"It's not who you are that holds you back, it's who you think you're not."
Author Unknown

Just a quick post here- I don't read NY Times often but this weekend I ran across an interesting article on one of the news aggregator sites about a report by small research firm called TrimTabs Investment Research. I've heard this name before so I decide to do a bit more DD on these guys- and I'll tell you I was quite impressed.

Their forecasting ability seems to be far superior to the numbers Bureau of Labor Statistics puts out each month. And here come the bad news- job growth according to these guys was firmly negative in February:

"TRIMTABS, which estimates employment growth using data from an online job index and an analysis of income tax withheld versus job creation rates, has been far more accurate than the Bureau of Labor Statistics. For example, in 2006, the government's initial estimates of employment growth came in at 1.52 million jobs. But the bureau revised that data upward in February 2007, for a total of 2.24 million. By comparison, TrimTabs' estimates of 2006 employment growth, using real-time data, totaled 2.39 million jobs. The firm reported those figures to clients contemporaneously. Last week, TrimTabs told clients it estimated that 77,000 jobs would be lost in February; Wall Street economists are calling for a gain of 30,000 for the month. Since October 2007, TrimTabs estimates, the economy has lost about 175,000 jobs, the first sustained employment drop since early 2003. Growing job losses naturally will contribute to a weakening consumer, whose ills will affect the overall economy. And the stock market is feeling this pain as well, in Mr. Biderman's view. "

And if you thought the labor numbers look bad- here is another piece of bad news which should come as a real surprise to anyone who visited my blog before :) - GDP growth is likely to be negative in Q1

TrimTabs calls its new measure the Consumer Spendables Indicator, and it sensibly includes these crucial sources of consumption cash: after-tax wages; after-tax income from nonwage sources, like capital gains, dividends, pensions, partnerships and self-employment; and net equity extraction from consumers' homes, either through property sales or mortgage refinancing.

FOR the first time since the fourth quarter of 2003, TrimTabs estimates, consumers will have less money to spend this quarter on a year-over-year basis. The firm expects this figure to fall 0.6 percent from the same period in 2007.

source- NY Times

So the punch line is still the same- stay safe out there- shorting is perfectly ethical- need ideas to short- go to my MSN Strategy Lab profile

skepticalcapitalist@gmail.com

P.S. Just to confirm credibility of the source- recently Goldman Sachs took a minority stake in the company

"Goldman Sachs has found TrimTabs' analysis very useful," Hudson Street Services Chief Executive Michael Sanders said in a statement. "We hope our new collaboration will help grow TrimTabs Investment Research activities."

"You're only given a little spark of madness. You mustn't lose it"
Robin Williams

"Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement. ...The Company received a letter from JPMorgan Chase Bank, N.A. ("JPMorgan"), dated February 28, 2008, after failing to meet a margin call of approximately $28 million. The letter states that an Event of Default as defined under that certain Master Repurchase Agreement, dated as of August 3, 2006, as amended on February 7, 2007 by and between the Company and JPMorgan (the "Agreement") exists. The letter also notified the Company that JPMorgan will exercise its rights under the Agreement. The aggregate amount of proceeds lent to the Company under the Agreement was approximately $320 million. The Company's receipt of the notice of an event of default has triggered cross-defaults under all of the Company's other reverse repurchase agreements and its secured loan agreements. The Company's obligations under those agreements are material."

It's official now- TMA has defaulted on its loans and now not even Cramer can help them...This filing today is very significant for several reasons. First, it shows that the mess in the financial sector is nowhere close to being over, and that we still have many more lender bankruptcies that are likely to unfold in the next several months. And second, it also opens another avenue for the already troubled large cap banks to lose more money. I am not sure how much more loses Citi and Co could sustain before going back to the Middle Eastern well to ask for more capital. I guess now the "high single digits" prediction several pessimistic bloggers made for the embattled lender does not seem all that impossible :)

Few more quick notes on the financial sector- not many of them are good- Ambac's much expected bailout plan that caused the DOW to rally 200 points ( it's amazing how markets have been able to find silly reasons to rally recently) released today sounds simply like a joke:

Michael Callen, Chairman and CEO, commented on the offering, saying, "This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base. We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement." He added, "In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac."

So they not only could not find anyone willing to commit to a fixed price offering with a decent price, but also diluted the existing stock holders 50%+, shut down a unit, and somehow now still miraculously plan "to take advantage of the favorable market environment for credit enhancement..."?? What a bazaar joke- I think these guys need to focus on making sure ABK does not follow TMA into BK, instead of putting out jokes worthy of Comedy Central...

By the way it is still a complete puzzle to me- how in the world could Moody and S&P give a company (MBI) a AAA debt rating if it has to pay 14% interest on its debt? What kind of Zimbabwenomics is that?

P.S. Now I need to end the day with on a generally bullish note- every single long position in my MSN portfolio has ended the day in green today - 18 stocks in total- :)

Stay safe and once again-short to hedge- better safe, than sorry...
skepticalcapitalist@gmail.com

"Ye shall know the truth, and the truth shall make you mad"
Aldous Huxley

Quick Q&A with myself...

Trigger-happy Fed to cut 50BP more in March? Heh? I guess why act surprised... Nothing new here- Ben has lost his rational senses long time ago...

source: clevelandfed.org

I wonder if they are looking at the same numbers everyone else is?

Inflation expectations are spinning out control???
source: clevelandfed.org

Now on the real investing front- are agricultural stocks a bubble? I personally think that we are very close to the AG peak... Look for POT, MOS, ADM etc to repeat the course of DRYS and Co in the next several months... I refer to a double digit swift haircut...( I wouldn't quite go all shortthough- bubbles can feed on the themselves for a long time...)

source: http://investmenttools.com/futures/bdi_baltic_dry_index.htm

That would be all for now, stay safe
skepticalcapitalist@gmail.com

Vad

"Learn all you can from the mistakes of others. You won't have time to make them all yourself" Alfred Sheinwold

If you read through my strategy one thing should become clear- the core of my approach to investing is based on sound principles of fundamental finance. I studied and passed all of my CFA exams not because I was required to do so by my employer, but rather because I was simply eager to learn how to value a standalone company, stock, bond, option or a CDO for that matter. And while my FA (fundamental analysis) background should theoretically predispose me to ignore all the TA (technical analysis) related noise as a pure nonsense, I don't necessarily do so outright. Some of the basic TA rules, help an average investor to avoid some of the most common mistakes like constantly buying companies with declining stock prices just because they seem cheap etc...

Let me make it clear- I never believed in a concept of buying stocks just because they are going up or selling them just because they are going down. Momentum investing is not my style-period. But on the other hand, I also don't buy into the concept of buying stocks just because they have a low Price to Earnings (P/E) or a Price to Sales (P/S) multiple. Making an investment decision of buying a stock A or B just because has a low P/S multiple or because it's current P/E is lower than it was last quarter, to me is just as ridiculous as some of the "super duper" TA theories...

If one simply screened the stock universe to pick stocks that have a low P/S ratio or a low P/E, it would likely result in a meaningless list dominated by retailers and financials. But how could a real "financial expert" state with a straight face that just because JCP (JC Penney's) P/S is 0.5 times and INTC (Intel's) is 3 times- the retailer's stock is a lot cheaper?? Do you really believe that a dollar of sales from JCP is worth as much or even anywhere close to a dollar of sales from Intel? How about a simple fact that one makes almost 5 times more money from each dollar of these sales than the other? And that one is virtually a monopoly in a growing industry, while the is just one of the many struggling companies in an industry that is subject to violent fashion mood swings of the American consumers?

Same thing with low P/Es... How could one say that GS (Goldman Sachs) is cheaper than BUD (Anheuser Busch) just because its P/E is three times lower?? Does one really think that a dollar of earnings from a cyclical financial company on the top of the cycle is worth as much as a dollar of earnings from a consumer company whose name is synonymous with one the core staples of an American (or even international) ways of life?

Again, let's get real here- I think the "experts" out there are making a dangerous disservice to average investors by stating, for example, that just because current P/Es of the S&P 500 are lower than historical average- means that stocks are dirt cheap. My advice to investors is very simple- ignore the noise and think for yourself. For example here is a quote from today's article in WSJ:

"Some argue stocks are attractively priced after a 17% decline in the Standard & Poor's 500-stock index since October. Based on earnings forecasts for 2008 collected by Reuters Estimates, the S&P 500 is trading at 13.2 times projected earnings, compared with an average of 16.5 times going back to 1989, according to data compiled by Morgan Stanley."

Just like the WSJ's author concludes, I don't think it is quite that simple. Let's not forget, for example, that the Price to Earnings multiple consists of two parts- price and earnings. Does one really believe that for example Citigroup or Goldman Sachs are going to earn as much in 2008 as they did in 2007, even though every reasonable person out there knows that the first two quarters of last year likely represented a multi year pick of LBO driven M&A (hence banker fees) frenzy? And that the only people believing and projecting another hockey stick earnings growth in the third and fourth quarter of 2008 are the investment banking analysts themselves. I think that as the continued spiral of newly announced write offs and fresh hedge fund collapse stories confirm- the cycle of ever expanding earnings driven by super leverage and cheap money is over.

Just as Exxon Mobile's profits are unlikely to keep growing forever, AAPL's iPhones and iPods are unlikely to be immune to the consumer slowdown and thus are unlikely to keep growing in double digits forever...

I hope you get the point here... Standalone basic fundamental ratios alone are unlikely to help you to outperform the market consistently in the long run. It is important for everyone to understand that it is not the historical earnings and sales, but rather it's the future earnings (cash flow) potential and underlying fair market (not historical book) value of companies assets, that determine how much a stock or a company are worth.

Correctly estimating whether a company has a potential to generate steady cash flows, grow its earnings and be truly shareholder (not management) friendly is not easy, but not impossible. You have to approach this valuation process with an open mind, base it on facts not popular opinions, and try to ignore quick judgments based on flawed theories like buying a stock just because it has a low P/S ratio...

I hope I did not offend anyone out there; all of the above is simply my Skeptical Capitalistic opinion...

skepticalcapitalist@gmail.com

"A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties" Harry Truman

Today's action from the Fed was one of the rare occasions were I think Ben and Co have actually done something that has some sound and logical merit behind it... It has been clear for a while that merely cutting rates is not going to solve the mess... Problem with financial sector today is not related in any way to "excessively high" interest rates. I actually would argue they might be a bit too low already and thus need to be increased, but is rather related to a simple fundamental inability of bankers to correctly assess value of its assets and thus capital available to actually make loans...

If banks don't know how much capital cushion they have, they will in turn curtail lending activity, which in turn means lower liquidity, and thus in combination with still insanely high leverage of many market participants (think TMA, UBS's, C's and GS's hedge funds) means forced liquidation of assets when no one wants to buy them... With today's action one would expect some of the larger banks to trade some of their riskier, currently virtually illiquid assets (agency backed mortgages, CRE backed securities etc) to the Fed, receive liquid treasuries instead which should in turn allow inter bank lending to resume normal functioning again.

But once again- while today's action is clearly a good start, the true impact of it is still very much open for debate... I did not yet see any real signs of ABX or CMBX indexes making a sustained recovery. Until this happens- you can expect more write downs announcements as most banks will mark their assets down to match the declines in these indexes, which in turns feeds the vicious cycle once more...

Will see what's in store in the next few trading days...For now I would say skeptical and cautious..

If anyone is interested in some long ideas for a long run here are some of my most recent watch list additions:
SCHW, HIMX, WTI, IHG, NSC, SPN, VAR, LUFK, AKAM, MGI, TSRA

Graphs from Markit

ABX Index- AAA 2007-02- Very minor move today...Punchline- today's move did not help much yet...

This one is spreads for commercial mortgages- hence is inverted to price- the lower the better...Again no serios move yet

Anyway, that's all for now- stay safe and cheers,
skepticalcapitalist@gmail.com

P.S. By the way if you like reading my blog, please come back again as it is currently being remodeled... Soon I'll have more staff to offer, like actual watch list for picks etc...

I hate to be too skeptical about the world so here is the same message but in a little different format :)

P.S.
Thanks to Calculated Risk for digging this one out :)

"Yes, risk taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking" Tim McMahon

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen... Both companies' boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday's close, Bear Stearns's stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

Unfortunately, too many participants of the largest legal "gambling area" in the world called "Wall Street" believed that markets always go up... The little "secret sauce" of leverage made almost anything possible in this Wonder World of ever growing bonuses, stock prices and egos. The party time is officially over...

"March 16 (Bloomberg) -- The Federal Reserve, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities"

Bear Sterns is being sold to JPM for a mere $2 a share which represents less than 3% of the company's book value... Too bad for anyone who believed in the "sure thing" earnings of the investment banks and wondered why in the hell would they sell at such ridiculously low P/E multiples...

I am fully aware that tomorrow is likely going to bring a lot more pain to the net worth of most investors out there, I think that hopefully the lessons of Wall Street's most recent ultimate fiasco won't disappear in memories as quickly as the previous ones...It is almost easy to predict now that most standalone boutiques (read large hedge funds) like Lehman are also destined to repeat Bear's faith... Counterparty risk is the new "sub prime" and chances of any large hedge fund keeping their funds with small players like LEH are now very small. The big winners in the long haul are going to be JPM and BAC (may be WB and WFC). They have a benefit of being funded by retail investors and aren't as prone to pull their money out as the large hedge funds... Citi is now simply a relic of the past and could easily end up being sliced up in pieces and sold to whoever is still willing to buy after it goes to single digits...

Look for many more near failures of large banks, failures of the smaller ones, more bailouts and continued deleveraging of the Wonder Land and the entire world. Chances of many fixed income focused hedge funds and highly leveraged companies like TMA (20-1 leverage) to survive have just gone done to almost zero... I say shorting the liquidity crunched entities is now the closest investment strategy that I could find that approaches the new "sure thing" status...

I also think that assuming Fed does what everyone expects it to do now, and actually cuts rates by a full percentage point may be even prior to the regularly scheduled meeting on Tuesday, it will likely contribute even more fire to the next potential "bubbly" area- commodities including agriculture...So stay tuned here :)

What I would also recommend for anyone who has been following my blog for a while, and who is hopefully net short the market, is to watch and wait for the fear to finally overtake the greed as the main theme of the "expert CNBC shows" in the next several weeks. If you still keep hearing statements like "now is the great time to buy" tomorrow- ignore them- you are likely to be too early...

In the markets like this, good investors should fear that stocks can down more, rather than hoping that they go up...

Stay safe and cheers,
skepticalcapitalist@gmail.com

P.S. Short the BIDU and GOOG- both are simply houses of cards built on another "sure thing" idea of ever growing and "recession immune" advertising schemes...

"Light is good from whatever lamp it shines"

Goldman Sachs, JP Morgan and Lehman in combination with the Fed have triggered quite a rally (roughly 600 points on the Dow) since the Bear Sterns announcement... I personally have unloaded my ultra shorts mid day Monday, and went long in my model Marketocracy portfolio. This took my gains up to the levels not seen since mid December prior to the MoneyGram fiasco...

But my MSN Strategy Lab's portfolio lagged big time due to the inability to submit trades in real time. The 18 hour submission lag has cost me roughly 5% in total return, or may be even more depending on the opening prices tomorrow... But right now this is not as important, as pretty soon my blog will get a new feature that would allow readers to see the positions with only a short lag.

One might ask how I managed to go from a "sell everything" mood on Sunday to "go long" on Monday? Here some glimpses into my logic:

1. My short term long bias did not change the underlying skepticism on prospects of the economy escaping the recession or on the fact that stocks aren't quite yet as cheap as they could be. I simply don't believe in giving my gains away for nothing, the tape clearly said that the sell off was over in the short term, so I did.
2. Dow has retested the 11,700 level three times and each time it bounced back with a 400 point rally. The first two tries failed to lead to meaningful gains, we'll see if this one is any different but the momentum raiders might just take it higher this time...
3. Fed engineered bailout of Bear during the weekend was a very significant event, much more so than the rate cut today. What it has accomplished is something more important - it might have just stopped (postponed?) the "run on the investment banks" domino effect by signaling to the market that while stockholders of the WonderLand entities should be worried about their net worth, the counterparties in any investment transaction with them shouldn't.
4. It has in effect promised the investment bank customers a free protection similar to the one enjoyed by customers of the regular bank with respect to their deposits (FDIC insurance).
5. I see several fundamental issues with this help in the long run- the main one being the simple fact that conventional banks not only pay for this insurance, but they are also subject to significant regulatory oversight and various leverage limitations. I think that when politicians realize the actual monetary risk to tax payers and the "softer" danger of "moral hazard" that Fed took on by guaranteeing BSC's bonds, more regulation in the investment banking world is now almost inevitable.
6. This will likely lead to lower leverage, higher expenses and lower profits in the long run. Balance sheets will have to shrink and with them so will stock prices. Investment banks had a nice rally today and one might argue Lehman is still oversold, but here is my prediction- during the next several years- stronger conventional banks like BAC, JPM, WB and WFC will outperform their investment banking peers.
7. Another reason I covered yesterday was the fact that VIX- volatility index has hit another high. And given the fact that it also considered an indicator of "fear", I felt that too many people thought prices are heading lower, so I had to do the opposite...It has declined 20% today so I will keep watching it like a hawk for any signs that we now have too many optimists again :) Long term pain is still very much an option.

8. One more reason for short term optimism is the upcoming IPO of Visa. Forget the whether the stock itself is expensive or cheap- fact of the matter is quite simple- it will raise billions of dollars in cash for banks which could have not come at a better time for most of them. It will also lead to large paper gains that could offset some of the write downs at least in the short term. Some of the large beneficiaries include JPM, NCC, WFC, USB, BAC

9. Fanny and Freddie regulatory caps are going to be adjusted in the short term. I don't think it is necessarily such a good idea- but the fact is politicians and opportunist are running the show right now, so it will happen-period. It is, however, still likely that FRE and FNM will require more equity anyway, but for now in light of the BSC bailout - their clients should feel safer- bailout is now a 100% guaranteed.

To sum it up- there are simply too many factors working in favor of the market speculators in the short term to stay outright short. I also think that Fed has made some moves that are surely will add significant "moral hazard" premium to the next bubble but for now- enjoy the relief :)

Stay safe, Vad

"Never say, "oops" Always say, "Ah, interesting."
Author Unknown

One of the great things about the stock market is that no matter how much you think you know about investing, there will be always something new to learn. My experience from the last four days is just another case in the point...

As I have said before one of the key concepts behind my investment strategy is a belief in a top-down approach. Basically I identify most of the major mid term (6-18 months) trends in the economy, and then on the basis of this trend I focus my attention to specific sectors of the economy that I think are likely to benefit by picking some of the undervalued players. If you look through my initial forecast for 2008 that I made early in December, I wasn't too far on most items except for a few...

Weakness of the US Dollar has gone way beyond I thought was reasonable and probable. Main reason for this seems to have been the fact that the "trigger-happy" Fed has continued to cut rates aggressively, disregarding the clear signs of skyrocketing inflation. And while I am not of the opinion that exchange rates are driven predominately by current interest rate differential per se, but rather the future expectations, the recent slide in the dollar seem to have become a self fulfilling prophecy.

Emerging economies now simply felt invincible to any slowdown, and given the recent US Treasury policy of the de facto "weak dollar", what started as an orderly decline, seems to have crossed the mental line were the slide quickly became quite disorderly. This in turn pushed commodity prices into the stratosphere... In addition, given the overall geopolitical "successes" of current administration throughout the world, the actual reputation of anything with a "Made in USA" brand including the US Dollar is now simply at an all-time low.

I personally, still firmly believe that the BRIC countries are deeply mistaken in their underlying belief of their own immunity to the economic slowdown, and thus think that most emerging country currencies (with the exception of may be Chinese RMB) are now wildly overvalued, as is the EUR. USD should still be the currency of choice in the time of fear, because even though the US economy is currently on the ropes, it is still the most flexible and vibrant economy in the world and thus will do just fine in the long run.

Now back to my original message, so given that I might have been a bit too optimistic on the US Dollar, the flip side turned out to be that I might have been slightly too pessimistic on the strength of the commodities, especially oil. However, luckily enough for my portfolio, due to my unique strategy, a large portion of it (roughly 40%) is selected in a pretty mechanical manner- screen, read the 10Qs and buy if there are no warning signs disregarding the sector specific projections. If stock from this selection declines into high single digits losses- I sell it and reinvest into the winners. This strategy has worked great for me in the past, but in the last 4 days, a large portion of my incredible gains has now simply vanished.

The main reason for that has been the fact that while my quant screens pointed me towards the oil and gas and mining servicing sectors as being relatively cheap, they did not take into account the potential for violent overcrowding of the sector...A big chunk of my portfolio profits has been simply evaporated during the most recent correction... It might just be an indication that the great "commodities unwind" might have just begun...

As I have mentioned before, Fed's rate cuts simply mean excess liquidity, and given the widespread troubles in the financial sector and the economy in general, all the available money supply had to flow somewhere, so it ended up in the place that until recently seemed completely immune to any slowdown- commodities and agriculture related plays. And while my top-down logic has told me clearly that the bubble is in the making, I disregarded it, and let my emotions to overrule the common sense- in effect I recently doubled up on my commodity plays with pretty horrific consequences...

Just simply glancing at the reported results of the investment banks on Monday should have given me a clear clue that this 'unwind' was in the making- all of the three players who reported so far beat the estimates because of the gains related to commodities trading. Betting on POT, PBR and MOS to go up, simply became a "no-losing" "sure thing" proposition, with everyone and their mother simply flooding the sector with cash. And given today's double digit declines, now most of them are also heading for exit at the same time...

As I have learned a long time ago, selling on the top is quite difficult to achieve. When you try to time the top, you are also potentially giving up a lot of the upside as strong stocks tend to go up a lot further than you expected them in the first place. But they don't do so in one straight line, they usually pullback, regroup and then rally above the previous high. It is when they fail to rally above the previous high, when you should expect to get out...

I am afraid we might just be at such a point with the commodities related stocks, and thus I'll try to do my best to take the first good opportunity to get out while preserving some of the gains... And while doing it properly in the MSN portfolio could be quite a challenge due to the 18 hour trading delay requirement, I'll cover my exits on my blog whenever I actually pull the trigger...

P.S. As an example of how one should not invest- look no further than on my most recent journal entry- because of the above mentioned delay, it came out just on time to cover many of my shorts at the low point after a 400 point rally, and got reinvested back into the long positions just prior the sharp dive...:) The expected price paid for this endeavor- roughly 5% to the potential portfolio return, enough to probably force a "real money" manager to go into a deep personal recession driven by excess consumption of alcohol...

Anyway, stay safe out there- don't panic, but also don't hope that the market will magically heal itself- better to be fearful, than greedy...Remember that "Hope is NOT a strategy"

skepticalcapitalist@gmail.com

It seems for whatever its worth, cumulative impact of Fed's actions last week has been a positive one so far.

Spreads on AAA commercial mortgage based securities have declined by 75BP. The drop has been a steep one so far, likely due to short covering and reduced illiquidity premiums. I have heard from numerous sources now that many of the most respected names in the fixed income markets have been loading up on the highly rated paper over the last few weeks... This is definitely a positive development for the financial market in general.

Source Markit.com

Lower numbers are better here as they are inversely related to the actual prices of underlying securities

However, no signs of meaningful recovery yet in the residential mortgage backed securities market. The only group that made any kind of serious move has been the AAA and AA 06-2 rated group; very likely driven by one large short covering swoop, the rest of indices have barely budged... Market is still pricing in a significant deterioration in the residential housing prices but with the help from the Fed spillover to commercial real estate market could be less severe than originally anticipated.

As I mentioned last week, I shifted into a temporary "bull" mood, because even though I believe that the final wave of the declines might not be here yet- Fed's massive and unprecedented intervention has triggered massive short covering in many of my favorite sell ideas...

However, given the behavior of stock prices last week with commodities in a "free fall" pattern, and heavily shorted stocks skyrocketing upwards, I would expect a few more hedge fund blow ups announced in the next few weeks... Given the fact that trading gains in commodities have been helping the likes of Goldman Sachs and Lehman to support earnings during the latest quarter, I think that the latest rebound in the investment banks share prices might actually be a good opportunity to sell them short.

Trade safe and cheers,
skepticalcapitalist@gmail.com

"The unfortunate thing about this world is that good habits are so much easier to give up than bad ones" Somerset Maugham

Here we go again-another backward looking February economic number came out early this morning and for whatever reason- stocks reacted to it...

I mean, let's get real here. Why would anyone worry whether the GDP growth for Q4 2007 ended was confirmed at 0.6%? The original number has been reported weeks ago...I am struggling to understand why would it really change my perception on valuation of WMT or GS if the number came in at 0.7%? or 0.5%? Everyone already knew the number was low, everyone knew the reasons why (think "flip that condo" TV show)... What's more, most of the companies out there have already reported earnings for the full year 2007, and now the majority is getting ready to report on Q1 2008 results... The more I learn about this never ending focus on "meaningless backward looking" indicators, the more I believe that this media frenzy is one of the major reasons why average investors underperform the market. Reaction to "worthless" news triggers unnecessary emotional reactions which in turn lead to excess overtrading...

I've been trying to repeat my take on this many times here- stock prices should be driven by expectations of future results, not past... For example, in my opinion it is absolutely irrelevant how much revenue or, net income for that matter, Beazer Homes or Pulte Homes had in 2005 or 2006. These "go-go" times simply aren't coming back any time soon. The only thing that matters for anyone trying to value these stocks now, is simply estimating how much cash they can hoard from land and inventory sales, how much debt they have to refinance in the next 12 months or so, and how long will this never ending industry slowdown is going to last...

Anyway, enough rambling- here some of my thoughts on the recent developments in the financial sector specifically...

On the positive side, conditions have improved markedly in the commercial mortgage backed securities market. Spreads tightened up dramatically with some of the higher rated debt trading back at the levels not seen since late January... This is a very positive development for most financial institutions out there, especially "real" banks like JPM, BAC and WFC. Also the fact that some of the most conservative insurers stepped in to buy the AAA rated commercial backed paper is a sure sign to me that the worst could be over for now in the CMBS market... Another positive is that Visa's succesful IPO has provided some badly needed capital for most major players in the financial field at the time when it was so badly needed. Cash raised in the IPO will help with liquidity fears and, in addition, paper gains from the offering will also cushion a big chunk of expected write downs thus preserving the bruised capital base...

However, on the negative side, I think that rebound in prices of most investment banks specifically could be overdone. The truth of the matter is that most of the phenomenal earnings gains achieved by Goldman and Co during the last five year were driven by increased leverage and booming M&A/buyout related activities. Both of these factors are no longer relevant.

Bear Stern's bailout has likely marked a beginning of a new era in the development of standalone investment banking ("IB") houses. It is very clear now that the amount of regulation related to IBs activities is going to increase exponentially in the months/years to come. This additional regulation will lead to lower leverage, lower average VARs ("value at risk") and higher expenses. In addition to that, while global M&A activity is obviously going to rebound somewhat in the next few quarters, the "golden age" of private equity is over, period! No "if"s and no "but"s- the "package and sell junk with no consequences" model of debt distribution is NOT coming back any time soon, which it turn means, that one of the main sources of hyper "growth" in 2003-2006 is now going to slow to a trickle...

All of the above does not mean that Goldman Sachs, Morgan Stanley and Co are all of sudden going out of business tomorrow... I think that while another run-on-the-investment-bank is possible, the implicit goverment guarantee of counterparty risk, should help with any silly BK rumors. Let's be objective- GS and Co still have best in class franchises in asset management, fixed income and commodities trading, M&A advisory services etc. But the problem is that even in these well performing units, the now almost inevitable deleveraging, very likely means that single digit trailing P/Es, hold very little predictive value on the relative attractiveness of the sector when compared to the overall market.

Simply put- investment banks of "yesterday" and "tomorrow" are likely going to end up looking so different, that all of sudden one day someone is going to ask a question- why in the world would such a super cyclical and highly leverage company like an investment bank ever trade at a ridiculously expensive double digit P/E multiple? To me, standalone IBs are not that different from someone like a high volume manufacturer of semiconductors- they are both cyclical and highly leveraged. In one case this leverage is financial and in the other operating- but in the end as many investors now have found out - all leverage is evil as it tends to work it magic both ways...

Anyway, stay safe out there, ignore the BS on TV and avoid the IB stocks- they aren't yet cheap enough to be a a real deal...
SkepticalCapitalist@gmail.com

"I have seen the future and it is very much like the present - only longer"
Kehlog Albran

Some the frequent visitors to my blog might recall a short article I posted back on March 3rd about the payroll growth numbers moving firmly into negative territory...

Don't forget that at the time expectation on the Street was for a positive job growth, and not even the most skeptical economists anticipated a negative one. The result as we all know now was very painful...

"Nonfarm payroll employment edged down in February (-63,000), and the unemployment rate was essentially unchanged at 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today"

TrimTabs data turned out to be on target once again and anyone with a bearish portfolio stance (yours truly was one of them :)) was well rewarded...

If you quickly glance at my posts since the Bear Sterns meltdown, you'll notice that my portfolio stance is no longer outright bearish and I have actually been slightly less skeptical about market's short term direction. So again here are some good news that actually forced me to reconsider adding more short positions on the latest bounce:

TrimTabs now estimates that

"The labor market is holding up better than expected. The TrimTabs Online Job Postings Index actually rose 1.6% in the past three weeks"

So for whatever reason, be it temporary or longer lasting, the labor market could very well be holding up better than many bears are currently anticipating. My prediction as of today is simple- if March's payroll number does come in a firmly positive territory, we might just have another reason for a short term rally on our hands, which would mean that my slightly bullish stance is justified for now...

By the way- here is one more glimpse into another potentially positive development- again as reported by TrimTabs:

"Lost amid the wails of woe on Wall Street is that income growth is accelerating, not slowing... Taking a longer-term view, withholdings rose 4.6% year-over-year in the past four weeks and four days (Friday, February 22 through Wednesday, March 26), far exceeding the 2.7% year-over-year growth rate in all of January and February"

Hmm, sounds very intriguing? I am not sure again whether what we are seeing is merely a short term blip or is it an indication that things are truly getting better? I am still in a "skeptical" boat but for whatever its worth I am no longer net short the market...

Skepticalcapitalist@gmail.com