Monday, July 6, 2009

Bookkeeping: Closing Fidelity National Financial (FNF)

I am still scratching my head at the wild divergence in performance [Jun 18, 2008: A Very Strange Divergence in Title Insurance] between our 2 title insurance stocks - Fidelity National Financial (FNF) and First American (FAF). One thing the recent action has done is created almost identical valuations at around 10x 2009 estimates, so at this time I don't see a major advantage of holding both anymore. I am going to close the weaker of the two charts, FNF - and take a 30% loss on the last 0.75% stake. We have a reasonable 5% loss in the remaining stash of FAF.

If the past 15 years are any indicator this is the point that FNF will begin to outperform and FAF will crumble! :) In theory both should be somewhat hostage to mortgage rates but this divergence says something 'extra' has been percolating lately.

Been cleaning out the portfolio of some underperformers the past week or two, to get leaner and hopefully meaner, so this is another one under that vein.

Long First American in fund; no personal position

Bookkeeping: Long Reflation for a Very Short Term Trade

As long as S&P 887 holds, I'm willing to do the reflation trade for an oversold bounce... I added to James River Coal (JRCC), some Natural Gas ETF (at 52 week low!) (UNG), and some energy ETFs of varying types with about 10-15% of the cash horde. First time I've ever owned the natural gas etf.

I am picking up some Yingli Green Energy (YGE) to add to the position - not really reflation but close enough. Yingli actually had some good news today on the financial front but is being slammed due to a LDK Solar (LDK) forecast.
  • Solar-cell maker Yingli Green Energy Holding Co. Ltd. on Monday said it made adjustments to its capital structure by securing two credit facilities, paying off debt ahead of schedule and issuing a second tranche of senior notes.
Like I said, there is no sense or discerning in Chinese solar stocks - these are 2 very different companies in the supply chain but American investors simply throw them all in 1 pile. And they all trade with oil ;)

If S&P 500 breaks the 200 day simple moving average I'll be out of all this with losses, but for now I am expecting dead cat bounces and simply going on what my eyes see on charts - very overdue (short term) upside in names. This will set many up for great intermediate term shorts. This is only a trade, not an investment right here. Outside of things we need (college tuition, healthcare bills, food, energy) we have a lot more deflation than inflation so 'reflation' is more a dream of HAL9000 and friends for now. But a tradeable dream as April-May showed.

Long all names mentioned excluding LDK Solar in fund and personal account

A Morning Test of the 200 day SIMPLE Moving Average

As we've been stating for over a month, it's a strange time as we are dealing with 2 very different "pictures" based on the use of exponential or simple moving averages. But using the simple moving average, we tested the 200 day long term trend line this morning and thus far have held up. I covered part of my Potash (POT) short from Thursday and while not adding anything to the long side am waiting to see how things develop. As I pointed out with Monsanto (MON) this morning there are a lot of charts so crunched so quickly they are overdue for an oversold bounce. It might be "dead cattish" but it will still be a bounce.

If this 200 day does not hold, S&P 880 beckons (others are using S&P 875). Either way this is the lower end of our long held multi month range so "buying the dip" has been the trade that works down here, and until that pattern breaks traders will continue.

In a bigger picture short of way, I'd like to see a bounce here to begin developing a sturdy short side of the portfolio (individual equities) - I have a handful of limit orders for shorts at prices 5-7% above current levels in some names. A bounce here would be fine within the context of building a "right shoulder" and in fact, I wrote last night in the weekly summary I would expect one midweek since some sectors (i.e. reflation trade) fell so far from any moving average in such a short time.

Still monitoring but that's the thought process here - a break below S&P 875-880 obviously bearish but until then neutral to "buy the dip" short term bullish otherwise. Just not ready to act on it until the computers rush in. On the flip side, you can see the slope of the 200 day simple moving average... it won't take long to be below the 875-880 levels, so the next time it is tested it will actually be below areas people deem very important.

ISM Services came out to be a decent report this morning but strangely the market shrugged it off... another potentially poor intermediate sign as "good news" is being brushed off whereas 2 months ago even "bad, but less bad than in the past" news was being embraced.


p.s. compelling story about Goldman Sachs quant trading architecture ALLEGEDLY stolen from a previous insider. No wonder the market has been acting so rationally the past 2 weeks! I can only imagine if there is any threat to their proprietary tactics they had to shut down and re-assess... ZeroHedge is reporting program trading was up to an astounding 48% of all trading last week (40% the week before which was astounding in itself!) - but Goldman was nowhere to be found last week after dominating the program trading for months.

Just amazing what is going on under the surface of this market - if we only knew half the things I am sure we'd be astounded. Computers trading with computers is now HALF the trading, and Goldman went from top player to nothing in the span of a week. Now we see why. I cannot wait for the true story for this all to come out in the months to come.

Short Potash in fund; no personal position

WSJ: No Money Down Or Negative Equity Top Source of Foreclosures

This is an opinion piece in the Wall Street Journal but with a lot of data behind it so I thought worthwhile to share. What is does is show the causes of a large ream of foreclosures and dispels some of the myths of what is causing it. We've discussed since 2007 the "walk away" situation happening as first 1 in 6 [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater], then 1 in 5 [Mar 9, 2009: One in Five Houses Underwater], and now approaching my long term prediction that 1 in 4 Americans will be underwater on their mortgage.
  • What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house.
  • A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures. Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.
So you can see the commonly portrayed reason for foreclosure, "rates spiking in bad mortgages to bad borrowers" is really not the main issue at all, in fact this made up less than 10% of the foreclosures in 2nd half 2008.
  • What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.
The real cause? No skin in the game. This goes to what I've been saying for a long time - we even were posting stories in 2007 how people were paying off credit cards ahead of their home mortgages; something never seen before in the history of the U.S. Why? If you have no skin in the game, why bother trying to hold onto your home. We also see clear evidence of this in Europe - the countries who followed "innovative" US approaches saw housing bubbles and crashed - Ireland, UK, Spain. Those who never budged off their 20% down (skin in the game) ideals, never saw the bubbles - but never saw this sort of bust in their housing markets.

Effectively, we've transferred a whole batch of 2004-2007 "renters" into "pseudo" homeowners... really with many of these mortgage programs they were in the same (or better!) terms than as a renter. That's right, it cost less up front to be an owner than a renter! At least as a renter that had to put a security deposit down, but in this new fangled era of financial innovation we let people put 0% down, and finance the closing costs. EVEN BETTER THAN RENTING. :) And when the loans go bad, the responsible people are asked to send checks to bail many of these folks out. (Yes I realize regular people who just bought at a bad time also got caught in this trap but I am sorry if I don't have sympathy as I speak from a state where home prices are back to 1995 levels)

So what's our current solution? We are driving almost all American loans through Fannie and Freddie, and using FHA... which has (wait for it) 3.5% down programs - lessened by the 1st time federal tax credit of $8K and similar figures from many states. Even "IOU" California was offering a $10K tax credit. So if you have a $160K house (roughly the US median), 3.5% down is about $6K. All covered by federal or state programs and *POOF* people can walk in with nothing down again. Only this time we'll cut out the middleman and instead of bailing out the banks we'll just be bailing out Fannie, Freddie, and de facto FHA for the next 4-8 years as this crop of loans goes bad. It is almost laughable at this point, but I long have since thrown up my hands in the air. Our money supply is endless so really, just print more and send it to the people in all forms of handouts that require no one to save. Then when the loans go bad, despite handing out money to borrowers - just print another batch to subsidize Fannie, Freddie, FHA. Rinse. Wash. Repeat. Why bother learning from the past? When your money trees are endless you do not need to.
  • This means that most government policies being discussed to remedy woes in the housing market are misdirected. (understatement of the year) Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards. Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.
  • But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime.
  • .....the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.
The above point is so key - many of us in states like Michigan are very underwater on their mortgages... but we actually put down payments into our homes. Why? Because unlike many parts of the country where mostly the 2004-2007 vintage of home buyer is underwater (the height of the insane mortgages) many of the loans underwater here were made earlier before financial "innovation" took over the land. So to "walk away" you'd not only take a credit hit, you'd lose saved money you actually invested into the house. Of course, some who bought in the 2004-2007 time frame also put 5, 10, 20% down into their homes and face the same dilemma. But the man who put nothing, or 1% or 2%? Not so much of a dilemma. Sit "rent free" for 6-12 months while foreclosure proceedings happen and then go back to being... well the same thing you were the last few years, a renter (except you were effectively renting a home instead of an apartment). Or even better - wait for scrambling government agencies to send your bank money to help you on your "investment" (I use that word in the loosest way possible)....

I did not mention it here but the LATEST housing rescue plan from team Obama announced in the past 10 days now has upped the ante from "helping" people who owe 105% of what their house is worth, up to 125%. So who do you think has the greater chance of being 125% down ? Someone who actually put a 5-10-20% mortgage payment down on the home at inception? Or someone who put 0-1-2% and rolled the closing costs into the mortgage. It doesn't take much thinking to realize where your tax money is going.... all in the name of "helping those who deserve the help".

Again, it is to the point of being laughable. If you acted responsibly, you dear reader - are the fool. Political initiatives to "save those in need" are not only misguided based on what is causation, but implicitly unfair to those who tried to do the right thing. All the time the peasants are being fed political dogma about the root causes, when veering from common sense was reason #1. Even more amazing ... we are simply repeating the exact same path; outside of actual underwriting standards (at least that will stop liar loans) the same policy of little to no skin in the game is now institutionalized at the federal level. That's what happens when you have a nation of non savers.
  • The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising. Although the government is throwing money -- almost $2 trillion and counting -- at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted.
  • Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. .....stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.

More Gaps to Fill

Back a few weeks ago we posted some names that had "gaps" to fill in their charts [Jun 22: Gaps Filling and To Be Filled?] - James River Coal (JRCC) has filled its gaps, and we also listed Research in Motion (RIMM) and A-Power Energy (APWR) - here are updates on their progress; both of these of course would require a swan dive.

I found a few more as I scan charts - some in much more reasonable ranges; frankly there are quite a few out there since we had so many pre market "futures happy" purchase programs in April especially ... if you have any please let me know in comments and I'll add it to this chart (no penny stocks or sub $5 type of stuff) I actually want to be long some of these names at the bottom of their "gaps" if and when they get filled.

Sterlite Industries (SLT) - gaps all over the place, definitely a huge one in mid $9s and potentially a small one below $9

Starent Networks (STAR) - below $20, due to this gap I have cut back the position over time

HDFC Bank (HDB) - basically we have a 0.1% stake here; I almost shorted this Thursday, big gap down there at $80

Woodword Governor (WGOV) - readers pointed this one out, it broke below the 200 day this morning and has a nice one to fill at mid $15s

For those not familiar with "gap theory" it simply says that eventually all gaps are filled; I'd say from my experience this is true 98% of the time (with the caveat that some take years to fill, and we've been in a 10 year primary bear market!)

Long James River Coal, HDFC Bank, Starent Networks in fund; no personal position

Reflation Trade Bludgeoned this Morning

The crowded reflation trade of a month ago is emptying fast - as I said then, once this turns it will end badly since your fellow "investors" are not fundamentalists but mostly "hot money" types. When you are buying things on "thesis" with no real fundamental evidence other than "charts are looking good", once those program traders (and HAL9000) turn on you, you have no fundamental reason to be in the stocks. This however shows why it is so hard to be an investor rather than a strategist - you can know the move up was based on hot air, but fighting the move 2 months ago would only cost you major money - and you look foolish while everyone says "hey the stocks know better than you do! The market is all knowing!". And figuring out when reality sets in (and it's time to short) is also hard to time. So you can be conceptually correct, but placing orders (shorts) correctly so that you are not steamrolled by a bevy of snorting bulls is problematic.

That said, the downturn is now going very fast and I'd expect a bounce somewhere.

Things are so bad Freeport McMoran (FCX) is down on an upgrade.

Some names to throw out there...

One name showing some signs of green early is Monsanto (MON) which is very overdue for a bounce, even if its of the dead cat variety.

No positions

CNBC: Nassim Taleb: We're Still Mid Crash

The latest from Nassim Taleb via CNBC - one "positive" about green shoots is it has replaced "black swan" as the most overused term in finance. As always, good ole Carl is trying to guide the guest into positive thoughts; in law terms this is "leading the witness"; on CNBC that is 'reporting' - of course Nassim shrugs it off.

8-9 minute video - broken into 2 parts

[Apr 8, 2009: 10 Principles for a Black Swan Proof World]
[Apr 2, 2009: The Tale of Political Influence in Changing Accounting Rules, Nassim Taleb on CNBC]
[Dec 4, 2008: Nassim Taleb on Charlie Rose]

Sunday, July 5, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 48

Year 2, Week 48 Major Position Changes

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

Cash: 72.1% (vs 69.9% last week)
27 long bias: 22.1% (vs 28.6% last week)
7 short bias: 5.8% (vs 1.5% last week)

34 positions (vs 36 last week)

Weekly thoughts
First to our 2 charts, simple versus exponential....

On the Exponential moving averages, we spent the early part of the week making progress - attempting to make another run at the 200 day moving average. Wednesday was driven by the upteemth (4th) Chinese Purchasing Managers Index report showing expansion (again a fairly new report from a country that can say anything they want engaging in the type of loan expansion in 2009 that brought the Western world to its knees). However we closed near the lows Wednesday and then the rally attempt failed on the "jolt of reality" Thursday (monthly jobs report). The classic head and shoulders formation is still intact in terms of slow formation; I had pegged S&P 915-925 as the "right shoulder", but indeed S&P 930 seems to be the intraday peak the market has trouble with. A flurry of selling brought us below the 50 day moving average - normally this would be bearish but we did the same thing the previous week - and promptly within 2 days burst right back above the 50 day moving average.

On the Simple moving averages, we are still "holding" the quickly falling 200 day moving average. I've outlined S&P 880 as the line in the sand bulls need to hold - we have an interesting situation developing in this chart; the 200 day is falling so quickly it could hit my 880 line in the sand by mid week. So in theory we could keep falling - hit the S&P 880 level but bounce off the 200 day SIMPLE moving average and can still call it "bullish" I suppose.

Again, I typically use Exponential moving averages but am showing both since the longest term trend line (the 200 day) is at 2 very different spots on the 2 charts. More broadly what I am seeing above is similar to what I am seeing in a lot of individual charts - the first strokes of "distribution" ... a market (or stock) trying to go higher but not making a new high; yet still bouncing and not ready to break yet.

But again as we take 3 steps backwards we can see, we remain RANGE bound since the beginning of May - essentially a 70 point range of S&P 880 to 950. While I have a growing cash hoard, the last 10% or so is not due to being predicative... I am simply letting mechanical stops taking me out on charts that are weakening. Of course, if we have a bounce to the top of this multi month range we'll be dragging in performance, but this has protected us to the downside as well. As I've been saying for a few weeks now I see no reason to make big bets here - all I see are computers and daytraders jumping in and out of themes based on a knee jerk reaction to the daily news flow. It's all very short term oriented and not much can be read in it; I am more interested in the next fat pitch and am ambivalent which direction it is. Logic would dictate down since large moves generally are retraced to some degree, but I am not counting on anything in this market that seems to act very different than the ones of the past 10+ years. The general tone I continue to hear is "I cannot wait for the 10% correction so I can load up for the 2nd half run". I doubt it will be that clean and easy.

Let's focus on a few more charts, many swiped from [Jun 11, 2009: The Market in ETFs] to see where key groups are.

The incredibly crowded "reflation" trade from a month ago has taken it on the chin; this is dominated by the momentum crowd, many of which are the program traders and hedge funds (retail traders also love this group but their impact is nothing compared to the big boys) After breaking through the 200 day moving average ever briefly just after I wrote my June 11th piece, sending a false signal of bullishness - a quite stark reversal took place.

So just like that we've gone from being above the 200 day to sitting on the 50 day, another key support line. Reflation has been a failed trade for 3 weeks, I am surprised traders have not made a go of it at least one more time during that time frame. While that index is important, I truly think the whole reflation trade rests on one stock which has taken over the reigns, even from oil this year.

After putting a big scare in reflation bulls about 2 weeks ago, Freeport has recaptured the 50 day and is sitting right above it. This is the name I am watching... for example I have a short in Potash (POT) we put on Friday - if Freeport begins to bounce strongly next week, I'll have a sense my Potash short is over and the hedge funds are back for a quick trade in "reflation" again. Based on any fundamental reason? Nah - it's just a trade! Other than simply as protection versus the weakening dollar, I really find this whole trade extremely premature as most of the major economies in the world have no driver other than government spending. In about 12 months this "thesis" will make more sense to me... but as we've seen of late, it really does not need to make "sense"; it just needs to move rapidly and traders (or computers) will embrace anything.

As for oil, the ETF of choice is USO - we saw a gap down Thursday as the employment report knocked some sense into traders looking for any impending recovery.

And while oil is a global commodity so I can at least buy some of this move, natural gas is a local commodity and other than being driven up at times by so much Federal Reserve money finding its way into speculators hands, its showing the true state of the US economy.

Another place to look at the US economy is transportation - there is a simple ETF to look at here....

Next, let's look at 2 places institutional money is hiding out because its "safe" - (a) decoupling 2.0 is shown in the emerging markets and (b) technology is immune from the economy. The irony is both these thesis were bandied about 15 months ago for the exact same reasons - they failed, spectacularly ... but people have very short memories. (p.s. does anyone not own Apple?) If we have a sustained downturn I actually expect these 2 very crowded trades to go sour very quickly just like "reflation" has begun to. But for now, they are still in decent position - that said, NASDAQ failed to make a new high this time around similar to the S&P500, but unlike the S&P500 we are above the 200 day exponential moving average.

Within technology the all important semiconductor index - until this breaks down it will be hard to embolden the bears. Again much like consumer discretionary semiconductors are the "go to" sector to go for ahead of recovery.

One more to close - developed Europe; one ETF is iShares Europe 350 (IEV) which is a bit UK heavy (30% of the fund) but gives you a good look at the major European markets - France, Germany et al. If one thinks the US market is overpriced, developed Europe is much worse.

We can see after a head fake (oh nasty) on Wednesday to give bulls joy - the employment figure out of the US returned her back below the 200 day moving average. A tricky one here.


Outside of squiggly line world, we begin traditional earnings season with a company who misses 9 out of every 10 earnings reports - Alcoa (AA). This is an aluminum producer and part of the above mentioned reflation trade. I could care less what they report; all I care about is how the stock reacts and how the computers react (pile in or out of reflation stocks?). Then after this week comes the heart of earnings season next week through the end of July. Mostly big companies report early - and with so many heads chopped in America, I can see another quarter of "beats" on the bottom line while missing on the top line (similar to last quarter). How many times will we hear "better than expected"? (too many to count) We can also expect another great quarter out of banks since they are borrowing for almost nothing and lending at something.... plus the most secondaries done EVER in a quarter as we diluted shareholders like never before; huge wins for the investment banks.

(click to enlarge)

Since our accounting board (FASB) is under political pressure and broke down in March handing banks what they wanted (which basically started this rally) and we no longer care about balance sheets in this post modern world of ostrich head in sand analysis, the banks look fine - just fine. Dandy in fact. So I expect another quarter of shrinking companies, whose revenue is morphing downward but enough Americans were taken out of their jobs to create a bevy of "better than expected" earnings. That was good enough 3 months ago for tears of joy; the all important question is now that everyone knows this, and sees this is the obvious way companies are "winning" - will we be "surprised" again and take stocks up 10-20% off more shrinkage of unnecessary expenses (people, 401ks, healthcare, travel, et al).

Bigger picture, don't focus so much on earnings (easily gamed) - but the reaction to earnings. Remember what I said with Corning (GLW) last week - it had good news, but the stock was down a few days after the fact. So as these earnings roll in and Goldman Sachs (GS) reports a quarter for the ages let's see if the stock reacts up or if everyone already knows they are milking the system for all its worth - same for every other stock. We can only "Shrink to Prosperity" for so long; revenue (lack of) growth is showing you the true "health" of the economy.

The only major economic report in my eyes this week is Monday's ISM Services; with services now dominating the US economy this report is much more important that ISM Manufacturing. As for my guestimate of the week I am expecting a bounce somewhere soon - Thursday seems like ages ago right? Those job losses are in the rear view mirror and its time to chew on green shoots. Hopefully China has an economic report or two which we can drive S&P futures premarket up 1% one of these days. As I wrote in the "Simple" moving average section above - we almost have a perfect set up mid week (Tue-Wed?) to fall to S&P 880 and bounce off it) - this would send in the "powers behind the curtain" who have quite possibly the best technical analysts on the planet based on each point the market has bounced "out of the blue" the past few months ;) A lot of the charts I see above that fell below their 200 day are now sitting at the 50 day, ready for the "computer driven, futures rally" to churn them back up. Ready, set, manipulate!

Key areas I watch daily are (1) Apple (AAPL) [key to NASDAQ], (2) Freeport [reflation holding by edge of teeth], (3) emerging markets [look ma, we decoupled again! don't need no stinkin US of A], and (4) semiconductors [its not inventory restocking, really!] Again, aside from quick trades in and out on indexes or ETFs I don't see any particular reason to risk a lot of capital here. When this range is broken, I'll deploy cash one way or the other (dark or light sides of the force) ;)


p.s. let me give kudos for this disclosure from VP Biden. One good thing about Joe (do you mind if I call you Joe? *wink wink*) is with his foot in mouth disease we get to hear what the powers that be are really thinking rather than "happy talking points". However, I am not sure what to be more scared of - negligence or incompetence among the elite. The "top economic team" in the country really had no clue how bad it was out there - even with the Federal Reserve braintrust to help (while lowly bloggers such as myself - granted ones with Economics degrees - nailed it) ... this is the bubble of the powerful elite; they have no feeling for what "median John Doe" is living. Touching median John Doe at townhalls or reading a few letters while living on 6 figures with gold plated benefits packages (paid for by median John Doe) is a bit different than struggling thrugh John Doe's life or at least interacting with him / her on a constant basis.

  • Vice President Joe Biden said in a broadcast interview Sunday that administration officials "misread how bad the economy was," when the stimulus package was being put together at the beginning of the year. Unemployment, at 9.5%, is far higher that the 8% top promised at the time the stimulus was passed. But Biden said in an ABC interview it was too early to say whether additional stimulus money was needed, noting that billions of dollars in projects included in the current bill won't come online until September

So if you had read the depths of the situation correctly what would of changed? Instead of $800B of stimulus (half pork) maybe $1.5 Trillion?

Yawn... just imagine how bad the employment situation would be if not for all the "shovel ready" projects going on across the land. Anyhow, the "top economic team" now tells us we'll be fine later in the year as stimulus kicks in. Just like "subprime is contained" (early 07) Hank Paulson and "he knows nothing!" Ben Bernanke - I'm sure the powers that be are correct this time around. I mean with that track record....

I eagerly await that positive GDP number that is coming late this year that only cost our grandchildren $800 billion... and stimulus 3.0 to win the election of 2010. Thanks grandkids!

Updated Position Sheet

Cash: 72.1% (v 69.9% last week)
Long: 22.1% (v 28.6%)
Short: 5.8% (v 1.5%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

(click to enlarge)



Friday, July 3, 2009

US Workers Pay Continues to Suffer - First 0.0% Monthly "Growth" I Can Recall

I did not bother with posting the normal analysis of the monthly (un)employment report yesterday; it's really the same old story - some months it will be a bit better, some months a bit worse - the market will overreact either way as if one data point is changing the course in this economy. I continue to see no reason to change my view of a double dip recession and the only reason its not just one continuous dip is the enormous amount of money stolen ... err borrowed... from our grandchildren to pump up GDP figures later in the year. Just about a year ago the Bush rebates sent out some $100B in money we don't have to consumers (also taken from the grandchildren) along with another $60-$70B to businesses (that we don't have) and that pumped up GDP enough to make the quarter positive. Hence NO RECESSION! (at least at the time - remember we were going into an election; in retrospect by latter 2008 economists 'called' the recession as starting in Dec 2007 ) This year we're going to make the Bush stimulus look like peanuts by doing something over 4x as large - much of it will hit later this year and 1st half 2010. We'll stick our head in the sand and say "green shoots" because while the private economy is a mess, chopping down money trees let's us pretend things are just dandy. Sometimes a picture is worth a thousand words.

All this is just labels and definitions ... the reality is on the ground - the recession will continue even if GDP spikes to positive; while technically it will be a double dip (in my estimation) as we move into mid 2010, it will just be one long bad recession - the worst we've seen since the 1930s. Folks, a year ago people were calling for recovery - the same who are telling you everything will be ok now... Obama's team told us 8% unemployment is what we'd top out at. Thankfully no one on financial TV or in government is actually judged on performance. This WAS the longest recession we had post World War 2, MANY months ago. And it continues. It might be interrupted by the water hose of money we throw at it (that we don't have) but that is the only reason it won't technically be a 3 year recession. Sit down and think about that for a moment as you consider our dynamic "innovative" economy where the interest of workers are akin to toilet paper. The whole idea of the sacrifices workers make in this system is the tradeoff with dynamism of business and a bevy of jobs that this creates in new places as it destroys old ones. Just like "trickle down economics" that's proven to be a myth the past few decades in my opinion. The main change the past 30 years has been a huge transfer of wealth to the top since the early 80s.

As for yesterday's report employment report just take my previous post from a month ago and change the numbers [Jun 5, 2009: Real May Unemployment Report Reaches 13.4%] If you are new to the blog, in a sentence or two we've changed the way we account for unemployment since the late 1990s - both parties are guilty as changes have been made under direction of both. We cannot compare our unemployment rate today to how it was measured in the 70s or 80s since we've changed how we measure. Anyone who says unemployment is not as bad as the double dip recession of late 70s/early 80s is not looking under the surface - it is far worse. I've gone back and tried to re-adjust the numbers to an accurate gauge to have it apples to apples and its somewhere in the 13-14% range now. (estimated)

But I want to delve deeper into a few figures ... we are of course in a very bad CYCLICAL place in the economy. However, I've outlined in multiple posts in my Economic Forecast / Track Record tab - some of my longer term thoughts on the STRUCTURAL changes happening globally. I believe many Americans standard of living will lower (and to a lesser degree some advanced European countries although their workers have much higher levels of protection) as the Earth flattens and capital can go anywhere. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] But Americans will be worse off since in the "socialist" countries there is more of a push to stop inequality of wealth and their "transfers of wealth" go from top to bottom. In the US our "transfers of wealth" go from middle to top (Reverse Robin Hood) When anyone argues this they are ... in an ironic twist - called a socialist.

We've already seen many of the blue collar scorched, many now working at 30, 40, 50% of the wage rates they used to in their old jobs - many are now being 'transformed' from jobs making things to jobs providing services; and reaping the financial... uhh, benefits. White collar like to say 'well just get an education, and you won't be in that spot' - check back in 10-20 years when many white collar will be in the same space and that dogma will look foolish. Ask the architect who is trying to compete with his peer in Romania where the cost of living is 60% lower than in the US and hence homebuilders can pay 60% less of a wage. Sound improbable? That's not a forecast - that's a story I read 3 years ago. Extrapolate from there.

What's a safe place for stable wages long term? Apparently public co. CEOs. They are rock stars who do little wrong and have a skill set so rare that they deserve 300x the wage of the average American. Even though that same skill set only gets them 7-20x as much as the median worker in say "socialist" lands in Europe. But if we dare question it, we are again - socialists ourselves (codeword for unAmerican). So instead, as the middle class gets gutted we have to look upward and wait for the "trickle down" economics to provide prosperity - been a decade now... it will come sooner or later, I am sure. Where else? Places we are creating unsustainable long term costs - i.e. healthcare and government jobs (or quasi government i.e. education). These are areas we've talked about for nearly 2 years now - they are "stable" because we are kicking the can down the road on the costs, building bigger and builder long term obligations but growing these areas in many cases exponentially. To wit, look at the shock in this story in the Wall Street Journal that teachers (gasp) actually are being hit by the worst recession since WWII. You mean when states are underfunded by billions there is a cost (eventually?)
  • In a sign of how severe the employment downturn is getting, even schoolteachers, an occupation once viewed as recession proof, are feeling the pain. That contrasts with annual growth of about 3% over the past 15 years in the education field.
  • Ms. Frommer, 25 years old, said in college she was told teaching was among the steadiest jobs around. Now "there is no job security anymore," she said. Ms. Clutter: "You always think of teaching as a safe profession. Once you get in, you're there, you'll be able to retire," she said. "Not so much right now."
  • Layoffs from other sectors are sending workers to seemingly more stable professions like teaching and health care.
Anyhow it's all relative ... those places will be 'safe(r)' for an undetermined time until the average citizen wakes up and realizes where all his money is going. At some point average Joe will figure out his tax rates are going up while his wages stagnate, but those his tax dollars support live in a mostly parallel universe - mostly unaffected by the reality of the economy (unless we get 70 year floods like we are experiencing now). Just sniff around your local papers and I'm sure you can read about the municipal worker who has retired at age 55 with a $70, $90K yearly pension (p.s. can't blame them - that's the system of handouts we've created, they milked the system for what its worth). This is basically a parallel to our auto companies (promises made that cannot be made) but across the country in a much larger swath - and it can last much longer than the auto companies before meeting the same fate, because the taxpayers money (and our borrowing from creditors) are apparently without bound. So as I love to say, "momma raise your kid to be a government worker!" It will be an oasis from the storm on our shores, until the common man private workers finally says NO MORE.


Some think I'm a permabear - nah; I was already thinking about the "recovery" at the end of last year [Dec 15, 2008: The "Recovery"] ... the problem is its going to make the "jobless" recovery of 2002-2003 look like 'good times'! We have to wait for our financial overlords to create a new bubble - and only then can we turbocharge job creation for millions whose jobs have been permanently pushed away to other countries (structural changes), and/or their job was only existing in the first place by PREVIOUS bubbles of the past 10 years. In the Dec 15th piece, I listed a few categories of "prosperity" we created by the "shopping / house building / financial innovation" economy we transformed into as we got rid of non useful things like "making stuff". With them are many jobs that will take a long time to come back, if ever... (#8 of course is the most 'safe' but things are so dire even some of them are threatened)
  1. Automotive (16M yearly auto sales was based on house ATM)
  2. Newspaper/media (structural change as advertising moves online)
  3. Mortgage Brokers (based on house ATM, easy credit)
  4. Realtors (based on house ATM, easy credit)
  5. Investment Banking (based on house ATM, easy credit)
  6. Misc Financial of all types (house ATM, easy credit)
  7. Retail (house ATM, easy credit)
  8. State and local government jobs (house ATM, easy credit)

So what is the common private worker who is not a CEO, a nurse, or a government worker facing in the meantime? That's why I want to pull out some of the statistics about this poor soul from yesterday's report.

Let's look at the average work week - the data below is in order of most recent data first so June, May, April, and then March
  1. 33.0 hours
  2. 33.1 hours
  3. 33.2 hours
  4. 33.2 hours
So we've now fallen to the shortest work week ever since statistics have been kept (1964). Sit down and think about that as well - worse than the late 70s, or early 80s recession in which the government tells us unemployment "was higher" per their rejiggered statistics. 2nd derivative non improvement.

So for those still working, (even if not a full week) how is their wage growth going? Especially interesting in a world the Federal Reserve is throwing money from the heavens to get speculators out of savings and into ... well, speculation. Hopefully of the commodity kind! Driving up prices of things Joe 6 Pack needs to live - i.e. food, and energy. (which we now take as a signal the world economy is coming back!)
  1. 0.0%
  2. 0.1%
  3. 0.1%
  4. 0.2%
That's right - after slowing drastically the past few months, we've finally flatlined. 2nd derivative non improvement. Remember 0.1% monthly wage growth = 1.2% annual, and 0.2% = 2.4% annual. You can figure out what 0.0% annualizes too. This is what happens when a fixed amount of jobs is chased by an increasingly amount of people, laws of supply and demand. Economics 101. Desperate people need to work, and they will undercut others to get that job. And let's not forget outside of wage stagnation we have workers losing 401k matches, being asked to take a greater portion of healthcare costs, losing other benefits, et al.

Now let me clear on this point, I don't expect the current rate of 0.0% to 0.1%/monthly wage gains to stay this low for the next 5-10 years - my "wage arbitrage" point is going to be very long term and specific to certain groups. Hence the aggregate won't be as bad as specific job niches in the long run - thats a structural change I see coming. But in the near term competition among the desperate is going to be a cyclical wage pressure. What would be amazing is if the US sees wage deflation in the quarters to come - thankfully we're not Japan. (cough)

At this point, let me take you into the life of median Joe... median Joe makes $18.53/hour. Unfortunately his work week has dropped from 38ish hours to 33 hours. Therefore, median Joe makes about $32K a year, instead of his potential in a normal economy of $36K. I assume after taxes, FICA, all that jazz - Median Joe is probably making somewhere around $20-$25K / year. Median Joe probably does not read my blog, because to actually have enough money to invest - you have to do a lot better than median. I also don't believe that the 50% of workers who make less than Median Joe are reading my blog - but not to worry they are out there, trying to survive in our thriving service based economy. I personally worry about median Joe, if Uncle Ben and his merry band "succeeds" and does an adequate job of giving speculators enough juice to get commodities through the roof in mid 2010 forward.

And here is the dirty secret, most people don't really follow "inflation" very closely - they can 'see it' in things they buy, but it's hard to quantify - i.e. notice how small those bags of chips are getting? Even if the price is the same? That's inflation - but only to you. Not the government. Less product for same price. Salary on the other hand - everyone watches closely... you know your salary, its easily quantified. Master plan? Chop enough money trees to create inflation - since people only focus on their salaries, they will feel GREAT about how their wages will go up... not realizing the cost of goods is increasing at the same or higher rate. But since most people can't quantify the inflation in aggregate, but can quantify their salary - they will be appeased. For a while anyhow...until they start to see bread costing $3 a loaf etc. Just remember the dogma - inflation is good, it is not regressive nor the worst tax possible for those in the lower tranches of society. (median Joe and below) Anything that hurts savers and helps borrowers... is a wonderful thing in the land of Cramerica. A country run by those who have no connection to Median Joe (or lower). Go team inflation.

Number of workers long term unemployed - half a year or more? (I just began tracking this last month)
  1. 4.4M (June)
  2. 3.9M
  3. 3.6M (April)
For that last point, remember to clap your hands when continuing jobless claims being to drop (they already started the past few weeks) as workers exhaust extended benefits. Ignore the fact this number is dropping because people are losing that safety net, and pretend they are finding jobs and hence suddenly the rolls are dropping . (for example see the next section to postulate where these people are going in our imaginary state of prosperity) Also ignore the welfare rolls that are rising as an indication of where those people are REALLY landing. [Jun 22, 2009: WSJ - Numbers on Welfare See Sharp Increase]


Just for kicks we always like to look at the birth / death model. Newer readers - this is simply a number that is "guestimated" by the government ... since they have no idea how many small business are born or die each month they stick their thumb in the air (ok I am sure it's more complicated than that - perhaps 3 fingers are in the air) and estimate. Want to see the past 4 months in the WORST recession in the post World War 2 period? (please don't laugh too loudly)
  1. +185,000
  2. +220,000
  3. +226,000
  4. +114,000
So again, as this economy contracts - in perhaps some of the worst months we've seen in 70 years, small businesses across America are flourishing and a hiring binge is breaking out. I count almost 3/4 of a million jobs above just in 4 months! Wow - dynamic and powerful. Dirty secret? Oh if we showed even zero growth above you could see the unemployment rate would jump. And if instead of zero growth we actually showed contraction in the birth death model... you can just imagine what the unemployment rate would go to. But remember... keep your head firmly in the sand and keep reaching for the stars. -Casey Kasem.

For extra snickers - Leisure and Hospitality, and Contruction - yes Construction have been the birth death job "leaders" the past 4 months. Even as we see major contraction in anything we read about retailers, homebuilders, Las Vegas, et al. Anyhow...

Since I am talking my yellow weeds book, let's take some independent thoughts via Bloomberg
  • Americans’ wages are starting to buckle under the strain of mounting unemployment, threatening to erode the consumer spending essential to an economic recovery. Earnings per hour climbed at a 0.7 percent annual pace on average over the last three months, the smallest gain since records began in 1964, figures from the Labor Department showed today in Washington.
  • The median time all individuals were out of a job grew to 17.9 weeks in June, the longest on records dating to 1967.
  • “When we do get a recovery, it won’t be much of one,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “There’s no bargaining power for workers. Discretionary income is just cratering, and this will have a profound effect on the economy.” (LaVorgna has actually been one of the CNBC regulars who actually has some feet to stand out, with some solid calls over the past few years)
  • The only wage growth we are getting is through government transfer payments, and that can’t go on,” said Deutsche Bank’s LaVorgna. “Even that isn’t enough.” (we highlighted that last week in [Jun 26, 2009: US Savings Rate Surges to 6.9%; Spending Up Too but Government Assisted] but the one spot I disagree with Joe is that it can't continue. Joe, it can! Yes we can! Stimulus 3.0 is coming next year Joe - our money trees are endless, our currency is not an issue, and the world awaits to give us more money. Even our unborn grandchildren cry out from the future for us to take from them - we deserve it Joe!)
  • Employers are not only being stingy with raises, they are also cutting back on hours, causing the average weekly paycheck to drop to $611.49 in June, down 0.5 percent since February. The squeeze is unlikely to end soon, because there are 14.7 million workers who have been without a job for an average 24.5 weeks, the longest since records began in 1948.
  • “Employers don’t have to pay workers so much because there’s a queue of people waiting outside to get a job,”... “It’s reducing workers’ ability to negotiate higher wages. We’re looking at a couple of years of really slow wage growth, possibly even lower than inflation.”
  • Industries including manufacturing, wholesalers, retailers, utilities and leisure and hospitality cut average hourly earnings last month, today’s report showed.
  • Scattered reports of outright wage deflation are becoming more widespread,” Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York, said in a note to clients. “Workers appear willing to take the wage cuts, which makes this recession very unusual.
  • "The labor market is still in shambles," said economist Harm Bandholz of Unicredit Markets & Investment Banking in New York
Here is the kicker....
  • All growth in jobs in the U.S. over the last nine years has now been wiped out, and the economy currently has fewer jobs than in May 2000, according to the policy institute.
But not to worry, employment is a LAGGING indicator and Main Street is really quite irrelevant to the joys of Wall Street. (unless Wall Street is in need of a bailout, and then Main Street is very handy to have around) In fact, as we cut more people, profits can only go up - since workers are just a big expense. On this count, I am hoping companies can fire another 40-50M Americans because than profits should really shoot up - we might get Dow 36,000 after all. Who would buy things if we get rid of these 40-50M "cost centers"? Well we could just to 10 trillion government transfers annually with borrowed money - this would also allow Americans more time to shop with all that extra free time. And we always can sell things to the Chinese - which are going to support Europe, US, Japan, Brazil, Russia, and Antarctica with their stimulus. That last point sounds facetious but that's what the market is believing. Decoupling 4.0.

Look folks, I can only talk to you about the reality on the ground - I know the computers and institutions keep running into "consumer discretionary" stocks on each data point because that's what they are trained to do. When the economy is about to recover you go buy these things because that's the playbook. They've done it about 5x now since early 2008 - wrong each time. Does it matter this is a structural change in the US economy? Nah - just buy these stocks that rely on the US consumer and smile for CNBC. Meanwhile, I'll continue to be deemed the pessimist (I prefer realist) and tell you what I believe not only is happening, but what I believe will happen in the future. For 2 years, I've gotten the economy dead on... by being the "pessmist" (realist). I see no reason to change my thoughts go forward because I see historical changes happening - although I'll clap like a seal too when government transfer payment gloss over the reality (just as the Bush rebate check did a year ago) to get us to positive GDP later in the year.

While I smirk inwardly.

In summary: As we approach the celebration of our country, which unfortunately has been hampered by political and "upper 0.5%" dogma & oligarchy (still a chance we can take the country back fellow peasants!) let me leave you with the very obvious conclusion as I've analyzed the data set above:

Mmmmm.... Kool Aid.

Market Makers Snared Me in Riverbed Technology (RVBD)

The market makers in Riverbed Technology (RVBD) just have to be laughing amongst themselves; they did very well Thursday. With a large drop in the first 30 minutes (down to $21.60) they must of snared a bevy of stop loss orders (including mine @ $21.90) - the rest of the day RVBD was on a 45 degree angle up to finish almost unchanged. I wrote
This is the first penetration of the 20 day moving average since March.

Not so much - as you can see below

As I warned

As always the closing price is more important than the midday, and we are prone to being "shaken out" of positions by taking intraday stops

And so it goes... sometimes you lose, sometimes you win when you play it so close to the vest.

So by the skin of its nose, the Riverbed Technology chart is still in positive shape and still has not broken the 20 day moving average on a closing basis since March.

Long Riverbed Technology in fund; no personal position

Thursday, July 2, 2009

Walter Industries (WLT) - Some Major Outperformance in the Coal Space

Long time readers will know I made a lot of outperformance in the coal space in late 2007 through mid 2008. While everyone was in oil, I was pounding the table in the stealth rally in coal. [Dec 6, 2007: Coal Stocks Quietly in a Bull Market]

One name that was a very strange combination was Walter Industries (WLT) which at the time was a combo 'housing/coal' stock (yes, I'm serious). [May 1, 2008: Walter Industries - the Most Fascinating Company] Now they've refocused the business just as a coal pure play - specifically metallurgical coal. (for steel)

As the "reglation" trade crowd gets its head handed to them the past 3 weeks - I bring up this name because today it is green, and it's been performing at a pace completely outside its peer group. I'm always looking for anomalies or outliers which usually means "someone(s)" with a lot more access to information than the rest of us, knows something. I'm not sure if this signifies some news specific to Walter coming or just a relative valuation trade, but seeing it green on multiple days when the rest of the coal group is down has me wondering if something is coming. Maybe someone is sniffin' around [Jul 18, 2008: Wilbur Ross Believes M&A Activity in Coal Will be Unprecedented in Next 12 Months]

Below is a 1 month comparison of performance of Walter versus some of the larger coal names

(click to enlarge)

[Jul 29, 2008: Walter Industries with Blowout Earnings]

No positions

Dennis Kneale CNBC

For entertainment purposes only I present this 7 minute video - Dennis is well known in "financial blogosphere" along with anyone who actually watches CNBC for having quite possibly the least amount of financial acumen on the channel. Which is remarkable for someone who has been in financial journalism for 20 years - you'd think via osmosis alone he'd sound half as rationale as the 2 bit bloggers he does not read (although he spends the first 3 minutes of the rant below talking about the comments on blogs - he does not read). :)

Despite 20 years of experience, in early June ago we posted questions/comments he had presented to Jim Rogers along the lines "I haven't looked back at your history" and "How long have you been living in China?"

Oh Dennis Kneale, would it bother you THAT much to do some research on your guests? I know it's just a well paid TV gig that you can say whatever you want as long as it includes "buy stocks" and "I'm bullish" but can you at least give the appearance of doing homework. I mean, if you are not going to do "research" on Jim Rogers background ("I don't know how you were invested in the past" "So how long have you been living in China?") - who happens to be one of the most successful long term investors of a few generations

Thankfully, I believe that is my only Dennis Kneale reference on the blog aside from this one today. So aside from probably entering as many stock trades during his life as one of my dogs, he doesn't even do the reporting side (i.e. research) very well. Hence a perfect fit for financial infotainment... err, news reporting. A part of me believes CNBC loves this guy because he stirs up outrage for his actual presence... remember, CNBC has moved to "wrestling type" formatting as this most excellent article we highlighted earlier in the year showed. Barry Ritholtz agrees with me that this is the reason.

Maybe if Dennis spent more time researching markets, economics, stocks and the background of his guests, and less time googling himself and reading comments on the "internets" he might increase his acumen. But that's just me.

The other reason to watch this, is to see who is on the other side of your trade (not that he trades) but at least if you have a bearish sentiment you can see what the Kool Aid is on the other side of your positioning.

Either way, as you drown a few cold ones this weekend - please enjoy Dennis Kneale in full technicolor. Just don't watch it with your mouth full of food.

Bonus coverage - original rant here:

Bookkeeping: Closing Longtop Financial Technologies (LFT)

I am doing a lot of rearranging of furniture today... I have to say I am seeing a lot of charts rolling over hence I am moving quickly. Anything thats flashing even a yellow caution flag I am looking at very closely. Longtop Financial (LFT) is not giving me comfort - I only have a 0.2% stake left, but the chart is yelling short more than long to me right now. I am going to take a 8% loss on this tiny batch and head for the hills. This is another name we'll revisit in the future as I still like the story here.

I think this market has one more decent bounce in it next week, to fill the gap created this morning and that's going to be the gap to short (last hurrah)... unless we break S&P 900 right here. So either on that bounce or below S&P 880 I expect to turn much of this cash to the dark side. Remember, we've been stuck in the box (range) for 2 months - until proven otherweise we're just churning form 1 end of the box to the other - eventually we'll break out one way or the other and that's the time to pounce.

Until then, we're still quite net long (but "small") with a mountain of cash.

[Jun 12, 2009: Beginning Stake in Longtop Finanical]

No position

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