefit from the heady production of risky home loans, to the nation's capital, where policy-makers are busy tearing apart mortgage market conventions in the name of foreclosure prevention.
• "We kept more people in their homes and returned more loans to performing status than in any prior quarter in our history while reducing operating costs by 18 percent," Chief Executive William Erbey said.

Full report here - expectation was for 17 cents and with the government doing everything in their power to subsidize financial companies to promote bad behavior, I expect more beats as we move forward

Ocwen Financial Corporation is a leading asset manager and business process solutions provider specializing in loan servicing, special servicing and mortgage services.

[Apr 22, 2009: Fight the Power - or at Least Hedge Against It with Ocwen Financial]
[Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans]
[Apr 16, 2009: Bookkeeping - Starting to Ramp Up Purchases in Ocwen Financial]
[Feb 3, 2009: Freddie Mac to Outsource Delinquent Collections - Ocwen Financial Chosen to Start]
[Jan 9, 2009: Bookkeeping: Starting Ocwen Financial]

Long Ocwen Financial in fund; no personal position

Bookkeeping: Adding to Capital One Financial (COF) Short

I need to start thinking in complete inverse here, if only I had been long Capital One Financial (COF) - the stock gapped up another 20%... I said facetiously if not $20, why not $25. So I suppose if not $25 why not $35. Every $5 I am going to add a bigger swatch. I am up to about a 5% short position and will take this to 15% if we get up to $45-$50.

I love the stress test; now the government says instead of converting preferred to common which the banks protested, they will now allow to convert preferred to convertible preferred ... this is so laughable at this point. Banana Republic. Whatever the banks ask for, they get.

As I said yesterday I am now going to get deeper on the short side with upside targets of S&P 950-975. The closer we get the higher I'll go into the short end. There is now complete and utter complacency on the long side just as there was on the short side 2 months ago. Wake up every morning, go long and win.

p.s. if you want to see other workings of the invisible hand check out futures at midnight versus 8:00AM forward. I have been watching this over the past year, and the past month if you bought futures at midnight and sold at 9:35 AM I think the success rate is 80%+. Many days it nets you 1-2%. Because there is such a rush by "someone" to bid up futures in the morning day after day, after week after week. Apparently the normal market hours are not long enough for "someone" and he/she needs to buy futures furiously every morning. I wonder whom.

p.s.s. on a quite related note, I saw a report yesterday on Bloomberg that Goldman Sachs (GS) which now is doing about 20% of all trading volume recently, only had 8 days they lost money in their trading operation in the entire first quarter. Thats >80% win percentage. Apparently the traders on their desk are of a level no other desk has... clearly the idiots at Morgan Stanley (MS) have no skill. See, when you are the one who has a big hand in which way the market goes each day, you tend to win a lot. See Banana Republic comment above.

Short Capital One Financial in fund and personal account

Corporations Who Moved from Full Time to Temp are now Going Freelance; Teens Competing with Adults for Summer Work

Good news displayed below with no editorial comments as readers know my beliefs on the job market. However keep in mind when the employment numbers are poor, simply label them "backwards looking" but if they are "better than expected" label them a green shoot. We indeed, can have it both ways.

Via WSJ: Negotiating the Freelance Economy

• Ms. Haden, of Fayetteville, Ark., is among a growing number of professionals who are making ends meet by working on a project-by-project contract basis. Even as permanent- and temp-job opportunities are shrinking, the amount of contract work to be found on freelance-jobs sites is expanding. What's more, it's moving beyond computer-programming and graphic-design gigs for small employers to include listings from larger companies and assignments in fields such as accounting, law, engineering and sales.
• At the same time, the number of U.S. workers employed by temporary-help-services firms in March fell 27% to 1.8 million from the same month in 2008, according to the Labor Department. (temporary workers are easy to get rid off, but even they are now too expensive for corporate America) (similar situation seen in Japan) [Oct 28, 2008: Pooring of Japan Too?]
• As the recession takes hold, more employers are using freelance workers to avoid the expenses associated with hiring permanent staff, says Fabio Rosati, chief executive officer of Mountain View, Calif.-based Elance. "The power of online work is that it's immediate, cost-effective and flexible," he says. (by flexible we mean, even more easily chopped off then temporary workers)
  
• Indeed, freelance workers are often cheaper and more flexible than temp workers, whose jobs, though short-term, tend to be full-time, subject to temp-agency fees, and bound by agency restrictions, such as limits on the permanent hiring of temps.

This used to be the domain of computer type of workers but it's expanding...

• Freelance-job sites also say they're seeing more midsize and large employers posting assignments, and the jobs have expanded into more business functions, such as finance, manufacturing and law. For example, roughly 1,700 new jobs were added to the sales and marketing category on Elance in March, a 50% increase from a year ago. That's led to new types of contract workers, too.

Some downfalls of this new "workforce adjustment"

• ... But many other sites hold individuals fully responsible for billing clients and collecting payments.
• There are other downsides to freelancing, from the lack of health coverage and paid time off to the need to make your own retirement contributions. Striking out on your own also requires regularly searching for and vetting potential new assignments, while ensuring that you complete on time the ones you've already secured.

USA Today: Teens Compete with Laid Off Adults for Summer Jobs

• Teenagers who lined up in beige folding chairs at a Six Flags amusement park job fair last month continually repeated the gripe: The hunt for summer work is brutal.
• The hiring environment looks like it'll be even harsher than last summer, which was deemed the worst teen employment market in six decades.
• Last June through August, just 32.7% of teens worked, down from 45% for the same period in 2000, according to seasonally adjusted data from the U.S. Bureau of Labor Statistics. Unemployment for 16-to-19-year-olds hit 21.7% in March, up from 15.8% last March, according to the bureau. That's the highest rate since 1992.
• Six Flags, which has 20 parks across the U.S., Mexico and Canada, has "definitely seen more adult (applicants) this year," says spokeswoman Sandra Daniels. "We've seen retirees. We've seen people who have been laid off,"
• ... here she was on a Saturday morning vying against her peers — as well as laid-off older workers and cash-strapped retirees — for work.
• Amusement parks "are seeing more job applicants than any year in the last 15 years" — at a ratio of five applicants for each open job, says Dennis Speigel, president of the International Theme Park Services consulting firm.
• Would-be teen lifeguards for Volusia County, Fla., recently faced strong adult competition for a seasonal job that comes with a $500 bonus and a $9.37 hourly wage. "For the last couple of years, our average age was about 17 years old" for the tryouts, says Beach Patrol Captain Scott Petersohn. But this year, some contenders were decades older.

Of course these are anecdotal and most likely in no way reflect what is really going on out there on Main Street. Plus ... "it's backwards looking".

Blackstone Group (BX) Narrows Loss

There used to be a time when you could tell a stock was reporting because of outsized movement in the stock... nowadays outsized moves are a daily occurrence so actual earnings releases are lost in the mix. Blackstone Group (BX) reported yesterday morning; the results were ok - essentially we started this position as a play on government largess. [Mar 31, 2009: Bookkeeping - Starting Blackstone Group] The theme has truly caught on as even the public semi hedge funds / semi private capital firms have exploded higher.


I chose Blackstone because it was actually the conservative play in the group with a good chance of profits in the future - but as with every sector during this run, buying the most speculative would of done you far better. Fortress Investment Group (FIG) has had a run of epic proportion... you can tell we are back to old times because yesterday FIG ran up well over $1 in after hours just from a mention on "Fast Money" TV show.

On to Blackstone's report

• Private equity company Blackstone Group LP (BX) reported a quarterly loss Wednesday and said its ability to do leveraged deals was still limited, but it topped Wall Street forecasts and paid a full quarterly distribution of 30 cents a share, sending its shares up 10 percent. Blackstone's chief operating officer, Tony James, said on a conference call the company should be able to make a full distribution of $1.20 per share this year, absent any big surprises.
• Blackstone, which makes its money buying distressed companies and then selling them for a profit, said it lost $231.6 million, or 84 cents per common unit, compared with a loss of $251 million, or 95 cents per common unit, during the same quarter last year. The company's economic net loss after taxes, which excludes compensation charges tied to its initial public offering, was $82.4 million, or 7 cents per share, during the first quarter, compared with an economic net loss of $66.5 million, or 6 cents per share, during the year-ago quarter. Blackstone went public at the peak of the private equity boom in June 2007.
• Blackstone said total revenue fell 31 percent to $47.1 million from $68.5 million during the year-ago period.
• "The world is an uncertain place right now," James said. "We believe that we'll have the fee-related earnings ... to make the dividend for the full $1.20. But we're also pretty pessimistic about the world." (this is where I'd normally laugh but we are in the Twilight Zone - so ignore his words and buy stocks)
• James said the company wrote down the value of its private equity portfolio by 3 percent in the quarter, and wrote down the value of its real estate portfolio by 19 percent. Private equity firms are obliged to value their companies as if they were to sell them today, rather than years in the future. (unlike banks for example - post FASB changes, which kicked off this rally)
• James said Blackstone has about $27 billion of "dry powder," meaning capital available to invest. He added that it has commitments from investors of about $8 billion for its sixth buyout fund, which it is in the process of raising. James said on the conference call that capital for buyouts is still scarce but that Blackstone could get debt for deals if the transactions were modest in scale.

These private equity guys were the masters of the universe just 2 years ago in spring/summer 2007 so it is interesting to hear their take... surprisingly more dour than the clarion call for the punditry.

Via AP

• "The underlying economy continues to decline," James said, adding that he stands by a statement he made about a year ago that the current economic turmoil is deeper and more severe than those in recent history. The timing of a turnaround is still uncertain, James added.
• Blackstone generated $344.6 million in management and advisory fees during the first quarter, a 7 percent increase compared with the same quarter a year earlier. Assets under management that generate fees fell slightly to $92.2 billion at the end of the first quarter, compared with $92.9 billion at the same time last year.

1. Blackstone's corporate private equity division revenue turned positive in the first quarter because of performance fees earned in one of the firm's funds. The unit generated $68.4 million in revenue.
2. The real estate division reported negative revenue of $211.9 million because of a decline in the value of certain investments. Negative revenue can occur when a firm has to reverse gains it previously reported tied to an investment.
3. Revenue in marketable alternative asset management more than tripled to $99.5 million amid improving performance fees and a decline in investment losses,
   
4. ....financial advisory revenue improved 29 percent to $92 million because of an increase in restructuring and reorganization advisory services.

At this point the stock is so extended we essentially have nothing but a holding position; extended stocks mean nothing in the current euphoria and people bid things that have run 30-50% in a few days, up more and more. This is fun while it lasts, but it creates massive air pockets below when (some day) the market goes down again (circa 2011 I suppose). I was buying in the $7s and even at $11 it passed my hopes for the next few months. No idea where the market will value it since there is little visibility on earnings - a lot of moving parts here.

Long Blackstone Group in fund; no personal position

Simon Property Group (SPG) Dilutes Shareholders for 2nd Time in 2009

This will be quite an era to remember for so many reasons; I will look back fondly on these days when companies issue massive equity dilutions and investors scaled buildings to buy the stocks instead of fleeing for the hills as they have done in my previous years in the market. As we've stated before, we "get it" - by diluting shareholders to extinguish debt the risk profile goes down in the near term. But in the medium to long term, all these extra shares create massive overhangs - earnings PER share is how stocks (used to be) valued. (now we use emotion, preferably rampant joy and headcounts of green shoots) One day we will get back to valuations and people bidding stocks to the stratosphere will see that a constant amount of INCOME divided by a massive amount of new stock will lead to far lower Earning PER Share as well as slower EPS growth. But that's a problem for another year apparently.

I present to you Simon Property Group (SPG) which tonight diluted its shareholders for the 2nd time... in 2009 alone! (actually the 2nd time in 2 months!) We see this across the board from Dow Chemical (DOW), US Steel (X) [to name two in the past week alone] but the REITs have been especially egregious employers of this methodology. Next will come the banks as the government has allowed them to short squeeze their way to much higher stock prices. And we'll clap and cheer all the way.

• Simon Property Group Inc., the biggest U.S. shopping mall owner, plans to sell shares to the public for the second time this year, raising more than $800 million that may be used to repay debt or fund acquisitions.
• Simon is capitalizing on renewed investor interest in real estate investment trusts as shareholders anticipate economic recovery. The company’s stock has soared 67 percent since it said March 20 it planned to sell 15 million shares at $31.50.
• “The market has given all REITs an opportunity,” said Alex Goldfarb, an analyst at Sandler O’Neill in New York. “In this day and age, a dollar in the hand is worth more than $2 in the bush.”
• Simon has about $8.4 billion in debt maturing through 2012, according to data compiled by Bloomberg.
• Chief Executive Officer David Simon said in March he planned to “hoard and warehouse capital, I think, so ultimately we can continue to be a leader in this industry, and ultimately take advantage of external opportunities once we see opportunities in the marketplace.”

I have to congratulate Simon Group - the stock, despite two waves of dilution in 2 months, is back to highs of the year and working its way to surpass levels before the fall 2008 crash. That's remarkable. Simply remarkable. One little green line to work through and away we go to the next leg of nirvana.

No position

Natural Gas Continues its Run; XTO Energy (XTO) Reports

We've been discussing natural gas the past two weeks, first as a complete laggard that was not participating; then as a speculative reversal

I only point this chart out to disprove anyone who says speculation has nothing to do with these commodities... clearly the supply / demand dynamic has shifted 20% in just over a week. ;)

That said, that is one nice "double bottom". Nice to see XTO Energy (XTO) bounce - they who need not give CEO $100M+ have a nice report. They beat analysts expectations even if you do include the 1x charges.

• Shares of XTO Energy(XTO Quote) got a sharp boost Wednesday from earnings that exceeded expectations on increased production during the first quarter, as well as encouraging oil-inventory data from the Energy Department.
• Excluding items, XTO said adjusted earnings for the quarter came in at $531 million, or 91 cents per share. Analysts polled by Thomson Reuters were looking for EPS of 77 cents in the quarter. One-time items in the just-ended period include $79 million in write-downs on the value of XTO's oil and gas properties. Including that charge, XTO earned $486 million, or 83 cents a share, compared with $465 million, or 92 cents a share a year earlier.
• Revenue, meanwhile, jumped 29% to $2.16 billion, up from $1.67 billion in the prior-year period and higher than analysts' targets of $2.12 billion.
• The Fort Worth, Texas, oil and gas producer also hiked its growth forecasts for the year, saying it believes gas production in 2009 will increase 16% over 2009.
• The company turned in the surprising results even as prices declined -- the average gas price in the first quarter fell 6% -- but the company offset those pressures with production volumes that ratcheted higher compared with the year-ago period. Oil drilling in shales was particularly strong, the company said.

EOG Resources (EOG) continues its nice run. Devon Energy (DVN) also had an excellent day - another throw a dart into the right sector and watch the student body trading take over. I am not a chaser type generally but chasing has been 100% the absolute way to play anything the past 4-6 weeks.


p.s. Cisco (CSCO) beat after the bell and yes I was "shocked" and "surprised" they did it. See you 2% higher on the S&P tomorrow. After that - 27 more sessions of 2% each to all time highs.

No positions

Bookkeeping: Selling Half Morgan Stanley China A Share Fund (CAF)

I am now going to be weighing more heavily on the short side of the book building that side from here (920) to S&P 975 if necessary. It "feels" like late February but in inverse - no one wants to be short (long back then) and anyone who thinks about is an idiot - as the market only goes in one direction. (down then, up now) I have 2 specific stocks in the solar space (symbols DSTI ASTI) that when they run almost always mark the height of insanity - both are exploding now. As countless 2nd and 3rd tier auto suppliers go out of business (government is supporting the 1st tier) this summer and fall, restuarants and shops around those suppliers die, and auto dealerships close their doors - we'll still have our 0% car financing, $6000 government supported Chrysler rebates, and 4.7% no money down FHA loans to get us through. So don't despair - GDP should explode higher on these figures as it did in Q2 2008 with a tiny $170B Bush rebate... that's peanuts to what we are going to have now. Countless unemployed will enjoy driving around listening to the stock market racing up on their way to the mall.. or to the grocery store - preferably Whole Food Markets (WFMI) of course.

I could be a few hours, days or weeks early but at this pace we literally will reach all time highs in a month. Every 10 S&P 500 points from here I will layer in another, larger batch of shorts. I will say "uncle" when we cross all time highs (north of S&P 1400) which should come by Father's day at current pace. The market is 38% *straight* off the low. We talked about how the rubber band, reversion to mean trade would happen when the S&P was at an all time divergence of 40% from 200 day moving average. We are now about 5% below the 200 day. In just over 8 weeks.

Tonight, Cisco (CSCO) reports - let me preview it; they missed on revenue, but beat on the bottom line. They cut a lot of workers. They see "stabilization". This will "shock" people in delight. Maybe we can rally 28 more days on this same news item.

Friday we will only lose 575,000 jobs although we will revise upward the numbers the bulls were giddy about (and took as gospel) 30 days ago. This will "shock" people in delight. And then in 30 days we will revise upward the 575,000. If we can rally 28 more days off the same news, so be it.

Tomorrow, we will have the bank stress test results and they will "shock" people in delight... oh wait, they were all leaked out today. That's ok, we'll officially be "shocked" tomorrow.

Please go fill up your gas tonight on the way home, and please ring the bell and tell your neighbors of the $3 gas coming in a few weeks and to enjoy it as our consumer discretionary recovery will be stoked by $3 gas.

Carry on.

p.s. I threw away half my Morgan Stanley China A Shares Fund (CAF) into the bull's mouth here

Long Morgan Stanley China A Shares Fund; no personal position

2% a Day will Take S&P500 Back to All Time Highs in 28 More Sessions

Let's do this people.

WSJ: FHA Loans the Next Housing Bust

Sometimes you just want to throw up your hands in the air... we just exited a disaster caused by low to no money loans to high credit risk borrowers - that give home buyers almost no skin in the game & a system where all lenders had to do was originate the loan to get paid ...then ship it off to someone else to bear the risk. And now, as a solution? We are institutionalizing the practice via the Federal Housing Administration (FHA). I don't get a system where we learn nothing from past mistakes... no actually I do get it, because as the banks ask, so will the politicians jump.

This will be the taxpayer losses of the next few years. We warned about the fraud that was coming in December [Dec 11, 2008: Freddie, Fannie Considering Waiving Appraisals for Refinancing]

As for FHA? Cmon now... we are going from semi government (Fannie/Freddie) to fully government "efficiency"? Cripes.

• ...some housing industry experts worry that F.H.A. may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.
• Over the years, the Department of Housing and Urban Development, which oversees F.H.A., has been slow to weed out mortgage lenders that abuse or defraud the agency and profit through means like certifying unqualified borrowers. (the circle of life - isn't this how we got here in the first place?)
• There are also growing concerns that subprime fraud artists have set their sights on F.H.A. “It looks like an incoming tsunami,” said HUD’s inspector general, Kenneth M. Donohue.
• The fallout for both homeowners and taxpayers could be substantial if F.H.A. becomes the next housing domino to teeter.
• And a HUD audit released this month suggests that fund may soon face trouble again; over the fiscal year, its capital ratio dropped to 3 percent, from 6.4 percent, reflecting a sharp increase in claims. By statute, that capital ratio must be at least 2 percent.

• 
  

It's not a surprise - we said Fannie, Freddie, and FHA will be used as the tool to prop up prices by offering "easy terms"... but it is so disheartening.

Via WSJ

• Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn't well known is that a parallel subprime market has emerged over the past year -- all made possible by the Federal Housing Administration. This also won't end happily for taxpayers or the housing market.
• Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.
• ... taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent -- nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in "serious delinquency," which means at least three months overdue.
• The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law FHA must carry a 2% reserve (or a 50 to 1 leverage rate), and it is now 3% and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts.
• How did this happen? The FHA was created during the Depression to help moderate-income and first time homebuyers obtain a mortgage. However, as subprime lending took off, banks fled from the FHA and its business fell by almost 80%.
• The bill that passed last summer more than doubled the maximum loan amount that FHA can insure -- to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house. This increase in the loan amount was supposed to boost the housing market as subprime crashed and demand for homes plummeted. But FHA's expansion has hardly arrested the housing market decline. The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent. (we discussed this in detail last year when it passed, saying "temporary" would change to "permanent" once people saw just how bad the housing bust would be)
• Even more foolish has been the campaign to lower FHA downpayment requirements. When FHA opened in the 1930s, the downpayment minimum was 20%; it fell to 10% in the 1960s, and then 3% in 1978. Last year the Senate wisely insisted on raising the downpayment to 3.5%, but that is still far too low to reduce delinquencies in a falling market. Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser's equity can be very close to zero. With even a small drop in prices, many homeowners soon have mortgages larger than their home's value -- which is one reason FHA's defaults are rising. (this sort of program, with almost nothing down in an environment when housing prices are falling rapidly is basically a recipe for "walk aways" - people are simply renting not owning in reality)
• Every study shows that by far the best way to reduce defaults and foreclosures is to increase downpayments. Banks know this and have returned to a 10% minimum downpayment on their non-FHA loans.
• In a rational world, Congress and the White House would tighten FHA underwriting standards, in particular by eliminating the 100% guarantee. That guarantee means banks and mortgage lenders have no skin in the game; lenders collect the 2% to 3% origination fees on as many FHA loans as they can push out the door regardless of whether the borrower has a likelihood of repaying the mortgage. (does this sound familiar to you? banks pushing out loans that they have zero responsibility for? Before it was securitization... now its simply the taxpayers obligation)

Think about this stat

• The Washington Post reported in March a near-tripling in the past year in the number of loans in which a borrower failed to make more than a single payment.

This is the farce that home buying has become - instead or renting for 6 months with a lousy landlord looking over you "buy a home" and live rent free until they kick you out. Bought and paid for by taxpayer. Keep in mind all you need is FICO 620 to qualify for FHA.

• The Veterans Affairs housing program has a default rate about half that of FHA loans, mainly because the VA provides only a 50% maximum guarantee. If banks won't take half the risk of nonpayment, this is a market test that the loan shouldn't be made.
• These reforms have long been blocked by the powerful housing lobby -- Realtors, homebuilders and mortgage bankers, backed by their friends in Congress. They claim FHA makes money for taxpayers through the premiums it collects from homebuyers. But keep in mind these are the same folks who said taxpayers weren't at risk with Fannie Mae and Freddie Mac.

So as you read about all these home sales we are cheering, consider 33% of all homes bought "to live in" (not as investments which don't quality for FHA loans) are now originating under this program. So the half a trillion portfolio is growing by leaps and bounds each month. And then talk to me about the coming house recovery. It's a mirage - many of these homes (de facto rentals) will be handed back in 9, 12, 18 months; and the taxpayer will be on the hook for the obligation. But at least we are removing the middleman this time; no need for banks to take the hits on their balance sheets - the losses will be suffered directly by the taxpayer without making a pit stop.

I cannot stress enough: this is HOW WE GOT HERE IN THE FIRST PLACE - mortgage originators who had ZERO skin in the game had NO REASON to vet borrowers because it was NOT their obligation. They get paid simply to make the loans. All they had to do was bundle the loans in securitizations than sell the snake oil, labeled as low risk invesments, to buyers across the globe. That required new suckers to be born - now we can find no new suckers. Well, only 1. The US Taxpayer. And so we begin again the same path.

I give up on this topic. Buy stocks - everything is fine. Unlimited losses borne by taxpayer can fund everything in America. I'm not sure what level is below disgust, but that's where I am at.

As Drought Sears California, People Cutting Back on Haircuts

I love the consumer discretionary trade here... as long as you don't read news stories from around the country and go by the playbook of "stocks to buy when we come out of recession", it's a winning trade. I am posting this story for 2 reasons - (a) to contribute to the green shoot recovery, although indeed it is difficult to grow green shoots in drought conditions, and (b) as long time readers know I think fresh water will be the natural resource the wars of 20,30 years out will be fought over - rather than oil. [Jun 20, 2008: World Population to Hit 7 Billion by 2012] [Mar 24, 2008: New Limits to Growth Revive Malthusian Fears] [Jun 18, 2008: The Ultimate Shortage- Water]

Anyhow disregard this news as a stock trader because "the charts are excellent" but I just like to pass along some stories from "main street" for amusement. [Apr 3: The Current (and Coming) Disassociation Between Economics and Stock Markets] Remember, Wall Street is not Main Street until it comes to bailouts, and then "we're all in this together so please send us your tax dollars".

Via Bloomberg

• The drought in California’s Central Valley is so severe that it’s drying up money for haircuts. One customer waited six months to get a $10 haircut, then asked to have his head shaved so he could wait another six months, said Armando Ramirez, a barber in Firebaugh.
• “People come in and say, ‘Hey Armando, how about I give you a dollar for a cut, it’s all I have,’” said Ramirez, 63, who has owned his shop for four decades. “Saturday is supposed to be my busiest day, but I’m lucky if I get one customer before I go to lunch.” Ramirez, the barber, said he tried to sell his business earlier this year but didn’t find any takers.
• Businesses are casualties of the three-year drought that is forcing farmers to leave hundreds of thousands of acres fallow in the Central Valley, the semi-arid agricultural region running 400 miles (600 kilometers) down the middle of the state. The drought may cost the valley 35,000 jobs and $959 million in lost revenue this year.
  
• “I’ve never seen a drought this bad,” said Bob Diedrich, who has been farming near Firebaugh, 140 miles southeast of San Francisco, since 1973. “It’s putting a chokehold on us.”
• The U.S. Bureau of Reclamation in February cut off water deliveries to Central Valley farmers for the first time in 15 years because reservoir levels were low.
• “Our mom-and-pop shops are hurting,” said Hope Morikawa, director of the Hanford Chamber of Commerce, 30 miles south of Fresno, which has lost dozens of its 700 members this year and began offering its services for free.
• Stacey Marshall can look out the window of her women’s clothing boutique in Hanford and see four empty storefronts. “We’ve lost the scrapbook store, a cigar store and the bakery,” said Marshall, whose sales are dropping at a rate of about 13 percent this year. “The wine cellar and Boogie’s, a restaurant, closed.”
• Snowpack runoff is forecast to be 66 percent of average in the year ending Sept. 30, following years of 58 percent and 51 percent.
• In the heart of Central Valley, half of the 30 communities in Fresno County had unemployment rates above 20 percent in March, when the state rate was 11.5 percent.
• Farmers in the Westlands Water District, which includes Fresno County and part of Kings County, are planting about 200,000 acres, down from 500,000 in wetter years, said Sarah Woolf, spokeswoman. It’s the largest agricultural irrigation district in the U.S., she said.
• California’s agricultural output ranks highest among U.S. states. Now some Central Valley residents are going hungry. “People don’t have enough to eat, and there are no jobs,” said Phyllis Baltierra, 74, the community services coordinator in Firebaugh, where unemployment is 28 percent. More than 1,000 people showed up for a food giveaway in March, compared with 200 in July or August, she said.
• “We’re down to bottom here,” Baltierra said. “People are moving in with each other because they can’t afford to live by themselves.”
• Mayor Robert Silva is helping organize food drives in nearby Mendota, where 85 percent of jobs are related to agriculture and unemployment exceeds 40 percent. “My community is suffering,” Silva said. “There are a lot of tragedies going on here.”

Second derivative improvements everywhere. Thankfully government employment reports are still showing job creation in small business across the country or else I'd have to believe stories like this from Bloomberg.

Ken Heebner's Trading for CGM Focus (CGMFX) Tripled in 2008

I am glad to see this by Ken Heebner; it makes me feel almost normal that I've had to turn over positions so quickly to survive latter 2007 and 2008. He was a bit early on his move into life insurers at the end of 2008 as they suffered terrible losses in the downturn of Jan-Feb 09 [Feb 18: Ken Heebner's Fourth Quarter 2008 Moves] but assuming he held on, it is working out splendidly for him now. We should have an update of March 31 holdings next week, although by now (6 weeks later) they may have all changed. ;)

Via Bloomberg

• Kenneth Heebner, the top-ranked U.S. fund manager in the past decade, almost tripled the value of trades by his CGM Focus Fund last year as he shifted out of oil stocks and invested $3 billion of new shareholder cash.
• Heebner bought and sold $82 billion of securities, producing $71 million in commissions for brokerages including Citigroup Inc. and Merrill Lynch & Co., according to an April 27 regulatory filing by his Boston-based fund. He paid $18 million in commissions on $29 billion of transactions in 2007.
• Investors poured into CGM Focus during the first six months of last year, after it returned 80 percent in 2007, the most among U.S. diversified stock funds. That forced Heebner to increase stock purchases. As returns fell through 2008, shareholders bailed out, requiring the manager to sell assets.
  
• CGM Focus ended the year with a 48 percent loss, compared with a 37 percent decline by the Standard & Poor’s 500 Index.
• Martha Maguire, a spokeswoman for Capital Growth Management LP, said the increased trading and commissions resulted from inflows and outflows of investor funds. “The brokerage transactions reflect buying and selling,” she said.
• CGM Focus shareholders withdrew a net $347 million in the second half of the year, according to a Feb. 27 filing with the U.S. Securities and Exchange Commission. The fund had about $4.2 billion in assets on Dec. 31. The withdrawals have continued into 2009, according to Chicago-based research firm Morningstar Inc. Investors removed about 5.3 percent of year-end assets, or $219.2 million, from January through March, Morningstar estimated.
• “What happened in ‘08 was Ken got whipsawed,” said A. Michael Lipper, the managing member of LSF Capital Advisors LLC, a Summit, New Jersey, firm that invests in financial-services companies. “With his very good long-term record, money came in and some of that money was hot money that was very sensitive to short-term performance.”
• Known as “Bigfoot” for his large movements in and out of stocks, Heebner sold CGM Focus’s stakes in oil and metals companies in the third quarter of 2008, incurring “major losses,” according to the fund’s annual report. CGM Focus invested in financial-services companies during the quarter, only to get hit with more losses when those stocks slumped. By the end of the year, it held stock in insurers, drugmakers, and metals and mining companies.
• The fund had a portfolio turnover rate of 504 percent last year, according to the annual report filed with the SEC on Feb. 27. The average portfolio turnover rate for a diversified U.S. stock fund is 97 percent, according to Morningstar. The turnover rate is calculated by dividing the lesser of security purchases and sales by average monthly assets.

It actually says a lot about the short term type of culture we've built when even the average fund is literally turning over their entire portfolio once a year. Everyone is now a swing trader. But that's the market we have - so adapt or die.

[May 28, 2008: Ken Heebner - America's Hottest Investor]
[Sep 10, 2008: Ken Heebner to Launch Hedge Fund]
[Nov 14, 2008: Ken Heebner Moves into Financials Big Time]

Bookkeeping: Adding to a Lot of Short Hedges

I added to a lot of shorts north of S&P 910 today; mostly the ETF types but also Capital One Financial (COF) - target is below S&P 890 within next 48 hrs

We now are reaching the point of ludicrous when people are running up $1.50 auto suppliers - people on Wall Street have no grasp how debilitating Chrysler and GM shutdowns are going to be on the supplier base even with government spending $5B to prop them up.

Green shoot of the day, only half a million people will be losing jobs instead of the normal 600,000

2nd derivative improvement

Investors Fully Invested at 2007 Heights Need 72% Gain to Break Even

I did not bother to run the numbers since we are so far away from that level, but according to this CBSMarketwatch story the "fully invested, long only, cash is trash, shorts are evil and unAmerican" investor who was fully "in" at 2007 highs, needs a 72% gain from here using the S&P 500 as the index, just to break even. [Feb 4, 2009: Americans Lost $10.2 Trillion in 2008]

• Even as the market flirts with the break-even level for 2009, investors dreaming of recouping their money invested in stocks before the crisis still face a long road ahead.
• Investors who were fully invested in the broad S&P 500 index at its 2007 heights still need that index to rally another 72.5% just to recoup their losses, according to Standard & Poor's. Including dividends firms give back to investors, the S&P still needs to rally 70%, as most S&P companies have cut back the income they provide investors.
• Since hitting 12-year lows in early March, the market, as measured by the S&P 500 index, has now rallied about 35%.
  
• But the advance remains only a small step if one intends to see their S&P 500 portfolio return to pre-crisis levels. From its October 2007 highs to its lows in early March of this year, the S&P plunged 57%. Yet, returning to the October 2007 levels means the S&P needs to gain much more percentage wise.
• "But a lot of investors close to retirement are already feeling those statistics, as they have to wait a lot longer to retire just to get back to breakeven," he said. [Sep 1, 2008: Laboring Longer is Growing Trend for Americans]
• Going back to 1926 through October 2007, the average yearly return of the S&P 500 has been 10.5%. But if one includes the past 17 months of slump, the average yearly return has now sunk to 9.6%.
• "But in the 1930s, we had some years that returned 85% because we had fallen so hard," said S&P's Silverblatt. "This time, it could also happen but it's safe to say that it will take at least several years."

So if you use LONG TERM averages it's going to take about 7 years to make up those losses from here. However, we have printing press prosperity now and this "Great Recession" thing will all be a bad dream soon enough... just a hiccup. If we can just repeat the past 8 weeks performance two more times we are there - break even. See you at all time highs circa Labor Day 2009.

Allegiant Travel (ALGT) 2.3M Share Offering and Surging April Traffic

Allegiant Travel (ALGT) made good on the shelf filing we pointed out a few weeks ago [Apr 24: Bookkeeping - Adding to Allegiant Travel] ; it has now gone down twice on the same news item; typical market "logic".

Via AP

• Allegiant Travel Co. is planning to sell 2.3 million common shares in a secondary offering. About 2.25 million shares will be offered by Allegiant's second-largest shareholder, PAR Investment Partners, and the rest by Timothy Flynn, who sits on the company's board. After the sale, PAR will own over 1.9 million Allegiant shares.

Almost the entire sale will be from PAR Investment Partners and unlike my first take when I thought it was new dilutive shares, essentially this appears to be an unlocking of shares. The float is only 13.5M shares so this is a pretty large increase from that standpoint. While I don't love seeing a major holder unloaded half their holdings, I don't know PAR Investment Partners reasoning and it could just be a very large gain they are locking in (I don't have time to research the investment history right now) We might see one more hit to the stock price if the PAR sale is relatively concentrated and sloppy - that would provide another opportunity to add.

With that said, Allegiant Travel is simply hitting the cover off the ball - the April numbers are in and splendid. Unlike so many other stocks which have had huge runs and are incredibly expensive, even with this move we still have a unique growth story at just over 11x forward earnings. We're taking a sizeable hit today since this is one of our larger positions, but I continue to add on the dips (including a small purchase today). Certainly if the vacuum that is the market falls, this one can drop but if they are executing like this in such a bad economy just imagine in the green shoot V shaped recovery how well they will be doing. Full report here.

• Allegiant Air said on Monday that its April traffic jumped 32.8 percent as its niche of hauling leisure travelers from smaller cities helped it resist the business travel falloff that has hurt other airlines. Allegiant, a unit of Allegiant Travel Co., said it flew 422 million revenue passenger miles, or one paying passenger one mile, across its whole system. That was up from 326.1 million revenue passenger miles in April 2008.
• Capacity grew 25.7 percent to 481.3 million available seat miles, from 382.9 million a year ago.
• Its load factor, or the percentage of seats filled, rose 2.5 percentage points to 87.7 percent. Not counting charter flights, load factor increased to 90.3%.
  

Now indeed if speculators are successful in running up oil to $60, $70, or $80 this summer - all airlines will get hit. But Allegiant made money last year at $140 oil so it won't have anything to do with Allegiant as much as the program trading, lemming like knee jerk movements that dominate our markets in this era. I would prefer they hedge some pricing on fuel down here at these levels in case Bernanke is successful in pushing us into stagflation, but they don't seem to engage in hedging in their business model.

I am going to push technicals aside on this one because if it starts to drop further from here we're talking 8-9x estimates as the multiple. So I'll be a dip buyer unlike many other stocks where I just shed the stock once it breaks support - certainly a "double top" has a chance of happening here (bearish)

Las Vegas-based Allegiant Travel Company (NASDAQ: ALGT - News) focuses on flying travelers in small cities to world-class leisure destinations such as Las Vegas, Nev., Los Angeles, Cal., Phoenix, Ariz., Fort Lauderdale, Fla., Orlando, Fla. and Tampa/St. Petersburg, Fla. Through its subsidiary, Allegiant Air, LLC, the Company operates a low-cost, high-efficiency, all-jet passenger airline offering air travel both on a stand-alone basis and bundled with hotel rooms, rental cars and other travel related services.

[Apr 20: Allegiant Travel Continues to Impress]
[Feb 19: Allegiant Travel in Wall Street Journal]
[Feb 4: Allegiant Travel Position Started]
[Jan 27: Allegiant Travel Continues to Execute; Buyback Announced]
[Jan 7: Allegiant Travel December Traffic]
[Jan 5: Beginning Allegiant Travel] (old portfolio)

Long Allegiant Travel in fund; no personal position