Thursday, August 27, 2009

Adult beverage recommended before reading

Someone asked me the other day via Twitter if I'd seen Dick Hoey's comments on the Kudlow show where he asserted that bulls follow forward-looking indicators while (and I'm paraphrasing here) bears are looking in the rear-view mirror. PUHLEASE.

At this point, I'd say that it's the bears who have some sembelance of reality in their view points, and not just because I am one. But let's walk through some points one by one.

Home Prices
Yes, I'm worried about home prices. I'm a little concerned that they're 33% below the peak. But not so much because of the lost wealth (which is a tragedy) but because of how that will affect consumers, banks, builders, and a host of others. Let's see, consumers can't take money off their home equity loans to buy stuff in the future because many of them are underwater. Consumers also can't sell those homes because they won't come out whole, ruining the whole set of industries that really thrived on the idea that homes were meant as an investment instead of shelter.

Let's not forget that banks are stuck with ever-increasing amounts of Real Estate Owned on balance sheets because they can't sell them without tanking the housing market even further.

Builders, well there's a bit of insanity going on there, just because they still exist in the size they do. Prices start to stabilize (a false tell in my eyes because of the REO from the banks, not to mention the homes that were on the market, got pulled because they didn't sell for months on end and are now back on the market) and the builders start to build again. An article on Bloomberg this week said they're buying land again. The only analogy that I can come up that fits this lunacy is that it's like cooking Thanksgiving dinner 7 nights in a row, even though the refrigerator is so full that you don't know how you'll EVER get through all those leftovers.

Retirement Savings
Even after the 'Rally of the Century' that we've had since March, the S&P is down 40% from the October 2007 high. My client base is mostly individuals... individuals who came to my firm after seeing their retirement savings cut in half, in many cases within 10 years of when they had at least hoped to retire. Guess what kids - those folks aren't going to be spending the way they were in the past. They can't! They're saving every last penny they can at this point, hoping to build that nest egg back up so that they can at least retire within a few years of when they had originally hoped. And you know what... their money that we currently have in places other than the stock market? They're not so excited to put it back in. These folks have been burned a lot in the past few years. The stock market just doesn't have the allure it used to for them.

Consumer Debt Levels
Not only are consumers trying to save everything they can right now, but many of them are in debt up to their eyeballs. I know I've shown this chart before, but it's such a lovely picture, let's put it up again (Parental Warning: not suitable for small children):

Yeah. Pretty, eh? Household debt at the level of GDP. Think it's changed much in the past few months? Nah. Me neither. If it took years to get it to a sustainable/decent level back in the 30's why would we expect anything different now? Because it's different this time? Right. Tell it to someone else.

This debt is going to be a ball and chain around the ankle of the consumer for a long time to come. A LONG TIME. Those "coiled springs" that so many analysts keep talking about in reference to the retailers who have cut costs and just need the consumer back before earnings take off like rockets... BUNK. By the way, can I remind everyone that at least until recently the consumer drove 70% or so of the economy. Guess what is also probably going to change? Yeah. That.

Coming Mortgage Resets
I've shown this graph before too... but just in case anyone missed it...

Please notice all the resets of Alt-A and Option ARMS that are coming in the next 18 months or so. Any (honest) mortgage broker will tell you that both of those categories have the capability of being even worse than the Subprime mortgages. I've heard that up to 50% of the folks with those loans that haven't even reset yet can't make their payments. Guess what happens when they DO reset? Yep. Ugly. Really ugly.

But there's no housing problem.

And I haven't even gotten to the accounting changes coming for the banks that put all the toxic waste back on the balance sheets. But that's another post.


Sunday, August 23, 2009

Happy Happy, Joy Joy

Tonight Jack Welch (yes, that Jack Welch) said that it's a 50/50 chance that we go down again. Watching Twitter is important folks, 'cause that's where he said it... right after a diatribe about the Red Sox. Glad to know that even someone who might know a little about the financial world doesn't think I'm totally out in left field. (All puns intended... all the time.)

What is most interesting to me is that both Meredith Whitney and Dick Bove, two of the top bank analysts out there, believe that there are somewhere around another 200+ banks to go under before this whole whatever-we're-calling-it is over. As of Friday night, we're over 80 failures this year. And the thing that I don't think Wall Street gets is that each of these 'too little to care if they fail' banks affects a lot of folks on Main Street. Want everyone else back in the market, Wall Street? Start to care if other peoples' pools are polluted.

The biggest announcement of the past week, though, and one that got virtually no press, was the announcement that the FDIC is looking to relax the rules for Private Equity getting involved in the banking sector. Gee, color me cynical, but why would they do that? Ummmm, maybe because they already know that based on the losses they already know about they need to raise fees to banks. And ummm... maybe because they know there are lot of other failures to come?

But everything is just fabulous out there. Go long in the market folks. Go ahead, I dare you. I'll even sell you the stock you want to buy. Color me generous.

Tuesday, August 18, 2009

What goes up... must come down...

All of the sudden, I find myself with increasing company in the bear camp. I don't know whether to dance the bear dance with my new found friends, or defect to the bull camp. But I'm pretty sure that I heard some dancing music warming up.

So the market is trading at 16.8x 2010 earnings. That seem extreme to anyone else? And not only does no one in the bull camp seem to expect any revenue growth this year, it seems like maybe not much is expected next year. So we're cost cutting our way to properity then? Right. Pardon my skepticism, but I just can't help myself - probably the fault of my parents that taught me that thinking for myself might not be such a bad idea.

I run a number of different valuation models that I've developed over the last ::bleep:: (substitute 'many', it will do just as well) years in the industry. Last night my earnings momentum model that usually gives me 100 or more stocks on which I can do more fundamental work rendered a list of ... wait for it... nineteen (19) stocks. NINETEEN. On another growth model that I developed over the past 3 years or so, a multifactor model that requires revenue growth to support the earnings growth, I usually get a list of 300+ names. This week? Right around 100.

So what can I take from this? As of right now, given today's valuations and earnings/revenue prospects for stocks, revenue growth is an almost extinct animal.

If you're good with cost cutting as the only way of getting out of this lovely little economic scenario, good for you. But don't use my money to invest, 'k?

Sunday, August 16, 2009


Here's something to think about.




Wall Street vs Main Street

I guess Alan Abelson of Barron's and I are thinking a bit alike lately. I don't know whether to be comforted or scared about that.

I mentioned last week on CNBC that I thought this was coming down to a struggle between Wall Street and Main Street. Aparently Alan (you don't mind if I call you Alan, do you Alan?) agrees with me.

Go ahead, tell me the story about how good things are again. My opinion, for whatever it's worth, is that the market just isn't worth 16.8x next year's earnings. I know all the bulls think that we're going to have company after company guiding earnings upward and that earnings will be like a huge coiled spring that launches us into the next realm of the market. I also know that the market is a discounting mechanism, and that you really want to buy in some cases as much as 6-9 months before we expect to be out of the recession. But someone forgot to tell 70% of the economy that things were better.

Let's look at life for Joe and Jane Consumer for a moment. Not only is unemployment off the charts, but we're seeing people use all their benefits and drop off the backside of the statistic. The backside, you know, the part where there isn't any more money? Yeah. Comfy place. Doesn't tend to inspire a rebound in spending.

Despite there being a slight pick up in the number of homes being sold, Joe & Jane's home isn't worth anymore today than it was a month or two ago. And statistically it's probably worth somewhere around 33% less than it was a couple of years ago. Since Joe & Jane put 20% down (at most), that means it's worth less than they paid for it in many cases. And all those foreclosures going on down the block, not helpful. Luckily, though, their Alt-A mortgage doesn't reset for another few months. Oh, and that checkbook that wrote against the home equity line of credit? Might as well use it for fire starter this winter (especially if you can't afford the traditional heating bill), 'cause it's quite literally not worth the paper it is printed on.

If it comes down to choosing one payment over another, the credit cards aren't getting paid just so the mortgage can be made for one more month. That's not good for the banks or retailers. If they are making card payments still, chances are their interest rates have risen and their credit limits have fallen - can't use the revolving card for spending anymore because the only revolving it's doing is spinning in the grave of consumer spending.

Luckily, in order to help the car companies yet again stimulate the economy and help consumers drive more fuel efficient cars, the government launched Cash for Clunkers. Fabulous idea. Sold lots of cars. Also gave something like 300,000 people who had a paid off clunker of a car a gift that goes on giving - A CAR PAYMENT! So there goes another $400 a month out of discretionary income.

Yes, there's a lot of the stimulus bill that hasn't been issued yet. Why issue it when people really need it? Better to wait so that any positive effects come just a few months before the election... not that I'm saying the government planned it that way... Oh. Wait. I am saying that. I guess I have little skepticism as far as the benefits of this. Sure, our roads out here in the Seattle area are much better now that road construction projects are coming through. But I'm still waiting for the trickle up effect to show through. Geez, even beer isn't selling the way it was. What more of a sign do you need?

I guess the thing that tickles my oh-so-ironic funny bone the most is the belief from the Wall Street pundits (you know, those OTHER people who flap their lips on TV all the time) who think all the money on the sidelines is going to come pouring back in the market. A couple of thoughts on this:

First - if you're a baby boomer who just saw 40% of your savings evaporate before your eyes, you're panicked and not likely to want to jump back in the overheated market.

Second - and I think this is the part that those on Wall Street who never walk around in the rest of the country will never get - when your friends, family, boss, neighbor has their job, savings or future hit by the closing of one of those little banks that is NOT 'too big to fail', confidence errodes really quickly. No, it's not about the deposits so much because the FDIC has those covered. I'm talking about the business and construction loans that are not being picked up by the acquiring banks, leaving projects halfway completed with no further funding. I'm talking about grown men in tears because their lives as they know it have just evaporated. Doesn't tend to make for a lot of trust for those folks that got the bailout money, know what I mean?

If you totally disagree with me, so be it. But remember this one piece of information if nothing else: in a bear market rally it doesn't take a selling climax to end the rally - it just takes a lack of further buyers.

Be careful out there.

Wednesday, August 12, 2009

It's been a big month here at Lake Woebegon...

Let me start by apologizing for a month of silence. Some of you, no doubt, found it refreshing that I'd shut up for a bit.

We at Storehouse have been somewhat gratefully busy converting our firm from one platform to another. It's a goood move over all, but painful.

But enough of all that. I've been doing a lot of CNBC lately, and if you're following you probably know that I'm pretty much the Princess of Darkness right now. No, I don't believe the rally. No, I don't think it's supported by fundamentals. I certainly don't think the valuation of the market is warranted. At all. Revenue growth is beyond anemic. But most importantly...


There are a myriad of reasons why we're happily playing the market using chicken methodologies. I intend to post those over the next few days. In the meantime, here are today's two appearances on CNBC, which should give you some insight into what I'm thinking. In the afternoon appearance (first one below), Scott Wapner had all the finese of a pit bull with rabies, in my humble opinion. Of course, I was on the receiving end of the questions. I'm just saying, from my perspective, he was out of line.