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Friday, December 26, 2008


The Post Christmas Post

The numbers are not fully compiled, but based on credit card data, this Christmas season was about as bad as it ever gets for retailers, notwithstanding the bracing figures from Amazon.com. The stats bear out the anecdotal evidence we all heard - agreements within extended families to forgo exchanging gifts, the downsizing, the hunt for things on sale, etc. Yet, the kids seemed as happy as ever. It wouldn't be the worst thing if one lesson we all take away is that you don't have to go overboard spending to have a very nice holiday. But it's a hard lesson for retailers.

Apparently, the public took its savings from lower gas prices...and banked it, or used it to pay down older credit card debts. If so, people are getting smarter.

The next thing we will hear and see are retailers shutting down in droves. The economics are pretty simple. Retailers operate in the red all year but come out between Thanksgiving and Christmas. A lousy Christmas means a clearance sale and red figures for the year. Then, to continue in operation, the store has to restock, but those with losses, and most operations of any scale, need to borrow to finance the new inventory. However, in case you've been lying under a rock for the last nine months or so, the usual lenders have retreated and are nowhere to be found. If you can't finance inventory, the doors simply close. Bad news for retail employees and bad news for commercial real estate landlords and their lenders. That's what makes for a deeper recession.

Right now, I am expecting to see this thing bottom out sometime in mid to late 2009, maybe early 2010 with several quarters, possibly a full year of negative GDP and 10% unemployment. Ouch you say, but to put things in perspective, the mild recessions we have "enjoyed" the last twenty years with unemployment topping out around 6% are not historically typical. The bad recessions I remember, like 1974 and 1981-82 usually saw 8% unemployment as I recall, and were probably higher because all of the folks who give up looking for work aren't counted in the stats. People forget that in the 60's and 70's, 5% unemployment was considered full employment. We have been very spoiled by the free market driven economic boom since 1983. Because of that, 10% will feel like a depression, but it's really nothing like it; unemployment hit 25% in the 1930's.

This is bad enough for stocks, but I think you just look the other way where stocks are concerned for a while, because a real bull market can not take hold until the bond market begins acting normally. Right now, even good credits can't find a bid, so we are nowhere near resolving the deleveraging mess, though we've come a long way. But this credit bubble was just huge. That's why I am tweaking my formula again to put in a preferred stock buy for my IRA at the start of each quarter. Preferred stocks act like little bonds. The dividend yields are just too good to pass up, particularly in a tax deferred account.

When bubbles pop, Ponzi schemes also flame out since people want their money back, which the operators have either lost, stolen or both. So it's no coincidence that after two or three decades, Bernie Madoff finally was found out at the bottom of this lousy market. Of course, this was a game of "see no evil" played by regulators, fund of funds managers, institutional money managers, and wealthy investors who preferred to believe the impossible -that steady, almost non - varying returns could be achieved through up and down markets by means of some kind of black box hedging program. Of course, it's easy to see how silly this all was in retrospect, but some had the good sense to avoid this guy and they are deserving of our grudging admiration. As for me, I doubt I could have been eligible to be a Madoff investor, but I never would have wanted to be - I don't trust funds or money managers, I don't like them, I like to control my portfolio and when to take gains, etc.

One other thing - no way could Madoff have pulled this swindle alone. It's just way too big a job, creating phony statements, keeping track of hypothetical account values that don't exist, etc. So other employees, possibly family members, are sure to be implicated.

By the way, one should also be suspicious of companies that always seem to report right on their number, quarter after quarter, through good times and bad, a la the GE of the Welch days. The securities analysts love predictability of earnings, but to me, it's a red flag that the earnings are being managed and are the result of stupid accounting tricks.

Sports is a lighter pastime than stocks, though if you are a Jets fan, we are learning yet a new way to be tortured. My prediction for this team was 8-8, but how could you not believe that this team was playoff bound when they were alone in first place with a pitifully easy schedule ahead. So now they are 9-6 and needing an improbable sequence of events to win the division, the only way they can get in the playoffs. The Jets must hope Buffalo beats New England in the 1 PM game, which I think is no more than a 10% chance, and if they do, they must beat the improving Dolphins at 4 PM. At least they are home, but I think that gives them roughly a 40% chance in that game. Mathematically that makes the odds about 24-1 against both events happening. I am happy for Chad Pennington of the Dolphins who has proven that he can throw enough to execute a sensible game plan, something the Jets were afraid to give him last year since they believed he could not throw downfield at all. That becomes a self fulfilling prophecy when you don't allow your receivers to cross the line of scrimmage.

By the way, the scenario is not good for New England either since once they win, the Jets motivation to beat the Dolphins may be lacking, and that will put New England out too, if the Dolphins win.


Then there are the Yankees, for whom recessions apparently don't exist. They have brought in three talented free agents as their new hired guns. Yes, that will help them, but those Yankee diehards who believe that this constitutes an automatic ticket to the playoffs need a little rethink. The two guys who made this team what they were are aging at shortstop and in the bullpen closer role, the catcher has had it, and there is still no centerfielder. You know what they say about teams that are weak up the middle. And the Yankees arguably play in baseball's toughest division. No matter how good they are, they still have to displace either the Red Sox or the Rays, and that is not a given.

Well we may have thrown some good money after bad, but that's what our formula does on occasion, what with its tendency to average down. On Monday, I bought 400 shares of I2 technology (ITWO) at 6.04, the low price coming because its planned takeover fell through (no surprise there). Maybe, if the credit crunch ever ends, another offer will materialize. I can wait, and wait, and wait....

Thursday, December 18, 2008


GE's Woes

A Post Script on Elliot Waves (would that be a PS Elliot? sorry for that one) - I would think most devotees would say that we are in Wave 3 of a bear market supercycle where Wave 1 started in 2000 when the tech bubble burst. They would discount the Dow record in last year's bull rally since NASDAQ and the general market never fully recovered. As for the rally we have just had, it's just a corrective bear market rally within the longer wave 3 (down). If that makes you feel worse, it's supposed to.


Really unsettling to see the bad news and economic strain impacting GE but this blog has commented a number of times about the fact that GE has lived off a long held reputation as a well managed company that it deserved back in the 60's and 70's (the Strategic Business Unit days), but hasn't deserved for a decade or more. When you allow managers to move around learning various businesses (but never expert in the one they are managing) and allow neophyte statisticians (black belts) to run the company, it should be no surprise that things have to catch up to you eventually. On the financial side, GE has long had a culture of "making the quarter," whatever it takes, so there is a mad dash by the accountants in the last few weeks of each quarter to scrounge up "net income" that for some reason never seems to come out of the recurring operations of the company. On top of all this, the culture has a strong bias for financial and operations leaders and against marketing. In fact, there is very little understanding of the marketing function and what differentiates it from sales.

It's fashionable to criticize Jeff Immelt for all this and put him on termination watch, but it's really the once revered Jack Welch, perhaps America's most overrated business executive, who tilted the culture in these directions. To Immelt's credit, he has tried to shift things a bit, devaluing six sigma and emphasizing businesses with real potential while deemphasizing GE Capital. But this company is an aircraft carrier - it has a huge turning radius and I doubt Jeff can complete the maneuver - he will have to displace too much water.

a couple of moves I really liked this week - one was the withdrawal of quarterly guidance (and maybe all earnings guidance), putting the analysts on their own as I think all publicly owned companies should do. In GE's case, this may have the additional salutary effect of taking the heat off of the business CFO's a little bit at quarterly close so they don't do stupid human accounting tricks just to make a forecasted number. The second smart move was foregoing the usual dividend increase. That took some guts, but too bad Jeff couldn't find the courage to do what he really needed to do in this environment - reduce the dividend, perhaps in half. If the rumors are true that GE is short of cash that it needs to do some of its usual things - like make aquisitions and extend financing to customers, then the dividend is a waste of a precious resource.


Last night, I had the very good fortune to visit Birdland and see Freddy Cole, Nat King Cole's younger brother. Cole led a very competent quartet through a set of wonderful songs that featured him on the piano and singing. Cole does not have anything like the vocal chops his brother had, but he puts across a song in a winning way, cabaret style, sometimes half talking, but somehow always keeping the melody intact. All in all, there could hardly be a more pleasant hour and a half for me to spend than to hear Mr. Cole's combo in my favorite venue. He appears on the Birdland bandstand through Saturday night.


Still buying into this stinky market, though now and then we do see signs of life. The Fed is pulling out all the stops, although the conservatives' hysteria concerning Bernanke's plan to buy Treasuries at the longer end seems a little out of order. Isn't this just another variation of what used to be called open market operations?

Anyway, I bought 1100 more shares of Books a Million (BAMM) for my IRA Monday at
1.90. Yesterday, IRA added 800 shares of Limco Piedmont (LIMC) at the bargain price of 2.85. Of course it closed lower than that today.

Thursday, December 11, 2008


Drowning in Elliot Waves?

Louis Rukeyser, of Wall Street Week fame, used to make fun of technical analysis. He used to call the technicians "elves" and considered their good calls to be a matter of luck more than anything else. However, he used to have elves on the show regularly, both as panelists (famously Bob Nurock until their falling out) and guests. The hot technician back then was Robert Prechter, an advocate of Elliot Wave Theory.

I read a couple of Prechter's books, and must say they were reasonably well written and very entertaining. His theories were attractive, but in reality, he fell out of favor too. The big problem with technical analysis and their advocates is that they want to use it as a predictive tool. Inevitably, they will make what turn out to be foolish predictions, killing their credibility.

My view of technical analysis is that it usefully lends perspective which is important to market followers. Where is the market in a particular move? Is a rally, such as what we have experienced recently, merely a bear market rally, an extended bottoming process, or in fact a reversal to a new bull move? Some technicians will tell you that studying volume statistics can help you figure it out. Elliot Wave advocates will try to tell you what number wave we're in within what cycle within what super cycle. I don't think this information is much use in determining the market's next move or the one after that, but it can provide some context for understanding recent action.

Elliot Wave advocates, and Prechter's books, rest on a belief that human psychology and in fact, much of what we see in nature, can be related to the Fibonacci number series, i.e., 1,2,3,5,8,13, 21,34 etc. where any number is the sum of the two previous. If the number of days in a move turns out to be a Fibonacci number, that lends credibility to the analysis. Rukeyser would say this is hocus pocus and I would agree. But Prechter makes a somewhat more convincing case that dominant moves occur in 5 waves (e.g. up, down, up, down, up), and corrective moves are in three waves, such as down, up, down. A dominant wave can be either up or down, as can a correction.

So to return to the question of the moment, expressed in the vocabulary of Prechter, if we started a secular bear market a year or so ago, we need to figure out whether we've completed 5 waves and have now started either a dominant or corrective bull phase (and are in Wave 1 of 5 or of 3 as the case may be), or whether this is simply wave 2 of a 5 wave bear market. I haven't followed Prechter recently, but based on what he was saying some years ago, I think he is in the latter camp, that is we have entered a long term bear (as we did in 1929) and this is just wave 2 of that supercycle, or more likely, wave 1 of a three wave bear market rally within wave 1 of the longer term bear.

If you are not completely confused by all this, you are really not trying.

The fact is that technical analysis can confirm what you already know from fundamental analysis - that we are in the midst of extremely serious economic troubles. They are not going away quickly, and there are really no reliable safety zones for investors. So we have the phenomenon of people lending money to the Treasury for no interest AT ALL. The fact is that as bad as stocks are, the bond market is worse. The debt markets are still largely frozen - many reasonable credits are being quoted at a dime or two on the dollar.

What's going to happen? I don't know - but I am an optimist, and believe that after a number of false starts, the world will figure out how to restart markets again. So I am still buying, though I might do some last minute tax loss selling here, since the ITWO merger got put off and I have too many realized gains for 2008. I've got lots and lots of losses, but they have not been realized yet, and those are the only ones you get tax credit for.


The Mets got K-Rod - probably the best closer available (OK, maybe Kerry Wood) and still in his 20's. That's what they had to do. Now they need to resign Perez, and look for a little catching help. I think second base will work itself out. The NL East should be a very competitive division next year.


On November 24, I bought 200 shares of Belden (BDC) for the IRA at 11.69. On 12/1, I bought 700 shares of beleaguered Bank of Granite (GRAN) at 3.20. On 12/4, we bought 200 shares of SEIC Investments (SEIC), a zero buy, at 13.8575. And on 12/9, I bought 300 shares of Alcoa (AA) at 9.46.

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