I can't let this moment pass without observing it's been wrong to be bullish or bearish lately. You have so many reasons to be bearish, it ought to lead a true contrarian to be bullish. And yet, Mr. Market seems to be mocking both viewpoints these days, with the S&P 500 trading in a range since early May.
Nor can I let this moment pass without pointing out what a huge mistake it is overall to be either bullish or bearish on the overall market. The best stock investors don't invest based on anything but the details and fundamentals pertaining to individual businesses. It's a classic investor foible to spend too much time thinking about macro concerns, which are ultimately completely unpredictable and provide no reliable source of return to the conservative investor. It's strictly speculator's territory.
And yet, against all common sense, yours truly has broken down and thrown his hat into the ring and predicted an imminent bout of depression for the manic-depressive Mr. Market. I set out to write a long-only research service some years ago, and now Extreme Value contains four short recommendations.
Time alone will tell if the other bears and I are right...
CIT Group might not be too big to fail... but I bet it winds up being big enough to matter. CIT provides funding for thousands of small and midsize businesses. It's a huge source of cash advances to clothing makers and their suppliers. California's huge clothing import industry could really take it on the chin if CIT fails.
CIT told some of its debtholders yesterday if they couldn't cough up $2 billion in emergency financing, it would likely have to file bankruptcy.
The Treasury says it won't help CIT because it doesn't want to lose anymore than the $2.3 billion it's already given the company. The government thinks CIT's failure won't be a big deal because it had already curtailed lending severely and other banks appear ready to step in to fill the void.
The Financial Times says CIT won't find a buyer because "CIT's funding model is flawed and few banks are willing to take over its book of middle-market business loans."
They said Lehman Brothers wasn't too big to fail, and it had huge consequences, including shutting U.S. investors out of Japanese debt markets until now...
I've been telling Extreme Value readers for months there's no credit crisis for World Dominating businesses like Wal-Mart. Proving this once again, Wal-Mart looks like it's going to single-handedly get the U.S. back into Japan's "samurai" bond market, for the first time since Lehman Brothers defaulted on samurai bonds last September.
Samurai bonds are yen-denominated bonds sold in Japan by foreign businesses. Wal-Mart filed with Japanese regulators on July 9 to sell as much as 300 billion yen worth of bonds (about $3.2 billion). Wal-Mart was the first retailer to sell samurai bonds in July 2008 since Sears sold them in 1979. It was the last U.S. company to sell them right after Lehman Brothers failed.
U.S. companies might be back in Japanese bond markets, but U.S. investors are having a harder time getting into U.S. natural gas...
The U.S. Natural Gas Fund ETF failed to get regulatory approval to issue new shares. So it can't buy more long natural gas contracts... right at a time when investors are interested in buying hard assets. The fund has grown sixfold since March. Citigroup says the fund accounts for one-third to one-half of all the gas contracts traded on NYMEX and ICE, possibly propping up gas prices.
Because investors want the fund, but it can't buy more gas contracts, the fund's price has disconnected from natural gas. Yesterday, the fund dropped 2.3%, much less than natural gas futures dropped. In their infinite wisdom, the regulators have restricted the market and possibly set up an arbitrage opportunity. Theoretically speaking at least, it appears you might be able to sell short the natural gas fund and go long the futures and collect the spread. Though in practice, I have no idea if it would actually work.
According to the Investment Company Institute, commodity ETFs have grown 63% since the end of 2008, to $58.2 billion in assets.
More than 1.5 million homes received default notices, auction notices, or were seized by banks in the first six months of the year, a new record, according to RealtyTrac. The biggest culprit: prime mortgages, which accounted for 29% of all foreclosures in the first half of 2009.
The worst state for foreclosures: California, home to 20 of the 50 worst counties in the U.S. The worst county in the U.S.: Clark County, Nevada, home to Las Vegas, where one out of every 13 homes received a foreclosure notice.
The ongoing commercial real estate debacle has a new wrinkle in it: increased supply from companies wishing to raise cash by sale-leaseback transactions. That's when you sell a building you occupy and lease it from the new owner. It's a way to get capital out of your real estate so you can use it for your business.
Trouble is, too many companies want to do this right now. So with plenty of supply and few eligible buyers, prices are too low.
Sale-leaseback transactions totaled $853 million in the first five months of 2009, compared to almost $3 billion in the first five months of 2008, according to Real Capital Analytics, a firm that tracks deals $5 million and up.
One possible beneficiary of lower pricing is Realty Income (O), the monthly dividend company. Realty Income specializes in buying sale-leasebacks of standalone properties with regional and national retail chains as tenants (like Taco Bell, Office Max, Children's World day care, Jiffy Lube, and WaWa convenience stores).
With more businesses interested in doing sale-leasebacks, and prices down, Realty Income could lay the foundations of future dividend growth by scooping up good properties on the cheap.
New highs: Hatteras (HTS), AmeriGas Partners (APU), Crucell (CRXL).
Feeling bullish? Or bearish? There are decent arguments for either camp. Let us know where you stand: feedback@stansberryresearch.com.
"I just received the weekly update of Retirement Millionaire and enjoyed the comments immensely. However, I'd like to take issue with the good Dr.'s statement that it takes 1.2 barrels of oil to produce one barrel of ethanol. It is quite easy to find data such as this with a Google search, but if one digs for the source, it can generally
be found coming from Big Oil interests. Misinformation is one of their tactics to combat competition from alternative fuel sources.
"In fact, for every Kilocalorie expended to produce ethanol, 1.67 kilocalories are produced. That is a net gain. The Office of Energy Efficiency and Renewable Energy of the US Department of Energy stated similar numbers by gallons in its 2007 paper Ethanol Myths: Under the Microscope... Also, the facts reveal that it takes about the same amount of energy to change a barrel of crude to get a barrel of gasoline. The other fact left from most analysis is that after the ethanol fuel has been produced the by-product of the corn is NOT waste. It becomes very high protein distiller's grain that is in much demand by the livestock industry.
"S&A Research does an excellent job of exposing the charade of government waste and inefficiencies. I would expect you would want to do the same when private industries, that often don't have the public's best interest in mind, make statements that should be more closely scrutinized." – Alliance member Gary
Ferris comment: Well... The facts might be in need of further checking. I'll leave that between you and Doc Eifrig. But I hope you're not implying the government (i.e., the U.S. Department of Energy) is more competent or that it doesn't lie to us constantly.
"Could you comment on the significance of rnp calling in all their preferreds?" – Paid-up subscriber Harry M.
Ferris comment: The fund you name is Cohen & Steers REIT and Preferred Income Fund (RNP). Actually, Cohen & Steers is calling in the last of its outstanding auction market preferred securities (AMPS). It has now redeemed the last $923 million of AMPS, for a total of more than $3.5 billion.
Auction rate securities of all kinds were sold to investors on the promise that the market makers (who I believe are Morgan Stanley, Bank of America, Citigroup, and Merrill Lynch) would always be there as bidders of last resort. With that promise in place, auction rate securities were sold as highly liquid and almost as safe as cash. Then, the auction market collapsed, and the bidders of last resort withdrew. They got in big trouble and had to be forced by the government to make good on their promises.
"Within the last week, you had something on Met Life and their coming catastrophe with, I think, commercial real estate. I tried to find that and was unable when I did a search. Could you send me the info???" – Paid-up subscriber R.C.
Ferris comment: If you're an Extreme Value subscriber, you can read my MetLife research in the March 2009 issue. And to get the full story, be sure to read follow-ups in the May and June issues. If you're not already a subscriber, click here to get access.
"I live in the Dallas-Ft. Worth area. I recently sold my 1980s cookie-cutter, energy inefficient house for the same $/sq ft that I bought a new, custom-built, energy star spec house! (of course the new house is larger, so cost more total $) My old neighborhood was a 'first-time buyer neighborhood' so the $8K 1st-timer tax credit has helped keep houses selling well there... When the real estate market soured, the builders got caught with a lot of inventory/spec homes on their hands, so I was able to negotiate a great deal. My new house sat on the market for 1&1/2 years before I bought it.
"Yesterday, I chatted with a painter who was doing some touch-up work on my new house. He said that his boss cut a lot of jobs over the last year, but things are picking up again. Sounds like the majority of the spec homes have been sold, but there are still a few deals to be had. The builder of my house is ramping up again; starting 40 new homes soon... Also interesting (and scarry): I talked to a guy last week who's company does alarm systems, surround sound, and pre-wires new homes. His company used to have 70 installers & now they have 7. They went from about 120 total employees to about 20.
"If DFW is one of the stronger markets in the country, I can only imagine how bad things are in other places." – Paid-up subscriber GF
"As an investment broker, I've found quantum online to be a good place to do research on preferreds and converts-you may want to check out this website and possibly pass it on to readers... It's a free site! www.quantumonline.com." – Paid-up subscriber S.G.
"I am an avid follower of your recommendations, until lately. You have been stepping in front of a moving train for a couple of months now by continually predicting the market to fall hard. So far, it hasn't. I agree with you that there are really no fundementals holding the market or the economy up, however as long as the market keeps going, you have to go with it. Markets go up and markets go down. If you keep saying the market is going to correct and enough time passes, it finally will. However, you've missed all the up side. If the market corrects tomorrow, you can say that you were right because time was on your side. If enough time passes, ANY perdictions will finally come true. I'll begin shorting again ONLY when the market tells me to do so, and thus far it hasn't said so yet. Maybe tomorrow?" – Paid-up subscriber J.
Jeff Clark comment: I know. I know. Heck, even I'm getting tired of my bearish rants. You can't really argue I'm stepping in front of a moving train, however.
We turned bearish in the Short Report on May 8 when we purchased puts on QQQQ (a trade which gave us 88% gains in less than one week). Back then, the S&P 500 was at 929. Yesterday, the S&P closed at 932. In the meantime, the index has been as much as 20 points higher and about 50 points lower – an extraordinarily tight trading range for 2.5 months. It's more like stepping in front of a parked train.
As frustrating as it is to be bearish and see no action, it's equally as frustrating in the bull camp. This is the type of choppy action that wears out traders and whittles away account balances. If I was bullish and constantly writing about the coming rally, we'd likely be having this exact same discussion – just from the other side of the table.
While I've made no secret of my bearishness, and I continue to expect the 10-week long market consolidation to resolve itself to the downside, we've not really acted on that bearishness in the Short Report. Outside of the intraday "scalp" trades we setup in the Direct Line – which have been both bullish and bearish – I've made relatively few reco
mmendations. Indeed, it seems as though I'm constantly making the bearish argument and then saying we have to wait for the right setup. Like you, I'm just waiting for the market to tell me the right time to get aggressively short. Maybe tomorrow?
"Your defense of Goldman Sach's right to hammer the investor into the ground kind of has me wound up. This is not just a case of them using the market to their advantage; this is a case of them using their government contacts to write the laws to their own favor. Who would NOT win in such a scenario? You said,
You want the Goldmans of the world to go away? Just think for yourself. That is your only recourse. The law can't do it. The regulators can't do it. Nobody at Stansberry can do it for you, though we publish quite a few ideas each month that can help you out in that department. Ultimately, it is your burden to bear. And you bear it alone, just like the rest of us adults...
"This attitude in defense of Goldman Sach's actions... even though you qualified with with, 'I don't excuse Goldman or any other den of Wall Street thieves for their truly despicable, larcenous behavior. But neither am I naïve enough to pretend that isn't how such people have always behaved and always will behave. You and I and that thundering herd of so-called investors out there... we're all totally out of excuses.' It's up to us, not 'them.' is disappointing. Disappointing, what an inadequate word. No great loss. I shall just file it in the lessons learned category, the one I keep within six inches reach at all times.
"No one may owe you anything, but they do owe you the truth and Goldman Sachs has done nothing but lie, bribe, cheat, and hide facts to which people doing business with them are entitled." – Paid-up subscriber T.
Ferris comment: I'm at least as disappointed by the many who refuse to take responsibility for borrowing, buying, and investing unwisely as I am by powerful financial interests that behave the way powerful financial interests always behave.
More than one reader interpreted my passionate plea for self-reliance and individual empowerment as a defense of the slime-purveyors at Goldman Sachs, even though, as you point out, I called their behavior "despicable" and "larcenous."
That's not so say I don't understand the reaction. If there's one thing nobody wants to hear, it's that he is the primary author of his own circumstances. It's much easier to complain, embrace victimhood, be lazy, and sit around waiting for the inevitable disappointments to show up and prove you were right all along.
Regards,
Dan Ferris
Medford, Oregon
July 16, 2009